MUNIYIELD
QUALITY
FUND, INC.
STRATEGIC
Performance
Annual Report
October 31, 1997
<PAGE>
MuniYield Quality Fund, Inc.
TO OUR SHAREHOLDERS
For the year ended October 31, 1997, the Common Stock of MuniYield Quality Fund,
Inc. earned $0.894 per share income dividends, which included earned and unpaid
dividends of $0.075. This represents a net annualized yield of 5.89%, based on a
month-end per share net asset value of $15.17. Over the same period, the total
investment return on the Fund's Common Stock was +11.03%, based on a change in
per share net asset value from $14.57 to $15.17, and assuming reinvestment of
$0.895 per share income dividends.
For the six-month period ended October 31, 1997, the total investment return on
the Fund's Common Stock was +8.66%, based on a change in per share net asset
value from $14.40 to $15.17, and assuming reinvestment of $0.445 per share
income dividends.
For the six-month period ended October 31, 1997, the average yields of the
Fund's Auction Market Preferred Stock were as follows: Series A, 3.33%; Series
B, 3.69%; Series C, 3.86%; and Series D, 3.51%.
The Municipal Market Environment
Long-term interest rates generally declined during the six-month period ended
October 31, 1997. The general financial environment has remained one of solid
economic growth tempered by few or no inflationary pressures. While economic
growth has been conducive to declining bond yields, it has remained strong
enough to suggest that the Federal Reserve Board (FRB) might find it necessary
to raise short-term interest rates. This would be intended to slow economic
growth and ensure that any incipient inflationary pressures would be curtailed.
There were investor concerns that the FRB would be forced to raise interest
rates prior to year-end, thus preventing an even more dramatic decline in
interest rates. Long-term tax-exempt revenue bonds, as measured by the Bond
Buyer Revenue Bond Index, declined over 50 basis points (0.50%) to end the
six-month period ended October 31, 1997 at 5.60%.
Similarly, long-term US Treasury bond yields generally moved lower during most
of the six-month period ended October 31, 1997. However, the turmoil in the
world's equity markets during the last week in October has resulted in a
significant rally in the Treasury bond market. The US Treasury bond market was
the beneficiary of a flight to quality mainly by foreign investors whose own
domestic markets have continued to be very volatile. Prior to the initial
decline in Asian equity markets, long-term US Treasury bond yields were
essentially unchanged. By the end of October, US Treasury bond yields declined
80 basis points to 6.15%, their lowest level of 1997.
The tax-exempt bond market's continued underperformance as compared to its
taxable counterpart has been largely in response to its ongoing weakening
technical position. As municipal bond yields have declined, municipalities have
hurriedly rushed to refinance outstanding higher-couponed debt with new issues
financed at present low rates. During the last six months, over $118 billion in
new long-term tax-exempt issues were underwritten, an increase of over 25%
versus the comparable period a year ago. As interest rates have continued to
decline, these refinancings have intensified municipal bond issuance. During the
past three months, approximately $60 billion in new long-term municipal
securities were underwritten, an increase of over 34% as compared to the October
31, 1996 quarter.
The recent trend toward larger and larger bond issues has also continued.
However, issues of such magnitude usually must be attractively priced to ensure
adequate investor interest. Obviously, the yields of other municipal bond issues
are impacted by the yield premiums such large issuers have been required to pay.
Much of the municipal bond market's recent underperformance can be traced to
market pressures that these large bond issuances have exerted.
In our opinion, the recent correction in world equity markets has enhanced the
near-term prospects for continued low, if not declining, interest rates in the
United States. It is likely that the recent correction will result in slower US
domestic growth in the coming months. This decline is likely to be generated in
1
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1997
part by reduced US export growth. Additionally, some decline in consumer
spending also can be expected in response to reduced consumer confidence.
Perhaps more importantly, it is likely that barring a dramatic and unexpected
resurgence in domestic growth, the FRB may be unwilling to raise interest rates
until the full impact of the equity market's corrections can be established.
All of these factors suggest that for at least the near term, interest rates,
including tax-exempt bond yields, are unlikely to rise by any appreciable
amount. It is probable that municipal bond yields will remain under some
pressure as a result of continued strong new-issue supply. However, the recent
pace of municipal bond issuance is likely to be unsustainable. Continued
increases in bond issuance will require lower tax-exempt bond yields to generate
the economic savings necessary for additional municipal bond refinancing. With
tax-exempt bond yields at already attractive yield ratios relative to US
Treasury bonds (approximately 90% at the end of October), any further pressure
on the municipal market may represent an attractive investment opportunity.
Portfolio Strategy
During the six-month period ended October 31, 1997, we maintained a neutral to
aggressive investment strategy, which benefited Fund performance. Our focus
during the period was on how fast the economy would grow without triggering
inflation or an interest rate hike by the FRB. We did not believe inflation was
a problem and kept cash reserves to a minimum to participate in the market
rally.
In October, uncertainty disrupted the world equity markets, causing a "flight to
quality" in the US bond market. This worldwide economic event will most likely
preclude the FRB from raising interest rates further and slow US economic
growth. This scenario could continue to enhance our strategy of being fully
invested in high-quality, long-term municipal bonds.
Looking ahead, we will continue to monitor world events to see whether
inflationary pressures will appear in 1998. It is our expectation that the US
economy will slow and that interest rates will move lower over the next year.
Consequently, we expect to maintain our current portfolio strategy in the near
future.
MuniYield Quality Fund, Inc.'s positive performance during the year ended
October 31, 1997 was mainly the result of our fully invested strategy, which
captured the positive price movement resulting from lower long-term interest
rates. This strategy produced a greater total return and higher yield for Common
Stock shareholders than the Lipper Analytical General Municipal Closed End Funds
Average.
In Conclusion
We appreciate your ongoing interest in MuniYield Quality Fund, Inc., and we look
forward to serving your investment needs in the months and years to come.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Vincent R. Giordano
Vincent R. Giordano
Senior Vice President
/s/ Kenneth A. Jacob
Kenneth A. Jacob
Vice President and Portfolio Manager
December 1, 1997
We are pleased to announce that Kenneth A. Jacob is responsible for the
day-to-day management of MuniYield Quality Fund, Inc. Mr. Jacob has been
employed by Merrill Lynch Asset Management, L.P. (an affiliate of the Fund's
investment adviser) since 1984 as Vice President.
2
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1997
PROXY RESULTS
During the six-month period ended October 31, 1997, MuniYield Quality Fund, Inc.
Common Stock shareholders voted on the following proposals. The proposals were
approved at a shareholders' meeting on September 18, 1997. The description of
each proposal and number of shares voted are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
1. To elect the Fund's Board of Directors: James H. Bodurtha 29,178,047 625,946
Herbert I. London 29,162,664 641,329
Robert R. Martin 29,173,475 630,518
Arthur Zeikel 29,169,986 634,007
- -----------------------------------------------------------------------------------------------
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2. To ratify the selection of Deloitte & Touche LLP
as the Fund's independent auditors for the current
fiscal year. 29,069,078 159,642 575,274
- -----------------------------------------------------------------------------------------------
</TABLE>
During the six-month period ended October 31, 1997, MuniYield Quality Fund, Inc.
Preferred Stock shareholders (Series A, B, C and D) voted on the following
proposals. The proposals were approved at a shareholders' meeting on September
17, 1997. The description of each proposal and number of shares voted are as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
1. To elect the Fund's Board of Directors: James H.
Bodurtha, Herbert I. London, Robert R. Martin,
Joseph L. May, Andre F. Perold and Arthur Zeikel as
follows:
Series A 1,134 0
Series B 1,074 0
Series C 1,717 1
Series D 1,875 0
- -----------------------------------------------------------------------------------------------
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2. To ratify the selection of Deloitte & Touche LLP as the Fund's
independent auditors for the current
fiscal year as follows:
Series A 1,134 0 0
Series B 1,074 0 0
Series C 1,717 0 1
Series D 1,867 0 8
- -----------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1997
THE BENEFITS AND RISKS OF LEVERAGING
MuniYield Quality 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 on 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.
PORTFOLIO ABBREVIATIONS
To simplify the listings of MuniYield Quality Fund, Inc.'s portfolio holdings in
the Schedule of Investments, we have abbreviated the names of many of the
securities according to the list below and at right.
AMT Alternative Minimum Tax (subject to)
DATES Daily Adjustable Tax-Exempt Securities
EDA Economic Development Authority
GO General Obligation Bonds
HDA Housing Development Authority
HFA Housing Finance Agency
IDA Industrial Development Authority
IDB Industrial Development Board
IDR Industrial Development Revenue Bonds
PCR Pollution Control Revenue Bonds
RITR Residual Interest Trust Receipts
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
4
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1997
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alabama -- 1.1% BBB Baa1 $3,000 Courtland, Alabama, IDB, IDR, Refunding
(Champion International Corporation), Series
A, 7.20% due 12/01/2013 $3,335
BBB Baa1 3,640 Courtland, Alabama, IDB, Solid Waste Disposal
Revenue Bonds (Champion International
Corporation Project), AMT, 7% due 6/01/2022 3,955
- -----------------------------------------------------------------------------------------------------------
Alaska -- 1.7% A- A2 5,000 Alaska Industrial Development and Export
Authority (Revolving Fund), AMT, Series A,
6.50% due 4/01/2014 5,368
NR* NR* 6,000 Valdez, Alaska, Marine Terminal Revenue
Refunding Bonds (Amerada Hess Pipeline
Corporation), 6.10% due 2/01/2024 6,145
- -----------------------------------------------------------------------------------------------------------
Arizona -- 0.8% A1+ P1 3,400 Maricopa County, Arizona, Pollution Control
Corporation, PCR, Refunding (Arizona Public
Service Company), VRDN, Series C,
4% due 5/01/2029 (a) 3,400
A1+ P1 1,600 Pinal County, Arizona, IDA, PCR
(Magma--Copper/Newmont Mining Corporation),
VRDN, 3.65% due 12/01/2009 (a) 1,600
- -----------------------------------------------------------------------------------------------------------
Arkansas -- AAA NR* 1,990 Arkansas State Development Finance Authority,
0.3% S/F Mortgage Revenue Bonds, AMT, Series A,
7.30% due 3/01/2013 (h) 2,112
A1+ P1 100 Clark County, Arkansas, Solid Waste Disposal
Revenue Bonds (Reynolds Metals Company
Project), VRDN, AMT, 3.75% due 8/01/2022 (a) 100
- -----------------------------------------------------------------------------------------------------------
California -- California State Public Works Board, Lease
2.4% Revenue Bonds (i):
A Aaa 6,800 (Department of Corrections--Monterey County,
Soledad II), Series A, 7% due 11/01/2004 8,001
AAA Aaa 7,000 (Various University of California Projects),
Series A, 6.60% due 12/01/2002 7,892
- -----------------------------------------------------------------------------------------------------------
Colorado--7.2% Colorado HFA, S/F Program, AMT:
NR* Aa2 2,490 Senior Series A-1, 7.40% due 11/01/2027 2,799
NR* Aa2 6,990 Senior Series D-1, 7.375% due 6/01/2026 7,794
NR* Aa2 1,355 Colorado HFA, S/F Project, Senior Series C-2,
7.45% due 6/01/2017 1,534
NR* Aaa 1,350 Colorado Health Facilities Authority,
Hospital Revenue Bonds (P/SL Healthcare
System Project), Series A, 6.875% due
2/15/2003 (i) 1,529
NR* Aaa 4,550 Colorado Health Facilities Authority Revenue
Bonds (Swedish Medical Center Project),
Series A, 6.80% due 1/01/2003 (i) 5,138
Denver, Colorado, City and County Airport
Revenue Bonds:
BBB Baa1 2,045 AMT, Series B, 7.25% due 11/15/2002 (i) 2,346
BBB Baa1 7,955 AMT, Series B, 7.25% due 11/15/2023 8,867
BBB Baa1 1,510 AMT, Series D, 7.75% due 11/15/2001 (i) 1,730
BBB Baa1 5,000 AMT, Series D, 7.75% due 11/15/2013 6,250
BBB Baa1 5,740 AMT, Series D, 7.75% due 11/15/2021 6,427
AAA Aaa 3,000 Refunding, Series D, 5.875% due 11/15/2016(c) 3,075
- -----------------------------------------------------------------------------------------------------------
Florida -- 0.8% AA- VMIG1+ 600 Dade County, Florida, IDA, Exempt Facilities
Revenue Refunding Bonds (Florida Power and
Light Company), VRDN, 3.65% due 6/01/2021 (a) 600
NR* Baa 3,120 Palm Bay, Florida, Lease Revenue Refunding
Bonds (Florida Education and Research
Foundation Project), Series A, 7% due
9/01/2024 3,483
A1 VMIG1+ 1,200 Pinellas County, Florida, Health Facilities
Authority, Revenue Refunding Bonds (Pooled
Hospital Loan Program), DATES, 3.65% due
12/01/2015(a) 1,200
A1+ VMIG1+ 100 Saint Lucie County, Florida, PCR, Refunding
(Florida Power and Light Company Project),
VRDN, 3.65% due 1/01/2026(a) 100
- -----------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1997
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Georgia -- 1.6% AA Aa3 $ 4,825 Atlanta, Georgia, GO, UT, Series A, 6.125%
due 12/01/2023 $ 5,213
A-1 VMIG1+ 100 Burke County, Georgia, Development Authority,
PCR (Georgia Power Company--Plant Vogtle
Project), VRDN, 2nd Series, 3.65% due
4/01/2025 (a) 100
A A3 4,785 Monroe County, Georgia, Development
Authority, PCR, Refunding (Oglethorpe
Power--Scherer), Series A, 6.80% due 1/01/2011 5,560
- -------------------------------------------------------------------------------------------------------------
Illinois -- 10.3% AAA Aaa 2,745 Chicago, Illinois, Board of Education,
Chicago School Reform, GO, UT, 6.25% due
12/01/2009(c) 3,088
AAA Aaa 17,000 Chicago, Illinois, Metropolitan Housing
Development Corporation, Mortgage Revenue
Refunding Bonds (Housing Development), Series
A, 6.85% due 7/01/2022 (b)(f) 18,015
AAA Aaa 5,000 Chicago, Illinois, Wastewater Transmission
Revenue Refunding Bonds, 5.125% due 1/01/2025(e) 4,805
BBB Baa1 21,000 Illinois Development Finance Authority, PCR,
Refunding (Illinois Power Company Project),
Series A, 7.375% due 7/01/2021 24,155
AA- Aa3 2,130 Illinois Development Finance Authority
Revenue Bonds (Presbyterian Home Lake),
Series B, 6.25% due 9/01/2017 2,271
NR* A1 3,750 Illinois Student Assistance Commission,
Student Loan Revenue Bonds, AMT, Sub-Series
CC, 6.875% due 3/01/2015 4,013
Metropolitan Pier and Exposition Authority,
Illinois, Dedicated State Tax Revenue
Refunding Bonds (McCormick Place Expansion
Project), Series A (c)**:
AAA Aaa 16,570 5.87% due 12/15/2020 4,790
AAA Aaa 10,000 6.03% due 12/15/2022 2,578
AAA Aaa 10,000 Will County, Illinois, Community Unit School
District No. 365, UT, Series B, 5.45%** due
11/01/2013(d) 4,263
- -------------------------------------------------------------------------------------------------------------
Indiana -- 5.8% De Kalb County, Indiana, Redevelopment
Authority (Mini-Mill), Series A (l):
AAA NR* 3,000 6.50% due 1/15/2014 3,296
AAA NR* 3,220 6.625% due 1/15/2017 3,556
AAA NR* 2,500 Indiana Bond Bank Revenue Guarantee Bonds
(State Revolving Fund Program), Series A,
6.875% due 2/01/2012 2,812
AAA Aaa 3,195 Indiana State Office Building Commission,
Capital Complex Revenue Refunding Bonds
(Governmental Center Package Facilities),
Series A, 5.25% due 7/01/2015 (b) 3,141
BBB Baa2 7,800 Indianapolis, Indiana, Airport Authority,
Special Facilities Revenue Bonds (Federal
Express Corporation Project), AMT, 7.10% due
1/15/2017 8,745
A+ NR* 15,000 Indianapolis, Indiana, Local Public
Improvement Bond Bank, Refunding, Series D,
6.75% due 2/01/2020 16,568
- -------------------------------------------------------------------------------------------------------------
Kansas -- 0.6% AAA Aaa 3,500 Kansas City, Kansas, Utility System Revenue
Refunding and Improvement Bonds, 6.375% due
9/01/2023 (e) 3,862
- -------------------------------------------------------------------------------------------------------------
Kentucky -- 6.0% NR* Baa1 5,000 Ashland, Kentucky, PCR, Refunding (Ashland
Oil Incorporated Project), 6.65% due
8/01/2009 5,396
AAA Aaa 5,000 Kentucky Housing Corporation, Housing Revenue
Bonds, AMT, Series B, 6.625% due 7/01/2026(f) 5,293
AAA Aaa 9,650 Kentucky State Turnpike Authority, Economic
Development, Revenue Refunding Bonds
(Revitalization Projects), 5.50% due
7/01/2008 (b) 10,283
AAA Aaa 6,570 Lexington-Fayette Urban County Government,
Kentucky, Governmental Project Revenue Bonds
(University of Kentucky Alumni Association
Inc. Project), 6.75% due 11/01/2020 (c) 7,469
NR* NR* 5,250 Perry County, Kentucky, Solid Waste Disposal
Revenue Bonds (TJ International Project),
AMT, 7% due 6/01/2024 5,700
A1+ Aa2 5,000 Trimble County, Kentucky, PCR (Louisville Gas
and Electric Company), AMT, Series B, 6.55%
due 11/01/2020 5,405
- -------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1997
SCHEDULE OF OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Louisiana -- 1.9% NR* A3 $11,115 Lake Charles, Louisiana, Harbor and Terminal
District, Port Facilities Revenue Refunding
Bonds (Trunkline LNG Company Project), 7.75%
due 8/15/2022 $12,738
- ----------------------------------------------------------------------------------------------------------------
Maryland -- 0.3% NR* Aaa 1,950 Prince Georges County, Maryland, Hospital
Revenue Bonds (Dimensions Health
Corporation), 7% due 7/01/2002 (i) 2,203
- ----------------------------------------------------------------------------------------------------------------
Massachusetts -- AAA Aaa 1,000 Boston, Massachusetts, GO, UT, Series B,
7.4% 5.875% due 8/01/2012 (b) 1,056
Massachusetts Bay Transportation Authority,
General Transportation Systems, Refunding,
Series A:
AA- A1 3,730 7% due 3/01/2011 4,453
AA- A1 3,550 7% due 3/01/2014 4,274
AA- A1 5,000 Massachusetts Bay Transportation Authority,
Massachusetts Transportation Systems, Series
C, 6.10% due 3/01/2002 (i) 5,433
BBB+ Aaa 1,045 Massachusetts Municipal Wholesale Electric
Company, Power Supply System Revenue Bonds,
Series B, 6.75% due 7/01/2002 (i) 1,171
AAA Aaa 2,000 Massachusetts State, Consolidated Loan Bonds,
Series B, 5.50% due 7/01/2013 (b) 2,053
AAA Aaa 3,500 Massachusetts State, HFA, Residential
Development, Series D, 6.80% due 11/15/2012(j) 3,760
Massachusetts State, HFA, S/F Housing Revenue
Bonds:
A+ Aa 4,025 Series 33, 6.35% due 6/01/2017 4,229
A+ Aa 3,035 Series 37, 6.35% due 6/01/2017 3,195
A+ A1 3,595 Massachusetts State Health and Educational
Facilities Authority Revenue Bonds (Brigham
and Women's Hospital), Series C,
7% due 6/01/1999 (i) 3,827
NR* Aaa 16,200 Massachusetts State Turnpike Authority,
Metropolitan Highway System Revenue Bonds,
Series A, 5% due 1/01/2037 (c) 15,248
- ----------------------------------------------------------------------------------------------------------------
Michigan -- 3.2% BBB Baa1 12,650 Dickinson County, Michigan, Economic
Development Corporation, PCR, Refunding
(Champion International Corporation Project),
5.85% due 10/01/2018 12,955
AAA Aaa 3,215 Michigan State Building Authority, Revenue
Refunding Bonds, Series I, 6.25% due
10/01/2020 (c) 3,465
A A2 4,375 Michigan State Hospital Finance Authority,
Revenue Refunding Bonds (Detroit Medical
Center Obligation Group), Series A, 6.50% due
8/15/2018 4,714
- ----------------------------------------------------------------------------------------------------------------
Missouri -- 0.9% AAA Aaa 2,000 Kansas City, Missouri, Municipal Assistance
Corporation, Revenue Refunding Bonds
(Leasehold--H. Roe Bartle), Series A, 5% due
4/15/2020 (c) 1,927
AA- Aa3 4,000 Saint Louis, Missouri, Parking Facility
Revenue Bonds, 6.625% due 12/15/2002 (i) 4,340
- ----------------------------------------------------------------------------------------------------------------
Nebraska -- 1.4% AAA Aaa 9,400 Nebraska Public Power District, Power Supply
System Revenue Bonds, Series A, 5.25% due
1/01/2028 (c) 9,218
- ----------------------------------------------------------------------------------------------------------------
New Hampshire -- NR* Baa1 4,290 New Hampshire Higher Educational and Health
0.7% Facilities Authority, Revenue Refunding
Bonds (Saint Anselm College), 6.20% due
7/01/2013 4,435
- ----------------------------------------------------------------------------------------------------------------
New Mexico -- 0.8% A A2 5,000 Lordsburg, New Mexico, PCR, Refunding (Phelps
Dodge Corporation Project), 6.50% due
4/01/2013 5,412
- ----------------------------------------------------------------------------------------------------------------
New York -- 13.1% New York City, New York, GO, UT:
BBB+ Baa1 5,000 Refunding, Series E, 6.50% due 2/15/2006 5,507
BBB+ Baa1 2,315 Refunding, Series J, 6% due 8/01/2017 2,404
AAA Aaa 4,740 Series A, 7.75% due 8/15/2001 (i) 5,397
BBB+ Baa1 260 Series A, 7.75% due 8/15/2017 291
BBB+ Baa1 5,000 Series B, 5.875% due 8/15/2013 5,159
BBB+ Baa1 9,055 Series F, 5.75% due 2/01/2019 9,152
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1997
SCHEDULE OF OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
New York New York City, New York, GO, UT (concluded):
(concluded) BBB+ Baa1 $ 8,825 Series G, 5.75% due 2/01/2017 $ 8,968
BBB+ Baa1 5,000 Series K, 6.25% due 4/01/2026 5,332
New York City, New York, Municipal Water
Finance Authority, Water and Sewer System
Revenue Bonds (c):
AAA Aaa 8,085 RITR, Series RI-97-6, 7.495% due 6/15/2026 (g) 8,560
AAA Aaa 1,590 Series B, 5.75% due 6/15/2026 1,642
AAA Aaa 3,485 New York State Dormitory Authority Revenue
Bonds (Saint Vincents Hospital and Medical
Center), 5.75% due 8/01/2015 (b)(f) 3,603
New York State Environmental Facilities
Corporation, PCR (State Water Revolving
Fund):
A- Aa2 3,380 New York City Municipal Water Finance
Authority, Series B, 5.25% due 6/15/2014 3,343
A Aa 5,680 Series E, 6.50% due 6/15/2001 (i) 6,216
A Aa 220 Series E, 6.50% due 6/15/2014 239
New York State Local Government Assistance
Corporation, Series A:
A+ A3 1,000 6% due 4/01/2016 1,067
A+ A3 13,450 6.50% due 4/01/2020 14,466
BBB+ Baa1 5,000 New York State Urban Development Corporation,
Revenue Refunding Bonds (Correctional Capital
Facilities), 5.75% due 1/01/2013 5,096
- ----------------------------------------------------------------------------------------------------------
Ohio -- 1.6% AA- Aa3 10,000 Ohio State Air Quality Development Authority,
Revenue Refunding Bonds (Dayton Power and
Light Project), Series B, 6.40% due 8/15/2027 10,778
- ----------------------------------------------------------------------------------------------------------
Rhode Island -- 0.4% AAA Aaa 2,500 Providence, Rhode Island, Series A, GO, UT,
5.70% due 7/15/2019 (d) 2,582
- ----------------------------------------------------------------------------------------------------------
South Carolina -- A A1 12,000 Fairfield County, South Carolina, PCR (South
6.1% Carolina Electric and Gas Company),
6.50% due 9/01/2014 13,039
A- A1 8,000 Richland County, South Carolina, Solid Waste
Disposal Facilities Revenue Bonds (Union Camp
Corporation Project), AMT, Series A, 6.75%
due 5/01/2022 8,669
AAA Aaa 4,000 South Carolina State, Housing Finance and
Development Authority, Mortgage Revenue
Bonds, Series A-1, AMT, 5.95% due 7/01/2029(b) 4,097
AAA Aaa 9,500 South Carolina State Public Service Authority
Revenue Bonds (Santee Cooper), Series D,
6.625% due 7/01/2002 (i) 10,597
NR* NR* 3,800 Spartanburg County, South Carolina, Solid
Waste Disposal Facilities Revenue Bonds (BMW
Project), AMT, 7.55% due 11/01/2024 4,289
- ----------------------------------------------------------------------------------------------------------
South Dakota -- AAA Aa1 5,500 South Dakota HDA, Homeownership Mortgage,
0.9% Refunding, Series A, 6.45% due 5/01/2022 5,731
- ----------------------------------------------------------------------------------------------------------
Tennessee -- 3.4% BBB Baa1 2,500 McMinn County, Tennessee, IDB, Solid Waste
Revenue Bonds (Recycling Facility--Calhoun
Newsprint--Bowater), AMT, 7.40% due 12/01/2022 2,787
AA Aa2 18,050 Metropolitan Government, Nashville and
Davidson Counties, Tennessee, GO, UT, 6.15%
due 5/15/2002 (i) 19,703
- ----------------------------------------------------------------------------------------------------------
Texas -- 4.4% AAA Aaa 6,615 Austin, Texas, Independent School District,
Refunding, UT, 5.60% due 8/01/2009 6,998
AAA Aaa 2,150 Austin, Texas, Utility System Revenue Bonds
(Combined Prior Lien), 6.25% due 5/15/2004(c)(i) 2,371
NR* Aaa 1,000 Bell County, Texas, Health Facilities
Development Corporation Revenue Bonds
(Lutheran General Health Care System--Parkside
Medical Services Corporation), 6.50% due
7/01/2019 (k) 1,140
- ----------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1997
SCHEDULE OF OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Texas BBB Baa1 $ 1,840 Gulf Coast Waste Disposal Authority, Texas,
(concluded) Revenue Bonds (Champion
International Corporation), AMT, 7.45% due
5/01/2026 $ 2,030
Harris County, Texas, Health Facilities
Development Corporation, Hospital Revenue
Bonds:
A- A2 5,000 (Memorial Hospital Systems Project), Series
A, 6.60% due 6/01/2004 (i) 5,664
A1+ NR* 100 Refunding (Methodist Hospital), VRDN, 3.70%
due 12/01/2026 (a) 100
AA Aa2 5,000 Harris County, Texas, Toll Road Revenue
Refunding Bonds, Sub-Lien, GO, UT, 6.75% due
8/01/2014 5,472
A+ Aa 5,295 Texas Housing Agency, Residential Development
Mortgage Revenue Bonds, Series A, 7.50% due
7/01/2015 (h) 5,672
- -------------------------------------------------------------------------------------------------------------
Utah -- 3.0% AA Aa 15,000 Salt Lake City, Utah, Hospital Revenue
Refunding Bonds (IHC Hospitals Inc.), 6.30%
due 2/15/2015 16,810
A- NR* 2,710 West Valley City, Utah, Redevelopment Agency,
Tax Increment Revenue Bonds, 6% due 3/01/2024 2,809
- -------------------------------------------------------------------------------------------------------------
Virginia -- 7.9% AA Aa3 5,000 Chesapeake, Virginia, Water and Sewer, GO,
UT, Series A, 5% due 12/01/2025 4,789
Norfolk, Virginia, Capital Improvement, GO,
UT (e):
AAA Aaa 2,190 5.375% due 6/01/2016 2,210
AAA Aaa 2,190 5.375% due 6/01/2017 2,210
AAA Aaa 3,500 Richmond, Virginia, Refunding, GO, UT, Series
B, 5% due 1/15/2021 (e) 3,365
Virginia State, HDA, Commonwealth Mortgage:
AA+ Aa1 22,000 Series A, 7.15% due 1/01/2033 23,159
AA+ Aa1 5,000 Series B, Sub-Series B-1, 6.875% due 7/01/2011 5,331
AA Aa 10,000 Virginia State Transportation Board,
Transportation Contract Revenue Refunding
Bonds (Route 28 Project), 6.50% due 4/01/2018 10,906
- -------------------------------------------------------------------------------------------------------------
Washington -- 0.4% AAA Aaa 2,825 Washington State Public Power Supply System
Revenue Refunding Bonds (Nuclear Project No.
2), Series A, 5.70% due 7/01/2011 (b) 2,950
- -------------------------------------------------------------------------------------------------------------
West Virginia -- 1.7% A A2 5,000 Braxton County, West Virginia, Solid Waste
Disposal Revenue Bonds (Weyerhaeuser Company
Project), AMT, 6.50% due 4/01/2025 5,400
BBB+ Baa1 5,600 Putnam County, West Virginia, PCR, Refunding
(Appalachian Power Company Project), Series
C, 6.60% due 7/01/2019 5,954
- -------------------------------------------------------------------------------------------------------------
Wisconsin -- 0.8% A A1 3,800 Wisconsin Housing and EDA, Housing Revenue
Bonds, AMT, Series D, 7.20% due 11/01/2013 4,036
NR* A2 1,100 Wisconsin State Health and Educational
Facilities Authority Revenue Bonds (Mercy
Hospital of Janesville Inc.), 6.60%
due 8/15/2022 1,173
- -------------------------------------------------------------------------------------------------------------
Total Investments (Cost -- $607,343) -- 98.9% 654,526
Other Assets Less Liabilities -- 1.1% 7,121
========
Net Assets -- 100.0% $661,647
========
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(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,
1997.
(b) AMBAC Insured.
(c) MBIA Insured.
(d) FSA Insured.
(e) FGIC Insured.
(f) FHA Insured.
(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, 1997.
(h) GNMA Collateralized.
(i) Prerefunded.
(j) FNMA Collateralized.
(k) Escrowed to Maturity.
(l) Connie Lee Insured.
+ Highest short-term rating by Moody's Investors Service, Inc.
* Not Rated.
** Represents a zero-coupon bond; the interest rate shown is the effective
yield at the time of purchase by the Fund.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
9
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1997
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Statement of Assets, Liabilities and Capital as of October 31, 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets: Investments, at value (identified cost--$607,343,485)
(Note 1a) .................................................... $654,526,019
Cash ......................................................... 343,565
Receivables:
Interest .................................................... $ 11,968,731
Securities sold ............................................. 10,310 11,979,041
------------
Prepaid expenses and other assets ............................ 14,273
------------
Total assets ................................................. 666,862,898
------------
- ---------------------------------------------------------------------------------------------------------
Liabilities: Payables:
Securities purchased ........................................ 4,233,300
Dividends to shareholders (Note 1f) ......................... 568,233
Investment adviser (Note 2) ................................. 297,394 5,098,927
------------
Accrued expenses and other liabilities ....................... 117,435
------------
Total liabilities ............................................ 5,216,362
------------
- ---------------------------------------------------------------------------------------------------------
Net Assets: Net assets ................................................... $661,646,536
============
- ---------------------------------------------------------------------------------------------------------
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.05 per share (8,000 shares
of AMPS* issued and outstanding at $25,000 per share
liquidation preference) ..................................... $200,000,000
Common Stock, par value $.10 per share (30,425,258 shares
issued and outstanding) ..................................... $ 3,042,526
Paid-in capital in excess of par ............................. 423,867,420
Undistributed investment income--net ......................... 4,185,678
Accumulated realized capital losses on investments--net
(Note 5) ..................................................... (16,631,622)
Unrealized appreciation on investments--net .................. 47,182,534
------------
Total--Equivalent to $15.17 net asset value per share of
Common Stock (market price--$14.4375) ........................ 461,646,536
------------
Total capital ................................................ $661,646,536
============
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
10
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1997
FINANCIAL INFORMATION (continued)
Statement of Operations
<TABLE>
<CAPTION>
For the Year Ended
October 31, 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income Interest and amortization of premium
(Note 1d): and discount earned .................... $38,828,331
- -----------------------------------------------------------------------------------------------
Expenses: Investment advisory fees (Note 2) ....... $3,256,764
Commission fees (Note 4) ................ 510,956
Transfer agent fees ..................... 100,734
Accounting services (Note 2) ............ 82,487
Professional fees ....................... 78,541
Printing and shareholder reports ........ 47,955
Custodian fees .......................... 33,820
Listing fees ............................ 26,950
Directors' fees and expenses ............ 22,820
Pricing fees ............................ 14,141
Amortization of organization expenses
(Note 1e) .............................. 4,917
Other ................................... 43,861
----------
Total expenses .......................... 4,223,946
-----------
Investment income--net .................. 34,604,385
-----------
- -----------------------------------------------------------------------------------------------
Realized & Realized gain on investments--net ....... 3,328,987
Unrealized Gain on Change in unrealized appreciation on
Investments -- Net investments--net ....................... 14,811,503
(Notes 1b, 1d & 3): -----------
Net Increase in Net Assets Resulting
from Operations ........................ $52,744,875
===========
- -----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended October 31,
------------------------------
Increase (Decrease) in Net Assets: 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations: Investment income--net .................. $ 34,604,385 $ 34,288,678
Realized gain (loss) on investments--net 3,328,987 (5,776,283)
Change in unrealized appreciation on
investments--net ....................... 14,811,503 5,462,482
------------ ------------
Net increase in net assets resulting from
operations ............................. 52,744,875 33,974,877
------------ ------------
- -------------------------------------------------------------------------------------------
Dividends to Investment income--net:
Shareholders Common Stock ........................... (27,227,016) (27,326,111)
(Note 1f): Preferred Stock ........................ (7,025,740) (7,212,600)
------------ ------------
Net decrease in net assets resulting from
dividends to shareholders .............. (34,252,756) (34,538,711)
------------ ------------
- -------------------------------------------------------------------------------------------
Net Assets: Total increase (decrease) in net assets . 18,492,119 (563,834)
Beginning of year ....................... 643,154,417 643,718,251
------------ ------------
End of year* ............................ $661,646,536 $643,154,417
============ ============
* Undistributed investment income--net .. $ 4,185,678 $ 3,834,049
============ ============
- -------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
MuniYield Quality Fund, Inc..October 31, 1997
FINANCIAL INFORMATION (concluded)
Financial Highlights
<TABLE>
<CAPTION>
The following per share data and ratios have been derived For the Year Ended
from information provided in the financial statements. October 31,
-----------------------------------------------------
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year .............. $ 14.57 $ 14.58 $ 13.16 $ 15.95 $ 13.38
Operating -------- -------- ------ -------- --------
Performance: Investment income--net .......................... 1.13 1.14 1.15 1.16 1.18
Realized and unrealized gain (loss) on
investments--net ................................ .59 (.01) 1.43 (2.57) 2.58
-------- -------- ------ -------- --------
Total from investment operations ................ 1.72 1.13 2.58 (1.41) 3.76
-------- -------- ------ -------- --------
Less dividends and distributions to Common Stock
shareholders:
Investment income--net ......................... (.89) (.90) (.89) (.96) (.99)
Realized gain on investments--net .............. -- -- (.02) (.22) --
In excess of realized gain on investments--net . -- -- --+ -- --
-------- -------- ------ -------- --------
Total dividends and distributions to Common
Stock shareholders .............................. (.89) (.90) (.91) (1.18) (.99)
-------- -------- ------ -------- --------
Effect of Preferred Stock activity:
Dividends and distributions to Preferred
Stock shareholders:
Investment income--net ....................... (.23) (.24) (.25) (.16) (.20)
Realized gain on investments--net ............ -- -- --+ (.04) --
In excess of realized gain on
investments--net ............................. -- -- --+ -- --
-------- -------- ------ -------- --------
Total effect of Preferred Stock activity ........ (.23) (.24) (.25) (.20) (.20)
-------- -------- ------ -------- --------
Net asset value, end of year .................... $15.17 $ 14.57 $ 14.58 $ 13.16 $ 15.95
======== ======== ====== ======== ========
Market price per share, end of year ............. $14.4375 $ 12.875 12.625 $ 11.00 $ 15.25
======== ======== ====== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
Total Investment Based on market price per share ................. 19.58% 9.12% 23.63% (21.32%) 19.68%
Return:* ======== ======== ====== ======== ========
Based on net asset value per share .............. 11.03% 6.93% 19.34% (10.00%) 27.46%
======== ======== ====== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses, net of reimbursement ................. .65% .66% .66% .66% .60%*
Net Assets:** ======== ======== ====== ======== ========
Expenses ........................................ .65% .66% .66% .66% .61%*
======== ======== ====== ======== ========
Investment income--net .......................... 5.32% 5.32% 5.65% 5.50% 5.52%*
======== ======== ====== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, net of Preferred Stock, end
Data: of year (in thousands) .......................... $461,647 $443,154 $443,718 $400,387 $485,376
======== ======== ====== ======== ========
Preferred Stock outstanding, end of year
(in thousands) .................................. $200,000 $200,000 $200,000 $200,000 $200,000
======== ======== ====== ======== ========
Portfolio turnover .............................. 36.87% 68.22% 57.56% 42.31% 66.14%
======== ======== ====== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
Leverage: Asset coverage per $1,000 ....................... $ 3,308 $ 3,216 $ 3,219 $ 3,002 $ 3,427
======== ======== ====== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
Dividends Per Series A--Investment income--net ................ $ 864 $ 953 $ 961 $ 571 $ 713
Share on ======== ======== ====== ======== ========
Preferred Stock Series B--Investment income--net ................ $ 892 $ 880 $ 917 $ 627 $ 685
Outstanding:++ ======== ======== ====== ======== ========
Series C--Investment income--net ................ $ 884 $ 888 $ 977 $ 577 $ 747
======== ======== ====== ======== ========
Series D--Investment income--net ................ $ 873 $ 885 $ 921 $ 698 $ 832
======== ======== ====== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* 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.
+ Amount is less than $.01 per share.
++ 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.
12
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1997
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniYield Quality 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 MQY. 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 prices as of the
close of such exchanges. Options, which are traded on exchanges, are valued at
their last sale price as of the close of such exchanges or, lacking any sales,
at the last available bid price. Securities with remaining maturities of sixty
days or less are valued at amortized cost, which approximates market value.
Securities 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 the 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.
o Financial futures contracts--The Fund may purchase or sell interest rate
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.
o 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.
(e) Deferred organization expenses--Deferred organization expenses are amortized
on a straight-line basis over a five-year period.
(f) Dividends and distributions--Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
13
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
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.
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, 1997 were $232,694,855 and $230,708,829, respectively.
Net realized and unrealized gains (losses) as of October 31, 1997 were as
follows:
- ------------------------------------------------------------
Realized
Gains Unrealized
(Losses) Gains
- ------------------------------------------------------------
Long-term investments ....... $ 3,421,687 $47,182,534
Financial futures contracts . (92,700) --
----------- -----------
Total ....................... $ 3,328,987 $47,182,534
=========== ===========
- ------------------------------------------------------------
As of October 31, 1997, net unrealized appreciation for Federal income tax
purposes aggregated $47,182,534, of which $47,203,913 related to appreciated
securities and $21,379 related to depreciated securities. The aggregate cost of
investments at October 31, 1997 for Federal income tax purposes was
$607,343,485.
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 years ended October 31, 1997 and
October 31, 1996 remained constant.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred Stock of the
Fund that entitle their holders to receive cash dividends at an annual rate that
may vary for the successive dividend periods. The yields in effect at October
31, 1997 were as follows: Series A, 3.573%; Series B, 3.525%; Series C, 3.50%;
and Series D, 3.55%.
As of October 31, 1997, there were 8,000 AMPS shares authorized, issued and
outstanding with a liquidation preference of $25,000 per share.
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, 1997, Merrill Lynch, Pierce, Fenner
& Smith Inc., an affiliate of FAM, earned $269,376 as commissions.
5. Capital Loss Carryforward:
At October 31, 1997, the Fund had a net capital loss carryforward of
approximately $8,171,000, of which $3,654,000 expires in 2003 and $4,517,000
expires in 2004. This amount will be available to offset like amounts of any
future taxable gains.
6. Subsequent Event:
On November 6, 1997, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.074592 per share,
payable on November 26, 1997 to shareholders of record as of November 17, 1997.
14
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1997
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of MuniYield Quality Fund, Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of MuniYield Quality Fund, Inc. as of
October 31, 1997, 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, 1997 by correspondence with the custodian and broker. 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 Quality
Fund, Inc. as of October 31, 1997, 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 5, 1997
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid by MuniYield Quality Fund,
Inc. during its taxable year ended October 31, 1997 qualify as tax-exempt
interest dividends for Federal income tax purposes. Additionally, there were no
capital gains distributed by the Fund during the year.
Please retain this information for your records.
15
<PAGE>
Officers and Directors
Arthur Zeikel, President and Director
James H. Bodurtha, Director
Herbert 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
Hugh T. Hurley III, Vice President
Kenneth A. Jacob, Vice President
Gerald M. Richard, Treasurer
Philip M. Mandel, Secretary
Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Transfer Agents
Common Stock:
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Preferred Stock:
IBJ Schroder Bank & Trust Company
One State Street
New York, NY 10004
NYSE Symbol
MQY
This report, including the financial information herein, is transmitted to the
shareholders of MuniYield Quality 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
Quality Fund, Inc.
Box 9011
Princeton, NJ
08543-9011 #16352 -- 10/97
[LOGO] Printed on post-consumer recycled paper
