MUNIYIELD
ARIZONA
FUND, INC.
FUND LOGO
Annual Report
October 31, 1996
This report, including the financial information herein, is
transmitted to the shareholders of MuniYield Arizona 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.
<PAGE>
MuniYield Arizona Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
MuniYield Arizona Fund, Inc.
TO OUR SHAREHOLDERS
For the year ended October 31, 1996, the Common Stock of MuniYield
Arizona Fund, Inc. earned $0.756 per share income dividends, which
included earned and unpaid dividends of $0.060. This represents a
net annualized yield of 5.79%, based on a month-end net asset value
of $13.06 per share. Over the same period, the total investment
return on the Fund's Common Stock was +4.47%, based on a change in
per share net asset value from $13.29 to $13.06, and assuming
reinvestment of $0.764 per share income dividends.
For the six-month period ended October 31, 1996, the total
investment return on the Fund's Common Stock was +4.66%, based on a
change in per share net asset value from $12.86 to $13.06, and
assuming reinvestment of $0.375 per share income dividends.
For the six-month period ended October 31, 1996, the Fund's Auction
Market Preferred Stock had an average yield of 3.10% for Series A
and 3.22% for Series B.
<PAGE>
The Municipal Market Environment
Municipal bond yields generally moved lower during the six months
ended October 31, 1996. Long-term tax-exempt revenue bond yields, as
measured by the Bond Buyer Revenue Bond Index, declined
approximately 35 basis points (0.35%) to close the six-month period
ended October 31, 1996 at approximately 5.94%. The municipal bond
market exhibited considerable weekly yield volatility over the six
months ended October 31, 1996 with bond yields vacillating as much
as 20 basis points. This ongoing volatility was in response to
fluctuating evidence regarding the degree to which recent economic
growth would result in any significant increase in inflationary
pressures. Much of the evidence supporting stronger growth centered
around the strong employment growth seen in April and June with bond
yields rising in response. Other more recent economic indicators
have suggested that economic growth will not be excessive and
inflationary pressures will remain well-contained. This continued
benign inflationary environment has supported lower tax-exempt bond
yields in recent months. US Treasury bond yields have exhibited
similar, albeit greater, volatility during the six-month period
ended October 31, 1996, falling more than 20 basis points to end the
period at 6.64%. Over the past six months, tax-exempt bond yields
registered significantly greater declines than those shown by the US
Treasury bond. This relative outperformance by the municipal bond
market was largely the result of the strong technical support the
tax-exempt market has enjoyed throughout most of 1996. Perhaps most
significantly, the pace of new bond issuance has recently slowed.
Over the last year, approximately $180 billion in long-term
municipal securities was issued, an increase of over 25% versus the
same period a year ago. Much of this increase was the result of
issuers seeking to refinance their existing higher-couponed debt as
interest rates declined in 1995 and early 1996. As interest rates
rose, these financings became increasingly economically impractical
and issuance declined. Over the last six months, approximately $90
billion in long-term tax-exempt securities was underwritten, an
increase of 5% versus the comparable period a year earlier. Only $41
billion in tax-exempt securities was issued in the last three
months, a 3% decline in issuance versus the October 31, 1995
quarter.
At the same time, investor demand remained consistently strong. With
nominal new-issue yields generally above 6%, retail investor
interest was steady. Additionally, investors received over $50
billion this June and July in assets derived from coupon income,
bond maturities, and proceeds from early redemptions. Annual new
bond issuance has declined in recent years and is expected to remain
below levels seen in the early 1990s. Consequently, as the higher-
couponed bonds issued in the early-to-mid 1980s were redeemed at
their first optional call date, the total number of outstanding tax-
exempt bonds has declined. This combination of a declining net
supply and significant amounts of assets helped maintain investor
demand in recent months.
<PAGE>
It is unlikely that the municipal bond market will continue to
significantly outperform US Treasury securities in the near future.
The tax-exempt bond market's recent performance has led to the yield
ratio between long-term taxable and tax-exempt securities falling
from in excess of 90% to approximately 85%. While still historically
very attractive, some institutional investors, particularly short-
term traders, began to view the tax-exempt bond market's recent
outperformance as an opportunity to sell a relatively expensive
asset. However, to the long-term investor, such a sale would
represent the loss of an attractively priced asset which may not be
easily replaced given the relative scarcity of municipal bonds under
present supply conditions.
Looking ahead, no clear consensus for the direction of interest
rates currently exists. Perhaps, the primary focus going forward
will be the extent to which the increase in interest rates seen thus
far in 1996 will negatively impact future economic growth. Should
growth slow in the interest rate-sensitive sectors of the economy,
like housing, auto, and consumer spending, as many economists assert
is likely, then bond yields are likely to decline. Under such a
scenario, the municipal bond market's performance is likely to
closely mirror that of the US Treasury bond market.
Portfolio Strategy
During the third quarter of the Fund's fiscal year ended October 31,
1996, we maintained MuniYield Arizona Fund, Inc.'s neutral-to-
defensive position by cutting the Fund's exposure to the bond market
and maintaining a high cash reserve position. We developed this
strategy in anticipation of stronger economic growth and the
possibility of rising inflation. The economy experienced growth
which later subsided, and inflation never rose to become a
significant problem. The bond market reacted favorably to these
events, and interest rates started to trend lower.
Upon realizing that growth and inflation would not be a problem and
that radical tax reform was not imminent, we shifted our portfolio
strategy during the Fund's fourth fiscal quarter. We returned to the
municipal bond market by lowering our cash reserve position and
structuring the portfolio to participate in any bond market rally.
Restructuring the portfolio with Arizona municipal bonds remains a
difficult task because of a lack of supply and constant high demand
for bonds from investors. We continue to focus our efforts on
consistently seeking to provide our shareholders with an above-
average yield and achieve higher total returns when opportunities
present themselves.
While being defensive during the third fiscal quarter caused us to
miss some market opportunities, our fourth quarter strategy worked
out well. We anticipate this same strategy to continue to show
strong results over the near term. Over the last 12 months, the Fund
provided shareholders with an attractive yield. However, the
investment strategy we employed this year hindered the Fund's total
return.
<PAGE>
In Conclusion
We appreciate your ongoing interest in MuniYield Arizona Fund, Inc.,
and we look forward to serving your investment needs and objectives
in the months and years to come.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President
(Hugh T. Hurley III)
Hugh T. Hurley III
Vice President and Portfolio Manager
December 3, 1996
We are pleased to announce that Hugh T. Hurley III is responsible
for the day-to-day management of MuniYield Arizona Fund, Inc. Mr.
Hurley has been employed by Merrill Lynch Asset Management, L.P. (an
affiliate of the Fund's investment adviser) since 1996 as Vice
President and since 1993 as Assistant Vice President. Prior thereto,
he was employed by Titus and Donnelly Municipal Bond Brokers as
Municipal Bond Broker from 1990 to 1993.
PROXY RESULTS
<TABLE>
During the six-month period ended October 31, 1996, MuniYield
Arizona Fund, Inc. Common Stock shareholders voted on the following
proposals. The proposals were approved at a special shareholders'
meeting on September 19, 1996. The description of each proposal and
number of shares voted are as follows:
<PAGE>
<CAPTION>
Shares Voted Shares Voted
For Without Authority
<S> <S> <C> <C>
1.To elect the Fund's Board of Directors: James H. Bodurtha 4,279,566 113,145
Herbert I. London 4,279,566 113,145
Robert R. Martin 4,278,188 114,523
Arthur Zeikel 4,274,696 118,015
<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. 4,279,446 37,175 76,090
<CAPTION>
During the six-month period ended October 31, 1996, MuniYield
Arizona Fund, Inc. Preferred Stock shareholders (Series A and B)
voted on the following proposals. The proposals were approved at a
special shareholders' meeting on September 19, 1996. The description
of each proposal and number of shares voted are as follows:
Shares Voted Shares Voted
For Without Authority
<S> <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 512 2
Series B 684 0
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <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 512 2 0
Series B 684 0 0
</TABLE>
THE BENEFITS AND RISKS OF LEVERAGING
<PAGE>
MuniYield Arizona 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 American 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
<PAGE>
To simplify the listings of MuniYield Arizona 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)
COP Certificates of Participation
GO General Obligation Bonds
IDA Industrial Development Authority
LEVRRS Leveraged Reverse Rate Securities
LT Limited Tax
PCR Pollution Control Revenue Bonds
UT Unlimited Tax
VRDN Variable Rate Demand Notes
YCN Yield Curve Notes
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Arizona--84.9%
<S> <S> <C> <S> <C>
Arizona Educational Loan Marketing Corporation, Educational Loan Revenue Bonds,
AMT, Series B:
NR* A $ 700 7% due 3/01/2002 $ 757
NR* A 2,920 7% due 3/01/2003 3,167
NR* Aaa 1,865 Arizona Health Facilities Authority, Hospital System Revenue Refunding Bonds
(Saint Luke's Health System), 7.25% due 11/01/2003 (h) 2,090
AAA Aaa 325 Arizona State Municipal Financing Program, COP, Series 34, 7.25% due 8/01/2009 (i) 386
Arizona State Transportation Board, Highway Revenue Bonds (h):
AAA Aaa 1,500 7% due 7/01/2000 1,647
AA Aaa 1,400 Sub-Series B, 6.50% due 7/01/2002 1,550
AAA Aaa 750 Arizona State University, Research Park Development, Revenue Refunding Bonds,
5% due 7/01/2021 (a) 698
AA+ Aa 3,000 Arizona State Wastewater Management Authority, Wastewater Treatment Financial
Assistance Revenue Bonds, 6.80% due 7/01/2011 3,321
Chandler Arizona Water and Sewer Revenue Bonds (a):
AAA Aaa 1,000 6.50% due 7/01/2014 1,083
AAA Aaa 1,000 5.25% due 7/01/2016 963
<PAGE>
A1+ P1 1,900 Coconino County, Arizona, Pollution Control Corporation, Arizona Public Service
Revenue Bonds (Navajo Project), VRDN, AMT, Series A, 3.65% due 10/01/2029 (b) 1,900
BBB- NR* 1,750 Coconino County, Arizona, Pollution Control Corporation, PCR (Nevada Power Co.
Project), AMT, 6.375% due 10/01/2036 1,757
AAA Aaa 605 Gilbert, Arizona, Projects of 1988, GO, UT, Series C, 8.50% due 7/01/2005 (a) 756
Glendale, Arizona, IDA, Educational Facilities Revenue Refunding Bonds
(American Graduate School International) (d):
AAA NR* 500 7% due 7/01/2005 (h) 576
AAA NR* 500 7.125% due 7/01/2005 (h) 581
AAA NR* 500 5.875% due 7/01/2015 505
AAA Aaa 2,920 Maricopa County, Arizona, Alhambra Elementary School District Number 68
Refunding Bonds, UT, Series A, 6.80% due 7/01/2011 (g) 3,201
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Arizona (continued)
<S> <S> <C> <S> <C>
AAA Aaa $1,000 Maricopa County, Arizona, Chandler Unified School District Number 80
Refunding Bonds, 6.25% due 7/01/2011 (c) $ 1,098
AAA Aaa 2,000 Maricopa County, Arizona, Gilbert Unified School District Number 41
Improvement Bonds, UT, Series C, 6.10% due 7/01/2004 (c)(h) 2,170
Maricopa County, Arizona, IDA, Hospital Facility Revenue Refunding Bonds
(Samaritan Health Services Hospital), Series A (a):
AAA Aaa 500 7% due 12/01/2013 552
AAA Aaa 2,400 7% due 12/01/2016 2,854
AAA Aaa 2,600 Maricopa County, Arizona, Paradise Valley Unified School District Number 69,
Project of 1994, UT, Series B, 5.25% due 7/01/2015 (a) 2,539
AAA Aaa 1,500 Maricopa County, Arizona, Peoria Unified School District Number 11 Refunding
Bonds, 6.10% due 7/01/2010 (g) 1,587
AA- A1 1,245 Maricopa County, Arizona, Phoenix Elementary School District Number 1 Revenue
Bonds, UT, 6.60% due 7/01/2001 (h) 1,365
AAA Aaa 1,000 Maricopa County, Arizona, School District Number 4 (Mesa University), UT, 5%
due 7/01/2012 956
AA Aa 1,825 Maricopa County, Arizona, Scottsdale Unified School District Number 48 Improvement
Bonds, UT, 6.60% due 7/01/2012 2,075
<PAGE>
AAA Aaa 500 Maricopa County, Arizona, Tempe Elementary School District Number 3, Refunding
and Improvement Bonds, UT, 7.50% due 7/01/2010 (c) 604
AAA Aaa 1,000 Mohave County, Arizona, IDA, Hospital System Revenue Bonds (Baptist Hospital),
5.50% due 9/01/2021 (a) 975
AAA Aaa 2,700 Navajo County, Arizona, Pollution Control Corporation, Revenue Refunding Bonds
(Arizona Public Service Company), Series A, 5.875% due 8/15/2028 (g) 2,723
AAA Aaa 2,175 Phoenix, Arizona, Airport Revenue Refunding Bonds, Series A, 5.75% due
7/01/2002 (a) 2,298
Phoenix, Arizona, Civic Improvement Corporation, Wastewater System Lease
Revenue Bonds:
AAA NR* 3,000 6.125% due 7/01/2003 (h) 3,294
A A1 500 Refunding, 5% due 7/01/2018 452
AAA Aaa 800 Refunding, 5% due 7/01/2018 (a) 745
Phoenix, Arizona, Civic Improvement Corporation, Water System Revenue Junior
Lien Bonds:
AA- Aa 1,000 5.60% due 7/01/2017 1,005
AA- Aa 1,000 6% due 7/01/2019 1,019
AA+ Aa1 2,000 Phoenix, Arizona, GO, UT, Series B, 5% due 7/01/2020 1,861
Phoenix, Arizona, Refunding Bonds, UT, Series A:
AA+ Aa1 1,485 6% due 7/01/2011 1,598
AA+ Aa1 1,750 5% due 7/01/2019 1,625
AAA Aaa 1,500 Pima County, Arizona, Sewer Revenue Refunding Bonds, Series A, 5% due
7/01/2015 (c) 1,415
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
Ratings Ratings Amount Issue (Note 1a)
Arizona (concluded)
<S> <S> <C> <S> <C>
AAA Aaa $3,050 Pima County, Arizona, Tucson Unified School District Number 1, GO, Refunding, LT,
7.50% due 7/01/2009 (c) $ 3,696
AA Aa 3,165 Salt River Project, Arizona, Agricultural Improvement and Power District,
Electric System Revenue Bonds, Series A, 6.50% due 1/01/2022 3,363
AA+ Aa 825 Tempe, Arizona, Refunding Bonds, GO, UT, Series A, 5.35% due 7/01/2010 829
AAA Aaa 1,000 Tempe, Arizona, Unified High School District Number 213 Refunding and Improvement
Bonds, UT, 7% due 7/01/2008 (c) 1,167
<PAGE>
AAA Aaa 1,000 Tucson, Arizona, GO, UT, Series A, 5.375% due 7/01/2017 (a) 988
AAA Aaa 2,000 Tucson, Arizona, Local Business Development Finance Corporation,
Lease Revenue Refunding Bonds, 6.25% due 7/01/2012 (c) 2,112
A+ A1 1,430 Tucson, Arizona, Water Revenue Refunding Bonds, 6.50% due 7/01/2016 1,529
AA A1 1,345 University of Arizona, University Revenue Refunding Bonds, 6.25% due 6/01/2011 1,420
Puerto Rico--11.2%
Puerto Rico Commonwealth, Aqueduct and Sewer Authority Revenue Bonds, Series A (h):
AAA Baa1 1,500 7% due 7/01/1998 1,604
AAA Baa1 1,000 7.875% due 7/01/1998 1,083
AAA Aaa 2,000 Puerto Rico Commonwealth, GO, YCN, 8.02% due 7/01/2020 (e)(f) 2,023
AAA Aaa 520 Puerto Rico Commonwealth, Highway and Transportation Authority, Highway Revenue
Bonds, Series T, 6.625% due 7/01/2002 (h) 583
Puerto Rico Electric Power Authority, Power Revenue Bonds:
AAA Aaa 2,000 LEVRRS, 8.348% due 7/01/2023 (e)(f) 2,048
BBB+ Aaa 2,250 Series P, 7% due 7/01/2001 (h) 2,537
Total Investments (Cost--$81,475)--96.1% 84,730
Other Assets Less Liabilities--3.9% 3,427
-------
Net Assets--100.0% $88,157
=======
<FN>
(a)MBIA Insured.
(b)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, 1996.
(c)FGIC Insured.
(d)Connie Lee Insured.
(e)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, 1996.
(f)FSA Insured.
(g)AMBAC Insured.
(h)Prerefunded.
(i)BIG Insured.
*Not Rated.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets, Liabilities and Capital as of October 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$81,474,532) (Note 1a) $84,730,227
Cash 23,735
Receivables:
Securities sold $ 3,953,390
Interest 1,587,006 5,540,396
-----------
Deferred organization expenses (Note 1e) 8,164
Prepaid expenses and other assets 24,039
-----------
Total assets 90,326,561
-----------
Liabilities: Payables:
Securities purchased 2,024,930
Dividends to shareholders (Note 1f) 54,282
Investment adviser (Note 2) 29,779 2,108,991
-----------
Accrued expenses and other liabilities 60,791
-----------
Total liabilities 2,169,782
-----------
Net Assets: Net assets $88,156,779
===========
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (1,212 shares of
AMPS* issued and outstanding at $25,000 per share liquidation
preference) $30,300,000
Common Stock, par value $.10 per share (4,429,326 shares
issued and outstanding) $ 442,933
Paid-in capital in excess of par 60,342,318
Undistributed investment income--net 279,486
Accumulated realized capital losses on investments--net (Note 5) (6,463,653)
Unrealized appreciation on investments--net 3,255,695
-----------
Total--Equivalent to $13.06 net asset value per share of
Common Stock (market price--$12.125) 57,856,779
-----------
Total capital $88,156,779
===========
<FN>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations
<CAPTION>
For the Year Ended October 31, 1996
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 4,953,826
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 442,295
Professional fees 86,360
Commission fees (Note 4) 78,602
Accounting services (Note 2) 36,772
Transfer agent fees 32,009
Printing and shareholder reports 30,864
Directors' fees and expenses 23,137
Listing fees 8,875
Custodian fees 8,370
Pricing fees 7,127
Amortization of organization expenses (Note 1e) 4,116
Other 11,956
-----------
Total expenses before reimbursement 770,483
Reimbursement of expenses (Note 2) (187,960)
-----------
Total expenses after reimbursement 582,523
-----------
Investment income--net 4,371,303
-----------
Realized & Realized loss on investments--net (79,557)
Unrealized Change in unrealized appreciation on investments--net (852,369)
Loss on -----------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 3,439,377
(Notes 1b, 1d & 3): ===========
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended
October 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 4,371,303 $ 3,531,075
Realized loss on investments--net (79,557) (1,352,566)
Change in unrealized appreciation on investments--net (852,369) 7,081,388
----------- -----------
Net increase in net assets resulting from operations 3,439,377 9,259,897
----------- -----------
<PAGE>
Dividends to Investment income--net:
Shareholders Common Stock (3,382,627) (2,481,154)
(Note 1f): Preferred Stock (1,016,052) (875,977)
----------- -----------
Net decrease in net assets resulting from dividends to
shareholders (4,398,679) (3,357,131)
----------- -----------
Capital Stock Proceeds from issuance of Preferred Stock resulting from
Transactions reorganization -- 17,350,000
(Notes 1e & 4): Net proceeds from issuance of Common Stock resulting from
reorganization -- 31,828,468
Offering costs from issuance of Common Stock resulting from
reorganization (68,551) --
----------- -----------
Net increase (decrease) in net assets derived from capital
stock transactions (68,551) 49,178,468
----------- -----------
Net Assets: Total increase (decrease) in net assets (1,027,853) 55,081,234
Beginning of year 89,184,632 34,103,398
----------- -----------
End of year* $88,156,779 $89,184,632
=========== ===========
<FN>
*Undistributed investment income--net $ 279,486 $ 306,862
=========== ===========
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights
<CAPTION>
For the
Period
The following per share data and ratios have been derived Oct. 29,
from information provided in the financial statements. For the Year 1993++ to
Ended October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 13.29 $ 11.33 $ 14.11 $ 14.18
Operating -------- -------- -------- --------
Performance: Investment income--net .98 1.03 .99 --
Realized and unrealized gain (loss) on
investments--net (.20) 2.01 (2.68) --
-------- -------- -------- --------
<PAGE> Total from investment operations .78 3.04 (1.69) --
-------- -------- -------- --------
Less dividends to Common Stock shareholders:
Investment income--net (.76) (.77) (.75) --
-------- -------- -------- --------
Capital charge resulting from issuance of
Common Stock (.02) (.05) -- (.07)
-------- -------- -------- --------
Effect of Preferred Stock activity:++++
Dividends to Preferred Stock shareholders:
Investment income--net (.23) (.26) (.17) --
Capital charge resulting from issuance of
Preferred Stock -- -- (.17) --
-------- -------- -------- --------
Total effect of Preferred Stock activity (.23) (.26) (.34) --
-------- -------- -------- --------
Net asset value, end of period $ 13.06 $ 13.29 $ 11.33 $ 14.11
======== ======== ======== ========
Market price per share, end of period $ 12.125 $ 11.75 $ 10.375 $ 15.00
======== ======== ======== ========
Total Investment Based on market price per share 9.70% 21.04% (26.55%) .00%+++
Return:** ======== ======== ======== ========
Based on net asset value per share 4.47% 25.37% (14.73%) (.49%)+++
======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement .66% .55% .54% --
Net Assets:*** ======== ======== ======== ========
Expenses .87% .95% 1.09% --
======== ======== ======== ========
Investment income--net 4.93% 5.33% 5.13% .02%*
======== ======== ======== ========
Supplemental Net assets, net of Preferred Stock, end of period
Data: (in thousands) $ 57,857 $ 58,885 $ 21,153 $ 25,506
======== ======== ======== ========
Preferred Stock outstanding, end of period
(in thousands) $ 30,300 $ 30,300 $ 12,950 --
======== ======== ======== ========
Portfolio turnover 31.75% 75.93% 80.03% --
======== ======== ======== ========
Leverage: Asset coverage per $1,000 $ 2,909 $ 2,943 $ 2,633 --
======== ======== ======== ========
<PAGE>
Dividends Series A--Investment income--net $ 824 $ 953 $ 598 --
Per Share on ======== ======== ======== ========
Preferred Stock Series B--Investment income--net $ 849 $ 551 -- --
Outstanding: ======== ======== ======== ========
<FN>
*Annualized.
**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.
++Commencement of Operations.
++++The Fund's Preferred Stock was issued on December 2, 1993
(Series A) and March 27, 1995 (Series B).
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniYield Arizona 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 American
Stock Exchange under the symbol MZA. 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 and assets for
which market quotations are not readily available are valued at 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.
<PAGE>
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
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.
* 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.
<PAGE>
(e) Deferred organization and offering expenses--Deferred
organization expenses are amortized on a straight-line basis over a
five-year period. Direct expenses relating to issuance of Common
Stock resulting from the reorganization were charged to capital.
(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.
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. For the year ended October 31,
1996, FAM earned fees of $442,295, of which $187,960 was voluntarily
waived.
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, Merrill Lynch, Pierce, Fenner & Smith Inc.
("MLPF&S"), and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended October 31, 1996 were $26,967,857 and
$29,943,899, respectively.
Net realized and unrealized gains (losses) as of October 31, 1996
were as follows:
Realized
Gains Unrealized
(Losses) Gains
Long-term investments $ 555,887 $3,255,695
Financial futures contracts (635,444) --
---------- ----------
Total $ (79,557) $3,255,695
========== ==========
<PAGE>
As of October 31, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $3,255,695, of which $3,520,965
related to appreciated securities and $265,270 related to
depreciated securities. The aggregate cost of investments at October
31, 1996 for Federal income tax purposes was $81,474,532.
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 holders of Common Stock.
Common Stock
For the year ended October 31, 1996, shares issued and outstanding
remained constant at 4,429,326. At October 31, 1996, total paid-in
capital amounted to $60,785,251.
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 yield in effect at October 31, 1996 were as
follows: Series A, 3.40% and Series B, 3.40%.
As of October 31, 1996, there were 1,212 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 of ranging from 0.25% to 0.375%,
calculated on the proceeds of each auction. For the year ended
October 31, 1996, MLPF&S, an affiliate of FAM, earned $41,098 as
commissions.
5. Capital Loss Carryforward:
At October 31, 1996, the Fund had a net capital loss carryforward of
approximately $6,007,000, of which $1,193,000 expires in 2001,
$3,561,000 expires in 2002 and $1,253,000 expires in 2003. This
amount will be available to offset like amounts of any future
taxable gains.
6. Subsequent Event:
On November 8, 1996, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $.060205 per share, payable on November 27, 1996 to shareholders
of record as of November 18, 1996.
<PAGE>
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
MuniYield Arizona Fund, Inc.:
We have audited the accompanying statement of assets, liabilities
and capital, including the schedule of investments, of MuniYield
Arizona Fund, Inc. as of October 31, 1996, 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 three-year period
then ended and for the period October 29, 1993 (commencement of
operations) to October 31, 1993. 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, 1996 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 Arizona Fund, Inc. as of October 31, 1996, 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 3, 1996
</AUDIT-REPORT>
<PAGE>
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid by MuniYield
Arizona Fund, Inc. during its taxable year ended October 31, 1996
qualify as tax-exempt interest dividends for Federal income tax
purposes. Additionally, there were no captial gains distributed by
the Fund during the year.
Please retain this information for your records.
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
Mark B. Goldfus, Secretary
Custodian
The Bank of New York
90 Washington Street
New York, New York 10286
Transfer Agents
Common Stock:
The Bank of New York
101 Barclay Street
New York, New York 10286
Preferred Stock:
IBJ Schroder Bank & Trust Company
One State Street
New York, New York 10004
ASE Symbol
MZA
<PAGE>
