<PAGE>
THE MORGAN STANLEY HIGH YIELD FUND, INC.
- --------------------------------------------------
OFFICERS AND DIRECTORS
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS James W. Grisham
Frederick B. Whittemore VICE PRESIDENT
VICE-CHAIRMAN OF THE BOARD OF DIRECTORS Michael F. Klein
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND DIRECTOR Harold J. Schaaff, Jr.
Peter J. Chase VICE PRESIDENT
DIRECTOR Joseph P. Stadler
John W. Croghan VICE PRESIDENT
DIRECTOR Valerie Y. Lewis
David B. Gill SECRETARY
DIRECTOR James R. Rooney
Graham E. Jones TREASURER
DIRECTOR Belinda A. Brady
John A. Levin ASSISTANT TREASURER
DIRECTOR
- --------------------------------------------------
INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- ---------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
- ---------------------------------------------------------
CUSTODIANS
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank
770 Broadway
New York, New York 10003
- ---------------------------------------------------------
SHAREHOLDER SERVICING AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 278-4353
- ---------------------------------------------------------
LEGAL COUNSEL
Rogers & Wells
200 Park Avenue
New York, New York 10166
- ---------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
- ---------------------------------------------------------
For additional Fund information, including the Fund's net asset value per share
and information regarding the investments comprising the Fund's portfolio,
please call 1-800-221-6726.
----------
THE
MORGAN STANLEY
HIGH YIELD
FUND, INC.
----------
THIRD QUARTER REPORT
SEPTEMBER 30, 1996
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------
For the nine months ended September 30, 1996, the total return for the Morgan
Stanley High Yield Fund, Inc. (the "Fund"), based on net asset value per share,
was 10.86% compared to 7.65% for the CS First Boston High Yield Index (the
"Index"). For the period since the Fund's commencement of operations on November
30, 1993 through September 30, 1996, the Fund's total return based on net asset
value per share, is 32.04% compared with 26.71% for the Index. On September 30,
1996, the closing price of the Fund's shares on the New York Stock Exchange was
$14.25 representing a 1.9% premium to the Fund's net asset value per share.
The high yield bond market performed well for the third quarter as the CS First
Boston High Yield Index rose 3.75%. The Fund outperformed the Index and posted a
total return of 7.16% for the quarter, based on net asset value per share. This
occurred in the framework of a flat ten-year Treasury bond, three basis points
lower over the quarter, but lower short rates as the three-month rate dropped
seventeen basis points to 5.03%. As a result, the spread to Treasuries narrowed
and at the end of the quarter the Index had a spread of 383 basis points to
Treasuries. The high yield market outperformed both the domestic stock and bond
markets during the quarter.
The biggest factor affecting the Fund was its weighting in the cable television
industry. This industry is viewed as one of the highest quality in the high
yield market and suffered in the early part of the year in sympathy with the
sharp rise in Treasury rates. Higher quality bonds follow movements in the
Treasury market more closely than lower quality bonds. The Fund also benefitted
from its exposure to the telecommunications sector. These bonds rallied in
response to the announced merger of MFS and Worldcom. Our exposure to the
emerging markets also helped performance as that market continued its torrid
performance.
The high yield market has been quite good for some time and the spread to
Treasuries is in the narrow end of the range. As a result, we are currently a
bit cautious. We have been upgrading the quality of the portfolio in this
environment and find among our larger holdings such large corporations as
Viacom, Time Warner and Revlon. We feel these investments are improving credits
and offer good returns. In addition, we believe there is less risk of spreads
widening to Treasury bonds in the better quality sector than in much of the rest
of the market.
Sincerely,
[SIGNATURE]
Warren J. Olsen
PRESIDENT AND DIRECTOR
[SIGNATURE]
Robert Angevine
PORTFOLIO MANAGER
October 17, 1996
2
<PAGE>
The Morgan Stanley High Yield Fund, Inc.
Investment Summary as of September 30, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION (UNAUDITED)
TOTAL RETURN (%)
------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (1)(3)
---------------------- ---------------------- ----------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
<S> <C> <C> <C> <C> <C> <C>
---------------------- ---------------------- ----------------------
FISCAL YEAR TO DATE 19.63% -- 10.86% -- 7.65% --
ONE YEAR 26.74 26.74% 15.65 15.65% 10.74 10.74%
SINCE INCEPTION* 34.60 11.05 32.04 10.30 26.71 8.71
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
A BAR CHART REFLECTING THE DATA BELOW IS REFLECTED HERE.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31: NINE MONTHS
<S> <C> <C> <C> <C>
1993* 1994 1995 Ended 9/30/96 (Unaudited)
Net Asset Value Per Share $14.10 $11.96 $13.63 $13.98
Market Value Per Share $14.75 $11.38 $12.88 $14.25
Premium/(Discount) 4.6% -4.8% -5.5% 1.9%
Income Dividends - $1.37 $1.27 $1.06
Fund Total Return (2) 0.00% -5.53% 26.07% 10.86%
Index Total Return
(1)(3)** 1.26% -0.98% 17.39% 7.65%
</TABLE>
(1)Assumes dividends and distributions, if any, were reinvested.
(2)Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. These percentages are not an indication of the performance of a
shareholder's investment in the Fund based on market value due to differences
between the market price of the stock and the net asset value per share of
the Fund.
(3)The CS First Boston High Yield Index is an unmanaged index of high yield
corporate bonds.
* The Fund commenced operations on November 30, 1993.
** Unaudited.
3
<PAGE>
The Morgan Stanley High Yield Fund, Inc.
Investment Summary as of September 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Debt Securities 94.1%
Equity Securities 3.4%
Short-Term Investments 2.5%
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Broadcast -- Radio & Television 15.9%
Collateralized Mortgage Obligations 5.4%
Entertainment & Leisure 4.7%
Food Service & Lodging 5.4%
Foreign Government Bonds 10.1%
Multi-Industry 10.2%
Packaging & Container 7.8%
Retail -- General 4.1%
Telecommunications 9.3%
Utilities 4.4%
Other 22.7%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
----------
<C> <S> <C>
1. Cablevision Systems Corp. 3.3%
2. Lenfest Communications 3.2
3. Republic of Argentina Bonds 3.1
4. Gaylord Container Corp. 3.1
5. Federative Republic of Brazil
Bonds 2.9
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
----------
<C> <S> <C>
6. Viacom, Inc. 2.8%
7. Nextel Communications 2.6
8. Time Warner, Inc. 'K' 2.5
9. Revlon Worldwide Corp. 2.5
10. DR Securitized Lease Trust 2.5
---
28.5%
---
---
</TABLE>
- --------------------------------------------------------------------------------
* Excludes short-term securities.
4
<PAGE>
INVESTMENTS (UNAUDITED)
(Showing Percentage of Total Value of Investments)
- ---------
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ----------------------------------------------------------------------------------
- -------------
CORPORATE BONDS AND NOTES (75.9%)
- ----------------------------------------------------------------------------------
- -------------
AEROSPACE & DEFENSE (2.0%)
Jet Equipment Trust
11.44%, 11/1/14 $ 1,100 $ 1,249
'C1' 11.79%, 6/15/13 1,500 1,719
--------------
2,968
--------------
BANKING (1.9%)
Bank United Corp.
8.05%, 5/15/98 1,585 1,580
First Nationwide
9.125%, 1/15/03 415 408
First Nationwide
10.625%, 10/1/03 685 716
--------------
2,704
--------------
BROADCAST -- RADIO & TELEVISION (15.9%)
Cablevision Systems Corp.
9.250%, 11/1/05 1,350 1,299
9.875%, 5/15/06 3,550 3,559
Comcast Cellular
'A' Zero Coupon, 3/5/00 200 141
'B' Zero Coupon, 3/5/00 2,170 1,524
Comcast Corp.
9.375%, 5/15/05 900 918
9.50%, 1/15/08 1,000 1,010
Lenfest Communications
8.375%, 11/1/05 3,725 3,520
10.50%, 6/15/06 1,160 1,195
Marcus Cable Co.
0.00%, 12/15/05 4,640 3,155
Rogers Cablesystems 'B'
10.00%, 3/15/05 2,800 2,842
Viacom, Inc.
8.00%, 7/7/06 4,350 4,051
--------------
23,214
--------------
CHEMICALS (0.3%)
Exide Corp. (Convertible)
2.90%, 12/15/05 640 390
--------------
COMPUTERS (1.9%)
Advanced Micro Devices, Inc.
11.00%, 8/1/03 1,380 1,430
Unisys Corp.
12.00%, 4/15/03 1,320 1,370
--------------
2,800
--------------
DIVERSIFIED (0.5%)
K Mart Corp.
8.375%, 7/1/22 885 673
--------------
- ----------------------------------------------------------------------------------
- -------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ----------------------------------------------------------------------------------
- -------------
ENERGY (0.9%)
Nuevo Energy Co.
9.50%, 4/15/06 $ 1,310 $ 1,339
--------------
ENTERTAINMENT & LEISURE (2.1%)
Six Flags Theme Parks Inc. 'A'
12.25%, 6/15/05 2,410 2,133
Station Casinos, Inc.
9.625%, 6/1/03 870 854
--------------
2,987
--------------
ENVIRONMENTAL CONTROLS (2.0%)
Norcal Waste Systems Inc.
12.75%, 11/15/05 2,725 2,946
--------------
FINANCIAL SERVICES (1.5%)
APP International Finance
11.75%, 10/1/05 1,400 1,456
Homeside, Inc.
11.25%, 5/15/03 670 727
--------------
2,183
--------------
FOOD SERVICE & LODGING (5.4%)
Courtyard By Marriott 'B'
10.75%, 2/1/08 2,020 2,076
Host Marriott Travel
9.50%, 5/15/05 2,835 2,841
La Quinta Inns, Inc.
9.25%, 5/15/03 2,920 3,008
--------------
7,925
--------------
GAMING & LODGING (2.5%)
Grand Casinos
10.125%, 12/1/03 2,220 2,178
Louisiana Casino Cruise
11.50%, 12/1/98 318 261
Trump Atlantic City
11.25%, 5/1/06 1,195 1,177
--------------
3,616
--------------
INSURANCE (1.9%)
Home Holdings, Inc.
8.625%, 12/15/03 2,060 783
Reliance Group Holdings, Inc.
9.00%, 11/15/00 1,990 2,015
--------------
2,798
--------------
METALS (1.5%)
Algoma Steel, Inc.
12.375%, 7/15/05 2,050 2,132
--------------
- ----------------------------------------------------------------------------------
- -------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
- -------------
MULTI-INDUSTRY (10.2%)
Brooks Fiber Properties
0.00%, 3/1/06 $ 4,595 $ 2,832
Crown Paper
11.00%, 9/1/05 2,855 2,848
Echostar Satellite Broadcast
0.00%, 3/15/04 4,275 2,939
Flores & Rucks
9.75%, 10/1/06 830 843
MFS Communications
0.00%, 1/15/06 3,570 2,495
SD Warren Co. 'B'
12.00%, 12/15/04 1,575 1,699
TLC Beatrice International Holdings
11.50%, 10/1/05 1,195 1,253
--------------
14,909
--------------
PACKAGING & CONTAINER (7.8%)
Gaylord Container Corp.
11.50%, 5/15/01 3,580 3,786
12.75%, 5/15/05 610 667
G-I Holdings, Inc. 'B'
Zero Coupon, 10/1/98 1,700 1,475
Owen-Illinois, Inc.
11.00%, 12/1/03 3,275 3,577
Stone Container Corp.
10.75%, 08/15/06 1,840 1,891
--------------
11,396
--------------
REAL ESTATE (1.3%)
HMC Acquisition Properties
9.00%, 12/15/07 2,050 1,953
--------------
RETAIL -- GENERAL (4.1%)
Revlon Worldwide Corp.
Zero Coupon, 3/15/98 4,160 3,666
Southland Corp.
5.00%, 12/15/03 3,000 2,389
--------------
6,055
--------------
TELECOMMUNICATIONS (7.4%)
Dial Call Communications
0.00%, 4/15/04 2,500 1,731
Net Sat Servicos Ltd. 'A'
12.75%, 8/5/04 1,650 1,749
Nextel Communications
0.00%, 8/15/04 5,850 3,773
Paging Network
10.125%, 8/1/07 400 414
Philippine Long Distance Telephone
9.25%, 6/30/06 1,025 1,053
Telewest plc
0.00%, 10/1/07 3,175 2,040
--------------
10,760
--------------
TEXTILES & APPAREL (0.4%)
Collins & Aikman Products
11.50%, 4/15/06 525 554
--------------
- ----------------------------------------------------------------------------------
- -------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ----------------------------------------------------------------------------------
- -------------
UTILITIES (4.4%)
Cleveland Electric
8.375%, 12/1/11 $ 440 $ 416
8.375%, 8/1/12 1,050 992
9.50%, 5/15/05 1,000 1,031
First PV Funding Lease Obligation Bonds
10.15%, 1/15/16 2,000 2,129
Midland Cogeneration Ventures 'C-94'
10.33%, 7/23/02 1,169 1,229
Midland Funding II 'A'
11.75%, 7/23/05 650 689
--------------
6,486
--------------
- ----------------------------------------------------------------------------------
- -------------
TOTAL CORPORATE BONDS AND NOTES
(Cost $108,289) 110,788
--------------
- ----------------------------------------------------------------------------------
- -------------
COLLATERALIZED MORTGAGE OBLIGATIONS (5.4%)
- ----------------------------------------------------------------------------------
- -------------
Aircraft Lease Portfolio Securitization Ltd.,
1996-1 P1 D
12.75%, 6/15/06 1,775 1,828
DR Securitized Lease Trust 1993-K1 A1
6.66%, 8/15/10 1,450 1,088
DR Securitized Lease Trust 1994-K1 A
7.60%, 8/15/07 3,047 2,544
GE Capital Mortgage Services 1995-12
7.911%, 8/25/25 653 500
PNC Mortgage Services Corp. 1995-2 B4
7.50%, 9/25/25 724 557
Prudential Home Mortgage Securities 1996-A B1
7.963%, 4/15/25 1,250 841
1996-4 B3
6.50%, 4/25/26 722 549
--------------
- ----------------------------------------------------------------------------------
- -------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $7,951) 7,907
--------------
- ----------------------------------------------------------------------------------
- -------------
FOREIGN GOVERNMENT BONDS (10.1%)
- ----------------------------------------------------------------------------------
- -------------
ARGENTINA (3.1%)
+Republic of Argentina 'L' Bond
6.31%, 3/31/05 1,470 1,233
Republic of Argentina 'L' Par Bond
5.25%, 3/31/23 5,680 3,323
--------------
4,556
--------------
BRAZIL (2.9%)
Federative Republic of Brazil 'L'
4.50%, 4/15/09 480 332
Federative Republic of Brazil 'Z-L'
5.00%, 4/15/24 6,425 3,831
--------------
4,163
--------------
- ----------------------------------------------------------------------------------
- -------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ----------------------------------------------------------------------------------
<S> <C> <C>
- -------------
COLOMBIA (1.0%)
Republic of Colombia
8.70%, 2/15/16 $ 1,540 $ 1,410
--------------
MEXICO (2.2%)
United Mexican States Discount Bond
6.25%, 12/31/19 (Rights Attached) 4,750 3,283
--------------
VENEZUELA (0.9%)
+Republic of Venezuela Front Loaded Interest
Rate Reduction Bond 'A'
6.625%, 3/31/07 1,500 1,266
--------------
- ----------------------------------------------------------------------------------
- -------------
TOTAL FOREIGN GOVERNMENT BONDS
(Cost $13,196) 14,678
--------------
- ----------------------------------------------------------------------------------
- -------------
<CAPTION>
NO. OF
UNITS
<S> <C> <C>
- ----------------------------------------------------------------------------------
- -------------
UNITS (2.7%)
- ----------------------------------------------------------------------------------
- -------------
METALS (1.6%)
Sheffield Steel Corp. (1st Mtg. Bond
+ 5 Common Stock Warrants)
12.00%, 11/1/01 2,500 2,325
--------------
TELECOMMUNICATIONS (1.1%)
Occidente Y Caribe (Sr. Discount Note + 4 Common
Stock Warrants)
0.00%, 3/15/04 3,175 1,675
--------------
- ----------------------------------------------------------------------------------
- -------------
TOTAL UNITS
(Cost $4,207) 4,000
--------------
- ----------------------------------------------------------------------------------
- -------------
<CAPTION>
NO. OF
WARRANTS
<S> <C> <C>
- ----------------------------------------------------------------------------------
- -------------
WARRANTS (0.0%)
- ----------------------------------------------------------------------------------
- -------------
AEROSPACE & DEFENSE (0.0%)
Sabreliner Corp., expiring 4/15/03 2,000 1
--------------
GAMING & LODGING (0.0%)
Louisiana Casino Cruises, expiring 12/1/98 1,108 3
--------------
TELECOMMUNICATIONS (0.0%)
Nextel Communications, expiring 4/25/99 2,500 --
--------------
- ----------------------------------------------------------------------------------
- -------------
TOTAL WARRANTS
(Cost $40) 4
--------------
</TABLE>
- -----------------------------------------------------------------
- -------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<S> <C> <C>
- ----------------------------------------------------------------------------------
- -------------
PREFERRED STOCK (3.4%)
- ----------------------------------------------------------------------------------
- -------------
ENTERTAINMENT & LEISURE (2.6%)
Time Warner, Inc. 'K' 10.25% 3,538 $ 3,715
--------------
TELECOMMUNICATIONS (0.8%)
TCI Communications, Inc. 5.00% (Convertible) 12,820 1,195
--------------
- ----------------------------------------------------------------------------------
- -------------
TOTAL PREFERRED STOCK
(Cost $4,687) 4,910
--------------
- ----------------------------------------------------------------------------------
- -------------
<CAPTION>
FACE
AMOUNT
(000)
<S> <C> <C>
- ----------------------------------------------------------------------------------
- -------------
SHORT-TERM INVESTMENT (2.5%)
- ----------------------------------------------------------------------------------
- -------------
REPURCHASE AGREEMENT (2.5%)
Chase Securities, Inc. 5.40%, dated 9/30/96 due
10/1/96, to be repurchased at $3,677,
collateralized by $2,705 United States
Treasury Notes 10.625%, due 8/15/15, valued at
$3,723 (Cost $3,676) $ 3,676 3,676
--------------
- ----------------------------------------------------------------------------------
- -------------
TOTAL INVESTMENTS (100.0%)
(Cost $142,046) 145,963
--------------
- ----------------------------------------------------------------------------------
- -------------
OTHER ASSETS AND LIABILITIES
Other Assets 8,146
Liabilities (32,108) (23,962)
------------- --------------
- ----------------------------------------------------------------------------------
- -------------
NET ASSETS
Applicable to 8,728,126 issued and outstanding
$0.01 par value shares (100,000,000 shares
authorized) $ 122,001
---------
- ----------------------------------------------------------------------------------
- -------------
NET ASSET VALUE PER SHARE $ 13.98
---------
- ----------------------------------------------------------------------------------
- -------------
</TABLE>
+ -- Variable/floating rate security-rate disclosed is as of September 30, 1996.
7
