MUNIYIELD
MICHIGAN
FUND, INC.
FUND LOGO
Annual Report
October 31, 1998
This report, including the financial information herein, is
transmitted to the shareholders of MuniYield Michigan Fund, Inc. for
their information. It is not a prospectus, circular or
representation intended for use in the purchase of shares of the
Fund or any securities mentioned in the report. Past performance
results shown in this report should not be considered a
representation of future performance. The Fund has leveraged its
Common Stock by issuing Preferred Stock to provide the Common Stock
shareholders with a potentially higher rate of return. Leverage
creates risks for Common Stock shareholders, including the
likelihood of greater volatility of net asset value and market price
of shares of the Common Stock, and the risk that fluctuations in the
short-term dividend rates of the Preferred Stock may affect the
yield to Common Stock shareholders. Statements and other information
herein are as dated and are subject to change.
MuniYield
Michigan Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MuniYield Michigan Fund, Inc.
TO OUR SHAREHOLDERS
For the year ended October 31, 1998, the Common Stock of MuniYield
Michigan Fund, Inc. earned $0.894 per share income dividends, which
included earned and unpaid dividends of $0.082. This represents a
net annualized yield of 5.64%, based on a month-end per share net
asset value of $15.85. Over the same period, the total investment
return on the Fund's Common Stock was +8.25%, based on a change in
per share net asset value from $15.58 to $15.85, and assuming
reinvestment of $0.888 per share income dividends and $0.078 per
share capital gains distributions.
For the six-month period ended October 31, 1998, the total
investment return on the Fund's Common Stock was +6.22%, based on a
change in per share net asset value from $15.35 to $15.85, and
assuming reinvestment of $0.442 per share income dividends.
For the six-month period ended October 31, 1998, the Fund's Auction
Market Preferred Stock had an average yield of 3.71%.
The Municipal Market Environment
During the six months ended October 31, 1998, long-term bond yields
declined significantly. The near absence of any inflationary
pressures in the United States continued to support historic low
interest rates. Additionally, foreign economic factors have
continued to outweigh US domestic fundamentals, as they have for
much of 1998. The economic crisis that began in Asia over a year ago
has spread both to Russia and South America. However, economic
factors in these countries have begun to negatively impact US
growth. For example, employment in the US manufacturing sector
declined in recent months as a result of reduced demand for export
goods. Concern that the modest decline in US economic growth seen
thus far would spread and intensify led the Federal Reserve Board to
lower short-term interest rates in late September, in mid-October
and in mid-November. These actions were taken to offset the drag of
foreign economies on future US growth.
US Treasury bond yields continued to benefit from a strong "flight
to quality" as foreign investors were drawn to the relative safe
haven of US Government securities. Additionally, the sharp equity
market correction, which began at the end of August, triggered a
further flight into US Treasury securities. Long-term US Treasury
bond yields fell over 90 basis points (0.90%) to approximately 5% by
the end of September. This is the lowest level since the US Treasury
reintroduced 30-year maturity bond auctions in 1977.
By early October, worldwide investor confidence began to rise,
reducing the demand for the safety and liquidity of US Treasury
securities. Investor confidence was restored by the belief that
major world governments, as well as the International Monetary Fund,
would take the necessary action to support weak domestic economies
in Asia and Latin America. Additionally, rapid recovery in US and
world equity markets caused some investors to reallocate funds from
US debt instruments back to various world equity markets. US
Treasury security yields rose for the remainder of the month to end
October at 5.15%. During the six-month period ended October 31,
1998, long-term Treasury security yields declined approximately 80
basis points.
During the past 12 months, the tax-exempt bond market has contended
with significant new-issue supply pressures. Over the past year,
more than $277 billion in new long-term tax-exempt bonds were
underwritten, an increase of almost 30% compared to the same period
a year ago. During the most recent six-month period, approximately
$140 billion in new long-term municipal bonds were underwritten,
representing an increase of more than 15% over the same six-month
period last year. This increased supply, coupled with the high
returns the US equity market generated for much of 1998, was one of
the major reasons municipal bond yields declined less than their
taxable counterparts during the period.
The continued increase in new bond issuance has required ever-lower
tax-exempt bond yields to generate the economic savings necessary
for additional municipal bond financings. Consequently, the pace of
new bond issuance has slowed in recent months. In fact, the trend
may be reversing. During the three months ended October 31, 1998,
just over $60 billion in new long-term municipal bonds were
underwritten, a decline of 4% compared to the same quarter a year
ago. During the month of October, there were less than $20 billion
in new municipal bond securities issued, a decline of over 10%
compared to October 1997. We will monitor this trend closely in the
coming months to determine if the supply pressures exerted thus far
in 1998 are abating and fostering a more balanced supply/demand
environment.
MuniYield Michigan Fund, Inc.
October 31, 1998
Throughout the six-month period ended October 31, 1998, municipal
bond yields followed a pattern that was similar to US Treasury
securities, although the yield declines were more muted. As measured
by the unmanaged Bond Buyer Revenue Bond Index, long-term, uninsured
tax-exempt revenue bond yields declined over 40 basis points to
5.09% by the end of September, their lowest level since the early
1970s. Municipal bond yields rose during October to end the period
at 5.24%. Over the past six months, long-term tax-exempt bond yields
declined almost 30 basis points.
Although municipal bond yields declined during the six-month period,
recent supply pressures and the absence of the safe haven status
enjoyed by US securities caused municipal bond yields to rise
relative to US Treasury bond yields. At October 31, 1998, long-term
tax-exempt bond yield spreads were attractive relative to US
Treasury securities of comparable maturities (over 100%), well in
excess of their historic range of 85%--88%. Tax-exempt bond yield
ratios have rarely exceeded 90% in the 1980s and 1990s.
Historically, yield spreads have been wider than these levels when
there have been potential changes in Federal tax codes that would
have adversely affected the tax-favored status of municipal bonds.
Currently, municipal bond investors find themselves in a unique
investment environment. Previous opportunities to purchase tax-
exempt bonds with yields exceeding that of comparable US Treasury
issues have been limited to relatively brief episodes and then
further limited to a few municipal credits undergoing specific
financial pressures. At present, almost the entire municipal bond
universe, across nearly all maturity and credit sectors, can be
purchased at yields greater than their taxable counterparts.
However, the current opportunity may quickly disappear should tax-
exempt bond supply pressures diminish or the safe-haven status of US
Treasury securities become less desirable. Under these conditions,
municipal bond ratios should quickly revert to more normal historic
percentages, certainly well below their presently attractive levels.
Portfolio Strategy
During the six-month period ended October 31, 1998, we maintained
the constructive investment strategy that we adopted at the
beginning of the period. We continued to believe that the
combination of negligible inflation and a slowing domestic economy
should result in a low interest rate environment. We expect that
this environment is likely to continue well into 1999. Consequently,
we anticipate little change to the Fund's existing structure and
composition. Furthermore, we intend to maintain a fully invested
position in order to seek to enhance the Fund's dividend income.
Throughout the six months ended October 31, 1998, short-term tax-
exempt bond interest rates traded in a relatively narrow range
centered around 3.50%. Recent Federal Reserve Board actions to lower
short-term taxable interest rates in September, October, and again
in November have begun to be reflected in the tax-exempt market as
well. Interest rates paid to the Fund's Preferred Stock shareholders
have declined in recent weeks, which resulted in higher dividends to
the Fund's Common Stock shareholders. We anticipate that this
situation is likely to continue in the coming months, particularly
if the Federal Reserve Board lowers taxable short-term interest
rates further. However, should the spread between short-term and
long-term interest rates narrow, the benefits of the leverage will
decline and reduce the yield on the Fund's Common Stock. (For a
complete explanation of the benefits and risks of leveraging, see
page 4 of this report to shareholders.)
MuniYield Michigan Fund, Inc.
October 31, 1998
Looking ahead, we will closely monitor two areas of the Fund's
current portfolio composition. First, despite an already existing
high-credit quality structure (over 70% of the Fund is rated AA or
higher by at least one of the major rating agencies), we will
continue to emphasize higher-rated issues. The yield spread between
higher-quality and lower-rated tax-exempt issues has remained
historically narrow, and we are able to continue to purchase better
quality issues with little yield sacrifice. Also, while none of our
current holdings can be called within two years, we will continue to
manage the Fund's callable securities in order to limit the impact
that the loss of higher nominal coupon-bearing issues would have on
the Fund's income stream. We purchased higher-coupon issues at
interest rate levels that are significantly higher than presently
available. Since interest levels have declined, the market value of
these securities has increased dramatically. As these issues
approach their earliest call dates, we will monitor opportunities to
sell these bonds, capturing the existing market appreciation. As a
result, the proceeds of these sales will provide the opportunity to
purchase additional securities with greater call protection and pose
little disruption to the Fund's existing dividend income stream.
In Conclusion
We appreciate your ongoing interest in MuniYield Michigan Fund,
Inc., and we look forward to assisting you with your financial needs
in the months and years ahead.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President
(Fred K. Stuebe)
Fred K. Stuebe
Vice President and Portfolio Manager
December 7, 1998
PROXY RESULTS
During the six-month period ended October 31, 1998, MuniYield
Michigan Fund, Inc. Common Stock shareholders voted on the following
proposals. The proposals were approved at a shareholders' meeting on
September 24, 1998. The description of each proposal and number of
shares voted are as follows:
<TABLE>
<CAPTION>
Shares Shares Withheld
Voted For From Voting
<S> <S> <C> <C>
1. To elect the Fund's Board of Directors: James H. Bodurtha 7,187,984 165,124
Herbert I. London 7,183,402 169,706
Robert R. Martin 7,185,701 167,407
Arthur Zeikel 7,181,409 171,699
<CAPTION>
Shares Shares Voted Shares Voted
Voted For Against Abstain
<S> <C> <C> <C>
2. To select Deloitte & Touche LLP as the Fund's
independent auditors. 7,193,564 35,810 123,734
</TABLE>
During the six-month period ended October 31, 1998, MuniYield
Michigan Fund, Inc. Preferred Stock shareholders voted on the
following proposals. The proposals were approved at a shareholders'
meeting on September 24, 1998. The description of each proposal and
number of shares voted are as follows:
<TABLE>
<CAPTION>
Shares Shares Withheld
Voted For From Voting
<S> <S> <C> <C>
1. To elect the Fund's Board of Directors: James H. Bodurtha 2,082 77
Herbert I. London 2,082 77
Robert R. Martin 2,082 77
Joseph L. May 2,082 77
Andre F. Perold 2,082 77
Arthur Zeikel 2,082 77
<CAPTION>
Shares Shares Voted Shares Voted
Voted For Against Abstain
<S> <C> <C> <C>
2. To select Deloitte & Touche LLP as the Fund's
independent auditors. 2,160 0 0
</TABLE>
MuniYield Michigan Fund, Inc.
October 31, 1998
THE BENEFITS AND RISKS OF LEVERAGING
MuniYield Michigan Fund, Inc. utilizes leveraging to seek to enhance
the yield and net asset value of its Common Stock. However, these
objectives cannot be achieved in all interest rate environments. To
leverage, the Fund issues Preferred Stock, which pays dividends at
prevailing short-term interest rates, and invests the proceeds in
long-term municipal bonds. The interest earned on these investments
is paid to Common Stock shareholders in the form of dividends, and
the value of these portfolio holdings is reflected in the per share
net asset value of the Fund's Common Stock. However, in order to
benefit Common Stock shareholders, the yield curve must be
positively sloped; that is, short-term interest rates must be lower
than long-term interest rates. At the same time, a period of
generally declining interest rates will benefit Common Stock
shareholders. If either of these conditions change, then the risks
of leveraging will begin to outweigh the benefits.
To illustrate these concepts, assume a fund's Common Stock
capitalization of $100 million and the issuance of Preferred Stock
for an additional $50 million, creating a total value of $150
million available for investment in long-term municipal bonds. If
prevailing short-term interest rates are approximately 3% and long-
term interest rates are approximately 6%, the yield curve has a
strongly positive slope. The fund pays dividends on the $50 million
of Preferred Stock based on the lower short-term interest rates. At
the same time, the fund's total portfolio of $150 million earns the
income based on long-term interest rates. Of course, increases in
short-term interest rates would reduce (and even eliminate) the
dividends on the Common Stock.
In this case, the dividends paid to Preferred Stock shareholders are
significantly lower than the income earned on the fund's long-term
investments, and therefore the Common Stock shareholders are the
beneficiaries of the incremental yield. However, if short-term
interest rates rise, narrowing the differential between short-term
and long-term interest rates, the incremental yield pickup on the
Common Stock will be reduced or eliminated completely. At the same
time, the market value of the fund's Common Stock (that is, its
price as listed on the New York Stock Exchange) may, as a result,
decline. Furthermore, if long-term interest rates rise, the Common
Stock's net asset value will reflect the full decline in the price
of the portfolio's investments, since the value of the fund's
Preferred Stock does not fluctuate. In addition to the decline in
net asset value, the market value of the fund's Common Stock may
also decline.
As a part of its investment strategy, the Fund may invest in certain
securities whose potential income return is inversely related to
changes in a floating interest rate ("inverse floaters"). In
general, interest rates on inverse floaters will decrease when short-
term interest rates increase and increase when short-term interest
rates decrease. Investments in inverse floaters may be characterized
as derivative securities and may subject the Fund to the risks of
reduced or eliminated interest payments and losses of invested
principal. In addition, inverse floaters have the effect of
providing investment leverage and, as a result, the market value of
such securities will generally be more volatile than that of fixed-
rate, tax-exempt securities. To the extent the Fund invests in
inverse floaters, the market value of the Fund's portfolio and the
net asset value of the Fund's shares may also be more volatile than
if the Fund did not invest in such securities.
MuniYield Michigan Fund, Inc.
October 31, 1998
PORTFOLIO ABBREVIATIONS
To simplify the listings of MuniYield Michigan Fund, Inc.'s
portfolio holdings in the Schedule of Investments, we have
abbreviated the names of many of the securities according to the
list at right.
AMT Alternative Minimum Tax (subject to)
GO General Obligation Bonds
HDA Housing Development Authority
PCR Pollution Control Revenue Bonds
RITR Residual Interest Trust Receipts
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Michigan--90.2%
<S> <S> <C> <S> <C>
Battle Creek, Michigan, Tax Increment Finance Authority (f):
A- NR* $1,320 7.10% due 5/01/2004 $ 1,543
A- NR* 1,000 7.40% due 5/01/2004 1,183
AAA Aaa 5,000 Brighton, Michigan, Area School District, Revenue Refunding Bonds, GO,
UT, Series II, 4.90%** due 5/01/2015 (b) 2,238
AAA Aaa 3,545 Capital Region Airport Authority, Michigan, Airport Revenue Bonds, AMT,
6.60% due 7/01/2012 (c) 3,906
Detroit, Michigan, Sewage Disposal Revenue Bonds:
AAA Aaa 1,900 6.625% due 7/01/2001 (d)(f) 2,080
AAA Aaa 3,000 5% due 7/01/2027 (c) 2,955
AAA Aaa 2,000 Grand Ledge, Michigan, Public Schools District, UT, 6.45% due 5/01/2014 (c) 2,251
AAA Aaa 2,500 Grand Rapids, Michigan, Sanitation Sewer System, Revenue Refunding and
Improvement Bonds, Series A, 4.75% due 1/01/2028 (d) 2,379
A1+ VMIG1++ 1,400 Grand Rapids, Michigan, Water Supply Revenue Refunding Bonds, VRDN, 2.90% due
1/01/2020(a)(d) 1,400
AAA Aaa 2,000 Kalamazoo, Michigan, Hospital Finance Authority, Hospital Facility Revenue
Bonds (Borgess Medical Center), Series A, 5.625% due 6/01/2014 (b) 2,146
Kalamazoo, Michigan, Hospital Finance Authority, Hospital Facility Revenue
Refunding and Improvement Bonds (Bronson Methodist), Series A (f):
A A1 2,500 6.25% due 5/15/2003 2,789
A A1 1,750 6.375% due 5/15/2003 1,961
AAA Aaa 7,100 Kent, Michigan, Hospital Finance Authority, Health Care Revenue Bonds
(Butterworth Health Systems), Series A, 5.625% due 1/15/2006 (c)(f) 7,889
AAA Aaa 2,500 Kent, Michigan, Hospital Finance Authority, Hospital Facility, Revenue
Refunding Bonds (Pine Rest Christian Hospital), 6.50% due 11/01/2010 (d) 2,716
Michigan Higher Education Student Loan Authority Revenue Bonds, AMT:
NR* A 1,250 Series XIV-A, 6.75% due 10/01/2006 1,331
A1 VMIG1++ 300 VRDN, Series XII-D, 3.15% due 10/01/2015 (a)(b) 300
Michigan Municipal Bond Authority Revenue Bonds:
AA+ Aa1 1,500 (Drinking Water Revolving Fund), 4.75% due 10/01/2020 1,437
A NR* 1,100 (Local Government Loan--Revenue Sharing), Series B, 5.80% due 11/01/2013 1,173
AA+ Aa2 2,500 Refunding (Local Government--Qualified School), Series A, 6.50% due
5/01/2016 2,765
AA+ Aa1 4,700 (State Revolving Fund), Series A, 6.55% due 10/01/2002 (f) 5,263
</TABLE>
MuniYield Michigan Fund, Inc.
October 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Michigan (continued)
<S> <S> <C> <S> <C>
Michigan State Building Authority Revenue Bonds (Facilities Program),
Series II (b):
AAA Aaa $1,185 4.67%** due 10/15/2009 $ 734
AAA Aaa 1,675 4.77%** due 10/15/2010 981
Michigan State, HDA, Rental Housing Revenue Bonds:
AA- NR* 1,945 AMT, Series A, 7.15% due 4/01/2010 2,093
AA- NR* 3,410 Series B, 7.10% due 4/01/2021 3,662
Michigan State, HDA, S/F Mortgage Revenue Bonds:
AA+ NR* 2,500 Refunding, Series C, 6.50% due 6/01/2016 2,635
AA+ NR* 1,000 Series A, 6.80% due 12/01/2012 1,047
AA+ NR* 2,580 Series A, 6.875% due 6/01/2023 2,724
Michigan State Hospital Finance Authority Revenue Bonds:
A- A3 3,500 (Detroit Medical Center Obligation Group), Series A, 5.25% due 8/15/2028 3,407
AAA Aaa 2,000 (Mercy Health Services), Series R, 5.375% due 8/15/2026 (b) 2,043
AAA A1 1,000 (Mid-Michigan Obligation Group), 6.90% due 12/01/2002 (f) 1,137
AAA Aaa 2,000 (Oakwood Hospital Obligation Group), 7.10% due 7/01/2000 (f) 2,155
A- A3 5,875 Refunding (Detroit Medical Center Obligation Group), Series A, 6.50%
due 8/15/2018 6,425
AA Aa3 2,500 Refunding (Henry Ford Health Systems), Series A, 5.25% due 11/15/2020 2,507
NR* A1 3,000 Refunding (McLaren Health Care Corp.), Series A, 5% due 6/01/2028 2,871
AA- Aaa 1,250 (Sisters of Mercy Health Corp.), Series J, 7.50% due 2/15/2001 (f) 1,379
Michigan State Strategic Fund, Limited Obligation Revenue Bonds:
A1+ Aa3 1,100 Refunding (Consumers Power Co. Project), VRDN, Series A, 3.70% due 6/15/2010 (a) 1,100
AAA Aaa 2,500 Refunding (Detroit Edison Company), Series CC, 6.95% due 9/01/2021 (d) 2,735
A A1 5,000 Refunding (Ford Motor Co. Project), Series A, 7.10% due 2/01/2006 5,918
BBB+ Baa1 2,500 (Waste Management Inc. Project), AMT, 6.625% due 12/01/2012 2,701
Michigan State Strategic Fund, PCR, Refunding:
NR* P1 500 (Consumers Power Project), VRDN, 3.70% due 4/15/2018 (a) 500
A A2 2,500 (General Motors Corp.), 6.20% due 9/01/2020 2,705
Michigan State Trunk Line Revenue Bonds, Series A (d)(f):
AA- Aa3 1,000 5.625% due 11/15/2004 1,107
AA- Aa3 1,370 5.70% due 11/15/2004 1,522
Michigan State Trunk Line, Revenue Refunding Bonds, Series A (c):
AAA Aaa 5,000 4.75% due 11/01/2020 4,815
AAA Aaa 2,500 5% due 11/01/2026 2,463
AAA Aaa 6,500 Monroe County, Michigan, Economic Development Corp., Limited Obligation
Revenue Refunding Bonds (Detroit Edison Co. Project), Series AA, 6.95%
due 9/01/2022 (d) 8,307
AAA Aaa 1,000 Northern Michigan University, Revenue Refunding Bonds, 5% due 12/01/2025 (c) 985
AAA Aaa 5,000 Oxford, Michigan, Area Community School District (Building and Site), UT,
5.40% due 5/01/2025 (d) 5,184
AA+ Aa2 1,370 Plymouth-Canton, Michigan, Community School District, Refunding, UT, Series
A, 6.625% due 5/01/2016 1,467
AA+ Aa2 2,250 Reeths-Puffer, Michigan, Schools Building, UT, Series Q, 6.625% due 5/01/2002 (f) 2,503
AAA Aaa 2,000 Romulus, Michigan, Community Schools, UT, Series I, 6.75% due 5/01/2001 (e)(f) 2,187
Royal Oak, Michigan, Hospital Finance Authority, Hospital Revenue Bonds
(William Beaumont Hospital):
AA Aa2 6,250 Series D, 6.75% due 1/01/2001 (f) 6,769
AA Aaa 3,500 Series D, 6.75% due 1/01/2001 (f) 3,793
A1+ VMIG1++ 100 VRDN, Series J, 3.70% due 1/01/2003 (a) 100
</TABLE>
MuniYield Michigan Fund, Inc.
October 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Michigan (concluded)
<S> <S> <C> <S> <C>
A1+ VMIG1++ $1,350 University of Michigan, University Hospital Revenue Bonds, VRDN, Series A,
3.75% due 12/01/2027 (a) $ 1,350
A1+ VMIG1++ 1,300 University of Michigan, University Hospital Revenue Refunding Bonds, VRDN,
Series A, 3.75% due 12/01/2019 (a) 1,300
AA Aa1 2,510 University of Michigan, University Housing Revenue Bonds, Series A, 5.50%
due 11/15/2017 2,647
A1+ VMIG1++ 1,775 University of Michigan, University Revenue Bonds, Medical Service Plan,
VRDN, Series A, 3.75% due 12/01/2027 (a) 1,775
Wayne Charter County, Michigan, Airport Revenue Bonds (Detroit Metropolitan
Wayne County) (c):
AAA Aaa 7,500 AMT, Series A, 5.375% due 12/01/2017 7,739
AAA Aaa 3,500 Series B, 5% due 12/01/2028 3,436
Puerto Rico--4.5%
AAA Aaa 7,500 Puerto Rico, RITR, 7.02% due 7/01/2027 (g) 8,091
Total Investments (Cost--$156,753)--94.7% 168,704
Other Assets Less Liabilities--5.3% 9,415
--------
Net Assets--100.0% $178,119
========
<FN>
(a)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at October 31, 1998.
(b)AMBAC Insured.
(c)MBIA Insured.
(d)FGIC Insured.
(e)FSA Insured.
(f)Prerefunded.
(g)The interest rate is subject to change periodically and
inversely based upon prevailing market rates. The interest rate
shown is the rate in effect at October 31, 1998.
*Not Rated.
**Represents a zero coupon bond; the interest rate shown is the
effective yield at time of purchase by the Fund.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche
LLP.
See Notes to Financial Statements.
</TABLE>
QUALITY PROFILE
The quality ratings of securities in the Fund as of October 31, 1998
were as follows:
Percent of
S&P Rating/Moody's Rating Net Assets
AAA/Aaa 52.5%
AA/Aa 18.7
A/A 17.6
BBB/Baa 1.5
Other++ 4.4
[FN]
++Temporary investments in short-term municipal securities.
MuniYield Michigan Fund, Inc.
October 31, 1998
FINANCIAL INFORMATION
<TABLE>
Statement of Assets, Liabilities and Capital as of October 31, 1998
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$156,752,586) (Note 1a) $168,704,406
Cash 242,788
Receivables:
Securities sold $ 6,396,146
Interest 2,966,995 9,363,141
------------
Prepaid expenses and other assets 10,436
------------
Total assets 178,320,771
------------
Liabilities: Payables:
Investment adviser (Note 2) 78,518
Distributions to shareholders (Note 1e) 54,802 133,320
------------
Accrued expenses and other liabilities 68,533
------------
Total liabilities 201,853
------------
Net Assets: Net assets $178,118,918
============
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.05 per share (2,200 shares
of AMPS* issued and outstanding at $25,000 per share
liquidation preference) $ 55,000,000
Common Stock, par value $.10 per share (7,767,705 shares
issued and outstanding) $ 776,771
Paid-in capital in excess of par 108,391,554
Undistributed investment income--net 1,523,306
Undistributed realized capital gains on investments--net 475,467
Unrealized appreciation on investments--net 11,951,820
------------
Total--Equivalent to $15.85 net asset value per share of
Common Stock (market price--$16.00) 123,118,918
------------
Total capital $178,118,918
============
<FN>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
MuniYield Michigan Fund, Inc.
October 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations
<CAPTION>
For the Year Ended
October 31, 1998
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 9,989,304
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 880,276
Commission fees (Note 4) 139,546
Professional fees 89,131
Accounting services (Note 2) 29,205
Printing and shareholder reports 27,641
Transfer agent fees 27,132
Directors' fees and expenses 22,915
Listing fees 13,475
Custodian fees 13,471
Pricing fees 7,178
Other 18,046
------------
Total expenses 1,268,016
------------
Investment income--net 8,721,288
------------
Realized & Realized gain on investments--net 4,168,067
Unrealized Gain Change in unrealized appreciation on investments--net (1,309,899)
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 11,579,456
(Notes 1b, ============
1d & 3):
See Notes to Financial Statements.
</TABLE>
MuniYield Michigan Fund, Inc.
October 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended
October 31,
Increase (Decrease) in Net Assets: 1998 1997
<S> <S> <C> <C>
Operations: Investment income--net $ 8,721,288 $ 8,987,506
Realized gain on investments--net 4,168,067 541,037
Change in unrealized appreciation on investments--net (1,309,899) 1,615,126
------------ ------------
Net increase in net assets resulting from operations 11,579,456 11,143,669
------------ ------------
Dividends & Investment income--net:
Distributions to Common Stock (6,872,146) (6,932,397)
Shareholders Preferred Stock (1,633,213) (1,965,766)
(Note 1e): Realized gain on investments--net:
Common Stock (601,394) --
Preferred Stock (385,924) --
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (9,492,677) (8,898,163)
------------ ------------
Capital Stock Value of shares issued to Common Stock shareholders in
Transactions reinvestment of dividends and distributions 640,468 --
(Note 4): ------------ ------------
Net Assets: Total increase in net assets 2,727,247 2,245,506
Beginning of year 175,391,671 173,146,165
------------ ------------
End of year* $178,118,918 $175,391,671
============ ============
<FN>
*Undistributed investment income--net (Note 1f) $ 1,523,306 $ 1,294,808
============ ============
See Notes to Financial Statements.
</TABLE>
MuniYield Michigan Fund, Inc.
October 31, 1998
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 15.58 $ 15.29 $ 15.23 $ 14.05 $ 16.59
Operating -------- -------- -------- -------- --------
Performance: Investment income--net 1.12 1.16 1.18 1.19 1.20
Realized and unrealized gain (loss) on
investments--net .38 .28 .11 1.47 (2.44)
-------- -------- -------- -------- --------
Total from investment operations 1.50 1.44 1.29 2.66 (1.24)
-------- -------- -------- -------- --------
Less dividends and distributions to
Common Stock shareholders:
Investment income--net (.89) (.90) (.93) (.92) (.96)
Realized gain on investments--net (.08) -- -- (.27) (.10)
In excess of realized gain on
investments--net -- -- (.04) -- --
-------- -------- -------- -------- --------
Total dividends and distributions to
Common Stock shareholders (.97) (.90) (.97) (1.19) (1.06)
-------- -------- -------- -------- --------
Effect of Preferred Stock activity:
Dividends and distributions to Preferred
Stock shareholders:
Investment income--net (.21) (.25) (.25) (.23) (.22)
Realized gain on investments--net (.05) -- -- (.06) (.02)
In excess of realized gain on investments
--net -- -- (.01) -- --
-------- -------- -------- -------- --------
Total effect of Preferred Stock activity (.26) (.25) (.26) (.29) (.24)
-------- -------- -------- -------- --------
Net asset value, end of year $ 15.85 $ 15.58 $ 15.29 $ 15.23 $ 14.05
======== ======== ======== ======== ========
Market price per share, end of year $ 16.00 $ 15.125 $ 14.50 $ 13.875 $ 12.625
======== ======== ======== ======== ========
Total Investment Based on market price per share 12.56% 10.92% 11.67% 19.93% (18.40%)
Return:* ======== ======== ======== ======== ========
Based on net asset value per share 8.25% 8.35% 7.28% 18.29% (9.00%)
======== ======== ======== ======== ========
Ratios to Average Expenses .72% .74% .75% .76% .76%
Net Assets:** ======== ======== ======== ======== ========
Investment income--net 4.96% 5.15% 5.26% 5.50% 5.25%
======== ======== ======== ======== ========
Supplemental Net assets, net of Preferred Stock, end of
Data: year (in thousands) $123,119 $120,392 $118,146 $117,600 $108,467
======== ======== ======== ======== ========
Preferred Stock outstanding, end of
year (in thousands) $ 55,000 $ 55,000 $ 55,000 $ 55,000 $ 55,000
======== ======== ======== ======== ========
Portfolio turnover 40.41% 16.06% 19.73% 15.47% 18.88%
======== ======== ======== ======== ========
Leverage: Asset coverage per $1,000 $ 3,239 $ 3,189 $ 3,148 $ 3,138 $ 2,972
======== ======== ======== ======== ========
Dividends Investment income--net $ 742 $ 894 $ 880 $ 806 $ 765
Per Share on ======== ======== ======== ======== ========
Preferred Stock
Outstanding:++
<FN>
*Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales loads.
**Do not reflect the effect of dividends to Preferred Stock
shareholders.
++Dividends per share have been adjusted to reflect a two-for-one
stock split that occurred on December 1, 1994.
See Notes to Financial Statements.
</TABLE>
MuniYield Michigan Fund, Inc.
October 31, 1998
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniYield Michigan Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, closed-end
management investment company. The Fund determines and makes
available for publication the net asset value of its Common Stock on
a weekly basis. The Fund's Common Stock is listed on the New York
Stock Exchange under the symbol MYM. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily
in the over-the-counter markets and are valued at the most recent
bid price or yield equivalent as obtained by the Fund's pricing
service from dealers that make markets in such securities. Financial
futures contracts and options thereon, which are traded on
exchanges, are valued at their closing price as of the close of such
exchanges. Options written or purchased are valued at the last sale
price in the case of exchange-traded options. In the case of options
traded in the over-the-counter market, valuation is the last asked
price (options written) or the last bid price (options purchased).
Securities with remaining maturities of sixty days or less are
valued at amortized cost, which approximates market value.
Securities and assets for which market quotations are not readily
available are valued at their fair value as determined in good faith
by or under the direction of the Board of Directors of the Fund,
including valuations furnished by a pricing service retained by the
Fund, which may utilize a matrix system for valuations. The
procedures of the pricing service and its valuations are reviewed by
the officers of the Fund under general supervision of the Board of
Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
* Options--The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset
and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
MuniYield Michigan Fund, Inc.
October 31, 1998
(e) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
(f) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$12,569 have been reclassified between undistributed net realized
capital gains and undistributed net investment income and $19 has
been reclassified between paid-in capital in excess of par and
undistributed net realized capital gains. These reclassifications
have no effect on net assets or net asset value per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.50% of
the Fund's average weekly net assets, including proceeds from the
issuance of Preferred Stock.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended October 31, 1998 were $68,353,498 and
$89,363,668, respectively.
Net realized gains for the year ended October 31, 1998 and net
unrealized gains as of October 31, 1998 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $ 4,168,067 $11,951,820
----------- -----------
Total $ 4,168,067 $11,951,820
=========== ===========
As of October 31, 1998, net unrealized appreciation for Federal
income tax purposes aggregated $11,951,820, of which $12,059,372
related to appreciated securities and $107,552 related to depreciated
securities. The aggregate cost of investments at October 31, 1998
for Federal income tax purposes was $156,752,586.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock,
including Preferred Stock, par value $.10 per share, all of which
were initially classified as Common Stock. The Board of Directors is
authorized, however, to reclassify any unissued shares of capital
stock without approval of the holders of Common Stock.
Common Stock
Shares issued and outstanding during the year ended October 31, 1998
increased by 40,495 as a result of dividend reinvestment and during
the year ended October 31, 1997 remained constant.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred
Stock of the Fund, with a par value of $.05 per share and a
liquidation preference of $25,000 per share, that entitle their
holders to receive cash dividends at an annual rate that may vary
for the successive dividend periods. The yield in effect at October
31, 1998 was 3.30%.
Shares issued and outstanding during the years ended October 31,
1998 and October 31, 1997 remained constant.
The Fund pays commissions to certain broker-dealers at the end of
each auction at an annual rate ranging from 0.25% to 0.375%,
calculated on the proceeds of each auction. For the year ended
October 31, 1998, Merrill Lynch, Pierce, Fenner & Smith Inc., an
affiliate of FAM, earned $105,116 as commissions.
5. Subsequent Event:
On November 5, 1998, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $.082485 per share, payable on November 27, 1998 to shareholders
of record as of November 20, 1998.
MuniYield Michigan Fund, Inc.
October 31, 1998
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
MuniYield Michigan Fund, Inc.:
We have audited the accompanying statement of assets, liabilities
and capital, including the schedule of investments, of MuniYield
Michigan Fund, Inc. as of October 31, 1998, the related statements
of operations for the year then ended and changes in net assets for
each of the years in the two-year period then ended and the
financial highlights for each of the years in the five-year period
then ended. These financial statements and the financial highlights
are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at October
31, 1998 by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
MuniYield Michigan Fund, Inc. as of October 31, 1998, the results of
its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
December 4, 1998
</AUDIT-REPORT>
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid by MuniYield
Michigan Fund, Inc. during its taxable year ended October 31, 1998
qualify as tax-exempt interest dividends for Federal income tax
purposes. Additionally, the following table summarizes the taxable
capital gains distributions paid by the Fund during the year:
Payable Long-Term
Date Capital Gains
Common Stock Shareholders 12/30/97 $ .077828*
Preferred Stock Shareholders 11/25/97 $27.56*
12/02/97 $27.56*
12/09/97 $21.41*
10/13/98 $25.67**
10/20/98 $23.02**
10/27/98 $25.29**
[FN]
*The entire distribution is subject to the 28% tax rate.
**The entire distribution is subject to the 20% tax rate.
Please retain this information for your records.
MuniYield Michigan Fund, Inc.
October 31, 1998
MANAGED DIVIDEND POLICY
The Fund's dividend policy is to distribute substantially all of its
net investment income to its shareholders on a monthly basis.
However, in order to provide shareholders with a more consistent
yield to the current trading price of shares of Common Stock of the
Fund, the Fund may at times pay out less than the entire amount of
net investment income earned in any particular month and may at
times in any month pay out such accumulated but undistributed income
in addition to net investment income earned in that month. As a
result, the dividends paid by the Fund for any particular month may
be more or less than the amount of net investment income earned by
the Fund during such month. The Fund's current accumulated but
undistributed net investment income, if any, is disclosed in the
Statement of Assets, Liabilities and Capital, which comprises part
of the Financial Information included in this report.
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
James H. Bodurtha, Director
Herbet I. London, Director
Robert R. Martin, Director
Joseph L. May, Director
Andre F. Perold, Director
Terry K. Glenn, Executive Vice President
Vincent R. Giordano, Senior Vice President
Donald C. Burke, Vice President
Kenneth A. Jacob, Vice President
Fred K. Stuebe, Vice President
Gerald M. Richard, Treasurer
Philip M. Mandel, Secretary
Custodian
The Bank of New York
90 Washington Street
New York, NY 10286
Transfer Agents
Common Stock:
The Bank of New York
101 Barclay Street
New York, NY 10286
Preferred Stock:
IBJ Schroder Bank & Trust Company
One State Street
New York, NY 10004
NYSE Symbol
MYM
