MUNIYIELD
QUALITY
FUND, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
October 31, 1998
<PAGE>
MuniYield Quality Fund, Inc.
TO OUR SHAREHOLDERS
For the year ended October 31, 1998, the Common Stock of MuniYield Quality Fund,
Inc. earned $0.880 per share income dividends, which included earned and unpaid
dividends of $0.075. This represents a net annualized yield of 5.65%, based on a
month-end per share net asset value of $15.58. Over the same period, the total
investment return on the Fund's Common Stock was +8.93%, based on a change in
per share net asset value from $15.17 to $15.58, and assuming reinvestment of
$0.879 per share income dividends.
For the six-month period ended October 31, 1998, the total investment return on
the Fund's Common Stock was +5.89%, based on a change in per share net asset
value from $15.15 to $15.58, and assuming reinvestment of $0.439 per share
income dividends.
For the six-month period ended October 31, 1998, the Fund's Auction Market
Preferred Stock had an average yield as follows: Series A, 3.73%; Series B,
3.61%; Series C, 3.24%; and Series D, 3.31%.
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
1
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1998
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.
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 unman aged 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
Over the six-month period ended October 31, 1998, we maintained a
neutral-to-positive outlook for the municipal market. We also remained committed
to our strategy of being fully invested in long-term investment-grade municipal
bonds. At October 31, 1998, approximately 75% of the Fund was comprised of bonds
rated A or better by at least one of the major rating agencies.
While the rate of inflation is presently negligible, we believe that it can
possibly decline even further as other countries try to use exporting as a means
out of their economic crises. We believe this flood of exports could slow the US
economy and possibly allow the Federal Reserve Board to lower interest rates
further. Given this scenario, we believe that the Fund is well-positioned to
perform favorably in a declining interest rate environment.
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 11, 1998
2
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1998
PROXY RESULTS
During the six-month period ended October 31, 1998, MuniYield Quality 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 Voted Shares Withheld
For From Voting
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. To elect the Fund's Board of Directors: James H. Bodurtha 29,191,357 246,508
Herbert I. London 29,192,265 245,600
Robert R. Martin 29,190,087 247,778
Arthur Zeikel 29,189,811 248,053
</TABLE>
<TABLE>
<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. 29,114,665 75,225 247,975
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
During the six-month period ended October 31, 1998, 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
24, 1998. 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 2,000 0
Series D 1,880 0
Series B as follows:
James H. Bodurtha, Joseph L. May and Arthur Zeikel 1,544 453
Herbert I. London, Robert R. Martin and Andre F. Perold 1,543 454
Series C as follows:
James H. Bodurtha, Herbert I. London, Joseph L. May,
Andre F. Perold and Arthur Zeikel 1,910 89
Robert R. Martin 1,904 95
</TABLE>
<TABLE>
<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 2,000 0 0
Series B 1,998 0 0
Series C 2,000 0 0
Series D 1,864 0 15
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
MANAGED DIVIDEND POLICY
The Fund's dividend policy is to distribute substantially all of its net
investment income to its share holders 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.
3
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1998
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 share holders. 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.
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.
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)
EDA Economic Development Authority
GO General Obligation Bonds
HDA Housing Development Authority
HFA Housing Finance Agency
IDB Industrial Development Board
IDR Industrial Development Revenue Bonds
PCR Pollution Control Revenue Bonds
RIB Residual Interest 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, 1998
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 $ 3,291
BBB Baa1 3,640 Courtland, Alabama, IDB, Solid Waste Disposal Revenue Bonds
(Champion International Corporation Project), AMT, 7%
due 6/01/2022 3,948
=================================================================================================================================
Alaska--1.7% A- A2 5,000 Alaska Industrial Development and Export Authority
(Revolving Fund), AMT, Series A, 6.50% due 4/01/2014 5,394
NR* NR* 6,000 Valdez, Alaska, Marine Terminal Revenue Refunding Bonds
(Amerada Hess Pipeline Corporation), 6.10% due 2/01/2024 6,378
=================================================================================================================================
Arkansas--0.0% A1+ P1 100 Clark County, Arkansas, Solid Waste Disposal Revenue Bonds
(Reynolds Metals Company Project), VRDN, AMT, 3.25%
due 8/01/2022 (a) 100
=================================================================================================================================
California--3.0% California State Public Works Board, Lease Revenue Bonds,
Series A (i):
A Aaa 6,800 (Department of Corrections--Monterey County Soledad II),
7% due 11/01/2004 8,095
AAA Aaa 7,000 (Various University of California Projects), 6.60% due 12/01/2002 7,936
AAA Aaa 5,000 Los Angeles, California, Department of Water and Power,
Waterworks Revenue Refunding Bonds, 4.25% due 10/15/2034 (c) 4,399
=================================================================================================================================
Colorado--5.9% NR* Aa2 2,325 Colorado HFA, S/F Program, AMT, Senior Series A-1, 7.40%
due 11/01/2027 2,650
NR* Aa2 1,120 Colorado HFA, S/F Project, Senior Series C-2, 7.45% due 6/01/2017 1,272
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) 1,536
NR* Aaa 4,550 Colorado Health Facilities Authority Revenue Bonds (Swedish
Medical Center Project), Series A, 6.80% due 1/01/2003 (i) 5,149
Denver, Colorado, City and County Airport Revenue Bonds:
BBB Aaa 2,045 AMT, Series B, 7.25% due 11/15/2002 (i) 2,349
BBB Baa1 7,955 AMT, Series B, 7.25% due 11/15/2023 8,866
BBB Baa1 5,000 AMT, Series D, 7.75% due 11/15/2013 6,388
BBB Baa1 5,740 AMT, Series D, 7.75% due 11/15/2021 6,379
AAA Aaa 5,000 RITR, Series 13, 6.77% due 11/15/2023 (c)(g) 5,201
=================================================================================================================================
District of AAA Aaa 5,000 Washington, District of Columbia, Convention Center
Columbia--0.7% Authority, Dedicated Tax Revenue Bonds, Senior Lien, 4.75%
due 10/01/2028 (b) 4,682
=================================================================================================================================
Florida--1.2% AAA Aaa 5,000 Florida State Board of Education, Capital Outlay (Public
Education), Series B, 4.50% due 6/01/2028 (c) 4,623
NR* B1 3,120 Palm Bay, Florida, Lease Revenue Refunding Bonds (Florida
Education and Research Foundation Project), Series A, 7%
due 9/01/2024 3,096
=================================================================================================================================
Georgia--1.6% AA Aa3 4,825 Atlanta, Georgia, GO, UT, Series A, 6.125% due 12/01/2023 5,325
A A3 4,785 Monroe County, Georgia, Development Authority, PCR, Refunding
(Oglethorpe Power--Scherer), Series A, 6.80% due 1/01/2011 5,773
=================================================================================================================================
Illinois--14.7% Chicago, Illinois, Board of Education (b)(g):
AAA NR* 6,035 RIB, Series 51, 6.885% due 12/01/2027 6,186
NR* Aaa 11,050 RITR, Series 39, 6.77% due 12/01/2030 11,299
AAA Aaa 10,000 RITR, UT, Series 3, 6.77% due 12/01/2027 10,251
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) 18,230
AAA Aaa 2,000 Chicago, Illinois, Sales Tax Revenue Refunding Bonds, 5.25%
due 1/01/2028 (e) 2,028
</TABLE>
5
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1998
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
=================================================================================================================================
<S> <C> <C> <C> <C> <C>
Illinois BBB Baa1 $21,000 Illinois Development Finance Authority, PCR, Refunding (Illinois
(concluded) Power Company Project), Series A, 7.375% due 7/01/2021 $ 24,197
AA- Aa3 2,130 Illinois Development Finance Authority Revenue Bonds
(Presbyterian Home Lake), Series B, 6.25% due 9/01/2017 2,369
NR* A1 3,750 Illinois Student Assistance Commission, Student Loan Revenue
Bonds, AMT, Sub-Series CC, 6.875% due 3/01/2015 3,966
Metropolitan Pier and Exposition Authority, Illinois, Dedicated
State Tax Revenue Bonds:
AAA Aaa 10,000 RITR, Series 8, 6.77% due 6/15/2027 (b)(g) 10,225
AAA Aaa 16,570 Refunding (McCormick Place Expansion Project), Series A,
5.87%** due 12/15/2020 (c) 5,333
AAA Aaa 10,000 Will County, Illinois, Community Unit School District No. 365,
Refunding (Valley View), UT, Series B, 5.45%** due 11/01/2013 (d) 4,830
=================================================================================================================================
Indiana--5.2% De Kalb County, Indiana, Redevelopment Authority (Mini-Mill),
Series A (l):
AAA NR* 3,000 6.50% due 1/15/2014 3,369
AAA NR* 3,220 6.625% due 1/15/2017 3,628
AAA NR* 2,500 Indiana Bond Bank, Revenue Guaranteed Bonds (State
Revolving Fund Program), Series A, 6.875% due 2/01/2012 2,884
BBB Baa2 7,800 Indianapolis, Indiana, Airport Authority, Special Facilities
Revenue Bonds (Federal Express Corporation Project), AMT,
7.10% due 1/15/2017 8,697
AA NR* 15,000 Indianapolis, Indiana, Local Public Improvement Bond Bank,
Refunding, Series D, 6.75% due 2/01/2020 16,602
=================================================================================================================================
Kansas--0.6% AAA Aaa 3,500 Kansas City, Kansas, Utility System Revenue Refunding and
Improvement Bonds, 6.375% due 9/01/2023 (e) 3,955
=================================================================================================================================
Kentucky--4.4% NR* Baa1 5,000 Ashland, Kentucky, PCR, Refunding (Ashland Oil Incorporated
Project), 6.65% due 8/01/2009 5,391
AAA Aaa 4,935 Kentucky Housing Corporation, Housing Revenue Bonds, AMT,
Series B, 6.625% due 7/01/2026 (f) 5,317
AAA Aaa 6,570 Lexington-Fayette Urban County Government, Kentucky,
Governmental Project Revenue Bonds (University of Kentucky
Alumni Association Inc. Project), 6.75% due 11/01/2004 (c)(i) 7,668
NR* NR* 5,250 Perry County, Kentucky, Solid Waste Disposal Revenue Bonds
(TJ International Project), AMT, 7% due 6/01/2024 5,800
A+ Aa2 5,000 Trimble County, Kentucky, PCR (Louisville Gas and Electric
Company), AMT, Series B, 6.55% due11/01/2020 5,422
=================================================================================================================================
Louisiana--3.7% A1+ P1 11,900 East Baton Rouge Parish, Louisiana, PCR, Refunding (Exxon
Project), VRDN, 3.70% due 3/01/2022 (a) 11,900
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 12,794
=================================================================================================================================
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-- Massachusetts Bay Transportation Authority, General
5.7% Transportation Systems, Refunding, Series A:
AA- Aa3 3,730 7% due 3/01/2011 4,617
AA- Aa3 3,550 7% due 3/01/2014 4,437
BBB+ Aaa 1,045 Massachusetts Municipal Wholesale Electric Company, Power
Supply System Revenue Bonds, Series B, 6.75% due 7/01/2002 (i) 1,172
AAA Aaa 3,500 Massachusetts State, HFA, Residential Development, Series D,
6.80% due 11/15/2012 (j) 3,796
Massachusetts State, HFA, S/F Housing Revenue Bonds:
A+ Aa 3,890 Series 33, 6.35% due 6/01/2017 4,153
A+ Aa 2,975 Series 37, 6.35% due 6/01/2017 3,176
</TABLE>
6
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1998
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
=================================================================================================================================
<S> <C> <C> <C> <C> <C>
Massachusetts NR* Aaa $ 7,000 Massachusetts State Health and Educational Facilities Authority
(concluded) Revenue Bonds (Southcoast Health System), Series A,
4.75% due 7/01/2027 (c) $ 6,592
AAA Aaa 9,985 Massachusetts State Turnpike Authority, Western Turnpike
Revenue Bonds, Series A, 5.55% due 1/01/2017 (c) 10,247
=================================================================================================================================
Michigan--2.7% BBB Baa1 12,650 Dickinson County, Michigan, Economic Development
Corporation, PCR, Refunding (Champion International
Corporation Project), 5.85% due 10/01/2018 13,125
A- A3 4,375 Michigan State Hospital Finance Authority, Revenue Refunding
Bonds (Detroit Medical Center Obligation Group), Series A,
6.50% due 8/15/2018 4,785
=================================================================================================================================
Missouri--1.5% AAA Aaa 4,000 Branson, Missouri, Reorganization School District No. R-4 (Direct
Deposit Program), UT, 4.375% due 3/01/2018 (b) 3,706
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) 1,997
AA- Aa3 4,000 Saint Louis, Missouri, Parking Facility Revenue Bonds, 6.625%
due 12/15/2002 (i) 4,480
=================================================================================================================================
Nebraska--1.5% AAA Aaa 9,400 Nebraska Public Power District, Power Supply
System Revenue Bonds, Series A, 5.25% due 1/01/2005 (c)(i) 10,120
=================================================================================================================================
New Hampshire--0.7% New Hampshire Higher Educational and Health Facilities Authority,
Revenue Refunding Bonds (Saint Anselm College):
NR* Baa1 3,410 6.20% due 7/01/2003 (i) 3,800
NR* Baa1 880 6.20% due 7/01/2013 938
=================================================================================================================================
New Mexico--0.9% A1+ P1 400 Farmington, New Mexico, PCR, Refunding (Arizona Public
Service Company), VRDN, Series A, 3.70% due 5/01/2024 (a) 400
A A2 5,000 Lordsburg, New Mexico, PCR, Refunding (Phelps Dodge
Corporation Project), 6.50% due 4/01/2013 5,523
=================================================================================================================================
New York--12.9% A1+ VMIG1+ 4,800 Long Island Power Authority, New York, Electric System Revenue
Bonds, VRDN, Sub-Series 5, 3.70% due 5/01/2033 (a) 4,800
New York City, New York, GO, UT:
A- A3 5,000 Refunding, Series E, 6.50% due 2/15/2006 5,682
A- A3 2,315 Refunding, Series J, 6% due 8/01/2017 2,525
A- A3 5,000 Series B, 5.875% due 8/15/2013 5,435
A- A3 9,055 Series F, 5.75% due 2/01/2019 9,621
A- A3 8,825 Series G, 5.75% due 2/01/2017 9,376
A- A3 5,000 Series K, 6.25% due 4/01/2006 (i) 5,758
New York City, New York, Municipal Water Financing Authority,
Water and Sewer System Revenue Bonds:
AAA Aaa 8,085 RITR, Series RI-97-6, 7.745% due 6/15/2026 (c)(g) 9,287
AAA Aaa 1,590 Series B, 5.75% due 6/15/2026 (c) 1,719
AAA Aaa 1,500 Series D, 4.75% due 6/15/2025 (e) 1,439
A1+ VMIG1+ 4,300 VRDN, Series G, 3.70% due 6/15/2024 (a)(e) 4,300
New York State Dormitory Authority Revenue Bonds:
AAA Aaa 4,850 (Mental Health Services Facilities Improvement), Series F,
4.50% due 8/15/2028 (b) 4,469
AAA Aaa 4,000 (Mental Health Services Facilities Improvement), Series G,
4.50% due 8/15/2018 (b) 3,779
AAA Aaa 5,000 (Mental Health Services Facilities), Series B, 5%
due 2/15/2023 (d) 4,930
AAA Aaa 3,485 (Saint Vincent's Hospital and Medical Center), 5.75%
due 8/01/2015 (b)(f) 3,758
</TABLE>
7
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1998
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
State Ratings Ratings Amount Issue (Note 1a)
=================================================================================================================================
<S> <C> <C> <C> <C> <C>
New York AA- Aa2 $ 3,380 New York State Environmental Facilities Corporation, PCR
(concluded) (State Water Revolving Fund--New York City Municipal Water
Finance Authority), Series B, 5.25% due 6/15/2014 $ 3,487
A+ A3 1,000 New York State Local Government Assistance Corporation,
Series A, 6% due 4/01/2016 1,098
BBB+ Baa1 5,000 New York State Urban Development Corporation, Revenue Refunding
Bonds (Correctional Capital Facilities), 5.75% due 1/01/2013 5,275
=================================================================================================================================
North Carolina-- AA Aa3 5,000 North Carolina Medical Care Commission, Health Care Facilities,
0.7% Revenue Refunding Bonds (Duke University Health
System), Series A, 4.75% due 6/01/2028 4,698
=================================================================================================================================
Ohio--2.7% 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 10,813
Ohio State Solid Waste Disposal Revenue Bonds
(USG Corporation Project), AMT:
BBB Baa3 5,000 5.60% due 8/01/2032 5,009
BBB Ba1 2,500 5.65% due 3/01/2033 2,471
=================================================================================================================================
Pennsylvania-- NR* Aaa 7,500 Delaware County, Pennsylvania, University Authority Revenue
2.6% Bonds (Villanova University), Series A, 5% due 12/01/2018 (c) 7,506
Harrisburg, Pennsylvania, Refunding (b)**:
NR* Aaa 1,735 Series D, 5.39% due 9/15/2018 632
NR* Aaa 1,485 Series D, 5.39% due 9/15/2020 485
NR* Aaa 1,825 Series F, 5.35% due 3/15/2018 681
NR* Aaa 1,345 Series F, 5.39% due 9/15/2018 490
NR* Aaa 2,280 Series F, 5.35% due 3/15/2019 806
NR* Aaa 2,965 Series F, 5.39% due 9/15/2020 969
AAA Aaa 6,000 Pennsylvania State Turnpike Commission, Oil Franchise
Tax Revenue Bonds, Senior Series A, 5.25% due 12/01/2017 (b) 6,190
=================================================================================================================================
Rhode Island--0.4% AAA Aaa 2,500 Providence, Rhode Island, GO, UT, Series A, 5.70% due 7/15/2019 (d) 2,686
=================================================================================================================================
South Carolina-- A+ A1 12,000 Fairfield County, South Carolina, PCR (South Carolina Electric
6.1% and Gas Company), 6.50% due 9/01/2014 13,256
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 8,769
AAA Aaa 4,000 South Carolina State Housing Finance and Development
Authority, Mortgage Revenue Bonds, AMT, Series A-1, 5.95%
due 7/01/2029 (b) 4,224
AAA Aaa 9,500 South Carolina State Public Service Authority Revenue Bonds
(Santee Cooper), Series D, 6.625% due 7/01/2002 (i) 10,625
NR* NR* 3,800 Spartanburg County, South Carolina, Solid Waste Disposal
Facilities Revenue Bonds (BMW Project), AMT, 7.55%
due 11/01/2024 4,373
=================================================================================================================================
South Dakota--0.9% AAA Aa1 5,500 South Dakota HDA, Home Ownership Mortgage Revenue
Refunding Bonds, Series A, 6.45% due 5/01/2022 5,808
=================================================================================================================================
Tennessee--0.4% BBB Baa1 2,500 McMinn County, Tennessee, IDB, Solid Waste Revenue Bonds
(Recycling Facility--Calhoun Newsprint--Bowater), AMT, 7.40%
due 12/01/2022 2,774
=================================================================================================================================
Texas--4.5% AAA Aaa 13,000 Austin, Texas, Revenue Refunding Bonds, Sub-Lien, Series A,
4.25% due 5/15/2028 (c) 11,485
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) 1,176
</TABLE>
8
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1998
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<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, Texas, Waste Disposal Authority Revenue Bonds
(concluded) (Champion International Corporation), AMT, 7.45% due 5/01/2026 $ 1,998
NR* A3 5,000 Harris County, Texas, Health Facilities Development Corporation,
Hospital Revenue Bonds (Memorial Hospital Systems Project),
Series A, 6.60% due 6/01/2004 (i) 5,720
A1+ Aa 500 Harris County, Texas, Industrial Development Corporation, PCR,
Refunding (Shell Oil Company Project), VRDN,3.70%
due 4/01/2027 (a) 500
AA Aa2 5,000 Harris County, Texas, Toll Road Revenue Refunding Bonds, GO, UT,
Sub-Lien, 6.75% due 8/01/2014 5,466
A+ Aa 3,870 Texas Housing Agency, Residential Development Mortgage
Revenue Bonds, Series A, 7.50% due 7/01/2015 (h) 4,157
=================================================================================================================================
Utah--3.0% AA Aa 15,000 Salt Lake City, Utah, Hospital Revenue Refunding Bonds (IHC
Hospitals Incorporated), 6.30% due 2/15/2015 17,485
A- NR* 2,710 West Valley City, Utah, Redevelopment Agency, Tax Incremental
Revenue Bonds, 6% due 3/01/2024 2,914
=================================================================================================================================
Virginia--5.0% Norfolk, Virginia, Capital Improvement, GO, UT (e):
AAA Aaa 2,190 5.375% due 6/01/2016 2,282
AAA Aaa 2,190 5.375% due 6/01/2017 2,274
AA+ Aa1 17,435 Virginia State, HDA, Commonwealth Mortgage Revenue Bonds,
Series A, 7.15% due 1/01/2033 18,331
AA Aa 10,000 Virginia State Transportation Board, Transportation Contract
Revenue Refunding Bonds (Route 28 Project), 6.50% due 4/01/2018 10,949
=================================================================================================================================
Washington--0.8% AAA Aaa 2,000 Washington State Healthcare Facilities Authority, Revenue
Refunding Bonds (Virginia Mason Medical Center), Series A,
5.125% due 8/15/2017 (c) 2,004
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) 3,080
=================================================================================================================================
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 5,497
BBB+ Baa1 5,600 Putnam County, West Virginia, PCR, Refunding (Appalachian
Power Company Project), Series C, 6.60% due 7/01/2019 5,983
=================================================================================================================================
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 1,188
=================================================================================================================================
Total Investments (Cost--$619,046)--99.6% 670,966
Other Assets Less Liabilities--0.4% 2,932
--------
Net Assets--100.0% $673,898
========
=================================================================================================================================
</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, 1998.
(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, 1998.
(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, 1998
FINANCIAL INFORMATION
Statement of Assets, Liabilities and Capital as of October 31, 1998
<TABLE>
=========================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$619,046,178) (Note 1a) ........ $670,966,096
Cash ................................................................... 15,388
Receivables:
Securities sold ...................................................... $ 17,259,646
Interest ............................................................. 11,081,790 28,341,436
------------
Prepaid expenses and other assets ...................................... 17,697
------------
Total assets ........................................................... 699,340,617
------------
=========================================================================================================================
Liabilities: Payables:
Securities purchased ................................................. 24,480,150
Dividends to shareholders (Note 1e) .................................. 537,312
Investment adviser (Note 2) .......................................... 297,299 25,314,761
------------
Accrued expenses and other liabilities ................................. 127,855
------------
Total liabilities ...................................................... 25,442,616
------------
=========================================================================================================================
Net Assets: Net assets ............................................................. $673,898,001
============
=========================================================================================================================
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 ................................... 4,596,821
Accumulated realized capital losses on investments--net (Note 5) ....... (9,528,684)
Unrealized appreciation on investments--net ............................ 51,919,918
------------
Total--Equivalent to $15.58 net asset value per share of Common Stock
(market price--$15.5625) ............................................... 473,898,001
------------
Total capital .......................................................... $673,898,001
============
=========================================================================================================================
</TABLE>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
10
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1998
FINANCIAL INFORMATION (continued)
Statement of Operations
<TABLE>
<CAPTION>
For the Year Ended
October 31, 1998
===========================================================================================================================
<S> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned ............... $ 38,488,246
(Note 1d):
===========================================================================================================================
Expenses: Investment advisory fees (Note 2) ...................................... $ 3,340,002
Commission fees (Note 4) ............................................... 506,050
Accounting services (Note 2) ........................................... 88,598
Professional fees ...................................................... 86,891
Transfer agent fees .................................................... 82,502
Custodian fees ......................................................... 36,169
Printing and shareholder reports ....................................... 32,578
Listing fees ........................................................... 32,325
Directors' fees and expenses ........................................... 23,033
Pricing fees ........................................................... 18,047
Other .................................................................. 32,839
------------
Total expenses ......................................................... 4,279,034
------------
Investment income--net ................................................. 34,209,212
------------
===========================================================================================================================
Realized & Realized gain on investments--net ...................................... 7,102,938
Unrealized Gain on Change in unrealized appreciation on investments--net .................. 4,737,384
Investments--Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations ................... $ 46,049,534
============
===========================================================================================================================
</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: 1998 1997
===========================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net ................................................ $ 34,209,212 $ 34,604,385
Realized gain on investments--net ..................................... 7,102,938 3,328,987
Change in unrealized appreciation on investments--net ................. 4,737,384 14,811,503
------------ ------------
Net increase in net assets resulting from operations .................. 46,049,534 52,744,875
------------ ------------
===========================================================================================================================
Dividends to Investment income--net:
Shareholders Common Stock ........................................................ (26,777,909) (27,227,016)
(Note 1e): Preferred Stock ..................................................... (7,020,160) (7,025,740)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders ... (33,798,069) (34,252,756)
------------ ------------
===========================================================================================================================
Net Assets: Total increase in net assets .......................................... 12,251,465 18,492,119
Beginning of year ..................................................... 661,646,536 643,154,417
------------ ------------
End of year* .......................................................... $673,898,001 $661,646,536
============ ============
===========================================================================================================================
*Undistributed investment income--net .................................. $ 4,596,821 $ 4,185,678
============ ============
===========================================================================================================================
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1998
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: 1998 1997 1996 1995 1994
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ................ $ 15.17 $ 14.57 $ 14.58 $ 13.16 $ 15.95
Operating -------- -------- -------- -------- --------
Performance: Investment income--net ............................ 1.12 1.13 1.14 1.15 1.16
Realized and unrealized gain (loss) on
investments--net .................................. .40 .59 (.01) 1.43 (2.57)
-------- -------- -------- -------- --------
Total from investment operations .................. 1.52 1.72 1.13 2.58 (1.41)
-------- -------- -------- -------- --------
Less dividends and distributions to Common Stock
shareholders:
Investment income--net .......................... (.88) (.89) (.90) (.89) (.96)
Realized gain on investments--net ............... -- -- -- (.02) (.22)
In excess of realized gain on investments--net .. -- -- -- --+ --
-------- -------- -------- -------- --------
Total dividends and distributions to Common
Stock shareholders ................................ (.88) (.89) (.90) (.91) (1.18)
-------- -------- -------- -------- --------
Effect of Preferred Stock activity:
Dividends and distributions to Preferred
Stock shareholders:
Investment income--net ........................ (.23) (.23) (.24) (.25) (.16)
Realized gain on investments--net ............. -- -- -- --+ (.04)
In excess of realized gain on
investments--net .............................. -- -- -- --+ --
-------- -------- -------- -------- --------
Total effect of Preferred Stock activity .......... (.23) (.23) (.24) (.25) (.20)
-------- -------- -------- -------- --------
Net asset value, end of year ...................... $ 15.58 $ 15.17 $ 14.57 $ 14.58 $ 13.16
======== ======== ======== ======== ========
Market price per share, end of year ............... $15.5625 $14.4375 $ 12.875 $ 12.625 $ 11.00
======== ======== ======== ======== ========
================================================================================================================================
Total Investment Based on market price per share ................... 14.33% 19.58% 9.12% 23.63% (21.32%)
Return:* ======== ======== ======== ======== ========
Based on net asset value per share ................ 8.93% 11.03% 6.93% 19.34% (10.00%)
======== ======== ======== ======== ========
================================================================================================================================
Ratios to Average Expenses .......................................... .64% .65% .66% .66% .66%
Net Assets:** ======== ======== ======== ======== ========
Investment income--net ............................ 5.12% 5.32% 5.32% 5.65% 5.50%
======== ======== ======== ======== ========
================================================================================================================================
Supplemental Net assets, net of Preferred Stock, end
Data: of year (in thousands) ............................ $473,898 $461,647 $443,154 $443,718 $400,387
======== ======== ======== ======== ========
Preferred Stock outstanding, end of year
(in thousands) .................................... $200,000 $200,000 $200,000 $200,000 $200,000
======== ======== ======== ======== ========
Portfolio turnover ................................ 42.95% 36.87% 68.22% 57.56% 42.31%
======== ======== ======== ======== ========
================================================================================================================================
Leverage: Asset coverage per $1,000 ......................... $ 3,369 $ 3,308 $ 3,216 $ 3,219 $ 3,002
======== ======== ======== ======== ========
================================================================================================================================
Dividends Per Series A--Investment income--net .................. $ 961 $ 864 $ 953 $ 961 $ 571
Share on ======== ======== ======== ======== ========
Preferred Stock Series B--Investment income--net .................. $ 879 $ 892 $ 880 $ 917 $ 627
Outstanding:++ ======== ======== ======== ======== ========
Series C--Investment income--net .................. $ 815 $ 884 $ 888 $ 977 $ 577
======== ======== ======== ======== ========
Series D--Investment income--net .................. $ 856 $ 873 $ 885 $ 921 $ 698
======== ======== ======== ======== ========
================================================================================================================================
</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, 1998
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 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 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 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.
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
13
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
security transactions are determined on the identified cost basis.
(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.
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 $278,053,516 and $288,561,187, 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 ................. $7,102,938 $51,919,918
---------- -----------
Total ................................. $7,102,938 $51,919,918
========== ===========
- --------------------------------------------------------------------------------
As of October 31, 1998, net unrealized appreciation for Federal income tax
purposes aggregated $51,919,918, of which $52,374,202 related to appreciated
securities and $454,284 related to depreciated securities. The aggregate cost of
investments at October 31, 1998 for Federal income tax purposes was
$619,046,178.
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, 1998 and
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 yields in effect at
October 31, 1998 were as follows: Series A, 3.35%; Series B, 3.19%; Series C,
3.299%; and Series D, 3.00%.
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 $224,661 as commissions.
5. Capital Loss Carryforward:
At October 31, 1998, the Fund had a net capital loss carryforward of
approximately $1,083,000, all of which expires in 2004. This amount will be
available to offset like amounts of any future taxable gains.
6. 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 $.074865 per share,
payable on November 27, 1998 to shareholders of record as of November 20, 1998.
14
<PAGE>
MuniYield Quality Fund, Inc. October 31, 1998
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
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, 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 and brokers. 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, 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 11, 1998
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid by MuniYield Quality Fund,
Inc. during its taxable year ended October 31, 1998 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.
QUALITY PROFILE (unaudited)
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............................................................ 39.6%
AA/Aa.............................................................. 20.0
A/A................................................................ 17.7
BBB/Baa............................................................ 16.1
BB/Ba.............................................................. 0.4
NR (Not Rated)..................................................... 2.5
Other+............................................................. 3.3
- --------------------------------------------------------------------------------
+ Temporary investments in short-term municipal securities.
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 #16352-10/98
[RECYCLE LOGO] Printed on post-consumer recycled paper
