MUNIBOND
INCOME
FUND, INC.
Annual Report May 31, 1994
This report, including the financial information herein, is
transmitted to the shareholders of MuniBond Income 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.
MuniBond Income Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
MUNIBOND INCOME FUND, INC.
<PAGE>
Officers and
Directors
Arthur Zeikel, President and Director
Walter Mintz, Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Harry Woolf, Director
Terry K. Glenn, Executive Vice President
Donald C. Burke, Vice President
Vincent R. Giordano, Vice President
Kenneth A. Jacob, Vice President
Gerald M. Richard, Treasurer
Mark B. Goldfus, Secretary
Custodian
The Bank of New York
110 Washington Street
New York, New York 10286
Transfer Agent
The Bank of New York
101 Barclay Street
New York, New York 10286
NYSE Symbol
MBD
<TABLE>
Per Share
Selected Quarterly
Financial Data*
<CAPTION>
Net Dividends / Distributions
Investment Realized Unrealized Net Investment Capital
For the Period Income Gains Losses Income Gains
<S> <C> <C> <C> <C> <C>
October 29, 1993++ to November 30, 1993 $.04 -- $(.09) -- --
December 1, 1993 to February 28, 1994 .20 $.05 (.10) $.17 --
March 1, 1994 to May 31, 1994 .21 -- (.72) .21 --
<PAGE>
<CAPTION>
Net Asset Value Market Price**
For the Period High Low High Low Volume***
<S> <C> <C> <C> <C> <C>
October 29, 1993++ to November 30, 1993 $14.18 $14.05 $14.875 $14.75 161
December 1, 1993 to February 28, 1994 14.48 14.07 14.875 13.00 374
March 1, 1994 to May 31, 1994 14.00 12.90 13.625 12.00 719
<FN>
++ Commencement of Operations.
* Calculations are based upon shares of Common Stock outstanding at the end of each period.
** As reported in the consolidated transaction reporting system.
*** In thousands.
</TABLE>
Important
Tax Information
All of the net investment income distributions paid monthly by
MuniBond Income Fund, Inc. during its taxable year ended May 31,
1994 qualify as tax-exempt interest dividends for Federal income tax
purposes. Additionally, there were no capital gains distributed by
the Fund during the year.
DEAR SHAREHOLDER
Since inception (October 29, 1993) through May 31, 1994, MuniBond
Income Fund, Inc. earned $0.445 per share income dividends, which
includes earned and unpaid dividends of $0.070. This represents a
net annualized yield of 5.66%, based on a month-end per share net
asset value of $13.36. Over the same period, the Fund's total
investment return was -3.07%, based on a change in per share net
asset value from $14.18 to $13.36, and assuming reinvestment of
$0.375 per share income dividends.
For the six-month period ended May 31, 1994, the Fund's total
investment return was -2.52%, based on a change in per share net
asset value from $14.10 to $13.36, and assuming reinvestment of
$0.375 per share income dividends.
<PAGE>
The Environment
Inflationary concerns persisted during the three-month period ended
May 31, 1994. The Federal Reserve Board followed up its initial
increase in the Federal Funds rate with three subsequent monetary
policy tightening moves. At the same time, investors viewed signs of
economic strength as an indication that the rate of inflation would
soon accelerate. Among the most troublesome statistics released was
the mid-May rise in the Commodity Research Bureau's inflation index.
However, by May 31, 1994 this index had declined back to the levels
at which it began the year.
Despite an upward revision in gross domestic product growth to 3.0%
for the first quarter of the year, later economic data releases
suggest a moderating trend. Disposable income fell 0.5% in April,
consumer spending dropped 0.4% after adjusting for inflation, and
sales of new homes also fell. Consumer confidence declined for the
first time in three months, reflected in sluggish retail sales.
However, employment data for May sent somewhat conflicting signals.
The unemployment rate dropped sharply in May from 6.4% to 6.0%, but
at the same time business payrolls grew only modestly.
In the weeks ahead, investors are likely to continue to focus their
attention on the direction of the economy and inflationary trends.
Evidence of stable and moderate economic growth, combined with
subdued inflationary pressures, would be a positive development for
the financial markets. The absence of these trends, along with
continued monetary policy tightening by the central bank, would
likely lead to continued volatility in stock and bond prices over
the near term.
The Municipal Market
During the six months ended May 31, 1994, tax-exempt bond yields
exhibited considerable volatility as they rose to their highest
level in two years. As measured by the Bond Buyer Revenue Bond
Index, the yield on a newly issued municipal bond maturing in 30
years rose during the period by approximately 70 basis points
(0.70%) to 6.41% by the end of May. Yields on seasoned municipal
revenue issues rose by over 80 basis points in sympathy with the
even more dramatic rise in US Treasury bond yields. By the end of
May, yields on US Treasury securities had risen by over 100 basis
points to 7.42%.
<PAGE>
Long-term tax-exempt interest rates gradually declined from the end
of November 1993 into early February. However, on a weekly basis,
municipal bond yields fluctuated by as much as 15 basis points as
investors were unable to reconcile the rapid economic growth seen in
the last quarter of 1993 and into early 1994 with continued weak
inflationary pressures. Following the Federal Reserve Board's
initial interest rate increase in early February, municipal bond
prices began to erode in concert with taxable bond prices as
investors began to sell securities in anticipation of further
interest rate increases. As the Federal Reserve Board continued to
raise short-term interest rates in subsequent months, municipal bond
yields rose further to a high of 6.60% in mid-May before declining
somewhat at month's end.
The magnitude of the rise in tax-exempt bond yields during the past
six months has not been seen since 1987 when municipal bond yields
rose 250 basis points from March to October of that year. It is very
important to note that the municipal bond price declines over the
last six months, while certainly damaging, were essentially much
different than the 1987 episode. Recent price declines have largely
been the result of consistent and insistent selling pressures over
the last four months. In 1987, the tax-exempt bond market was much
more volatile and, at times, chaotic as investors sought to
liquidate positions without much concern for fundamental value. The
recent price deterioration, for the most part, has been orderly, and
the municipal bond market's liquidity and integrity have not been
challenged or jeopardized.
To a large extent, the municipal bond market has continued to be
supported by its strong technical position. New-issue volume for the
last six months has been approximately $100 billion. This represents
a decline of approximately 40% versus the comparable period of the
year earlier. This reduction has been even more pronounced over the
last three months when only $41 billion in long-term securities were
issued, representing over a 50% decline in issuance from a year
ago's level. This decline was expected and discussed in earlier
shareholder reports. This reduced issuance has minimized potential
selling pressures in recent months as institutional investors have
been wary of selling appreciable amounts of securities that they may
be unable to replace later this year at any price level. We expect
this decline in new bond issuance to continue this year and into
1995.
<PAGE>
Despite recent price declines, tax-exempt securities remain among
the most attractive investment alternatives available. Longer-term
municipal securities, after the recent yield increases, yielded
approximately 85% of comparable US Treasury issues. Purchasers of
these municipal bonds also accrue substantial after-tax yield
advantages. For example, to investors in the 39% marginal Federal
income tax bracket, the purchase of a tax-exempt product yielding
6.35% represents an after-tax equivalent of 10.40%. With prevailing
estimates of l994 inflation at no more than 3%--4%, real after-tax
rates in excess of 6.25% easily compensate longer-term investors for
much of the price volatility recently experienced.
We continue to look for municipal bond yields to decline later this
year and into 1995 as inflationary pressures remain low and as the
domestic economy is further slowed by the impact of higher interest
rates. As this scenario unfolds, currently available tax-exempt
products should generate significant returns for long-term
investors.
Portfolio Strategy
We remain constructive on the municipal bond market and continue to
believe that tax-exempt bond yields will eventually decline by late
l994 and continue into l995. However, the volatility the municipal
bond market has demonstrated in recent months is expected to
continue into the summer. This has led us to take a more defensive
posture in recent months. This defensive posture will be maintained
until either the Federal Reserve Board concludes its current round
of interest rate increases or until there are consistent indications
that recent yield increases have had a negative impact on economic
growth. It is unlikely that until either or both of these conditions
have been met, the financial markets' current uncertainty will
continue and interest rates will remain unstable.
We raised the Fund's cash reserve position to approximately 10% of
net assets. This defensive action has two principal benefits. First,
additional capital depreciation as a result of rising interest rates
will be limited to some degree. Second, this increased liquidity
will enable the Fund to more quickly respond to those attractive
market opportunities recent periods of volatility have presented.
These episodes of market uncertainty have allowed us to add
attractively priced, investment-grade issues to the Fund. These
issues are expected to enhance the Fund's level of tax-exempt income
in the coming years. Also, while we have adopted a more defensive
posture in recent months, the Fund remains well positioned to take
advantage of expected interest rate declines later this year.
<PAGE>
In Conclusion
We thank you for your investment in MuniBond Income Fund, Inc., and
we look forward to assisting you with your investment needs and
objectives in the months and years to come.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent R. Giordano)
Vincent R. Giordano
Vice President and Portfolio Manager
July 5, 1994
Portfolio
Abbreviations
To simplify the listings of MuniBond
Income Fund, Inc.'s portfolio holdings
in the Schedule of Investments, we have
abbreviated the names of many of the
securities according to the list at right.
AMT Alternative Minimum Tax (subject to)
GO General Obligation Bonds
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
STATE Rating Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Alabama--1.1% B+ NR $ 1,000 Brewton, Alabama, Industrial Development Board, PCR, Refunding
(Container Corporation of America Project), 8% due 4/01/2009 $ 997
Arizona--4.0% BBB Baa2 4,000 Navajo County, Arizona, Pollution Control Corporation, Revenue
Refunding Bonds (Arizona Public Service Company), Series A,
5.875% due 8/15/2028 3,530
<PAGE>
California--2.0% A-1+ VMIG1 100 California Pollution Control Financing Authority, PCR,
Refunding (Shell Oil Company Project), Series C, VRDN,
2.90% due 11/01/2000 (a) 100
NR NR 1,805 Long Beach, California, Redevelopment Agency, M/F Mortgage
Revenue Bonds (Pacific Court Apartments), Issue B, AMT,
6.80% due 9/01/2013 1,734
Colorado--6.8% BB Baa 5,000 Denver, Colorado, City and County Airport Revenue Bonds,
AMT, Series C, 6.125% due 11/15/2025 4,107
NR NR 2,000 San Miguel County, Colorado, Revenue Bonds (Mountain
Village Metropolitan District), 7.40% due 12/15/2013 1,946
Florida--2.6% BBB- NR 2,500 Largo, Florida, Sun Coast Health Systems, Revenue Refunding
Bonds, 6.30% due 3/01/2020 2,300
Georgia--4.7% BBB+ NR 4,500 Georgia Tri-City Hospital Authority Revenue Bonds
(South Fulton Medical Center), 6.375% due 7/01/2016 4,153
Illinois--13.0% BBB- Baa 1,000 Chicago, Illinois, Skyway Toll Bridge Revenue Refunding
Bonds, 6.50% due 1/01/2010 967
AAA NR 2,000 Illinois Development Financing Authority, Environmental
Facilities Revenue Bonds (Citizens Utilities Company Project),
AMT, 5.90% due 11/15/2028 1,882
A-1+ NR 800 Illinois Development Financing Authority, PCR (Illinois
Power Company), VRDN, AMT, Series C, 2.90% due 3/01/2017 (a) 800
Illinois Health Facilities Authority Revenue Bonds:
BBB+ NR 1,000 (Community Hospital of Ottawa), 6.85% due 8/15/2024 971
NR Baa1 1,150 (Holy Cross Hospital Project), 6.70% due 3/01/2014 1,128
A- A 2,000 Illinois Health Facilities Authority, Revenue Refunding
Bonds (Illinois Masonic Medical Center), 5.50% due 10/01/2019 1,677
A+ A1 2,000 Illinois Housing Development Authority, Housing Development
Revenue Bonds, Series A,6% due 7/01/2018 1,854
A+ Aa 2,500 Illinois Housing Development Authority, Residential Mortgage
Revenue Refunding Bonds, AMT, Series A, 5.90% due 2/01/2024 2,220
Indiana--1.7% NR NR 1,500 Burns Harbor, Indiana, Solid Waste Disposal Facility
Revenue Bonds (Bethlehem Steel Corporation Project), AMT,
8% due 4/01/2024 1,506
<PAGE>
Iowa--5.5% BB- NR 1,000 Des Moines County, Iowa, IDR, Refunding (U.S. Gypsum
Company Project), 7.20% due 11/01/2007 989
A- NR 1,750 Iowa Financing Authority, Hospital Facility, Revenue Refunding
Bonds (Allen Memorial Hospital), Series B, 5.875% due 2/15/2013 1,602
BBB+ NR 2,500 Ottumwa, Iowa, Hospital Facility Revenue Refunding and
Improvement Bonds (Ottumwa Regional Health), 6% due 10/01/2010 2,307
Louisiana--6.0% NR Baa1 4,195 Lafourche Parish, Louisiana, Revenue Bonds (Hospital
Service District No. 003), 6% due 10/01/2012 3,769
BB- NR 1,600 New Orleans, Louisiana, Industrial Development Board, IDR,
Refunding (U.S. Gypsum Company Project), 7.20% due 10/01/2007 1,582
Massachusetts-- Massachusetts State Industrial Finance Agency Revenue Bonds:
3.2% NR NR 2,000 (Bay Cove Human Services Inc.), 8.375% due 4/01/2019 2,005
BB+ Ba1 1,000 (Vinfen Corporation), 7.10% due 11/15/2018 939
Michigan--7.4% BBB Baa1 4,000 Dickinson County, Michigan, Economic Development Corporation,
PCR, Refunding (Champion International Corporation Project),
5.85% due 10/01/2018 3,563
Michigan State Hospital Finance Authority, Revenue Refunding Bonds:
A- A 2,000 (Detroit Medical Center), Series B, 5.50% due 8/15/2023 1,711
BBB Baa1 1,500 (Pontiac Osteopathic), Series A, 6% due 2/01/2024 1,303
Mississippi--1.8% NR P1 1,600 Perry County, Mississippi, PCR, Refunding (Leaf River
Forest Project), VRDN, 2.95% due 3/01/2002 (a) 1,600
Montana--2.4% BBB+ Baa1 2,300 Forsyth, Montana, PCR, Refunding (The Montana Power
Company), Series B, 5.90% due 12/01/2023 2,106
New Mexico--3.3% A-1+ VMIG1 1,300 Albuquerque, New Mexico, Hospital Revenue Bonds (Sisters
of Charity at Saint Joseph's Church), VRDN, 2.80%
due 5/15/2022 (a) 1,300
A-1+ NR 1,000 Eddy County, New Mexico, PCR, Refunding (IMC Fertilizer Inc.
Project), VRDN, 2.65% due 2/01/2003 (a) 1,000
A-1+ NR 600 New Mexico, S/F Mortgage Finance Authority Revenue Bonds,
Series A, VRDN, 3.20% due 7/01/2017 (a) 600
<PAGE>
New York--5.9% A- Baa1 4,250 New York City, New York, GO, Refunding, Series D, UT,
5.75% due 8/15/2009 3,993
NR NR 1,000 New York City, New York, IDA, IDR (Japan Airlines Company Ltd.
Project), AMT, VRDN, 3.35% due 11/01/2015 (a) 1,000
A-1+ NR 100 New York State Environmental Facilities Corporation, Resource
Recovery Revenue Bonds (Huntington Project), AMT, VRDN,
3.05% due 11/01/2014 (a) 100
A-1+ VMIG1 200 Port Authority of New York and New Jersey, Special Obligation
Revenue Bonds (Versatile Structure Obligation), Series 1,
VRDN, 3% due 8/01/2028 (a) 200
Ohio--11.6% Ohio State Air Quality Development Authority, PCR, Refunding:
BB Baa3 2,000 (Cleveland Electric Company), AMT, 6.85% due 7/01/2023 1,922
BBB- Baa2 4,500 (Ohio-Edison), Series A, 5.95% due 5/15/2029 3,997
BB Ba2 3,500 Ohio State Water Development Authority, Pollution Control
Facilities Revenue Bonds (Toledo Edison Project), AMT,
Series A, 7.40% due 11/01/22 3,535
BBB- Baa 1,000 Stark County, Ohio, Hospital Revenue Bonds (Doctors
Hospital Inc.), 6% due 4/01/2024 842
Oregon--1.1% B+ NR 1,000 Yamhill County, Oregon, PCR, Refunding (Smurfit Newsprint
Corporation Project),8% due 12/01/2003 1,015
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
STATE Rating Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Pennsylvania-- BBB NR $ 3,935 Northeastern Pennsylvania Hospital and Educational Authority,
3.9% University Revenue Refunding Bonds (Wilkes University),
5.625% due 10/01/2018 $ 3,482
South Carolina-- A- Baa1 1,500 Aiken County, South Carolina, IDR, Refunding (Beloit Corporation
1.6% Project), 6% due 12/01/2011 1,390
Tennessee--1.7% NR NR 1,400 Knox County, Tennessee, Health, Educational and Housing
Facilities Board, Hospital Facilities Revenue Bonds (Baptist
Health Systems of East Tennessee), 8.60% due 4/15/2016 1,484
Vermont--5.5% BBB NR 1,000 Swanton Village, Vermont, Electric System Revenue Bonds,
6.70% due 12/01/2023 961
NR Baa 4,080 Vermont Educational and Health Buildings, Financing Agency
Revenue Refunding Bonds (Norwich University Project),
6% due 9/01/2013 3,879
<PAGE>
Wisconsin--1.6 NR A 1,425 Wisconsin State Health and Educational Facilities Authority
Revenue Bonds (Mercy Hospital of Janesville), 6.60% due 8/15/2022 1,398
Total Investments (Cost--$93,466)--98.4% 87,446
Other Assets Less Liabilities--1.6% 1,433
--------
Net Assets--100.0% $ 88,879
========
<FN>
(a)The interest rate is subject to change periodically based upon the prevailing market rate.
The interest rate shown is the rate in effect at May 31, 1994.
Ratings of issues shown have not been audited by Deloitte & Touche.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of May 31, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$93,466,012)(Note 1a) $ 87,445,499
Cash 83,754
Receivables:
Interest $ 1,417,392
Securities sold 967,160
Investment adviser (Note 2) 118,940 2,503,492
------------
Deferred organization expenses (Note 1e) 69,721
------------
Total assets 90,102,466
------------
Liabilities: Payables:
Securities purchased 962,917
Dividends to shareholders (Note 1f) 181,511 1,144,428
------------
Accrued expenses and other liabilities 79,457
------------
Total liabilities 1,223,885
------------
Net Assets: Net assets $ 88,878,581
============
<PAGE>
Capital: Common Stock, par value $.10 per share; 200,000,000 shares authorized;
6,654,055 shares issued and outstanding $ 665,405
Paid-in capital in excess of par 93,445,808
Undistributed investment income--net 465,369
Undistributed realized capital gains--net 322,512
Unrealized depreciation on investments--net (6,020,513)
------------
Total capital--Equivalent to $13.36 net asset value per share of
Common Stock (market price--$12.125) (Note 4) $ 88,878,581
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Period October 29, 1993++ to May 31, 1994
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount $ 2,976,799
Income (Note 1d):
Expenses: Investment advisory fees (Note 2) $ 298,995
Accounting services (Note 2) 28,463
Professional fees 23,024
Directors' fees and expenses 18,960
Printing and shareholder reports 13,380
Transfer agent fees (Note 2) 11,839
Listing fees (Note 1e) 8,546
Amortization of organization expenses (Note 1e) 7,528
Custodian fees 6,496
Other 16,158
------------
Total expenses before reimbursement 433,389
Reimbursement of expenses (Note 2) (417,935)
------------
Total expenses after reimbursement 15,454
------------
Investment income--net 2,961,345
------------
Realized Gain & Realized gain on investments--net 322,512
Unrealized Loss on Unrealized depreciation on investments--net (6,020,513)
Investments--Net ------------
(Notes 1d & 3): Net Decrease in Net Assets Resulting from Operations $ (2,736,656)
============
<PAGE>
<FN>
++ Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
For the Period
October 29, 1993++
Increase (Decrease) in Net Assets: to May 31, 1994
<S> <S> <C>
Operations: Investment income--net $ 2,961,345
Realized gain on investments--net 322,512
Unrealized depreciation on investments--net (6,020,513)
------------
Net decrease in net assets resulting from operations (2,736,656)
------------
Dividends to Investment income--net (2,495,976)
Shareholders ------------
(Note 1f): Net decrease in net assets resulting from dividends to shareholders (2,495,976)
------------
Common Stock Net proceeds from issuance of Common Shares 94,221,225
Transactions Offering and underwriting costs resulting from the issuance of Common Shares (210,017)
(Note 4): ------------
Net increase in net assets derived from Common Stock transactions 94,011,208
------------
Net Assets: Total increase in net assets 88,778,576
Beginning of period 100,005
------------
End of period* $ 88,878,581
============
*Undistributed investment income--net $ 465,369
============
<FN>
++ Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period
October 29, 1993++
Increase (Decrease) in Net Asset Value: to May 31, 1994
<S> <S> <C>
Per Share Net asset value, beginning of period $ 14.18
Operating -----------
Performance: Investment income--net .45
Realized and unrealized loss on investments--net (.86)
-----------
Total from investment operations (.41)
-----------
Less dividends:
Investment income--net (.38)
Capital charge resulting from issuance of Common Stock (.03)
-----------
Net asset value, end of period $ 13.36
===========
Market price per share, end of period $ 12.125
===========
Total Based on net asset value per share (3.07%)+++
Investment ===========
Return:** Based on market value per share (16.84%)+++
===========
Ratios to Expenses, net of reimbursement .03%*
Average ===========
Net Assets: Expenses .80%*
===========
Investment income--net 5.44%*
===========
Supplemental Net assets, end of period (in thousands) $ 88,879
Data: ===========
Portfolio turnover 37.15%
===========
<PAGE>
<FN>
++ Commencement of Operations.
+++ Aggregate total investment return.
* Annualized.
** Total investment returns exclude the effects of sales loads. Total
investment returns based on market value, which can be significantly
greater or lesser than the net asset value, result in substantially
different returns.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniBond Income Fund, Inc. (the "Fund") is presently the only series
of Merrill Lynch Municipal Series Trust (the "Trust"). The Fund is
registered under the Investment Company Act of 1940 as a newly
organized, non-diversified, closed-end, management investment
company. Prior to commencement of operations on October 29, 1993,
the Fund had no operations other than those relating to
organizational matters and the sale of 7,055 shares of Common Stock
on October 15, 1993 to Fund Asset Management, L.P. ("FAM") for
$100,005. 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 MBD. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Municipal bonds and other portfolio
securities in which the Fund invests are traded primarily in the
over-the-counter markets and are valued at the last available bid
price in the over-the-counter market or on the basis of yield
equivalents as obtained by the Fund's pricing service from one or
more dealers that make markets in the securities. Financial futures
contracts, which are traded on exchanges, are valued at their last
sale price as of the close of such exchanges. Options on futures
contracts on US Government securities, which are traded on
exchanges, are valued at their last bid price in the case of options
purchased and their last asked price in the case of options written.
Short-term investments with a remaining maturity 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.
<PAGE>
(b) 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.
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) Deferred organization and offering expenses--Deferred
organization expenses are charged to expense on a straight-line
basis over a five-year period beginning with the commencement of
operations of the Fund. Direct expenses relating to the public
offering of the Fund's shares of Common Stock were charged to
capital at the time of issuance of the shares.
(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.
(g) Non-income producing investments--Written and purchased options
are non-income producing investments.
<PAGE>
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM.
Effective January 1, 1994, the investment advisory business of FAM
was reorganized from a corporation to a limited partnership. Both
prior to and after the reorganization, ultimate control of FAM was
vested with Merrill Lynch & Co., Inc. ("ML & Co."). The general
partner of FAM is Princeton Services, Inc., an indirect wholly-owned
subsidiary of ML & Co. The limited partners are ML & Co. and Merrill
Lynch Investment Management, Inc. ("MLIM"), which is also an
indirect wholly-owned subsidiary of ML & Co.
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 of 0.55% based upon the
average daily value of the Fund's net assets. From October 29, 1993
to May 31, 1994, FAM earned fees of $298,995, all of which was
voluntarily waived. In addition, FAM voluntarily elected to
reimburse the Fund $118,940 in additional expenses.
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, MLIM, Merrill Lynch, Pierce, Fenner & Smith Inc.,
and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period October 29, 1994 to May 31, 1994 were $114,400,688
and $27,015,741, respectively.
Net realized and unrealized gains (losses) as of May 31, 1994 were
as follows:
Realized Unrealized
Gains (Losses) Losses
Long-term investments $ (612,507) $(6,020,513)
Short-term investments 5,100 --
Financial futures contracts 929,919 --
---------- -----------
Total $ 322,512 $(6,020,513)
========== ===========
As of May 31, 1994, net unrealized depreciation for Federal income
tax purposes aggregated $6,020,513, of which $61,098 related to
appreciated securities and $6,081,611 related to depreciated
securities. The aggregate cost of investments at May 31, 1994 for
Federal income tax purposes was $93,466,012.
<PAGE>
4. Capital Stock Transactions:
At May 31, 1994, the Fund had one class of shares of Common Stock,
par value $.10 per share, of which 200,000,000 shares were
authorized. During the period October 29, 1993 to May 31, 1994,
6,647,000 shares were sold. At May 31, 1994, total paid-in capital
amounted to $94,111,213.
5. Subsequent Event:
On June 10, 1994, the Fund's Board of Directors declared an ordinary
income dividend to Common Stock shareholders in the amount of
$.069938 per share, payable on June 29, 1994 to shareholders of
record as of June 20, 1994.
6. Reorganization Plan:
On July 13, 1994, The Board of Directors approved a plan of
reorganization, subject to shareholder approval and certain other
conditions, whereby MuniAssets Fund, Inc. ("MuniAssets") would
acquire substantially all of the assets and liabilities of the Fund
in exchange for newly issued shares of MuniAssets. MuniAssets is a
registered, non-diversified, closed-end management investment
company with a similar investment objective to the Fund, and is
managed by FAM.
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
MuniBond Income Fund, Inc.:
We have audited the accompanying statement of assets, liabilities
and capital, including the schedule of investments, of MuniBond
Income Fund, Inc. as of May 31, 1994, the related statements of
operations, changes in net assets, and the financial highlights for
the period October 29, 1993 (commencement of operations) to May 31,
1994. 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 audit.
<PAGE>
We conducted our audit 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 May 31,
1994 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 audit provides
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
MuniBond Income Fund, Inc. as of May 31, 1994, the results of its
operations, the changes in net assets, and the financial highlights
for the respective stated period in conformity with generally
accepted accounting principles.
Deloitte & Touche
Princeton, New Jersey
July 13, 1994
</AUDIT-REPORT>
