<PAGE>
MORGAN STANLEY
GLOBAL OPPORTUNITY BOND FUND, INC.
- -------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS
Michael F. Klein Stefanie V. Chang
PRESIDENT AND DIRECTOR VICE PRESIDENT
Peter J. Chase Harold J. Schaaff, Jr.
DIRECTOR VICE PRESIDENT
John W. Croghan Joseph P. Stadler
DIRECTOR VICE PRESIDENT
David B. Gill Valerie Y. Lewis
DIRECTOR SECRETARY
Graham E. Jones Joanna M. Haigney
DIRECTOR TREASURER
John A. Levin Belinda A. Brady
DIRECTOR ASSISTANT TREASURER
- -------------------------------------------------------------------------------
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
3 Chase MetroTech Center
Brooklyn, New York 11245
- -------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 278-4353
- -------------------------------------------------------------------------------
LEGAL COUNSEL
Rogers & Wells LLP
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.
- -------------------------------------------------------------------------------
MORGAN STANLEY
GLOBAL OPPORTUNITY
BOND FUND, INC.
- -------------------------------------------------------------------------------
ANNUAL REPORT
DECEMBER 31, 1997
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- -------------------------------------------------------------------------------
For the year ended December 31, 1997, the Morgan Stanley Global Opportunity
Bond Fund, Inc. (the "Fund") had a total return, based on net asset value per
share, of 17.38% compared to 12.56% for the Fund's benchmark (described
below). For the period since the Fund's commencement of operations on May
27, 1994 through December 31, 1997, the Fund's total return, based on net
asset value per share, was 73.78% compared with 62.51% for the Fund's
benchmark. The Fund uses as its benchmark, for purpose of comparing its
performance, a composite comprised of 50% of the J.P. Morgan Emerging Markets
Bond Plus Index and 50% of the CS First Boston High Yield Index. However,
the Fund's weightings in these asset classes are not restricted and will,
under normal circumstances, fluctuate depending on market conditions. At
December 31, 1997 the Fund's investment in debt instruments was comprised of
69.7% of emerging markets debt securities, and 30.3% U.S. high yield
securities.
1997 was another remarkable year for the emerging debt markets, in several
ways. While the asset class matured, and credit improvements in the broad
emerging world were the order for most of the year, the Asian financial
crisis unfolding at mid-year abruptly changed the risk profile for nearly all
emerging countries, changing investor perceptions as to the proper risk
premium for emerging markets. The weakness across Asia reached full pitch at
the end of the fourth quarter, with sharp sell-offs in the Hong Kong and
Korean markets. It continued into January with serious fears over the
solvency of Indonesia. The spill-over effects into emerging debt have been
devastating, and in the last quarter of the year the EMD markets experienced
their first significant down quarter for the first time since early 1995.
Broad gains in the monetary, foreign exchange and fiscal areas characterized
many emerging countries for the better part of 1997. The result was a
pick-up in real growth, accompanied by significant declines in inflation,
along with reasonable fiscal and current account balances. In Brazil,
inflation came solidly into annualized single-digit range, as tight monetary
policy and fiscal reform continued. In Russia, progress on the privatization
front and sound money policy also brought inflation close to G10 levels, and
allowed interest rates to fall to real rates of 8-10%, alongside a steady
ruble. Venezuelan reforms and buoyant crude oil prices improved that
country's debt profile, and Mexico continued along the path of accelerating
growth and improved trade accounts.
A significant theme in 1997 was active external debt management by several
large sovereigns, including Argentina, Brazil, Venezuela and Panama. A
declining U.S. interest rate environment and ample global liquidity allowed
these countries to achieve real present value savings through re-financing
relatively expensive 'Brady' (restructured) debt, by issuing new 'global'
bonds. This trend significantly improved these borrowers' debt profiles
going forward.
For much of the year our portfolio maintained healthy exposure to the large
Latin and Eastern European markets, while avoiding exposure to Asian
borrowers. During the first half of the year we held overweight positions in
Venezuela, Argentina, Russia and Bulgaria and shifted the Fund to an
overweight interest rate posture following the back-up in U.S. rates in the
first quarter. These country overweights helped the Fund return 11.9% by
mid-year, versus the index return of 7.6%, with Russia and Bulgaria leading
the way. As spreads on the benchmark emerging bond index tightened into 375
basis points over the U.S. yield curve, the Fund switched positions out of
higher-risk, higher-yielding markets into better quality credits. By the end
of the third quarter the emerging markets bond index spread had reached a
'full value' level of 350 basis points over Treasuries, and we reduced
duration in the Fund accordingly.
The final quarter of the year brought a crisis atmosphere in Asia, and severe
downturns in Hong Kong, Korea and Indonesia hammered prices and pushed up
volatility in the debt markets. Spreads widened out to as far as 800 basis
points over the U.S. curve, before ending the year at roughly 500 basis
points over the curve. The Fund's weak performance versus its benchmark
during the fourth quarter came as a result of an overweight position in
Venezuela, as well as an underweight position against U.S. interest rates.
The high yield bond market had another good year in 1997. The Salomon
Brothers high yield market index returned 13.2% compared to the 9.6% return
registered by the Salomon Brothers Broad index. Declining long term interest
rates and a strong stock market provided a favorable backdrop to the high
yield market.
Ten year Treasury rates declined 67 basis points and thirty year rates
declined 72 basis points from the beginning to the end of the year. However
short term interest rates rose resulting in a relatively flat yield curve.
The Federal Reserve boosted short term rates in March because of the fear of
future inflation given the strong economy and tight labor market. These
fears have not materialized so far however and the market retreat in March
was short lived. Inflation reports continue to be excellent and the problems
in Asia will only help keep inflation down.
2
<PAGE>
The strong stock market also supported the high yield market. The S&P 500's
33% rise increased investors' confidence that earnings will continue upwards
and that companies will have ready access to capital. Portfolio holdings such
as Qwest and Outdoor Systems benefited from IPOs and equity issuance.
The merger and acquisition activity also continued at a high pace. Stock for
stock transactions and mergers into high grade companies effectively
delivered many high yield companies and boosted bond prices. Portfolio
holdings Brooks Fiber and recently Teleport were beneficiaries in this
category.
The telecommunications sector was by far the best performer during 1997. The
sector benefited from acquisition activity and from the fact that many of the
securities in the industry tend to have a high duration, so declining rates
helped performance also. This was by far our most heavily weighted sector.
We also did a good job avoiding many landmines in 1997. The supermarket
industry, generally a popular one in the market, had several high profile
credit problems which we avoided. Subprime finance companies and auto
suppliers were also sectors that experienced problems that we successfully
avoided.
OUTLOOK
The continuing strength of the U.S. economy, and the attractive growth
prospects of selected companies in the U.S. high-yield market lead us to be
relatively optimistic about prospects for 1998 returns. Due to the age of
the economic cycle and the still historically narrow average yield spreads we
continue to emphasize somewhat higher than average credit quality in the
portfolio, Additionally, we intend to maintain interest-rate sensitivity on
the high yield portion which is no longer than that of its benchmark.
The Asian financial crisis will continue to impact all emerging markets into
1998. Severe dislocations in Asia have created several areas of value for
our portfolio, and for the first time since the inception of the Fund we are
(gradually) building exposure in Asia to what we consider solid sovereign and
corporate issuers with good medium-term prospects. The ripple effects of
Asia will likely keep the overall risk spreads in the broad emerging debt
universe high, as fair value may be deemed to be 400-500 basis points of
spread, rather than 300-400 basis points. More yield is in the market today,
and importantly several non-Asian countries, e.g. Brazil, Mexico, Russia,
have been forced by the Asian crisis to address more forcefully and
accelerate long overdue structural reform. While the stabilization and
recovery process in Asia will take many quarters to materialize, the
re-pricing of the overall debt market over the past four months, along with a
re-commitment to a proper policy mix in many countries, makes the 1998
outlook attractive from a total return standpoint.
Sincerely,
/S/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
/S/ Robert E. Angevine
Robert E. Angevine
PORTFOLIO MANAGER
/S/ Paul Ghaffari
Paul Ghaffari
PORTFOLIO MANAGER
January 1998
3
<PAGE>
Morgan Stanley Global Opportunity Bond Fund, Inc.
Investment Summary as of December 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
HISTORICAL Total Return (%)
INFORMATION --------------------------------------------------------------------------------
Market Value (1) Net Asset Value (2) Index (3)
---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Average Average Average
Cumulative Annual Cumulative Annual Cumulative Annual
---------- ------- ---------- ------- ---------- -------
One Year 13.93% 13.93% 17.38% 17.38% 12.56% 12.56%
Since Inception* 66.01 15.12 73.78 16.59 62.51 14.45
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- -------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION:
[CHART]
<TABLE>
<CAPTION>
Years ended December 31:
1994* 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Asset Value Per Share . . . . . $ 12.25 $ 12.99 $ 14.86 $ 13.74
Market Value Per Share. . . . . . . $ 12.50 $ 12.50 $ 14.63 $ 13.13
Premium/(Discount). . . . . . . . . 2.0% -3.8% -1.5% -4.4%
Income Dividends. . . . . . . . . . $ 0.91 $ 1.59 $ 1.49 $ 1.30
Capital Gains Distributions . . . . - - $ 0.50 $ 2.30
Fund Total Return (2) . . . . . . . -6.42% 20.34% 31.45% 17.38%
Index Total Return (3). . . . . . . -0.46% 22.37% 25.36% 12.56%
</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) Prior to fiscal year 1997, the Fund used the J.P. Morgan Emerging Markets
Bond Index for performance purposes. Beginning in 1997, the Fund is using a
Global Opportunity Blended Composite comprised of 50% of the J.P. Morgan
Emerging Markets Bond Plus Index and 50% of the CS First Boston High Yield
Index for the purpose of performance comparisons. This composite better
represents the investment strategy of the Fund. However, the Fund's
weighting in these asset classes is not restricted and will, under normal
circumstances, fluctuate depending on market conditions. As of December 31,
1997, the Fund's investment in debt instruments was comprised of 69.7%
emerging markets debt securities and 30.3% U.S. high yield securities.
* The Fund commenced operations on May 27, 1994.
4
<PAGE>
Morgan Stanley Global Opportunity Bond Fund, Inc.
Investment Summary as of December 31, 1997 (Unaudited)
- ------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Debt Securities 90.9%
Short-Term Investments 8.2%
Equity Securities 0.9%
</TABLE>
- ------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[CHART]
<TABLE>
<S> <C>
United States 41.6%
Brazil 17.3%
Russia 13.7%
Mexico 12.2%
Argentina 11.9%
Venezuala 10.7%
Bulgaria 3.6%
Jamaica 3.3%
Cayman Island 2.1%
Ivory Coast 1.8%
Other -18.2%
</TABLE>
- ------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. Russia Principal Note, 6.719%, 12/15/20 7.2%
2. Republic of Venezuela Debt Conversion Bond 9.25%, 9/15/27 5.4
3. Republic of Venezuela Debt Conversion Bond
'DL' 6.813%, 12/18/07 5.2
4. Federative Republic of Brazil Global Bond 10.125%, 5/15/27 4.5
5. Salomon Brothers Federative Republic of Brazil Credit
Linked Enhanced Note 9.00%, 1/15/99 4.2
6. Republic of Argentina 6.6885, 3/31/05 3.8
7. CIA International Telecom 144A 10.375%, 8/1/04 (Argentina) 3.0
8. Russia Interest Arrears Notes 6.719%, 12/2/15 2.9
9. United Mexican States 11.50%, 5/15/26 2.5
10. United Mexican States Discount Bond 'D' 6.75%, 12/31/19 2.4
----
41.1%
----
----
</TABLE>
* Excludes short-term investments.
5
<PAGE>
FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- ------------------------------------------------------------------------------
DECEMBER 31, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<S> <C> <C>
DEBT INSTRUMENTS (110.4%)
- ------------------------------------------------------------------------------
ARGENTINA (10.8%)
BONDS (10.8%)
CIA International Telecom 144A
10.375%, 8/1/04 ARP 2,100 U.S. $ 1,701
(b,e)Republic of Argentina
6.688%, 3/31/05 U.S. $ 2,400 2,147
Republic of Argentina '54'
Tranche I 8.75%, 7/10/02 ARP 850 740
Republic of Argentina 144A
11.75%, 2/12/07 650 618
Republic of Argentina Global
Bond 9.75%, 9/19/27 U.S. $ 1,000 958
-------------
6,164
-------------
- ------------------------------------------------------------------------------
BRAZIL (13.1%)
BONDS (13.1%)
CSN Iron 144A 9.125%, 6/1/07 550 475
CSN Iron (Registered) 9.125%,
6/1/07 1,500 1,296
Federative Republic of Brazil 'C'
Bond PIK 8.00%, 4/15/04 1,517 1,192
(d) Federative Republic of Brazil 'L'
4.50%, 4/15/09 1,300 962
(e) Federative Republic of BrazilGlobal Bond
10.125%, 5/15/27 2,760 2,591
(b) Federative Republic of Brazil
New Money Bond 'L'
6.75%, 4/15/09 1,100 889
Globopar 144A 10.50%, 12/20/06 80 77
-------------
7,482
-------------
- ------------------------------------------------------------------------------
BULGARIA (3.6%)
BONDS (3.6%)
(b) Republic of Bulgaria Discount Bond
'A' Euro 6.688%, 7/28/24 400 309
(d) Republic of Bulgaria Front Loaded
Interest Reduction Bond 2.25%, 7/28/12 2,050 1,248
(b) Republic of Bulgaria Past Due
Interest Bond 6.688%, 7/28/11 715 525
-------------
2,082
-------------
- ------------------------------------------------------------------------------
CAYMAN ISLANDS (2.1%)
BONDS (2.1%)
Pera Financial Services 144A
9.375%, 10/15/02 1,300 1,222
- ------------------------------------------------------------------------------
ECUADOR (1.0%)
BONDS (1.0%)
Conecel 144A 14.00%, 5/1/02 500 500
(b) Republic of Ecuador Past Due
Interest Bond PIK 6.688%, 2/27/15 142 93
-------------
593
-------------
- ------------------------------------------------------------------------------
IVORY COAST (1.8%)
LOAN AGREEMENTS (1.8%)
Republic of Ivory Coast Syndicated
Loan, Zero Coupon, 12/31/00
(Participation: Paribas) DEM 1,105 U.S. $ 243
Republic of Ivory Coast Syndicated
Loan, Zero Coupon, 12/31/00
(Participation: Salomon) FRF 8,400 607
Republic of Ivory Coast Syndicated
Loan, Zero Coupon, 12/31/00
(Participation: Salomon) U.S. $ 450 178
-------------
1,028
-------------
- ------------------------------------------------------------------------------
JAMAICA (3.3%)
BONDS (3.3%)
Government of Jamaica
9.625%, 7/2/02 1,000 950
Mechala Group Jamaica, Ltd. 'B'
144A 12.75%, 12/30/99 1,000 950
-------------
1,900
-------------
- ------------------------------------------------------------------------------
MAURITIUS (0.6%)
BONDS (0.6%)
Pindo Deli Finance Mauritius 144A
10.75%, 10/1/07 400 326
- ------------------------------------------------------------------------------
MEXICO (12.2%)
BONDS (12.2%)
Bancomext Global Bond
7.25%, 2/2/04 470 434
Empresas ICA Sociedad Controladora
144A 11.875%, 5/30/01 1,000 1,085
Innova 144A 12.875%, 4/1/07 350 351
National Financiera 17.00%, 2/26/99 ZAR 4,000 821
United Mexican States
11.50%, 5/15/26 U.S. $ 1,200 1,425
(b) United Mexican States Discount
Bond 6.617%, 12/31/19 250 232
(b) United Mexican States Discount
Bond 'D' 6.75%, 12/31/19 1,500 1,390
United Mexican States Global Bond
11.375%, 9/15/16 700 804
United Mexican States Par Bond
'W-A' 6.25%, 12/31/19 500 417
-------------
6,959
-------------
- ------------------------------------------------------------------------------
MOROCCO (1.6%)
LOAN AGREEMENTS (1.6%)
(b,c) Kingdom of Morocco Restructuring
and Consolidation Agreement 'A'
(Participation: J.P. Morgan,
Salomon) 6.656%, 1/1/09 1,050 911
-------------
- ------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an intregal part of these financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<S> <C> <C>
PANAMA (1.4%)
BONDS (1.4%)
Republic of Panama 8.875%,
9/30/27 U.S. $ 850 U.S. $ 800
- ------------------------------------------------------------------------------
PERU (2.1%)
BONDS (2.1%)
(d) Republic of Peru Front Loaded
Interest Reduction Bond
3.25%, 3/7/17 2,000 1,190
- ------------------------------------------------------------------------------
RUSSIA (13.7%)
BONDS (0.8%)
Unexim International Finance 144A
9.875%, 8/1/00 500 443
LOAN AGREEMENTS (2.8%)
(c) International Bank for Economic
Cooperation Loan
Agreement, 12/31/00
(Participation: Salomon) 1,700 1,012
(c) International Bank for Economic
Cooperation Loan
Agreement, 12/31/99
(Participation: Salomon) DEM 1,750 569
-------------
1,581
-------------
NOTES (10.1%)
(b) Russia Interest Arrears Notes
6.719%, 12/2/15 U.S. $ 2,365 1,680
(b) Russia Principal Note PIK
6.719%, 12/15/20 6,600 4,100
-------------
5,780
-------------
7,804
-------------
- ------------------------------------------------------------------------------
UNITED KINGDOM (1.2%)
BONDS
ING Bank 144A, Zero Coupon,
8/14/98 700 684
- ------------------------------------------------------------------------------
UNITED STATES (31.2%)
ASSET - BACKED SECURITIES (2.6%)
Aircraft Lease Portfolio Securitization
Ltd. 1996-1 P1D 12.75%, 6/15/06 374 404
CFS 1997-5 'A1' 144A 7.72%, 6/15/05 270 273
DR Securitized Lease Trust
1993-K1 'A1' 6.66%, 8/15/10 160 148
1994-K1 'A1' 7.60%, 8/15/07 471 463
First Home Mortgage Acceptance
Corp., 1996-B, Class C 144A
7.929%, 11/1/18 244 219
-------------
1,507
-------------
BONDS (28.0%)
Advanced Micro Devices, Inc.
11.00%, 8/1/03 495 532
Ameriserve Food Co.
8.875%, 10/15/06 200 201
10.125%, 7/15/07 85 88
Anthem Insurance 144A
9.00%, 4/1/27 U.S. $ 135 U.S. $ 149
Big Flower Press 8.875%, 7/1/07 275 278
CA FM Lease Trust 144A
8.50%, 7/15/17 245 258
Cablevision Systems Corp.
9.875%, 5/15/06 405 445
Comcast Cellular Holdings 'B'
9.50%, 5/1/07 265 276
Comcast Corp. 1.125%, 4/15/07 210 138
Criimi Mae Inc. 9.125%, 12/1/02 200 201
EES Coke Battery Co., Inc. 144A
9.382%, 4/15/07 100 106
Fleming Companies, Inc. 144A
10.50%, 12/1/04 110 115
10.625%, 7/31/07 70 74
Fox/Liberty Networks LLC 144A
(d)0.00%, 8/15/07 275 176
8.875%, 8/15/07 80 80
Grand Casinos 10.125%, 12/1/03 400 432
Hermes Europe Railtel BV 144A
11.50%, 8/15/07 40 44
HMC Acquisition Properties
9.00%, 12/15/07 350 365
Horseshoe Gaming 'B'
9.375%, 6/15/07 750 784
Host Marriott Travel 9.50%, 5/15/05 450 477
(b) Huntsman Corp. 144A
9.094%, 7/1/07 250 261
Integrated Health Services 144A
9.50%, 9/15/07 500 513
(d) Intermedia Communications
0.00%, 7/15/07 295 209
ISP Holdings, Inc. 'B' 9.00%, 10/15/03 495 514
IXC Communications, Inc.
12.50%, 10/1/05 175 201
Jet Equipment Trust 'C1' 144A
11.79%, 6/15/13 175 236
Kinetic Concepts Inc. 144A
9.625%, 11/1/07 300 304
KMart Corp. 7.75%, 10/1/12 125 122
Lenfest Communications
8.375%, 11/1/05 210 217
Midland Funding Corp. I 'C-94'
10.33%, 7/23/02 172 185
Midland Funding Corp. II 'A'
11.75%, 7/23/05 80 94
Navistar Financial Corp. 'B'
9.00%, 6/1/02 65 67
Newpark Resources Inc. 144A
8.625%, 12/15/07 60 61
(d) Nextel Communications, Inc.
0.00%, 8/15/04 810 719
(d) Norcal Waste Systems Inc.
13.50%, 11/15/05 500 581
Nuevo Energy Co. 9.50%, 4/15/06 240 256
Outdoor Systems Inc. 8.875%, 6/15/07 410 427
- ------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an intregal part of these financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ------------------------------------------------------------------------------
<S> <C> <C>
Paramount Communications
8.25%, 8/1/22 U.S. $ 245 U.S. $ 247
Qwest Communications International
10.875%, 4/1/07 135 153
(d) RCN Corp. 144A 0.00%, 10/15/07 300 186
Revlon Worldwide 'B' Zero Coupon,
3/15/01 275 190
Rogers Cablesystems 'B'
10.00%, 3/15/05 425 470
Rogers Communications, Inc.
9.125%, 1/15/06 90 91
SD Warren Co. 'B' 12.00%, 12/15/04 215 240
Sinclair Broadcast Group 9.00%, 7/15/07 475 484
Snyder Oil Corp. 8.75%, 6/15/07 175 178
Southland Corp. 5.00%, 12/15/03 665 582
Station Casinos Inc. 9.75%, 4/15/07 270 279
(d) TCI Satellite Entertainment 144A
0.00%, 2/15/07 615 410
(d) Teleport Communications
0.00%, 7/1/07 905 740
Teligent Inc. 11.50%, 12/1/07 135 135
Tenet Healthcare Corp. 8.625%,
1/15/07 405 418
(d) Transamerican Energy 144A
0.00%, 6/15/02 100 79
Vencor Inc. 8.625%, 7/15/07 450 451
Western Financial Bank 8.875%, 8/1/07 450 447
-------------
15,966
-------------
COLLATERALIZED MORTGAGE OBLIGATION (0.6%)
Long Beach Auto 1997-1, 'B' 144A
14.22%, 10/26/03 312 312
-------------
17,785
-------------
- ------------------------------------------------------------------------------
VENEZUELA (10.7%)
BONDS (10.7%)
(e) Republic of Venezuela Debt
Conversion Bond 9.25%, 9/15/27 3,433 3,087
(b) Republic of Venezuela Debt
Conversion Bond 'DL' 6.813%,
12/18/07 3,333 2,992
-------------
6,079
-------------
- ------------------------------------------------------------------------------
TOTAL DEBT INSTRUMENTS
(Cost U.S.$63,462) 63,009
-------------
- ------------------------------------------------------------------------------
STRUCTURED INVESTMENTS (4.2%)
- ------------------------------------------------------------------------------
BRAZIL (4.2%)
Salomon Brothers Federative Republic
of Brazil Credit Linked Enhanced
Note 9.00%, 1/15/99
(Cost U.S.$2,500) 2,500 2,385
-------------
- ------------------------------------------------------------------------------
SHARES
COMMON STOCKS (0.1%)
UNITED STATES
(a) Nextel Communications, Inc. 'A' 1,819 U.S. $ 48
(Cost U.S.$29)
-------------
- ------------------------------------------------------------------------------
NO. OF
RIGHTS
- ------------------------------------------------------------------------------
RIGHTS (0.0%)
MEXICO
United Mexican States
0.00%, 6/30/03 2,692,000 --
-------------
- ------------------------------------------------------------------------------
Shares
- ------------------------------------------------------------------------------
PREFERRED STOCK (1.0%)
United States
(a) IXC Communications, Inc. 144A
PIK 12.50% 4 5
Time Warner, Inc. Series 'M' 10.25% 530 597
-------------
- ------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost U.S.$562) 602
-------------
- ------------------------------------------------------------------------------
Face
Amount
(000)
- ------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (10.4%)
- ------------------------------------------------------------------------------
Argentina (1.1%)
Bonds (1.1%)
(b) Acindar Industries 144A
11.656%, 11/12/98 U.S. $ 600 603
-------------
- ------------------------------------------------------------------------------
United States (9.3%)
Repurchase Agreement
Chase Securities, Inc., 5.95%, dated
12/31/97, due 1/2/98, to be
repurchased at U.S.$5,330,
collateralized by U.S.$5,385
United States Treasury Notes,
5.625%, due 2/15/06, valued at
U.S.$5,383 5,328 5,328
-------------
- ------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost U.S.$5,933) 5,931
-------------
- ------------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN (0.0%)
French Franc FRF 1 --@
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS (126.1%)
(Cost U.S.$72,486) 71,975
-------------
- ------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an intregal part of these financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
Amount Amount
(000) (000)
- ------------------------------------------------------------------------------
<S> <C> <C>
OTHER ASSETS (2.8%)
Cash U.S. U.S. $ 142
Interest Receivable 1,440
Deferred Organization Costs 8
Dividends Receivable 2
Other Assets 10 U.S. $ 1,602
------------- -------------
- ------------------------------------------------------------------------------
LIABILITIES (-28.9%)
PAYABLE FOR:
Dividends and Distributions Declared (9,970)
Reverse Repurchase Agreements (6,033)
Investments Purchased (310)
Investment Advisory Fees (56)
Professional Fees (46)
Shareholder Reporting Expenses (32)
Director's Fees and Expenses (31)
Administrative Fees (14)
Custodian Fees (11)
Other Liabilities (5) (16,508)
------------- -------------
- ------------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 4,153,492, issued and
outstanding U.S.$0.01 par value shares
(100,000,000 shares authorized) U.S. $ 57,069
-------------
- ------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S. $ 13.74
-------------
- ------------------------------------------------------------------------------
AT DECEMBER 31, 1997, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------
Common Stock U.S. $ 42
Capital Surplus 57,779
Distributions in Excess of Net Investment Income (19)
Distributions in Excess of Net Realized Gain (205)
Unrealized Depreciation on Investments and
Foreign Currency Translations (528)
- ------------------------------------------------------------------------------
Net Assets U.S. $ 57,069
-------------
-------------
- ------------------------------------------------------------------------------
</TABLE>
(a) - Non-income producing
(b) - Variable/floating rate security - rate disclosed is as of December 31,
1997.
(c) - Participation interests were acquired through the financial
institutions indicated parenthetically.
(d) - Step Bond - coupon rate increases in increments to maturity. Rate
disclosed is as of December 31, 1997. Maturity date disclosed is the
ultimate maturity.
(e) - Denotes all or a portion of securities subject to repurchase under
Reverse Repurchase Agreements as of December 31, 1997 - see note A-4
to financial statements.
@ - Value is less than U.S.$500.
144A - Certain conditions for public sale may exist.
PIK - Payment-in-Kind. Income may be paid in additional securities or cash
at the discretion of the issuer.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
DECEMBER 31, 1997 EXCHANGE RATES:
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ARP Argentine Peso 1.000= U.S. $ 1.00
DEM German Mark 1.799= U.S. $ 1.00
FRF French Franc 6.019= U.S. $ 1.00
ZAR South African Rand 4.867= U.S. $ 1.00
- ------------------------------------------------------------------------------
</TABLE>
SUMMARY OF TOTAL INVESTMENTS BY INDUSTRY
CLASSIFICATION - DECEMBER 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
- ------------------------------------------------------------------------------
<S> <C> <C>
Aerospace & Defense U.S. $ 236 0.4%
Asset-Backed Securities 1,507 2.6
Automobiles 106 0.2
Banking 447 0.8
Broadcast - Radio & Television 3,070 5.4
Business Services 427 0.8
Chemicals 261 0.5
Coal, Gas & Oil 178 0.3
Collateralized Mortgage Obligations 312 0.6
Computers 580 1.0
Construction 1,085 1.9
Diversified 718 1.2
Energy 335 0.6
Finance 1,986 3.5
Food 390 0.7
Foreign Government & Agency Obligations 39,894 69.9
Gaming & Lodging 1,495 2.6
Health Care Supplies & Services 1,685 2.9
Insurance 149 0.3
Loan Agreements 2,366 4.2
Materials 61 0.1
Metals - Steel 1,772 3.1
Multi-Industry 2,050 3.6
Professional Services 278 0.5
Real Estate 365 0.6
Repurchase Agreements 5,328 9.3
Retail - General 582 1.0
Services 1,058 1.8
Soaps & Toiletries 190 0.3
Telecommunications 2,741 4.8
Transportation 44 0.1
Utilities 279 0.5
------------- -------------
U.S. $ 71,975 126.1%
------------- -------------
------------- -------------
- ------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an intregal part of these financial statements.
9
<PAGE>
SUMMARY OF TOTAL INVESTMENTS BY COUNTRY -
DECEMBER 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
COUNTRY (000) (000)
- ------------------------------------------------------------------------------
<S> <C> <C>
Argentina U.S. $ 6,767 11.9%
Brazil 9,867 17.3
Bulgaria 2,082 3.6
Cayman Islands 1,222 2.1
Ecuador 593 1.0
Ivory Coast 1,028 1.8
Jamaica 1,900 3.3
Mauritius 326 0.6
Mexico 6,959 12.2
Morocco 911 1.6
Panama 800 1.4
Peru 1,190 2.1
Russia 7,804 13.7
United Kingdom 684 1.2
United States 23,763 41.6
Venezuela 6,079 10.7
------------- -------------
U.S. $ 71,975 126.1%
------------- -------------
------------- -------------
- ------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an intregal part of these financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
STATEMENT OF OPERATIONS (000)
- --------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 60
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,531
Less: Foreign Taxes Withheld. . . . . . . . . . . . . . . . . . . . . . . (3)
- --------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,588
- --------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees. . . . . . . . . . . . . . . . . . . . . . . . . 658
Administrative Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
Professional Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Custodian Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Shareholder Reporting Expenses. . . . . . . . . . . . . . . . . . . . . . 60
Directors' Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . 28
Annual Meeting and Proxy Expenses . . . . . . . . . . . . . . . . . . . . 26
Transfer Agent Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Other Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
- --------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,226
- --------------------------------------------------------------------------------------------------
Net Investment Income. . . . . . . . . . . . . . . . . . . . . . . 5,362
- --------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold. . . . . . . . . . . . . . . . . . . . . . . . 8,681
Investment Securities Sold Short. . . . . . . . . . . . . . . . . . . . . (15)
Written Option Contracts. . . . . . . . . . . . . . . . . . . . . . . . . 27
Foreign Currency Transactions . . . . . . . . . . . . . . . . . . . . . . (8)
- --------------------------------------------------------------------------------------------------
Net Realized Gain . . . . . . . . . . . . . . . . . . . . . . . . . 8,685
- --------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Depreciation on Investments . . . . . . . . . . . . . . . . . . . . . . . (3,731)
Depreciation on Foreign Currency Translations . . . . . . . . . . . . . . (8)
- --------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation . . . . . . . . . . . (3,739)
- --------------------------------------------------------------------------------------------------
NET REALIZED GAIN AND CHANGE IN UNREALIZED
Appreciation/Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 4,946
- --------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS. . . . . . . . . . . U.S.$ 10,308
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income. . . . . . . . . . . . . . . . . U.S.$ 5,362 U.S.$ 7,098
Net Realized Gain. . . . . . . . . . . . . . . . . . . 8,685 6,865
Change in Unrealized Appreciation/Depreciation . . . . (3,739) 2,018
- ----------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . 10,308 15,981
- ----------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income. . . . . . . . . . . . . . . . . (5,362) (6,178)
In Excess of Net Investment Income . . . . . . . . . . (19) -
Net Realized Gain. . . . . . . . . . . . . . . . . . . (9,362) (2,059)
In Excess of Net Realized Gain . . . . . . . . . . . . (205) -
- ----------------------------------------------------------------------------------------------------
Total Distributions. . . . . . . . . . . . . . . . . . (14,948) (8,237)
- ----------------------------------------------------------------------------------------------------
Capital Share Transactions:
Reinvestment of Distributions (7,493 shares) . . . . . 118 -
- ----------------------------------------------------------------------------------------------------
Total Increase (Decrease). . . . . . . . . . . . . . . (4,522) 7,744
Net Assets:
Beginning of Period. . . . . . . . . . . . . . . . . . 61,591 53,847
- ----------------------------------------------------------------------------------------------------
End of Period (including distributions
in excess of net investment income of
U.S.$19 and undistributed net investment
income of U.S.$12, respectively) . . . . . . . . . . . U.S.$ 57,069 U.S.$ 61,591
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an intregal part of these financial statements.
11
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERIOD FROM
--------------------------------------------- MAY 27, 1994* TO
SELECTED PER SHARE DATA AND RATIOS: 1997 1996 1995 DECEMBER 31, 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . . . . U.S.$ 14.86 U.S.$ 12.99 U.S.$ 12.25 U.S.$ 14.10
- -----------------------------------------------------------------------------------------------------------------------------------
Offering Costs . . . . . . . . . . . . . . . . . . . . . . . . . - - - (0.17)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income. . . . . . . . . . . . . . . . . . . . . . 1.29 1.71 1.61 0.95
Net Realized and Unrealized Gain (Loss) on Investments . . . . . 1.19 2.15 0.72 (1.72)
- -----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations. . . . . . . . . . . . . . 2.48 3.86 2.33 (0.77)
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income . . . . . . . . . . . . . . . . . . . (1.29) (1.49) (1.59) (0.91)
In Excess of Net Investment Income. . . . . . . . . . . . . (0.01) - - -
Net Realized Gain . . . . . . . . . . . . . . . . . . . . . (2.25) (0.50) - -
In Excess of Net Realized Gain. . . . . . . . . . . . . . . (0.05) - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total Distributions. . . . . . . . . . . . . . . . . . (3.60) (1.99) (1.59) (0.91)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period . . . . . . . . . . . . . . . . . U.S.$ 13.74 U.S.$ 14.86 U.S.$ 12.99 U.S.$ 12.25
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Per Share Market Value, End of Period . . . . . . . . . . . . . U.S.$ 13.13 U.S.$ 14.63 U.S.$ 12.50 U.S.$ 12.50
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value. . . . . . . . . . . . . . . . . . . . . . . . 13.93% 34.44% 13.49% (4.51)%
Net Asset Value (1) . . . . . . . . . . . . . . . . . . . . 17.38% 31.45% 20.34% (6.42)%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS) . . . . . . . . . . . . . U.S.$ 57,069 U.S.$ 61,591 U.S.$ 53,847 U.S.$ 50,607
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses Before Interest Expense to Average Net Assets 1.75% 1.81% 1.95% 1.75%**
Ratio of Expenses After Interest Expense to Average Net Assets . 1.86% 2.00% 2.06% 2.97%**
Ratio of Net Investment Income to Average Net Assets . . . . . . 8.15% 12.17% 13.07% 11.90%**
Portfolio Turnover Rate. . . . . . . . . . . . . . . . . . . . . 333% 280% 160% 86%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
(1) 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. This percentage is 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.
The accompanying notes are an intregal part of these financial statements.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- ------------------------------------------------------------------------------
The Morgan Stanley Global Opportunity Bond Fund, Inc. (the "Fund"), was
incorporated in Maryland on March 31, 1994, and is registered as a
non-diversified, closed-end management investment company under the
Investment Company Act of 1940, as amended. The Fund's primary objective is
to produce high current income and as a secondary objective to seek capital
appreciation through investments primarily in high yield bonds.
A. The following significant accounting policies, which are in conformity
with generally accepted accounting principles for investment companies, are
consistently followed by the Fund in the preparation of its financial
statements. Generally accepted accounting principles may require management
to make estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results may differ from those
estimates.
1. SECURITY VALUATION: In valuing the Fund's assets, all listed securities
for which market quotations are readily available are valued at the last
sale price on the valuation date, or if there was no sale on such date,
at the mean between the current bid and asked prices or the bid price if
only bid quotations are available. Securities which are traded
over-the-counter are valued at the average of the mean of the current
bid and asked prices obtained from reputable brokers. Securities may be
valued by independent pricing services which use prices provided by
market-makers or estimates of market values obtained from yield data
relating to investments or securities with similar characteristics.
Certain securities may be valued on the basis of bid prices provided by
one principal market maker. Short-term securities which mature in 60
days or less are valued at amortized cost. All other securities and
assets for which market values are not readily available (including
investments which are subject to limitations as to their sale) are
valued at fair value as determined in good faith by the Board of
Directors (the "Board") although the actual calculations may be done by
others.
2. TAXES: It is the Fund's intention to continue to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly,
no provision for U.S. Federal income taxes is required in the financial
statements.
The Fund may be subject to taxes imposed by countries in which it invests.
Such taxes are generally based on either income or gains earned or
repatriated. Taxes are accrued and applied to net investment income, net
realized gains and net unrealized appreciation as such income and/or gains
are earned.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the
underlying securities, with a market value at least equal to the amount of
the repurchase transaction, including principal and accrued interest. To
the extent that any repurchase transaction exceeds one business day, the
value of the collateral is marked-to-market on a daily basis to determine
the adequacy of the collateral. In the event of default on the obligation
to repurchase, the Fund has the right to liquidate the collateral and apply
the proceeds in satisfaction of the obligation. In the event of default or
bankruptcy by the counter-party to the agreement, realization and/or
retention of the collateral or proceeds may be subject to legal
proceedings.
4. REVERSE REPURCHASE AGREEMENTS: In order to leverage the Fund, the Fund
may enter into reverse repurchase agreements with institutions that
the Fund's investment adviser has determined are creditworthy. Under
a reverse repurchase agreement, the Fund sells securities and agrees
to repurchase them at a mutually agreed upon date and price. Reverse
repurchase agreements involve the risk that the market value of the
securities purchased with the proceeds from the sale of securities
received by the Fund may decline below the price of the securities the
Fund is obligated to repurchase. Securities subject to repurchase
under reverse repurchase agreements, if any, are designated as such in
the Statement of Net Assets.
At December 31, 1997, the Fund had reverse repurchase agreements
outstanding as follows:
<TABLE>
<CAPTION>
Maturity in
30 to 90
Days
--------------
<S> <C>
Value of Securities Subject to
Repurchase . . . . . . . . . . . . . $ 6,546,000
Liability Under Reverse
Repurchase Agreement . . . . . . . . . $ 6,033,000
Weighted Average Interest Rate 5.33%
</TABLE>
The average weekly balance of reverse repurchase agreements
outstanding during the year ended December 31, 1997 was approximately
$1,434,000 at a weighted average interest rate of 5.12%.
5. FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated
into U.S. dollars at the mean of the bid and asked prices of such
currencies against U.S. dollars last quoted by a major bank as
follows:
- investments, other assets and liabilities at the prevailing rates
of exchange on the valuation date;
13
<PAGE>
- investment transactions and investment income at the prevailing
rates of exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the period, the Fund does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from
changes in the market prices of the securities held at period end.
Similarly, the Fund does not isolate the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market
prices of securities sold during the period. Accordingly, realized and
unrealized foreign currency gains (losses) are included in the reported net
realized and unrealized gains (losses) on investment transactions and
balances.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of foreign
currency exchange contracts, disposition of foreign currencies, currency
gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid. Net
unrealized currency gains (losses) from valuing foreign currency
denominated assets and liabilities at period end exchange rates are
reflected as a component of unrealized appreciation (depreciation) on
investments and foreign currency translations in the Statement of Net
Assets. The change in net unrealized currency gains (losses) for the period
is reflected in the Statement of Operations.
Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of U.S. dollar
denominated transactions as a result of, among other factors, the
possibility of lower levels of governmental supervision and regulation of
foreign securities markets and the possibility of political or economic
instability.
The Fund intends to use derivatives more actively than it has in the past.
The Fund intends to engage in transactions in futures contracts on foreign
currencies, stock indices, as well as in options, swaps and structured notes.
Consistent with the Fund's investment objectives and policies, the Fund
intends to use derivatives for non-hedging as well as hedging purposes.
Following is a description of derivative instruments and their associated
risks that the Fund intends to utilize:
6. PURCHASED OPTIONS: The Fund may purchase call and put options on listed
securities or securities traded over the counter. The Fund may purchase
call options on securities to protect against an increase in the price
of the underlying security. The Fund may purchase put options on securities
to protect against a decline in the value of the underlying security. Risks
may arise from an imperfect correlation between the change in market value
of the securities held by the Portfolio and the prices of options relating
to the securities purchased or sold by the Portfolio and from the possible
lack of a liquid secondary market for an option. Possible losses from
purchased options cannot exceed the total amount invested. Realized gains
or losses on purchased options are included with net gain (loss) on
investment securities sold in the financial statements.
7. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into
forward foreign currency exchange contracts generally to attempt to protect
securities and related receivables and payables against changes in future
foreign exchange rates and, in certain situations, to gain exposure to a
foreign currency. A forward foreign currency exchange contract is an
agreement between two parties to buy or sell currency at a set price on a
future date. The market value of the contract will fluctuate with changes
in currency exchange rates. The contract is marked-to-market daily and the
change in market value is recorded by the Fund as unrealized gain or
loss. The Fund records realized gains or losses when the contract is
closed 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. Risk may
arise upon entering into these contracts from the potential inability of
counterparties to meet the terms of their contracts and is generally
limited to the amount of unrealized gain on the contracts, if any, at the
date of default. Risks may also arise from unanticipated movements in the
value of a foreign currency relative to the U.S. dollar.
8. LOAN AGREEMENTS: The Fund may invest in fixed and floating rate loans
("Loans") arranged through private negotiations between an issuer of
sovereign debt obligations and one or more financial institutions
("Lenders") deemed to be creditworthy by the investment adviser. The Fund's
investments in Loans may be in the form of participations in Loans
("Participations") or assignments of all or a portion of Loans
("Assignments") from third parties. The Fund's investment in Participations
typically results in the Fund having a contractual relationship with only
the Lender and not with the borrower. The Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the Lender selling the Participation and only upon receipt by the
Lender of the payments from the borrower. The Fund generally has no right
to enforce compliance by the borrower with the terms of the loan agreement.
As a result, the Fund may be subject to the credit risk of both the
borrower and the Lender that is selling the Participation. When the Fund
purchases Assign-
14
<PAGE>
ments from Lenders it acquires direct rights against the
borrower on the Loan. Because Assignments are arranged through private
negotiations between potential assignees and potential assignors, the
rights and obligations acquired by the Fund as the purchaser of an
Assignment may differ from, and be more limited than, those held by the
assigning Lender.
9. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: The Fund
may make forward commitments to purchase or sell securities. Payment and
delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not to exceed 120 days)
after the date of the transaction. Additionally, the Fund may purchase
securities on a when-issued or delayed delivery basis. Securities purchased
on a when-issued or delayed delivery basis are purchased for delivery
beyond the normal settlement date at a stated price and yield, and no
income accrues to the Fund on such securities prior to delivery. When the
Fund enters into a purchase transaction on a when-issued or delayed
delivery basis, it either establishes a segregated account in which it
maintains liquid assets in an amount at least equal in value to the Fund's
commitments to purchase such securities or denotes such securities on the
custody statement for its regular custody account. Purchasing securities on
a forward commitment or when-issued or delayed-delivery basis may involve a
risk that the market price at the time of delivery may be lower than the
agreed upon purchase price, in which case there could be an unrealized loss
at the time of delivery.
10. SECURITIES SOLD SHORT: The Fund may sell securities short. A short sale is
a transaction in which the Fund sells securities it may or may not own, but
has borrowed, in anticipation of a decline in the market price of the
securities. The Fund is obligated to replace the borrowed securities at
their market price at the time of replacement. The Fund may have to pay a
premium to borrow the securities as well as pay any dividends or interest
payable on the securities until they are replaced. The Fund's obligation to
replace the securities borrowed in connection with a short sale will
generally be secured by collateral deposited with the broker that consists
of cash, U.S. government securities or other liquid, high grade debt
obligations. In addition, the Fund will either place in a segregated
account with its custodian or denote on its custody records an amount of
cash, U.S. government securities or other liquid high grade debt
obligations equal to the difference, if any, between (1) the market value
of the securities sold at the time they were sold short and (2) any cash,
U.S. government securities or other liquid high grade debt obligations
deposited as collateral with the broker in connection with the short sale
(not including the proceeds of the short sale). Short sales by the Fund
involve certain risks and special considerations. Possible losses from
short sales differ from losses that could be incurred from a purchase of a
security because losses from short sales may be unlimited, whereas losses
from purchases cannot exceed the total amount invested.
11. WRITTEN OPTIONS: The Fund may write covered call options in an attempt to
increase the Fund's total return. The Fund will receive premiums that are
recorded as liabilities and subsequently adjusted to the current value of
the options written. Premiums received from writing options which expire
are treated as realized gains. Premiums received from writing options which
are exercised or are closed are added to or offset against the proceeds or
amount paid on the transaction to determine the net realized gain or loss.
By writing a covered call option, the Fund forgoes in exchange for the
premium the opportunity for capital appreciation above the exercise price
should the market price of the underlying security increase.
12. SWAP AGREEMENTS: The Fund may enter into swap agreements to exchange the
return generated by one security, instrument or basket of instruments for
the return generated by another security, instrument or basket of
instruments. The following summarizes swaps which may be entered into by
the Fund:
INTEREST RATE SWAPS: Interest rate swaps involve the exchange of
commitments to pay and receive interest based on a notional principal
amount. Net periodic interest payments to be received or paid are accrued
daily and are recorded in the Statement of Operations as an adjustment to
interest income. Interest rate swaps are marked-to-market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized appreciation or depreciation in the Statement of Operations.
TOTAL RETURN SWAPS: Total return swaps involve commitments to pay interest
in exchange for a market-linked return based on a notional amount. To the
extent the total return of the security, instrument or basket of
instruments underlying the transaction exceeds or falls short of the
offsetting interest obligation, the Fund will receive a payment from or
make a payment to the counterparty, respectively. Total return swaps are
marked-to-market daily based upon quotations from market makers and the
change, if any, is recorded as unrealized gains or losses in the Statement
of Operations. Periodic payments received or made at the end of each
measurement period, but prior to termination, are recorded as realized
gains or losses in the Statement of Operations.
Realized gains or losses on maturity or termination of interest rate and
total return swaps are presented in the Statement of Operations. Because
there is no organized market for these swap agreements, the value
15
<PAGE>
reported in the Statement of Net Assets may differ from that which would be
realized in the event the Fund terminated its position in the agreement.
Risks may arise upon entering into these agreements from the potential
inability of the counterparties to meet the terms of the agreements and are
generally limited to the amount of net interest payments to be received
and/or favorable movements in the value of the underlying security,
instrument or basket of instruments, if any, at the date of default.
13. STRUCTURED SECURITIES: The Fund may invest in interests in entities
organized and operated solely for the purpose of restructuring the
investment characteristics of sovereign debt obligations. This type of
restructuring involves the deposit with or purchase by an entity of
specified instruments and the issuance by that entity of one or more
classes of securities ("Structured Securities") backed by, or representing
interests in, the underlying instruments. Structured Securities, invested
in by the Fund, generally will have credit risk equivalent to that of the
underlying instruments. Structured Securities are typically sold in private
placement transactions with no active trading market. Investments in
structured securities may be more volatile than their underlying
instruments, however, any loss is limited to the amount of the original
investment.
14. OVER-THE-COUNTER TRADING: Derivative instruments that may be purchased or
sold by the Fund are expected to regularly consist of instruments not
traded on an exchange. The risk of nonperformance by the obligor on such an
instrument may be greater, and the ease with which the Fund can dispose of
or enter into closing transactions with respect to such an instrument may
be less, than in the case of an exchange-traded instrument. In addition,
significant disparities may exist between bid and asked prices for
derivative instruments that are not traded on an exchange. Derivative
instruments not traded on exchanges are also not subject to the same type
of government regulation as exchange traded instruments, and many of the
protections afforded to participants in a regulated environment may not be
available in connection with such transactions.
15. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Interest
income is recognized on the accrual basis and discounts and premiums on
investments purchased are accreted or amortized in accordance with the
effective yield method over their respective lives, except where collection
is in doubt. Distributions to shareholders are recorded on the ex-date. The
amount and character of income and capital gain distributions to be paid
are determined in accordance with Federal income tax regulations which may
differ from generally accepted accounting principles. These differences are
primarily due to differing book and tax treatments for foreign currency
transactions and the timing of the recognition of losses on securities.
Permanent book and tax basis differences relating to shareholder
distributions may result in reclassifications to undistributed net
investment income (loss), accumulated net realized gain (loss) and capital
surplus.
Adjustments for permanent book-tax differences, if any, are not reflected
in ending undistributed net investment income (loss) for the purpose of
calculating net investment income (loss) per share in the financial
highlights.
B. Morgan Stanley Asset Management Inc. (the "Adviser"), provides
investment advisory services to the Fund under the terms of an Investment
Advisory and Management Agreement (the "Agreement"). Under the Agreement, the
Adviser is paid a fee computed weekly and payable monthly at an annual rate
of 1.00% of the Fund's average weekly net assets.
C. The Chase Manhattan Bank, through its affiliate Chase Global Funds
Services Company (the "Administrator"), provides administrative services to
the Fund under an Administration Agreement. Under the Administration
Agreement, the Administrator is paid a fee computed weekly and payable
monthly at an annual rate of .08% of the Fund's average weekly net assets,
plus $100,000 per annum. In addition, the Fund is charged certain
out-of-pocket expenses by the Administrator. The Chase Manhattan Bank acts as
custodian for the Fund's assets held in the United States.
D. Morgan Stanley Trust Company (the "International Custodian"), an
affiliate of the Adviser, acts as custodian for the Fund's assets held
outside the United States in accordance with a Custody Agreement. Custodian
fees are payable monthly based on assets under custody, investment purchase
and sale activity, an account maintenance fee, plus reimbursement for certain
out-of-pocket expenses. Investment transaction fees vary by country and
security type. For the year ended December 31, 1997, the Fund incurred
International Custodian fees of $43,000, of which $7,000 was payable to the
International Custodian at December 31, 1997. In addition, for the year ended
December 31, 1997, the Fund has earned interest income of $9,000 and incurred
interest expense of $19,000 on balances with the International Custodian.
E. For the year ended December 31, 1997, the Fund made purchases and sales
totaling $221,383,000 and $225,535,000, respectively, of investments other
than long-term U.S. Government securities and short-term investments. There
were no purchases and sales of long-term U.S. Government securities. At
December 31, 1997,the U.S. Federal income tax cost basis of securities was
$72,956,000 and, accordingly, net unrealized depreciation for U.S. Fed-
16
<PAGE>
eral income tax purposes was $981,000 of which $1,384,000 related to
appreciated securities and $2,365,000 related to depreciated securities. For
the year ended December 31, 1997, the Fund intends to elect to defer to
January 1, 1998 for U.S. Federal income tax purposes, post-October currency
losses of $8,000.
F. In connection with its organization and initial public offering of
shares, the Fund incurred $30,000 and $714,000 of organization and offering
costs, respectively. The organization costs are being amortized on a
straight-line basis over a five year period beginning May 27, 1994, the date
the Fund commenced operations. The offering costs were charged to capital.
G. At December 31, 1997, approximately 30% of the Fund's total investments
consist of high yield securities rated below investment grade. Investments in
high yield securities are accompanied by a greater degree of credit risk and
the risk tends to be more sensitive to economic conditions than higher-rated
securities. These investments are often traded by one market maker who may
also be utilized by the Fund to provide pricing information used to value
such securities. The amounts which will be realized upon disposition of the
securities may differ from the value reflected on the statement of net assets
and the differences could be material.
H. Each Director of the Fund who is not an officer of the Fund or an
affiliated person as defined under the Investment Company Act of 1940, as
amended, may elect to participate in the Directors' Deferred Compensation
Plan (the "Plan"). Under the Plan, such Directors may elect to defer payment
of a percentage of their total fees earned as a Director of the Fund. These
deferred portions are treated, based on an election by the Director, as if
they were either invested in the Fund's shares or invested in U.S. Treasury
Bills, as defined under the Plan. The deferred fees payable, under the Plan,
at December 31, 1997 totaled $24,000 and are included in Payable for
Directors' Fees and Expenses on the Statement of Net Assets.
I. During December 1997, the Board declared a distribution of $0.28 per
share, derived from net investment income and $2.12 per share, derived from
net realized gains, payable on January 9, 1998, to shareholders of record on
December 31, 1997.
J. During the year ended December 31, 1997, the Fund's written covered call
option activity was as follows:
<TABLE>
<CAPTION>
Face Premium
Amount (000) (000)
------------ -------
<S> <C> <C>
Options outstanding at
January 1, 1997 . . . . . . $ - $ -
Options written during the
year. . . . . . . . . . . . 3,900 32
Options closed during the
year. . . . . . . . . . . . (3,900) (32)
Options outstanding at
December 31, 1997 . . . . . $ - $ -
</TABLE>
- ------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION (UNAUDITED):
For the year ended December 31, 1997, the Fund designates $1,073,000 as
long-term capital gain at the 28% tax bracket and $40,000 at the 20% tax
bracket.
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- ------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Morgan Stanley Global Opportunity Bond Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Morgan Stanley Global Opportunity Bond Fund, Inc. (the "Fund") at December 31,
1997, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended and the financial
highlights for each of the three years in the period then ended and for the
period May 27, 1994 (commencement of operations) through December 31, 1994, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1997 by
correspondence with the custodians and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 18, 1998
18
<PAGE>
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the
"Plan"), each shareholder may elect by providing written instructions to
American Stock Transfer & Trust Company (the "Plan Agent") to have all
distributions automatically reinvested in Fund shares. Participants in the
Plan have the option of making additional voluntary cash payments to the Plan
Agent, annually, in any amount from $100 to $3,000, for investment in Fund
shares.
Dividend and capital gain distributions will be reinvested on the
reinvestment date in full and fractional shares. If the market price per
share equals or exceeds net asset value per share on the reinvestment date,
the Fund will issue shares to participants at net asset value. If net asset
value is less than 95% of the market price on the reinvestment date, shares
will be issued at 95% of the market price. If net asset value exceeds the
market price on the reinvestment date, participants will receive shares
valued at market price. The Fund may purchase shares of its Common Stock in
the open market in connection with dividend reinvestment requirements at the
discretion of the Board of Directors. Should the Fund declare a dividend or
capital gain distribution payable only in cash, the Plan Agent will purchase
Fund shares for participants in the open market as agent for the
participants.
The Plan Agent's fees for the reinvestment of dividends and
distributions will be paid by the Fund. However, each participant's account
will be charged a pro rata share of brokerage commissions incurred on any
open market purchases effected on such participant's behalf. A participant
will also pay brokerage commissions incurred on purchases made by voluntary
cash payments. Although shareholders in the Plan may receive no cash
distributions, participation in the Plan will not relieve participants of any
income tax which may be payable on such dividends or distributions.
In the case of shareholders, such as banks, brokers or nominees, which
hold shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time
to time by the shareholder as representing the total amount registered in the
shareholder's name and held for the account of beneficial owners who are
participating in the Plan.
Shareholders who do not wish to have distributions automatically
reinvested should notify the Plan Agent in writing. There is no penalty for
non-participation or withdrawal from the Plan, and shareholders who have
previously withdrawn from the Plan may rejoin at any time. Requests for
additional information or any correspondence concerning the Plan should be
directed to the Plan Agent at:
Morgan Stanley Global Opportunity Bond Fund, Inc.
American Stock Transfer & Trust Company
Dividend Reinvestment and Cash Purchase Plan
40 Wall Street
New York, NY 10005
1-800-278-4353
19
