MUNIBOND
INCOME
FUND, INC.
MUNIBOND
INCOME
FUND, INC.
Semi-Annual Report
November 30, 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
<PAGE>
MUNIBOND INCOME FUND, INC.
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
Robert E. Putney, III, Assistant Secretary
Custodian
The Bank of New York
90 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
DEAR SHAREHOLDER
For the year ended November 30, 1994, MuniBond Income Fund, Inc.
earned $0.875 per share income dividends, which included earned and
unpaid dividends of $0.071. This represents a net annualized yield
of 7.08%, based on a month-end net asset value of $12.35 per share.
Over the same period, the Fund's total investment return was -6.58%,
based on a change in per share net asset value from $14.10 to
$12.35, and assuming reinvestment of $0.804 per share income
dividends.
For the six-month period ended November 30, 1994, the Fund's total
investment return was -4.17%, based on a change in per share net
asset value from $13.36 to $12.35, and assuming reinvestment of
$0.428 per share income dividends.
<PAGE>
The Environment
Volatility in the US financial markets continued during the period,
largely prompted by concerns of increasing inflationary pressures.
The possibility of continued monetary policy tightening by the
Federal Reserve Board was predominant in the minds of investors
throughout most of the period. Therefore, there was little surprise
when the central bank continued to raise short-term interest rates.
The weakness of the US dollar in foreign exchange markets also
prompted declines in US stock and bond prices, but some
strengthening of the US currency has occurred recently.
Despite widespread inflationary expectations, recently released data
show that the rate of inflation remains near a 30-year low, as
consumer prices barely rose in October. Other economic results show
little evidence of an overheating economy. Housing starts fell
during October, and higher interest rates will likely continue to
weaken housing demand. Although retail sales are rising, the real
strength in the economy is still in the manufacturing sector.
In the weeks ahead, investors will continue to assess economic data
and inflationary trends in order to gauge whether further increases
in short-term interest rates are likely. In addition, investor
interest will also be focused on the progress that the new Congress
makes on both reducing the Federal budget deficit and providing tax
cuts that promote savings and investment. Legislative progress,
combined with continued indications of moderate and sustainable
levels of economic growth, would be positive for the US capital
markets.
The Municipal Market
The long-term tax-exempt market continued to erode throughout the
six months ended November 30, 1994. As measured by the Bond Buyer
Revenue Bond Index, yields on A-rated municipal revenue bonds
maturing in 30 years rose by over 90 basis points (0.90%) to 7.32%
during the period ended November 30, 1994. This represents the
highest level of tax-exempt bond yields in over two years. US
Treasury bonds suffered even greater declines during the six-month
period as Treasury bond yields rose approximately 60 basis points to
end the period at 8.00%.
<PAGE>
The tax-exempt bond market reacted negatively throughout the
November period to indications that, despite a series of interest
rate increases by the Federal Reserve Board, the strength of the
domestic economy seen in recent quarters has not yet been
significantly reduced. While inflationary pressures have remained
well contained, additional Federal Reserve Board actions have been
expected both to ensure that domestic economic growth is eventually
confined to current levels and to assure nervous financial markets
of its anti-inflationary intentions. Within this context,
institutional investors have largely withdrawn from the municipal
market to await a more stable environment. At the same time, retail
investors have been redeeming mutual fund shares, largely in
anticipation of continued price declines. Investor withdrawals were
particularly heavy in October and early November, with tax-exempt
mutual fund outflows exceeding $3 billion during the last quarter.
Fortunately, while the demand for tax-exempt bonds has declined
somewhat in recent months, new bond issuance has remained greatly
reduced. During the three months ended November 30, 1994, only $32
billion in long-term tax-exempt securities were issued, a decline of
over 50% compared to the November 30, 1993 quarter. Similarly, for
the six months ended November 30, 1994, only $75 billion in
municipal securities were underwritten, a decline of over 50%
compared to the same period a year earlier. This reduction in
issuance in recent quarters has allowed the municipal bond market to
react to both the decline in investor demand and the rise in fixed-
income yields in a more orderly fashion than in similar situations
in the past, particularly during 1987.
Long-term tax-exempt revenue bonds currently yield approximately 7%,
or almost 11.5% on an after-tax equivalent basis, to an investor in
the 39.6% Federal income tax bracket. As inflation has only
marginally increased in the past year, real tax-exempt interest
rates have risen dramatically. The Federal Reserve Board appears
committed to maintaining inflation at or below its current levels.
Indeed, most forecasts expect inflation to remain in its present
range of 3%--4% throughout 1995 and, potentially, for the remainder
of the 1990s. Real after-tax equivalent interest rates exceeding 7%
represent historically attractive municipal investments for long-
term investors.
<PAGE>
Federal Reserve Board actions taken thus far have yet to fully
impact US domestic growth and expected additional actions should
promote only a modest economic expansion within a benign
inflationary context beginning sometime early in 1995. Within such
an environment, it is unlikely that tax-exempt interest rates will
remain at their current attractive levels. Tax-exempt bond issuance
is unlikely to return to the historic high levels seen in 1992 and
1993, while investor demand should return as markets stabilize. As
we have discussed in earlier reports, the total number of tax-exempt
bonds outstanding is scheduled to decline dramatically in 1994 and
1995 as a result of both regular bond maturities and early
redemptions. Investors seeking tax-advantaged issues are likely to
find it very difficult to obtain currently available tax-exempt
yields as the current supply/demand balance is unlikely to be
maintained in the coming quarters.
Portfolio Strategy
We maintained the defensive posture we adopted for the Fund earlier
this year. Through early October, we maintained the Fund's cash
reserves at approximately 10% of net assets in an attempt to limit
further capital depreciation. Additionally, we sought to upgrade the
credit quality of our more recent purchases. Much of this decision
was dictated by a relative scarcity of acceptable noninvestment-
grade-issues in recent months. Furthermore, yields on investment-
grade securities, particularly housing revenue bonds, have increased
substantially, with current coupon rates presently in excess of
7.25%. These circumstances have allowed us to purchase higher-
quality issues with only minimal income sacrifice. Looking forward,
as the municipal market stabilizes and yield relationships return to
more historic averages, we expect these higher-quality issues to be
easily sold and higher-yielding, noninvestment-grade issues to be
purchased.
In November, we reduced the Fund's cash position to below 5% of net
assets as municipal bond interest rates became particularly
attractive both on an after-tax basis and as a percentage of US
Treasury bond yields. We believe that while recent volatility is
likely to persist, much, if not most of the dramatic increase in
fixed-income yields seen in the last 12 months has run its course.
Recent interest rate increases by the Federal Reserve Board have
done much to calm nervous investors' concerns regarding both an
overheating domestic economy and potential inflationary pressures.
In this environment, currently available tax-exempt yields are
likely to prove very attractive to long-term investors.
We appreciate your investment in MuniBond Income Fund, Inc., and we
look forward to assisting you with your financial needs.
<PAGE>
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent R. Giordano)
Vincent R. Giordano
Vice President and Portfolio Manager
January 4, 1995
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)
HFA Housing Finance Authority
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
M/F Multi-Family
PCR Pollution Control Revenue Bonds
S/F Single-Family
VRDN Variable Rate Demand Notes
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <S> <C>
Alabama--1.4% B+ NR* $1,000 Brewton, Alabama, Industrial Development Board, PCR, Refunding
(Container Corporation of America Project), 8% due 4/01/2009 $ 965
California-- NR* NR* 1,805 Long Beach, California, Redevelopment Agency, M/F Housing
2.3% Revenue Bonds (Pacific Court Apartments), AMT, Issue B, 6.80%
due 9/01/2013 1,662
<PAGE>
Colorado--2.7% NR* NR* 2,000 San Miguel County, Colorado, Revenue Bonds (Mountain Village
Metropolitan District), 7.40% due 12/15/2013 1,915
Florida--2.8% BBB- NR* 2,500 Largo, Florida, Sun Coast Health Systems, Revenue Refunding
Bonds, 6.30% due 3/01/2020 2,010
Georgia--5.2% BBB+ NR* 4,500 Georgia Tri-City Hospital Authority Revenue Bonds (South Fulton
Medical Center), 6.375% due 7/01/2016 3,714
Illinois--8.8% Illinois Health Facilities Authority Revenue Bonds:
BBB+ NR* 1,000 (Community Hospital of Ottawa), 6.85% due 8/15/2024 (c) 864
NR* Baa1 1,150 (Holy Cross Hospital Project), 6.70% due 3/01/2014 (c) 1,014
Illinois Health Facilities Authority, Revenue Refunding Bonds:
A- A 2,000 (Illinois Masonic Medical Center), 5.50% due 10/01/2019 1,527
BBB- NR* 1,485 (Saint Elizabeth's Hospital of Chicago), 7.625% due 7/01/2010 1,436
A+ A1 1,500 Illinois Housing Development Authority, M/F Program, Series 5,
6.75% due 9/01/2023 1,391
Indiana--2.0% NR* NR* 1,500 Burns Harbor, Indiana, Solid Waste Disposal Facility Revenue
Bonds (Bethlehem Steel Corporation Project), AMT, 8% due 4/01/2024 1,424
Iowa--4.3% BB- NR* 1,000 Des Moines County, Iowa, IDR, Refunding (U.S. Gypsum
Company Project), 7.20% due 11/01/2007 959
BBB+ NR* 2,500 Ottumwa, Iowa, Hospital Facility Revenue Refunding and
Improvement Bonds (Ottumwa Regional Health), 6% due 10/01/2010 (c) 2,095
Kentucky--1.3% NR* NR* 1,000 Perry County, Kentucky, Solid Waste Disposal Revenue Bonds
(TJ International Project), AMT, 7% due 6/01/2024 886
Louisiana-- NR* Baa1 4,195 Lafourche Parish, Louisiana, Revenue Bonds (Hospital Service
7.1% District No. 003), 6% due 10/01/2012 (c) 3,484
BB- NR* 1,600 New Orleans, Louisiana, Industrial Development Board, IDR,
Refunding (U.S. Gypsum Company Project), 7.20% due 10/01/2007 1,538
Massachusetts-- Massachusetts State Industrial Finance Agency Revenue Bonds:
6.9% NR* B1 2,000 (Bay Cove Human Services Inc.), 8.375% due 4/01/2019 1,861
BB+ Ba1 1,000 (Vinfen Corporation), 7.10% due 11/15/2018 875
NR* NR* 2,000 Massachusetts State Port Authority, Special Project Revenue
Bonds (Harborside Hyatt Project), AMT, 10% due 3/01/2026 2,136
<PAGE>
Michigan--3.7% Michigan State Hospital Finance Authority, Revenue Refunding
Bonds:
A- A 2,000 (Detroit Medical Center), Series B, 5.50% due 8/15/2023 1,514
BBB Baa1 1,500 (Pontiac Osteopathic), Series A, 6% due 2/01/2024 1,131
Minnesota-- AA+ Aa 1,000 Minnesota State, HFA, S/F Mortgage Revenue Bonds, Series Q,
1.3% 6.70% due 1/01/2017 942
Montana--2.6% BBB+ Baa1 2,300 Forsyth, Montana, PCR, Refunding (The Montana Power Company),
Series B, 5.90% due 12/01/2023 1,849
New Jersey-- AAA Aaa 1,000 New Jersey State Housing and Mortgage Finance Agency Revenue
1.4% Bonds (Home Buyer), AMT, Series M, 6.95% due 10/01/2022 (b)(c) 970
New Mexico-- A1+ VMIG1 800 Albuquerque, New Mexico, Hospital Revenue Bonds (Sisters of
3.2% Charity at Saint Joseph's Church), VRDN, 3.85% due 5/15/2022 (a) 800
A1+ NR* 700 Eddy County, New Mexico, PCR, Refunding (IMC Fertilizer Inc.
Project), VRDN, 3.70% due 2/01/2003 (a) 700
A1+ P1 800 Farmington, New Mexico, PCR (Arizona Public Service Co.),
VRDN, AMT, Series C, 3.65% due 9/01/2024 (a) 800
New York--1.9% BB+ Ba1 1,500 New York State Energy Research and Development Authority, Electric
Facilities Revenue Bonds (Long Island Lighting), AMT, Series A,
7.15% due 6/01/2020 1,353
Ohio--12.9% Ohio State Air Quality Development Authority, PCR, Refunding:
BB Ba2 2,000 (Cleveland Electric Company), AMT, 6.85% due 7/01/2023 1,690
BBB- Baa2 4,500 (Ohio-Edison), Series A, 5.95% due 5/15/2029 3,540
BB Ba2 3,500 Ohio State Water Development Authority, Pollution Control Facilities
Revenue Bonds (Toledo Edison Project), AMT, Series A, 7.40% due
11/01/2022 3,173
BBB- Baa 1,000 Stark County, Ohio, Hospital Revenue Bonds (Doctors Hospital Inc.),
6% due 4/01/2024 768
Oregon--1.8% A-1 NR* 300 Port St. Helen's, Oregon, PCR (Portland General Electric Company
Project), VRDN, AMT, Series A, 3.70% due 8/01/2014 (a) 300
B+ NR* 1,000 Yamhill County, Oregon, PCR, Refunding (Smurfit Newsprint
Corporation Project), 8% due 12/01/2003 977
<PAGE>
Pennsylvania-- BB+ Baa3 1,750 Allegheny County, Pennsylvania, IDA, Environmental Improvement,
11.1% Revenue Refunding Bonds (USX Corporation), Series A, 6.70% due
12/01/2020 (c) 1,549
BBB NR* 3,935 Northeastern Pennsylvania Hospital and Educational Authority,
University Revenue Refunding Bonds (Wilkes University), 5.625%
due 10/01/2018 3,139
BB Ba 2,500 Pennsylvania Convention Center Authority, Revenue Refunding
Bonds, Series A, 6.75% due 9/01/2019 2,244
BBB- NR* 1,000 Pennsylvania Economic Development Financing Authority,
Resource Recovery Revenue Bonds (Colver Project), AMT, Series
D, 7.15% due 12/01/2018 921
South Carolina A- Baa1 1,500 Aiken County, South Carolina, IDR, Refunding (Beloit
- --1.8% Corporation Project), 6% due 12/01/2011 1,288
Tennessee--2.0% 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 1,430
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <S> <C>
Vermont--8.4% BBB NR* $1,000 Swanton Village, Vermont, Electric System Revenue Bonds,
6.70% due 12/01/2023 $ 912
Vermont Educational and Health Buildings Financing Agency,
Revenue Refunding Bonds:
NR* NR* 1,565 (College of St. Joseph Project), 8.50% due 11/01/2024 1,557
NR* Baa 4,080 (Norwich University Project), 6% due 9/01/2013 3,487
Virginia--1.4% AA+ Aa1 1,000 Virginia State Housing Development Authority, Commonwealth
Mortgage, AMT, Series A, Subseries A-4, 7.80% due 7/01/2028 1,015
Total Investments (Cost--$79,081)--98.3% 69,805
Variation Margin on Futures Contracts**--(0.1%) (69)
Other Assets Less Liabilities--1.8% 1,310
--------
Net Assets--100.0% $ 71,046
========
<PAGE>
<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 November 30, 1994.
(b)MBIA Insured.
(c)All or portion of security held in connection with open futures contracts.
*Not Rated.
**Financial futures contracts sold as of November 30, 1994 were as follows:
Value
Number of Expiration (in thousands)
Contracts Issue Date (Note 1a)
105 US Treasury Bonds March 1995 $(10,297)
(Total Contract Price--$10,320) $(10,297)
========
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of November 30, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$79,081,331)(Note 1a) $ 69,804,543
Cash 74,556
Interest receivable 1,360,624
Deferred organization expenses (Note 1e) 69,721
-------------
Total assets 71,309,444
-------------
Liabilities: Payables:
Dividends to shareholders (Note 1f) $ 136,014
Variation margin (Note 1b) 68,906 204,920
-------------
Accrued expenses and other liabilities 58,309
-------------
Total liabilities 263,229
-------------
Net Assets: Net assets $ 71,046,215
=============
<PAGE>
Capital: Common Stock, par value $.10 per share; 200,000,000 shares authorized;
5,752,965 shares issued and outstanding $ 575,297
Paid-in capital in excess of par 81,508,112
Undistributed investment income--net 408,394
Undistributed realized capital losses on investments--net (2,191,769)
Unrealized depreciation on investments--net (9,253,819)
-------------
Total capital--Equivalent to $12.35 net asset value per share of
Common Stock (market price--$11.375) (Note 4) $ 71,046,215
=============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended November 30, 1994
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 2,656,231
Income
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 218,448
Professional fees 28,442
Printing and shareholder reports 22,548
Accounting services (Note 2) 17,826
Listing fees 13,177
Directors' fees and expenses 12,888
Transfer agent fees (Note 2) 10,830
Amortization of organization expenses (Note 1e) 6,528
Custodian fees 4,082
Pricing fees 3,092
Other 5,083
-------------
Total expenses before reimbursement 342,944
Reimbursement of expenses (Note 2) (218,448)
-------------
Total expenses after reimbursement 124,496
-------------
Investment income--net 2,531,735
-------------
<PAGE>
Realized & Realized loss on investments (2,514,281)
Unrealized Change in unrealized depreciation on investments--net (3,233,306)
Loss on -------------
Investments--Net Net Decrease in Net Assets Resulting from Operations $ (3,215,852)
(Notes 1d =============
& 3):
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the For the
Six Months Period
Ended Oct. 29, 1993++
Increase (Decrease) in Net Assets: Nov. 30, 1994 to May 31, 1994
<S> <S> <C> <C>
Operations: Investment income--net $ 2,531,735 $ 2,961,345
Realized gain (loss) on investments--net (2,514,281) 322,512
Change in unrealized depreciation on investments--net (3,233,306) (6,020,513)
------------- -------------
Net decrease in net assets resulting from operations (3,215,852) (2,736,656)
------------- -------------
Dividends to Investment income--net (2,588,710) (2,495,976)
Shareholders ------------- -------------
(Note 1f): Net decrease in net assets resulting from dividends to shareholders (2,588,710) (2,495,976)
------------- -------------
Common Stock Net proceeds from issuance of Common Stock -- 94,221,225
Transactions Offering and underwriting costs resulting from the issuance of
(Note 4): Common Stock -- (210,017)
Value of shares tendered (12,027,804) --
------------- -------------
Net increase (decrease) in net assets derived from Common Stock
transactions (12,027,804) 94,011,208
------------- -------------
<PAGE>
Net Assets: Total increase (decrease) in net assets (17,832,366) 88,778,576
Beginning of period 88,878,581 100,005
------------- -------------
End of period* $ 71,046,215 $ 88,878,581
============= =============
<FN>
*Undistributed investment income--net $ 408,394 $ 465,369
============= =============
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived For the For the
from information provided in the financial statements. Six Months Period
Ended Oct. 29, 1993++
Increase (Decrease) in Net Asset Value: Nov. 30, 1994 to May 31, 1994
<S> <S> <C> <C>
Per Share Net asset value, beginning of period $ 13.36 $ 14.18
Operating ------------- -------------
Performance: Investment income--net .43 .45
Realized and unrealized loss on investments--net (1.01) (.86)
------------- -------------
Total from investment operations (.58) (.41)
------------- -------------
Less dividends:
Investment income--net (.43) (.38)
------------- -------------
Capital charge resulting from issuance of Common Stock -- (.03)
------------- -------------
Net asset value, end of period $ 12.35 $ 13.36
============= =============
Market price per share, end of period $ 11.375 $ 12.125
============= =============
Total Based on net asset value per share (4.17%)+++ (3.07%)+++
Investment ============= =============
Return:** Based on market price per share (2.75%)+++ (16.84%)+++
============= =============
<PAGE>
Ratios to Expenses, net of reimbursement .31%* .03%*
Average ============= =============
Net Assets: Expenses .86%* .80%*
============= =============
Investment income--net 6.32%* 5.44%*
============= =============
Supplemental Net assets, end of period (in thousands) $ 71,046 $ 88,879
Data: ============= =============
Portfolio turnover 24.17% 37.15%
============= =============
++Commencement of Operations.
+++Aggregate total investment return.
*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 effect of sales loads.
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. These unaudited interim financial statements reflect all
adjustments which are, in the opinion of management, necessary to a
fair statement of the results for the interim period presented. All
such adjustments are of a normal recurring nature. 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.
<PAGE>
(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 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.
(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.
NOTES TO FINANCIAL STATEMENTS (concluded)
(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 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.
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."). The limited
partners are ML & Co. and Fund Asset Management, Inc. ("FAMI"),
which is also an indirect wholly-owned subsidiary of ML & Co. The
Fund has entered into a Distribution Agreement and a Distribution
Plan with Merrill Lynch Fund Distributor, Inc. ("MLFD" or
"Distributor"), a 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. For the six months
ended November 30, 1994, FAM earned fees of $218,448, all of which
was voluntarily waived.
Financial Data Services, Inc. ("FDS"), an indirect wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
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, FAMI, PSI, MLFD, FDS, 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 six months ended November 30, 1994 were $17,406,085 and
$25,176,762, respectively.
<PAGE>
Net realized and unrealized gains (losses) as of November 30, 1994
were as follows:
Unrealized
Realized Gains
Losses (Losses)
Long-term investments $(2,498,557) $(9,276,788)
Financial futures contracts (15,724) 22,969
----------- -----------
Total $(2,514,281) $(9,253,819)
=========== ===========
As of November 30, 1994, net unrealized depreciation for Federal
income tax purposes aggregated $9,276,788, of which $3,335 related
to appreciated securities and $9,280,123 related to depreciated
securities. The aggregate cost of investments at November 30, 1994
for Federal income tax purposes was $79,801,331.
4. Capital Stock Transactions:
At November 30, 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 six months ended November 30, 1994, the Fund
offered to purchase its shares of Common Stock from all beneficial
holders of the Fund's Common Stock at a price per share equal to the
net asset value of the Common Stock determined at the close of
business on the day the offer terminated (the "Tender Offer"). On
August 3, 1994, the Tender Offer was terminated, and 901,090 shares
of Common Stock were redeemed at $13.35. For the six months ended
November 30, 1994, shares issued and outstanding decreased by
901,090 as a result of the Tender Offer. At November 30, 1994, total
paid-in capital amounted to $82,083,409.
5. Subsequent Event:
On December 9, 1994, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $0.070988 per share, payable on December 29, 1994 to shareholders
of record as of December 19, 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.
<PAGE>
PER SHARE INFORMATION
<TABLE>
Per Share
Selected Quarterly
Financial Data*
<CAPTION>
Net Realized Unrealized Dividends / Distributions
Investment Gains Gains Net Investment Capital
For the Period Income (Losses) (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 --
June 1, 1994 to August 31, 1994 .24 (.28) .38 .23 --
September 1, 1994 to November 30, 1994 .19 (.16) (.95) .20 --
<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 14.04 14.875 13.00 374
March 1, 1994 to May 31, 1994 14.00 12.90 13.625 12.00 719
June 1, 1994 to August 31, 1994 13.70 13.17 13.25 11.75 863
September 1, 1994 to November 30, 1994 13.45 12.15 12.375 10.00 1,078
<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>
