MERRILL LYNCH MUNICIPAL STRATEGY FUND INC, 497, 1995-11-03

MERRILL LYNCH MUNICIPAL STRATEGY FUND INC
497, 1995-11-03

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<PAGE> 1

PROSPECTUS
OCTOBER 30, 1995

MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
COMMON STOCK
------------------------

Merrill Lynch Municipal Strategy Fund, Inc. (the "Fund") is a newly
organized, continuously offered, non-diversified, closed-end management
investment company seeking to provide shareholders with as high a level of
current income exempt from Federal income taxes as is consistent with its
investment policies and prudent investment management. The Fund seeks to achieve
its investment objective by investing primarily in a portfolio of long-term,
investment grade municipal obligations the interest on which, in the opinion of
bond counsel to the issuer, is exempt from Federal income taxes. The Fund
intends to maintain at least 75% of its total assets in municipal obligations
which are rated investment grade or, if unrated, are considered by Fund Asset
Management, L.P. (the "Investment Adviser") to be of comparable quality. THE
FUND MAY INVEST UP TO 25% OF ITS TOTAL ASSETS IN MUNICIPAL OBLIGATIONS WHICH ARE
RATED BELOW INVESTMENT GRADE (SUCH OBLIGATIONS ARE COMMONLY REFERRED TO AS "JUNK
BONDS") OR, IF UNRATED, ARE CONSIDERED BY THE INVESTMENT ADVISER TO BE OF
COMPARABLE QUALITY. The Fund may invest in certain tax-exempt securities
classified as "private activity bonds" that may subject certain investors in the
Fund to an alternative minimum tax. At times, the Fund may seek to hedge its
portfolio through the use of options and futures transactions. There can be no
assurance that the investment objective of the Fund will be realized.

No market presently exists for the Fund's Common Stock and it is not
currently expected that a secondary market will develop. Within approximately
six months after completion of the subscription offering of Common Stock
described herein, the Fund intends to offer shares of preferred stock
representing up to approximately 35% of the Fund's capital. There can be no
assurance, however, that preferred stock representing such percentage of the
Fund's capital will actually be issued. INVESTORS SHOULD NOTE THE SPECIAL RISKS
ASSOCIATED WITH THE LEVERAGING OF THE COMMON STOCK. SEE "RISKS AND SPECIAL
CONSIDERATIONS OF LEVERAGE" AND "DESCRIPTION OF CAPITAL STOCK." (Continued on
next page)

------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRICE TO SALES PROCEEDS TO
PUBLIC(1) LOAD(2) FUND(3)

<CAPTION>
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $10.00 None(2) $10.00
- ---------------------------------------------------------------------------------------------------------
Total(3).................................. $100,000,000 None(2) $100,000,000
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>

(1) The Common Stock is offered on a best efforts basis at a price equal to net
asset value, which is initially $10.00 per share.
(2) Because Merrill Lynch Funds Distributor, Inc. will pay all offering expenses
(other than registration fees) and sales commissions to selected dealers
(primarily Merrill Lynch, Pierce, Fenner & Smith Incorporated) from its own
assets, all of the proceeds of the offering will be available to the Fund
for investment in portfolio securities. See "Purchase of Shares." Purchases
of shares of the Fund are not subject to any front-end sales charge, but are
subject to a contingent deferred sales charge of up to 3.0% of the original
purchase amount as described herein.
(3) These amounts (a) do not take into account (i) organizational expenses of
the Fund, estimated to be $220,422, which will be amortized over a five-year
period and charged as expenses against the income of the Fund or (ii)
prepaid registration fees, in the amount of $114,578, which will be charged
to income as the related shares are issued, and (b) assume all shares
currently registered are sold pursuant to a continuous offering.

------------------------

MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE> 2

(Continued from previous page)

Shares of Common Stock of the Fund will be offered at $10.00 per share
without a front-end sales charge (but may be subject to a contingent deferred
sales charge (a "CDSC") as described herein) during a subscription offering
period expected to end on October 31, 1995, unless extended. On the third
business day after the conclusion of this subscription offering period, the
subscriptions will be payable, the Common Stock will be issued and the Fund will
commence operations. After the completion of the subscription offering period,
the Fund expects to engage in a continuous offering of its Common Stock at a
price equal to the next determined net asset value per share without a front-end
sales charge. Shares may be purchased directly from Merrill Lynch Funds
Distributor, Inc. (the "Distributor"), P.O. Box 9081, Princeton, New Jersey
08543-9081 [(609) 282-2800], or from securities dealers which have entered into
dealer agreements with the Distributor, including Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("Merrill Lynch"). Merrill Lynch may charge its customers a
processing fee (presently $4.85) for confirming purchases and repurchases.
Purchases directly through the Distributor [(609) 282-2800] are not subject to
the processing fee. The minimum initial purchase during the subscription and
continuous offering periods is $1,000 and the minimum subsequent purchase in the
continuous offering is $50. See "Purchase of Shares."

Since the Fund's Common Stock may not be considered readily marketable, the
Board of Directors of the Fund presently intends, but is not required, to make
tender offers on a quarterly basis to purchase all or a portion of the Common
Stock of the Fund from shareholders at the net asset value per share. In the
event that tender offers are not made, however, shareholders may find that their
shares of Common Stock are not marketable. See "Tender Offers." Shares of Common
Stock purchased by the Fund pursuant to tender offers which have been held for
less than three years will be subject to a CDSC which will not exceed 3.0% of
the original purchase amount for such Common Stock, which will be paid to the
Distributor. See "Contingent Deferred Sales Charge."

The issuance of the preferred stock will result in leveraging of the Common
Stock. Although the terms of the preferred stock offering will be determined by
the Fund's Board of Directors, it is anticipated that the preferred stock will
pay dividends that will be adjusted over either relatively short-term periods
(generally seven to 28 days) or medium-term periods (up to five years) and that
the dividend rate will be based upon prevailing interest rates for debt
obligations of comparable maturity. The proceeds of the preferred stock offering
will be invested in longer-term obligations in accordance with the Fund's
investment objective. Because under normal market conditions, obligations with
longer maturities produce higher yields than short-term and medium-term
obligations, the Investment Adviser believes that the spread inherent in the
difference between the short-term and medium-term rates paid by the Fund and the
longer-term rates received by the Fund will provide holders of Common Stock with
a potentially higher yield.

The Fund is designed primarily for long-term investors and should not be
considered a vehicle for trading purposes. The address of the Fund is 800
Scudders Mill Road, Plainsboro, New Jersey 08536, and its telephone number is
(609) 282-2800. This Prospectus sets forth concisely information about the Fund
that a prospective investor ought to know before purchasing shares. Investors
are advised to read this Prospectus carefully and retain it for future
reference.

2
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.

THE FUND Merrill Lynch Municipal Strategy Fund, Inc. (the "Fund")
is a newly organized, continuously offered,
non-diversified, closed-end management investment
company. See "The Fund."

THE OFFERING Merrill Lynch Funds Distributor, Inc. (the
"Distributor"), and other securities dealers which have
entered into selected dealer agreements with the
Distributor, including Merrill Lynch, will solicit
subscriptions for Common Stock of the Fund during a
period expected to end on October 31, 1995, unless
extended. On the third business day after the conclusion
of this subscription period, the subscriptions will be
payable, the Common Stock will be issued and the Fund
will commence operations. The public offering price of
the Common Stock during the subscription offering will
be $10.00 per share without a front-end sales charge
(although in certain cases a CDSC may apply as described
herein).

After the completion of the initial subscription
offering, the Fund expects to engage in a continuous
offering of its Common Stock at a price equal to the
next determined net asset value per share without a
front-end sales charge (although in certain cases a CDSC
may apply as described herein). The minimum initial
purchase during the subscription and continuous offering
periods is $1,000 and the minimum subsequent purchase in
the continuous offering is $50. The Fund reserves the
right to waive or modify the initial and subsequent
minimum investment requirements at any time. See
"Purchase of Shares."

INVESTMENT OBJECTIVE
AND POLICIES The investment objective of the Fund is to provide
shareholders with as high a level of current income
exempt from Federal income taxes as is consistent with
its investment policies and prudent investment
management. The Fund will seek to achieve its investment
objective by investing primarily in a portfolio of
long-term investment grade municipal obligations the
interest on which, in the opinion of bond counsel to the
issuer, is exempt from Federal income taxes. The Fund
intends to maintain at least 75% of its total assets in
municipal obligations which are rated investment grade
or, if unrated, are considered by the Investment Adviser
to be of comparable quality. The Fund may invest up to
25% of its total assets in municipal obligations which
are rated below investment grade or, if unrated, are
considered by the Investment Adviser to be of comparable
quality. Such lower quality municipal obligations (also
commonly referred to as "junk bonds") are frequently
traded only in markets where the number of potential
purchasers and sellers, if any, is very limited. See
"Investment Objective and Policies."

3
<PAGE> 4

TENDER OFFERS No market presently exists for the Fund's Common Stock
and it is not currently anticipated that a secondary
market will develop. In view of this, the Board of
Directors of the Fund intends to make tender offers on a
quarterly basis to purchase Common Stock of the Fund
from shareholders at a price per share equal to the net
asset value per share of the Common Stock determined at
the close of business on the day an offer terminates.
Although the Board of Directors currently intends to
make quarterly tender offers for the Common Stock, it is
under no obligation to do so and no assurance can be
given that in any particular quarter a tender offer will
be made. If a tender offer is not made, shareholders may
be unable to sell their shares. Shares of Common Stock
which have been held for less than three years and which
are purchased by the Fund pursuant to tender offers will
be subject to a CDSC. See "Contingent Deferred Sales
Charge." In addition, Merrill Lynch may charge its
customers a processing fee (presently, $4.85) to confirm
a repurchase of shares from such customers pursuant to a
Tender Offer. Tenders made directly through the
Distributor [(609) 282-2800] are not subject to the
processing fee.

LEVERAGE The Fund anticipates that it will be substantially
invested in longer-term municipal obligations within
approximately three months after completion of the
subscription offering of Common Stock described herein.
To leverage the Common Stock, the Fund intends to offer
shares of preferred stock within six months after
completion of the subscription offering representing up
to approximately 35% of the Fund's capital. There can be
no assurance, however, that preferred stock representing
such percentage of the Fund's capital will actually be
issued. The issuance of the preferred stock will result
in the leveraging of the Common Stock. Although the
terms of the preferred stock offering will be determined
by the Fund's Board of Directors, it is anticipated that
the preferred stock will pay dividends that will be
adjusted over either relatively short-term periods
(generally seven to 28 days) or medium- term periods (up
to five years) and that the dividend rate will be based
upon prevailing interest rates for debt obligations of
comparable maturity. The proceeds of the preferred stock
offering will be invested in longer-term obligations in
accordance with the Fund's investment objective.
Issuance and ongoing expenses of the preferred stock
will be borne by the Fund and will reduce the net asset
value of the Common Stock. Additionally, under certain
circumstances, when the Fund is required to allocate
taxable income to holders of preferred stock, it is
anticipated that the terms of the preferred stock will
require the Fund to make an additional distribution to
such holders in an amount approximately equal to the tax
liability resulting from such allocation and such
additional distribution (such amount, an "Additional
Distribution").

The use of leverage by the Fund creates an opportunity
for increased net income, but, at the same time, creates
special risks. Because under normal market conditions
obligations with longer maturities produce higher yields
than short-term and medium-term obligations, the
Investment Adviser believes that

4
<PAGE> 5

the spread inherent in the difference between the
short-term and medium-term rates (and any Additional
Distribution) paid by the Fund and the longer-term rates
received by the Fund will provide holders of Common
Stock with a potentially higher yield. Investors should
note, however, that leverage creates certain risks for
holders of Common Stock, including higher volatility of
both the net asset value and market value of the Common
Stock. Since any decline in the value of the Fund's
investments will be borne entirely by holders of Common
Stock, the effect of leverage in a declining market
would result in a greater decrease in net asset value
than if the Fund were not leveraged, which would likely
be reflected in a decline in the market price for shares
of Common Stock. Additionally, fluctuations in the
dividend rates on, and the amount of taxable income
allocable to, the preferred stock will affect the yield
to holders of Common Stock. See "Risks and Special
Considerations of Leverage." Upon issuance of the
preferred stock, holders of the Common Stock will
receive all net income of the Fund remaining after
payment of dividends (and any Additional Distribution)
on the preferred stock and will generally be entitled to
a pro rata share of net realized capital gains. Upon any
liquidation of the Fund, the holders of shares of
preferred stock will be entitled to receive liquidating
distributions (expected to equal the original purchase
price per share of preferred stock plus any accumulated
and unpaid dividends thereon and any accumulated and
unpaid Additional Distribution) before any distribution
is made to holders of Common Stock. See "Description of
Capital Stock-- Preferred Stock." Until the preferred
stock is issued, the Common Stock will not be leveraged,
and the special leverage considerations described herein
will not apply.

Holders of preferred stock, voting as a separate class,
will be entitled to elect two of the Fund's Directors,
and holders of common and preferred stock, voting
together as a single class, will be entitled to elect
the remaining Directors. If at any time dividends on the
Fund's preferred stock were to be in arrears in an
amount equal to two full years of dividend payments, the
holders of all outstanding shares of preferred stock,
voting as a separate class, would be entitled to elect a
majority of the Fund's Directors. The holders of
preferred stock will also vote separately on certain
other matters as required under the Fund's Articles of
Incorporation and the Investment Company Act of 1940, as
amended (the "1940 Act"), and Maryland law but otherwise
will have equal voting rights with holders of Common
Stock (one vote per share) and will vote together with
holders of Common Stock as a single class. See
"Description of Capital Stock--Preferred Stock--Voting
Rights."

There can be no assurance that the Fund will be able to
realize a higher net return on its investment portfolio
than the then current dividend rate (and any Additional
Distribution) on the preferred stock. Changes in certain
factors could cause the relationship between the
short-term and medium-term dividend rates (and any
Additional Distribution) paid by the Fund on the
preferred stock

5
<PAGE> 6

and the long-term rates received by the Fund on its
investment portfolio to change so that such short-term
and medium-term rates (and any Additional Distribution)
may substantially increase relative to rates on the
long-term obligations in which the Fund may be invested.
Under such conditions, the Fund's leveraged capital
structure would result in a greater decline in the net
asset value of the Common Stock and a greater decrease
in the current yield paid to holders of Common Stock
than if the Fund were not leveraged. The Fund will have
the authority to redeem the preferred stock for any
reason and may redeem all or part of the preferred stock
if it anticipates that the Fund's leveraged capital
structure will result in a lower rate of return to
holders of the Common Stock than that obtainable if the
Common Stock were unleveraged for any significant amount
of time or in order to maintain asset coverage required
by the 1940 Act and any nationally recognized
statistical rating organization rating the preferred
stock. The leveraging of the Common Stock would be
eliminated during any period that preferred stock is not
outstanding.

Prior to the time it offers the preferred stock, the
Fund intends to apply for ratings on such stock from one
or more nationally recognized statistical rating
organizations. The Fund believes that obtaining a rating
for the preferred stock will enhance the marketability
of the preferred stock and thereby reduce the dividend
rate on the preferred stock from that which the Fund
would be required to pay if the preferred stock were not
rated.

INVESTMENT ADVISER Fund Asset Management, L.P. is the Fund's investment
adviser (the "Investment Adviser") and is responsible
for the management of the Fund's investment portfolio
and for providing administrative services to the Fund.
For its advisory services, the Fund pays the Investment
Adviser a monthly fee at the annual rate of 0.50 of 1%
of the Fund's average daily net assets. For
administrative services, the Fund pays the Investment
Adviser a monthly fee at the annual rate of 0.25 of 1%
of the Fund's average daily net assets. While the
aggregate of the advisory and administrative fees is
higher than that paid by many other investment
companies, it is similar to that paid by other
continuously offered closed-end funds. The Investment
Adviser is an affiliate of Merrill Lynch Asset
Management, L.P. ("MLAM"), which is owned and controlled
by Merrill Lynch & Co., Inc. ("ML & Co."). The
Investment Adviser or MLAM acts as the investment
adviser to more than 125 other registered management
investment companies. The Investment Adviser also offers
portfolio management and portfolio analysis services to
individuals and institutions. As of September 30, 1995,
the Investment Adviser and MLAM had a total of
approximately $189.4 billion in investment company and
other portfolio assets under management (approximately
$29.8 billion of which were invested in municipal
securities), including accounts of certain affiliates of
the Investment Adviser. See "Investment Advisory and
Administrative Arrangements."

6
<PAGE> 7

DISTRIBUTIONS The Fund intends to pay dividends monthly and to
distribute substantially all of its net investment
income to holders of Common Stock. From and after
issuance of the preferred stock, monthly distributions
to holders of Common Stock will consist of substantially
all net investment income remaining after the payment of
dividends (and any Additional Distribution) on the
preferred stock. It is expected that the Fund will
commence paying dividends to holders of Common Stock
within approximately 90 days from the date of this
Prospectus. Net capital gains, if any, will be
distributed at least annually to holders of Common Stock
and, after issuance of the preferred stock, on a pro
rata basis to holders of Common Stock and preferred
stock. When capital gains or other taxable income is
allocated to holders of preferred stock under certain
circumstances, it is anticipated that the terms of the
preferred stock will require the Fund to make an
Additional Distribution. The Fund is not permitted to
declare any cash dividend or other distribution on its
Common Stock unless asset coverage (as defined in the
1940 Act) with respect to the Fund's preferred stock is
at least 200%. If the Fund issues preferred stock
representing 35% of its capital after the time of
issuance, its asset coverage with respect to the
preferred stock will be approximately 285%. If the
Fund's ability to make distributions on its Common Stock
is limited, this could under certain circumstances
impair the ability of the Fund to maintain its
qualification for taxation as a regulated investment
company, which would have adverse tax consequences for
holders of Common Stock. See "Taxes."

AUTOMATIC DIVIDEND
REINVESTMENT PLAN All dividends and capital gains distributions will be
automatically reinvested in additional shares of Common
Stock of the Fund unless a shareholder elects to receive
cash. Shareholders whose shares are held in the name of
a broker or nominee should contact such broker or
nominee to confirm that they may participate in the
Fund's dividend reinvestment plan. See "Automatic
Dividend Reinvestment Plan."

7
<PAGE> 8

RISK FACTORS AND SPECIAL CONSIDERATIONS

As a newly organized entity, the Fund has no operating history. See "The
Fund." The Fund expects that there will be no secondary market for its Common
Stock. Moreover, Merrill Lynch and other selected dealers are prohibited under
applicable law from making a market in the Fund's Common Stock while the Fund is
making either a public offering of or a tender offer to purchase its Common
Stock. To the extent a secondary market does develop, however, investors should
be aware that the shares of closed-end funds frequently trade in the secondary
market at a discount. Should there be a secondary market for the Fund's shares
of Common Stock, the market price of the shares may vary from net asset value.

Because of the lack of a secondary market and the CDSC, the Fund is
designed primarily for long-term investors and should not be considered a
vehicle for trading purposes.

The net asset value of the Fund's shares of Common Stock will fluctuate
with interest rate changes as well as with price changes of the Fund's portfolio
securities, and these fluctuations are likely to be greater in the case of a
fund having a leveraged capital structure, as contemplated for the Fund. See
"Risks and Special Considerations of Leverage."

The Fund has registered as a "non-diversified" investment company so that
it will be able to invest more than 5% of its assets in the obligations of any
single issuer, subject to the diversification requirements of Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), applicable to the
Fund. Since the Fund may invest a relatively high percentage of its assets in
the obligations of a limited number of issuers, the Fund may be more susceptible
than a more widely-diversified fund to any single economic, political or
regulatory occurrence.

The Fund intends to invest at least 75% of its total assets in municipal
obligations that are rated in the investment grade rating categories by Standard
& Poor's Ratings Group ("S&P"), Moody's Investors Service, Inc. ("Moody's") or
Fitch Investors Service, Inc. ("Fitch") or, if not rated, are considered to be
of comparable quality by the Investment Adviser. Obligations rated in the lowest
investment-grade category have certain speculative characteristics.
Additionally, the Fund may invest up to 25% of its total assets in municipal
obligations which are rated below investment grade (such obligations are
commonly referred to as "junk bonds") or, if not rated, considered by the
Investment Adviser to be of comparable quality. These securities are regarded as
predominantly speculative and investments therein entail certain risks. See
"Investment Objective and Policies." The Fund may invest in certain tax-exempt
securities classified as "private activity bonds" that may subject certain
investors in the Fund to the alternative minimum tax. See "Taxes--General."

The Fund will be subject to certain restrictions on investments imposed by
guidelines of one or more nationally recognized statistical rating organizations
which may issue ratings for the preferred stock. These guidelines may impose
asset coverage or portfolio composition requirements that are more stringent
than those imposed by the 1940 Act. It is not anticipated that these covenants
or guidelines will impede the Investment Adviser from managing the Fund's
portfolio in accordance with the Fund's investment objective and policies.

In order to seek to hedge various portfolio positions or to enhance its
return, the Fund may invest in certain instruments which may be characterized as
derivatives. These investments include various types of options transactions and
futures and options thereon. Such investments also may consist of non-municipal
tax-exempt securities and securities the potential investment return on which is
based on the change in particular measurements of value or interest rates
("indexed securities"), including securities the potential investment

8
<PAGE> 9

return on which is inversely related to a change in particular measurements of
value or interest rates ("inverse securities"). The Fund has express limitations
on the percentage of its assets that may be committed to certain of such
investments. Other of such investments have no express quantitative limitations,
although they may be made solely for hedging purposes, not for speculation, and
may in some cases require limitations as to the type of permissible
counter-party to the transaction. Investments in indexed securities, including
inverse securities, subject the Fund to the risks associated with changes in the
particular indices, which may include reduced or eliminated interest payments
and losses of invested principal. Derivative instruments may have certain
characteristics which have a similar effect on the return to Common Stock
investors as the leverage transactions discussed under "Risks and Special
Considerations of Leverage"; however, certain derivative investments will not be
taken into account for purposes of calculating the percentage of leverage of the
Fund's portfolio. For a further discussion of the risks associated with
derivative investments, see "Investment Objective and Policies", "Investment
Objective and Policies--Other Investment Policies--Indexed and Inverse Floating
Obligations", "--Call Rights" and "Investment Objective and Policies--Options
and Futures Transactions."

Subject to its investment restrictions, the Fund is authorized to engage in
options and futures transactions on exchanges and in the over-the-counter
markets ("OTC options") for hedging purposes with certain specified entities
meeting the criteria of the Fund. These transactions involve certain risk
considerations. These risks include the risk of imperfect correlation in
movements in the price of futures contracts and movements in the price of the
security which is the subject of the hedge and the inability to close futures
transactions under certain conditions. Options transactions involve the
potential loss of the opportunity to profit from any price increase in the
underlying security above the option exercise price or the potential loss of the
premium paid for the option. Because of the anticipated leveraged nature of the
Common Stock, hedging transactions will result in a larger impact on the net
asset value of the Common Stock than would be the case if the Common Stock were
not leveraged. OTC options and assets used to cover OTC options written by the
Fund are considered by the staff of the Securities and Exchange Commission to be
illiquid. The illiquidity of such options or assets may prevent a successful
sale of such options or assets, result in a delay of sale, or reduce the amount
of proceeds that might be otherwise realized. See "Investment Objective and
Policies-- Options and Futures Transactions." The Fund intends to apply for
ratings of the preferred stock from one or more nationally recognized
statistical rating organizations. In order to obtain these ratings, the Fund may
be required to limit its use of hedging techniques in accordance with the
specified guidelines of such rating organizations.

9
<PAGE> 10

FEE TABLE

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load (as a percentage of offering price).......... None
Dividend Reinvestment Plan Fees................................. None
Contingent Deferred Sales Charge (as a percentage of original 3.0% during the first year,
purchase price or net asset value at the time of decreasing 1.0% annually
repurchase)(a)................................................ thereafter to 0.0% after the
third year
ANNUAL EXPENSES (as a percentage of net assets attributable to
shares of Common Stock)(b)
Investment Advisory Fee(c)...................................... 0.50%
Administrative Fee(c)........................................... 0.25%
Shareholder Servicing Fee....................................... 0.08%
Interest Payments on Borrowed Funds............................. None
Other Expenses(c)............................................... 1.17%
---------------------------------
Total Annual Expenses(c)............................................ 2.00%
====================================
</TABLE>

- ---------------

(a) See "Contingent Deferred Sales Charge"--page 29.

(b) See "Investment Advisory and Administrative Arrangements"--page 32.

(c) In the event that the Fund utilizes leverage by issuing preferred stock in
an amount of 35% of the Fund's capital, it is estimated that the Investment
Advisory Fee would be .75%, the Administrative Fee would be .37%, Other
Expenses would be 1.72% and Total Annual Expenses would be 2.84%. See "Risks
and Special Considerations of Leverage."

<TABLE>
<CAPTION>
1 3
EXAMPLE YEAR YEARS
--- ---
<S> <C> <C>
An investor would pay the following expenses on a $1,000 investment, (1) total
annual expenses of 2.00% (assuming no leverage) and 2.84% (assuming leverage),
(2) a 5% annual return throughout the periods and (3) tender at the end of the
period..........................................................................
Assuming No Leverage.......................................................... $50* $73*
Assuming Leverage............................................................. $59* $98*
An investor would pay the following expenses on a $1,000 investment assuming no
tender at the end of the period.................................................
Assuming No Leverage.......................................................... $20 $63
Assuming Leverage............................................................. $29 $88
</TABLE>

- ---------------

* Reflects the Contingent Deferred Sales Charge.

The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The expenses set forth under "Other Expenses" are based on estimated
amounts through the end of the Fund's first fiscal year on an annualized basis.
The Example set forth above assumes reinvestment of all dividends and
distributions and utilizes a 5% annual rate of return as mandated by the
Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND
ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED
FOR PURPOSES OF THE EXAMPLE. Merrill Lynch may charge its customers a processing
fee (presently $4.85) for confirming purchases and repurchases. Purchases and
repurchases directly through the Distributor [(609) 282-2800] are not subject to
the processing fee. See "Purchase of Shares" and "Tender Offers."

10
<PAGE> 11

THE FUND

Merrill Lynch Municipal Strategy Fund, Inc. (the "Fund") is a newly
organized, continuously offered, non-diversified, closed-end management
investment company. The Fund was incorporated under the laws of the State of
Maryland on July 13, 1994, and has registered under the 1940 Act. The Fund's
principal office is located at 800 Scudders Mill Road, Plainsboro, New Jersey
08536, and its telephone number is (609) 282-2800.

USE OF PROCEEDS

Assuming all shares of Common Stock currently registered are sold in the
initial offering, it is estimated that the net proceeds from the sale of the
Common Stock offered hereby will be $99,665,000, after payment of organizational
and offering expenses by the Fund, and will be invested in accordance with the
Fund's investment objective and policies as soon as practicable after the
closing of the subscription offering of Common Stock, but in no event, under
normal market conditions, longer than six months from such closing date. Pending
such investment, it is anticipated that the proceeds will be invested in
short-term, tax-exempt securities. See "Investment Objective and Policies."

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to provide shareholders with as
high a level of current income exempt from Federal income taxes as is consistent
with its investment policies and prudent investment management. The Fund seeks
to achieve its investment objective by investing primarily in a portfolio of
long-term, investment grade municipal obligations, the interest on which, in the
opinion of bond counsel to the issuer, is exempt from Federal income taxes. The
investment objective of the Fund is a fundamental policy that may not be changed
without a vote of a majority of the Fund's outstanding voting securities, as
defined below under "Investment Restrictions." There can be no assurance that
the investment objective of the Fund will be realized. At times, the Fund may
seek to hedge its portfolio through the use of futures transactions and options
to reduce volatility in the net asset value of its shares of Common Stock.

The Fund, at all times, except during interim and temporary periods as
discussed below, will invest at least 80% of its total assets in a portfolio of
obligations issued by or on behalf of states, territories and possessions of the
United States and their political subdivisions, agencies or instrumentalities
paying interest which, in the opinion of bond counsel to the issuer, is exempt
from Federal income taxes ("Municipal Bonds"). The Fund, at all times, except
during temporary periods, will maintain at least 75% of its total assets in
Municipal Bonds rated investment grade by a nationally recognized statistical
rating organization or, if unrated, are considered to be of comparable quality
by the Investment Adviser. Additionally, the Fund may invest up to 25% of its
total assets in Municipal Bonds which are rated below investment grade by a
nationally recognized statistical rating organization or, if unrated, are
considered to be of comparable quality by the Investment Adviser. Such lower
quality Municipal Bonds are frequently traded only in markets where the number
of potential purchasers and sellers, if any, is very limited. The Fund may
invest in certain tax-exempt securities classified as "private activity bonds"
(in general, bonds that benefit non-governmental entities) that may subject
certain investors in the Fund to an alternative minimum tax. The

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Fund will not invest more than 25% of its total assets (taken at market value)
in Municipal Bonds whose issuers are located in the same state.

The Fund also may invest in securities not issued by or on behalf of a
state or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities pay interest or distributions which are
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in Municipal Bonds, to the extent such
investments are permitted by the 1940 Act. Other Non-Municipal Tax-Exempt
Securities could include trust certificates or other instruments evidencing
interests in one or more long-term Municipal Bonds. Certain Non-Municipal
Tax-Exempt Securities may be characterized as derivative instruments.
Non-Municipal Tax-Exempt Securities will be considered "Municipal Bonds" for
purposes of the Fund's investment objective and policies.

Investment in shares of Common Stock of the Fund offers several benefits.
The Fund offers investors the opportunity to receive income exempt from Federal
income taxes by investing in a professionally managed portfolio comprised
primarily of investment grade Municipal Bonds. The Fund also relieves the
investor of the burdensome administrative details involved in managing a
portfolio of Municipal Bonds. Additionally, the Investment Adviser will seek to
enhance the yield on the Common Stock by leveraging the Fund's capital structure
through the issuance of preferred stock. The benefits are at least partially
offset by the expenses involved in operating an investment company. Such
expenses primarily consist of the advisory fee, administrative fee and
operational costs. Additionally, the use of leverage involves certain expenses
and special risk considerations. See "Risks and Special Considerations of
Leverage."

The investment grade Municipal Bonds in which the Fund will invest are
those Municipal Bonds rated at the date of purchase in the four highest rating
categories of S&P, Moody's or Fitch or, if unrated, are considered to be of
comparable quality by the Investment Adviser. In the case of long-term debt, the
investment grade rating categories are AAA through BBB for S&P, Aaa through Baa
for Moody's and AAA through BBB for Fitch. In the case of short-term notes, the
investment grade rating categories are SP-1+ through SP-3 for S&P, MIG-1 through
MIG-4 for Moody's and F-1+ through F-3 for Fitch. In the case of tax-exempt
commercial paper, the investment grade rating categories are A-1+ through A-3
for S&P, Prime-1 through Prime-3 for Moody's and F-1+ through F-3 for Fitch.
Obligations ranked in the fourth highest rating category (BBB, SP-3 and A-3 for
S&P; Baa, MIG-4 and Prime-3 for Moody's; and BBB, F-3 and F-3 for Fitch), while
considered "investment grade," have certain speculative characteristics. There
may be sub-categories or gradations indicating relative standing within the
rating categories set forth above. See Appendix I to this Prospectus for a
description of S&P's, Moody's and Fitch's ratings of Municipal Bonds. In
assessing the quality of Municipal Bonds with respect to the foregoing
requirements, the Investment Adviser will take into account the nature of any
letters of credit or similar credit enhancements to which particular Municipal
Bonds are entitled and the creditworthiness of the financial institution which
provided such credit enhancement.

As noted above, the Fund may invest up to 25% of its assets in Municipal
Bonds which are rated below investment grade or, if unrated, are considered to
be of comparable quality by the Investment Adviser. These high yield bonds are
commonly referred to as "junk bonds" and are regarded as predominantly
speculative as to the issuer's ability to make payments of principal and
interest. Consequently, although such bonds can be expected to provide higher
yields, they may be subject to greater market price fluctuations and risk of
loss of principal than lower yielding, higher rated fixed income securities.
Such securities are particularly vulnerable

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<PAGE> 13

to adverse changes in the issuer's industry and in general economic conditions.
Issuers of high yield bonds may be highly leveraged and may not have available
to them more traditional methods of financing. The risk of loss due to default
by the issuer is significantly greater for the holders of these bonds because
such securities may be unsecured and may be subordinated to other creditors of
the issuer. In addition, while the high yield bonds in which the Fund may invest
normally will not include securities which, at the time of investment, are in
default or the issuers of which are in bankruptcy, there can be no assurance
that such events will not occur after the Fund purchases a particular security,
in which case the Fund may experience losses and incur costs.

High yield bonds frequently have call or redemption features that permit an
issuer to repurchase such bonds from the Fund, which may decrease the net
investment income to the Fund and dividends to shareholders in the event that
the Fund is required to replace a called security with a lower yielding
security. The Fund may have difficulty disposing of certain high yield bonds
because there may be a thin trading market for such securities. Reduced
secondary market liquidity may have an adverse impact on market price and the
Fund's ability to dispose of particular issues when necessary to meet the Fund's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. In addition, market
quotations are generally available on many high yield bond issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.

Certain Municipal Bonds may be entitled to the benefits of letters of
credit or similar credit enhancements issued by financial institutions. In such
instances, the Board of Directors and the Investment Adviser will take into
account in assessing the quality of such bonds not only the creditworthiness of
the issuer of such bonds but also the creditworthiness of the financial
institutions.

The Fund's investments may also include variable rate demand obligations
("VRDOs") and VRDOs in the form of participation interests ("Participating
VRDOs") in variable rate tax-exempt obligations held by a financial institution,
typically a commercial bank. The VRDOs in which the Fund will invest are
tax-exempt obligations in the opinion of counsel to the issuer which contain a
floating or variable interest rate adjustment formula and an unconditional right
of demand on the part of the holder thereof to receive payment of the unpaid
principal balance plus accrued interest on a short notice period not to exceed
seven days. Participating VRDOs provide the Fund with a specified undivided
interest (up to 100%) in the underlying obligation and the right to demand
payment of the unpaid principal balance plus accrued interest on the
Participating VRDOs from the financial institution on a specified number of
days' notice, not to exceed seven days. There is, however, the possibility that
because of default or insolvency, the demand feature of VRDOs or Participating
VRDOs may not be honored. The Fund has been advised by its counsel that the Fund
should be entitled to treat the income received on Participating VRDOs as
interest from tax-exempt obligations.

The average maturity of the Fund's portfolio securities will vary based
upon the Investment Adviser's assessment of economic and market conditions. The
net asset value of the shares of common stock of a closed-end investment
company, such as the Fund, which invests primarily in fixed-income securities,
changes as the general levels of interest rates fluctuate. When interest rates
decline, the value of a fixed-income portfolio can be expected to rise.
Conversely, when interest rates rise, the value of a fixed-income portfolio can
be expected to decline. Prices of longer-term securities generally fluctuate
more in response to interest rate changes than do short-term or medium-term
securities. These changes in net asset value are likely to be greater in the
case of a fund having a leveraged capital structure, as proposed for the Fund.
See "Risks and Special Considerations of Leverage."

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<PAGE> 14

The Fund intends to invest primarily in long-term Municipal Bonds with a
maturity of more than ten years. Also, the Fund may invest in intermediate-term
Municipal Bonds with a maturity of between three years and ten years. The Fund
may invest in short-term, tax-exempt securities, short-term U.S. Government
securities, repurchase agreements or cash. Such short-term securities or cash
will not exceed 20% of its total assets except during interim periods pending
investment of the net proceeds of public offerings of the Fund's securities or
in anticipation of the repurchase or redemption of the Fund's securities and
temporary periods when, in the opinion of the Investment Adviser, prevailing
market or economic conditions warrant. The Fund does not ordinarily intend to
realize significant interest income not exempt from Federal income tax.

The Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by such Act in the proportion of
its assets that it may invest in securities of a single issuer. However, the
Fund's investments will be limited so as to qualify the Fund for the special tax
treatment afforded regulated investment companies under the Code. See "Taxes."
To qualify, among other requirements, the Fund will limit its investments so
that, at the close of each quarter of the taxable year, (i) not more than 25% of
the market value of the Fund's total assets will be invested in the securities
(other than U.S. Government securities) of a single issuer, and (ii) with
respect to 50% of the market value of its total assets, not more than 5% of the
market value of its total assets will be invested in the securities (other than
U.S. Government securities) of a single issuer. A fund which elects to be
classified as "diversified" under the 1940 Act must satisfy the foregoing 5%
requirement with respect to 75% of its total assets. To the extent that the Fund
assumes large positions in the securities of a small number of issuers, the
Fund's yield may fluctuate to a greater extent than that of a diversified
company as a result of changes in the financial condition or in the market's
assessment of the issuers.

DESCRIPTION OF MUNICIPAL BONDS

Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including construction of a wide range of public facilities,
refinancing of outstanding obligations and obtaining of funds for general
operating expenses and loans to other public institutions and facilities. In
addition, certain types of industrial development bonds are issued by or on
behalf of public authorities to finance various privately operated facilities,
including pollution control facilities. For purposes of this Prospectus, such
obligations are Municipal Bonds if the interest paid thereon is exempt from
Federal income tax, even though such bonds may be "private activity bonds" as
discussed below. Also, for purposes of this Prospectus, Non-Municipal Tax-Exempt
Securities as discussed above will be considered Municipal Bonds.

The two principal classifications of Municipal Bonds are "general
obligation" bonds and "revenue" or "special obligation" bonds. General
obligation bonds are secured by the issuer's pledge of faith, credit and taxing
power for the payment of principal and interest. Revenue or special obligation
bonds are payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise tax
or other specific revenue source such as from the user of the facility being
financed. Industrial development bonds are in most cases revenue bonds and do
not generally constitute the pledge of the credit or taxing power of the issuer
of such bonds. The repayment of the principal and payment of the interest on
such industrial development bonds depends solely on the ability of the user of
the facility financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment. Municipal Bonds may also include "moral obligation" bonds which are
normally issued by special purpose public authorities. If an issuer of moral
obligation bonds is unable to meet its

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<PAGE> 15

obligations, the repayment of such bonds becomes a moral commitment but not a
legal obligation of the state or municipality in question.

The Fund may purchase Municipal Bonds classified as "private activity
bonds" (in general, bonds that benefit non-governmental entities). Interest
received on certain tax-exempt securities which are classified as "private
activity bonds" may subject certain investors in the Fund to an alternative
minimum tax. There is no limitation on the percentage of the Fund's assets that
may be invested in Municipal Bonds which may subject certain investors to an
alternative minimum tax. See "Taxes--General." Also included within the general
category of Municipal Bonds are participation certificates issued by government
authorities or entities to finance the acquisition or construction of equipment,
land and/or facilities. The certificates represent participations in a lease, an
installment purchase contract or a conditional sales contract (hereinafter
collectively referred to as "lease obligations") relating to such equipment,
land or facilities. Although lease obligations do not constitute general
obligations of the issuer for which the issuer's unlimited taxing power is
pledged, a lease obligation frequently is backed by the issuer's covenant to
budget for, appropriate and make the payments due under the lease obligation.
However, certain lease obligations contain "non-appropriation" clauses which
provide that the issuer has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "non-appropriation" lease obligations are secured by the
leased property, disposition of the property in the event of foreclosure might
prove difficult. These securities represent a relatively new type of financing
that has not yet developed the depth of marketability associated with more
conventional securities.

Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation which may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Fund.

OTHER INVESTMENT POLICIES

The Fund has adopted certain other policies as set forth below:

Borrowings. The Fund is authorized to borrow money in amounts of up to 5%
of the value of its total assets at the time of such borrowings; provided,
however, that the Fund is authorized to borrow moneys in amounts of up to
33 1/3% of the value of its total assets at the time of such borrowings to
finance the repurchase of its own Common Stock pursuant to tender offers or
otherwise, to redeem or repurchase shares of preferred stock or for temporary,
extraordinary or emergency purposes. Borrowings by the Fund (commonly known as
"leveraging") create an opportunity for greater total return since the Fund will
not be required to sell portfolio securities to purchase tendered shares but, at
the same time, increase exposure to capital risk. In addition, borrowed funds
are subject to interest costs that may offset or exceed the return earned on the
borrowed funds.

When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase or sell Municipal Bonds on a delayed delivery basis or on a when-issued
basis at fixed purchase or sale terms. These transactions arise when securities
are purchased or sold by the Fund with payment and delivery taking place in the
future. The purchase will be recorded on the date the Fund enters into the
commitment, and the value of the obligation will thereafter be reflected in the
calculation of the Fund's net asset value. The value of the obligation on the
delivery day may be more or less than its purchase price. A separate account of
the Fund will be established with its custodian consisting of cash, cash
equivalents or liquid Municipal Bonds having a market value at all times at
least equal to the amount of the commitment.

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<PAGE> 16

Indexed and Inverse Floating Obligations. The Fund may invest in Municipal
Bonds the return on which is based on a particular index of value or interest
rates. For example, the Fund may invest in Municipal Bonds that pay interest
based on an index of Municipal Bond interest rates. The principal amount payable
upon maturity of certain Municipal Bonds also may be based on the value of an
index. To the extent the Fund invests in these types of Municipal Bonds, the
Fund's return on such Municipal Bonds will be subject to risk with respect to
the value of the particular index. Also, the Fund may invest in so-called
"inverse floating obligations" or "residual interest bonds" on which the
interest rates typically vary inversely with a short-term floating rate (which
may be reset periodically by a dutch auction, a remarketing agent, or by
reference to a short-term tax-exempt interest rate index). The Fund may purchase
in the secondary market synthetically-created inverse floating rate bonds
evidenced by custodial or trust receipts. Generally, interest rates on inverse
floating rate bonds will decrease when short-term rates increase, and will
increase when short-term rates decrease. Such securities have the effect of
providing a degree of investment leverage, since they may increase or decrease
in value in response to changes, as an illustration, in market interest rates at
a rate which is a multiple (typically two) of the rate at which fixed-rate,
long-term, tax-exempt securities increase or decrease in response to such
changes. As a result, the market values of such securities generally will be
more volatile than the market values of fixed-rate tax-exempt securities. To
seek to limit the volatility of these securities, the Fund may purchase inverse
floating obligations with shorter-term maturities or which contain limitations
on the extent to which the interest rate may vary. The Investment Adviser
believes that indexed and inverse floating obligations represent a flexible
portfolio management instrument for the Fund which allows the Investment Adviser
to vary the degree of investment leverage relatively efficiently under different
market conditions. The Fund will not invest more than 10% of its total assets in
inverse floating obligations and residual interest bonds.

Call Rights. The Fund may purchase a Municipal Bond issuer's right to call
all or a portion of such Municipal Bond for mandatory tender for purchase (a
"Call Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to certain
conditions. A Call Right that is not exercised prior to the maturity of the
related Municipal Bond will expire without value. The economic effect of holding
both the Call Right and the related Municipal Bond is identical to holding a
Municipal Bond as a non-callable security.

Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the seller agrees,
upon entering into the contract, to repurchase the security at a mutually agreed
upon time and price, thereby determining the yield during the term of the
agreement. The Fund may not invest in repurchase agreements maturing in more
than seven days if such investments, together with all other illiquid
investments, would exceed 15% of the Fund's net assets. In the event of default
by the seller under a repurchase agreement, the Fund may suffer time delays and
incur costs or possible losses in connection with the disposition of the
underlying securities.

In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold". Therefore,
amounts earned under such agreements will not be considered tax-exempt interest.

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<PAGE> 17

OPTIONS AND FUTURES TRANSACTIONS

The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain financial
futures contracts ("financial futures contracts") and options thereon. While the
Fund's use of hedging strategies is intended to reduce the volatility of the net
asset value of Common Stock, the net asset value of the Common Stock will
fluctuate. There can be no assurance that the Fund's hedging transactions will
be effective. In addition, because of the anticipated leveraged nature of the
Common Stock, hedging transactions will result in a larger impact on the net
asset value of the Common Stock than would be the case if the Common Stock were
not leveraged. Furthermore, the Fund will only engage in hedging activities from
time to time and may not necessarily be engaging in hedging activities when
movements in interest rates occur.

Certain Federal income tax requirements may limit the Fund's ability to
engage in hedging transactions. Gains from transactions in options and futures
contracts distributed to shareholders will be taxable as ordinary income or, in
certain circumstances, as long-term capital gains to shareholders. See
"Taxes--Tax Treatment of Options and Futures Transactions." In addition, in
order to obtain ratings of the preferred stock from one or more nationally
recognized statistical rating organizations, the Fund may be required to limit
its use of hedging techniques in accordance with the specified guidelines of
such organizations.

The following is a description of the options and futures transactions in
which the Fund may engage, limitations on the use of such transactions and risks
associated therewith. The investment policies with respect to the hedging
transactions of the Fund are not fundamental policies and may be modified by the
Board of Directors of the Fund without the approval of the Fund's shareholders.

Writing Covered Call Options. The Fund may write (i.e., sell) covered call
options with respect to Municipal Bonds it owns, thereby giving the holder of
the option the right to buy the underlying security covered by the option from
the Fund at the stated exercise price until the option expires. The Fund writes
only covered call options, which means that so long as the Fund is obligated as
the writer of a call option, it will own the underlying securities subject to
the option. The Fund may not write covered call options on underlying securities
in an amount exceeding 15% of the market value of its total assets.

The Fund will receive a premium from writing a call option, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, the Fund limits its
opportunity to profit from an increase in the market value of the underlying
security above the exercise price of the option for as long as the Fund's
obligation as a writer continues. Covered call options serve as a partial hedge
against a decline in the price of the underlying security. The Fund may engage
in closing transactions in order to terminate outstanding options that it has
written.

Purchase of Options. The Fund may purchase put options in connection with
its hedging activities. By buying a put the Fund has a right to sell the
underlying security at the exercise price, thus limiting the Fund's risk of loss
through a decline in the market value of the security until the put expires. The
amount of any appreciation in the value of the underlying security will be
partially offset by the amount of the premium paid for the put option and any
related transaction costs. Prior to its expiration, a put option may be sold in
a closing sale transaction; profit or loss from the sale will depend on whether
the amount received is more or less than the premium paid for the put option
plus the related transaction costs. A closing sale transaction cancels out the
Fund's position as the purchaser of an option by means of an offsetting sale of
an identical option prior to the expiration of the option it has purchased. In
certain circumstances, the Fund may purchase call options on

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<PAGE> 18

securities held in its portfolio on which it has written call options or on
securities which it intends to purchase. The Fund will not purchase options on
securities if, as a result of such purchase, the aggregate cost of all
outstanding options on securities held by the Fund would exceed 5% of the market
value of the Fund's total assets.

Financial Futures Contracts and Options. The Fund is authorized to
purchase and sell certain financial futures contracts and options thereon solely
for the purposes of hedging its investments in Municipal Bonds against declines
in value and hedging against increases in the cost of securities it intends to
purchase. A financial futures contract obligates the seller of a contract to
deliver and the purchaser of a contract to take delivery of the type of
financial instrument covered by the contract or, in the case of index-based
financial futures contracts, to make and accept a cash settlement, at a specific
future time for a specified price. A sale of financial futures contracts may
provide a hedge against a decline in the value of portfolio securities because
such depreciation may be offset, in whole or in part, by an increase in the
value of the position in the financial futures contracts. A purchase of
financial futures contracts may provide a hedge against an increase in the cost
of securities intended to be purchased because such appreciation may be offset,
in whole or in part, by an increase in the value of the position in the
financial futures contracts.

The purchase or sale of a financial futures contract differs from the
purchase or sale of a security in that no price or premium is paid or received.
Instead, an amount of cash or securities acceptable to the broker equal to
approximately 5% of the contract amount must be deposited with the broker. This
amount is known as initial margin. Subsequent payments to and from the broker,
called variation margin, are made on a daily basis as the price of the financial
futures contract fluctuates making the long and short positions in the financial
futures contract more or less valuable.

The Fund may purchase and sell financial futures contracts based on The
Bond Buyer Municipal Bond Index, a price-weighted measure of the market value of
40 large tax-exempt issues, and purchase and sell put and call options on such
financial futures contracts for the purpose of hedging Municipal Bonds which the
Fund holds or anticipates purchasing against adverse changes in interest rates.
The Fund also may purchase and sell financial futures contracts on U.S.
Government securities and purchase and sell put and call options on such
financial futures contracts for such hedging purposes. With respect to U.S.
Government securities, currently there are financial futures contracts based on
long-term U.S. Treasury bonds, U.S. Treasury notes, GNMA Certificates and
three-month U.S. Treasury bills.

Subject to policies adopted by the Board of Directors, the Fund also may
engage in transactions in other financial futures contracts and options, such as
financial futures contracts and options on other municipal bond indices which
may become available, if the Investment Adviser should determine that there is
normally sufficient correlation between the prices of such financial futures
contracts and the Municipal Bonds in which the Fund invests to make such hedging
appropriate.

Over-The-Counter Options. The Fund may engage in options and futures
transactions on exchanges and in the over-the-counter markets ("OTC options").
In general, exchange-traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or clearing
corporation) with standardized strike prices and expiration dates. OTC option
transactions are two-party contracts with prices and terms negotiated by the
buyer and seller. See "Restrictions on OTC Options" below for information as to
restrictions on the use of OTC options.

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<PAGE> 19

Restrictions on OTC Options. The Fund will engage in transactions in OTC
options only with member banks of the Federal Reserve System and primary dealers
in U.S. Government securities or with affiliates of such banks or dealers which
have capital of at least $50 million or whose obligations are guaranteed by an
entity having capital of at least $50 million or any other bank or dealer having
capital of at least $150 million or whose obligations are guaranteed by an
entity having capital of at least $150 million. OTC options and assets used to
cover OTC options written by the Fund are considered by the staff of the
Securities and Exchange Commission to be illiquid. The illiquidity of such
options or assets may prevent a successful sale of such options or assets,
result in a delay of sale, or reduce the amount of proceeds that might otherwise
be realized.

Risk Factors in Options and Futures Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
price of financial futures contracts and movements in the price of the security
which is the subject of the hedge. If the price of the financial futures
contract moves more or less than the price of the security that is the subject
of the hedge, the Fund will experience a gain or loss which will not be
completely offset by movements in the price of such security. There is a risk of
imperfect correlation where the securities underlying financial futures
contracts have different maturities, ratings, geographic compositions or other
characteristics than the security being hedged. In addition, the correlation may
be affected by additions to or deletions from the index which serves as a basis
for a financial futures contract. Finally, in the case of financial futures
contracts on U.S. Government securities and options on such financial futures
contracts, the anticipated correlation of price movements between the U.S.
Government securities underlying the futures or options and Municipal Bonds may
be adversely affected by economic, political, legislative or other developments
which have a disparate impact on the respective markets for such securities.

Under regulations of the Commodity Futures Trading Commission (the "CFTC"),
the futures trading activities described herein will not result in the Fund
being deemed a "commodity pool," as defined under such regulations, provided
that the Fund adheres to certain restrictions. In particular, the Fund may
purchase and sell financial futures contracts and options thereon (i) for bona
fide hedging purposes, without regard to the percentage of the Fund's assets
committed to margin and option premiums, and (ii) for non-hedging purposes if,
immediately thereafter, the sum of the amount of initial margin deposits on the
Fund's existing futures positions and option premiums entered into for
non-hedging purposes do not exceed 5% of the market value of the liquidation
value of the Fund's portfolio, after taking into account unrealized profits and
unrealized losses on any such transactions. Margin deposits may consist of cash
or securities acceptable to the broker and the relevant contract market.

When the Fund purchases a financial futures contract, or writes a put
option or purchases a call option thereon, it will maintain an amount of cash,
cash equivalents (e.g., commercial paper and daily tender adjustable notes) or
short-term, high-grade, fixed-income securities in a segregated account with the
Fund's custodian so that the amount so segregated plus the amount of initial and
variation margin held in the account of its broker equals the market value of
the financial futures contract, thereby ensuring that the use of such financial
futures contract is unleveraged.

Although certain risks are involved in options and futures transactions,
the Investment Adviser believes that, because the Fund will engage in options
and futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to certain risks
frequently associated with speculation in options and futures transactions. The
Fund may be restricted in engaging in options and futures transactions due to
the requirement that less than 30% of its gross income in each taxable year be
derived from

19
<PAGE> 20

the sale or other disposition of securities held for less than three months. See
"Taxes--Tax Treatment of Options and Futures Transactions."

The volume of trading in the exchange markets with respect to Municipal
Bond options may be limited, and it is impossible to predict the amount of
trading interest that may exist in such options. In addition, there can be no
assurance that viable exchange markets will continue.

The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a liquid
secondary market for such options or futures. There can be no assurance,
however, that a liquid secondary market will exist at any specific time. Thus,
it may not be possible to close an options or futures transaction. The inability
to close options and futures positions also could have an adverse impact on the
Fund's ability to effectively hedge its portfolio. There is also the risk of
loss by the Fund of margin deposits or collateral in the event of bankruptcy of
a broker with which the Fund has an open position in an option or financial
futures contract.

The liquidity of a secondary market in a financial futures contract may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges which limit the amount of fluctuation in a financial futures contract
price during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices have in the past
reached or exceeded the daily limit on a number of consecutive trading days.

If it is not possible to close a financial futures position entered into by
the Fund, the Fund would continue to be required to make daily cash payments of
variation margin in the event of adverse price movements. In such a situation,
if the Fund has insufficient cash, it may have to sell portfolio securities to
meet daily variation margin requirements at a time when it may be
disadvantageous to do so.

The successful use of these transactions also depends on the ability of the
Investment Adviser to forecast correctly the direction and extent of interest
rate movements within a given time frame. To the extent these rates remain
stable during the period in which a financial futures contract is held by the
Fund or move in a direction opposite to that anticipated, the Fund may realize a
loss on the hedging transaction which is not fully or partially offset by an
increase in the value of portfolio securities. As a result, the Fund's total
return for such period may be less than if it had not engaged in the hedging
transaction. Furthermore, the Fund will only engage in hedging transactions from
time to time and may not necessarily be engaging in hedging transactions when
movements in interest rates occur.

RISKS AND SPECIAL CONSIDERATIONS OF LEVERAGE

EFFECTS OF LEVERAGE

Within approximately six months after the completion of the subscription
offering of shares of Common Stock, the Fund intends to offer shares of
preferred stock representing up to approximately 35% of the Fund's capital.
There can be no assurance, however, that preferred stock representing such
percentage of the Fund's capital will actually be issued. The issuance of the
preferred stock will result in the leveraging of the Common Stock. Although the
terms of the preferred stock offering will be determined by the Fund's Board of
Directors, it is anticipated that the preferred stock will pay dividends that
will be adjusted over either relatively short-

20
<PAGE> 21

term periods (generally seven to 28 days) or medium-term periods (up to five
years) and that the dividend rate will be based upon prevailing interest rates
for debt obligations of comparable maturity. The proceeds of the preferred stock
offering will be invested in longer-term obligations in accordance with the
Fund's investment objective. Issuance and ongoing expenses of the preferred
stock will be borne by the Fund and will reduce the net asset value of the
Common Stock. Additionally, under certain circumstances, when the Fund is
required to allocate taxable income to holders of preferred stock, it is
anticipated that the terms of the preferred stock will require the Fund to make
an additional distribution to such holders in an amount approximately equal to
the tax liability resulting from such allocation and such additional
distribution (such amount, an "Additional Distribution"). Because under normal
market conditions, obligations with longer maturities produce higher yields than
short-term and medium-term obligations, the Investment Adviser believes that the
spread inherent in the difference between the short-term and medium-term rates
(and any Additional Distributions) paid by the Fund as dividends on the
preferred stock and the longer-term rates received by the Fund will provide
holders of Common Stock with a potentially higher yield.

Utilization of leverage, however, involves certain risks to the holders of
Common Stock. For example, issuance of the preferred stock may result in higher
volatility of the net asset value of the Common Stock and potentially more
volatility in the market value of the Common Stock. In addition, fluctuations in
the short-term and medium-term dividend rates on, and the amount of taxable
income allocable to, the preferred stock will affect the yield to holders of
Common Stock. So long as the Fund, taking into account the costs associated with
the preferred stock and the Fund's operating expenses, is able to realize a
higher net return on its investment portfolio than the then current dividend
rate (and any Additional Distribution) of the preferred stock, the effect of
leverage will be to cause holders of Common Stock to realize a higher current
rate of return than if the Fund were not leveraged. Similarly, since a pro rata
portion of the Fund's net realized capital gains on its investment assets are
generally payable to holders of Common Stock, if net capital gains are realized
by the Fund, the effect of leverage will be to increase the amount of such gains
distributed to holders of Common Stock. However, short-term, medium-term and
long-term interest rates change from time to time as does their relationship to
each other (i.e., the slope of the yield curve) depending upon such factors as
supply and demand forces, monetary and tax policies and investor expectations.
Changes in such factors could cause the relationship between short-term,
medium-term and long-term rates to change (i.e., to flatten or to invert the
slope of the yield curve) so that short-term and medium-term rates may
substantially increase relative to the long-term obligations in which the Fund
may be invested. To the extent that the current dividend rate (and any
Additional Distribution) on the preferred stock approaches the net return on the
Fund's investment portfolio, the benefit of leverage to holders of Common Stock
will be reduced, and if the current dividend rate (and any Additional
Distribution) on the preferred stock were to exceed the net return on the Fund's
portfolio, the Fund's leveraged capital structure would result in a lower
current yield to holders of Common Stock than if the Fund were not leveraged.
Similarly, since both the costs associated with the issuance of preferred stock
and any decline in the value of the Fund's investments (including investments
purchased with the proceeds from any preferred stock offering) will be borne
entirely by holders of Common Stock, the effect of leverage in a declining
market would result in a greater decrease in net asset value to holders of
Common Stock than if the Fund were not leveraged.

In an extreme case, a decline in net asset value could affect the Fund's
ability to pay dividends on the Common Stock. Failure to make such dividend
payments could adversely affect the Fund's qualification as a regulated
investment company under the Internal Revenue Code of 1986, as amended. See
"Taxes." The Fund intends, however, to take all measures necessary to continue
to make Common Stock dividend

21
<PAGE> 22

payments. If the Fund's current investment income were not sufficient to meet
dividend requirements on either the Common Stock or the preferred stock, it
could be necessary for the Fund to liquidate certain of its investments. In
addition, the Fund will have the authority to redeem the preferred stock for any
reason and may redeem all or part of the preferred stock if (i) it anticipates
that the Fund's leveraged capital structure will result in a lower rate of
return for any significant amount of time to holders of the Common Stock than
that obtainable if the Common Stock were unleveraged, (ii) the asset coverage
for the preferred stock declines below 200%, either as a result of a decline in
the value of the Fund's portfolio investments or as a result of the repurchase
of Common Stock in tender offers, or (iii) in order to maintain the asset
coverage guidelines established by nationally recognized rating agencies rating
the preferred stock. Redemption of the preferred stock or insufficient
investment income to make dividend payments may reduce the net asset value of
the Common Stock and require the Fund to liquidate a portion of its investments
at a time when it may be disadvantageous, in the absence of such extraordinary
circumstances, to do so.

Assuming the utilization of leverage by the issuance of preferred stock
that pays dividends at a rate that will be adjusted every 28 days in the amount
of 35% of the Fund's capital, and an annual dividend rate of 3.75% payable on
such preferred stock based on market rates as of the date of this Prospectus,
the annual return that the Fund's portfolio must experience (net of expenses) in
order to cover such dividend payments would be 1.31%.

The following table is designed to illustrate the effect on the return to a
holder of the Fund's Common Stock of the leverage obtained by the issuance of
preferred stock, assuming hypothetical annual returns on the Fund's portfolio of
minus 10% to plus 10%. As the table shows, leverage generally increases the
return to stockholders when portfolio return is positive and decreases the
return when the portfolio return is negative. The figures appearing in the table
are hypothetical and actual returns may be greater or less than those appearing
in the table.

<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return
(net of expenses).................. (10)% (5)% 0% 5% 10%
Corresponding Common Stock Return.... (14.81)% (8.06)% (1.31)% 5.44% 12.19%
</TABLE>

Until the preferred stock is issued, the Fund's Common Stock will not be
leveraged, and the risks and special considerations related to leverage
described in this Prospectus will not apply. Such leveraging of the Common Stock
cannot be fully achieved until the proceeds of the offering of preferred stock
have been invested in long-term Municipal Bonds. In addition, the leveraging of
the Common Stock would be eliminated during any period that preferred stock is
not outstanding.

PORTFOLIO MANAGEMENT AND OTHER CONSIDERATIONS

In the event of an increase in short-term or medium-term rates or other
change in market conditions to the point where the Fund's leverage could
adversely affect holders of Common Stock as noted above, or in anticipation of
such changes, the Fund may attempt to shorten the average maturity of its
investment portfolio, which would tend to offset the negative impact of leverage
on holders of Common Stock. The Fund also may attempt to reduce the degree to
which it is leveraged by redeeming preferred stock pursuant to the provisions of
the Fund's Articles Supplementary establishing the rights and preferences of the
preferred stock or otherwise purchasing shares of preferred stock. Purchases and
redemptions of preferred stock, whether through redemptions, on the open market
or in negotiated transactions, are subject to limitations under the

22
<PAGE> 23

1940 Act. If market conditions subsequently change, the Fund may sell previously
unissued shares of preferred stock or shares of preferred stock that the Fund
previously issued but later repurchased or redeemed.

The Fund intends to apply for ratings of the preferred stock from one or
more nationally recognized statistical rating organizations. In order to obtain
these ratings, the Fund may be required to maintain portfolio holdings meeting
specified guidelines of such organizations. These guidelines may impose asset
coverage requirements that are more stringent than those imposed by the 1940
Act. It is not anticipated that these guidelines will impede the Investment
Adviser from managing the Fund's portfolio in accordance with the Fund's
investment objective and policies.

Under the 1940 Act, the Fund is not permitted to issue shares of preferred
stock unless immediately after such issuance the net asset value of the Fund's
portfolio is at least 200% of the liquidation value of the outstanding preferred
stock (expected to equal the original purchase price of the outstanding shares
of preferred stock plus any accumulated and unpaid dividends thereon and any
accumulated and unpaid Additional Distribution). In addition, the Fund is not
permitted to declare any cash dividend or other distribution on its Common Stock
unless, at the time of such declaration, the net asset value of the Fund's
portfolio (determined after deducting the amount of such dividend or
distribution) is at least 200% of such liquidation value. Under the Fund's
proposed capital structure, assuming the sale of shares of preferred stock
representing approximately 35% of the Fund's capital, the net asset value of the
Fund's portfolio is expected to be approximately 285% of the liquidation value
of the Fund's preferred stock. To the extent possible, the Fund intends to
purchase or redeem shares of preferred stock from time to time to maintain
coverage of preferred stock of at least 200%.

INVESTMENT RESTRICTIONS

The following are fundamental investment restrictions of the Fund and,
prior to issuance of the preferred stock, may not be changed without the
approval of the holders of a majority of the Fund's outstanding shares of Common
Stock (which for this purpose and under the 1940 Act means the lesser of (i) 67%
of the shares of Common Stock represented at a meeting at which more than 50% of
the outstanding shares of Common Stock are represented or (ii) more than 50% of
the outstanding shares). Subsequent to the issuance of the preferred stock, the
following investment restrictions may not be changed without the approval of a
majority of the outstanding shares of Common Stock and of the outstanding shares
of preferred stock, voting together as a class, and the approval of a majority
of the outstanding shares of preferred stock, voting separately by class. The
Fund may not:

1. Make investments for the purpose of exercising control or
management.

2. Purchase or sell real estate, real estate limited partnerships,
commodities or commodity contracts; provided that the Fund may invest in
securities directly or indirectly secured by real estate or interests
therein or issued by companies that invest in real estate or interests
therein, and the Fund may purchase and sell financial futures contracts and
options thereon.

3. Issue senior securities or borrow money, except as permitted by
Section 18 of the 1940 Act.

4. Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933, as amended
(the "1933 Act"), in selling portfolio securities.

23
<PAGE> 24

5. Make loans to other persons, except that the Fund may purchase
Municipal Bonds and other debt securities in accordance with its investment
objective, policies and limitations.

6. Invest more than 25% of its total assets (taken at market value at
the time of each investment) in securities of issuers in a single industry;
provided that, for purposes of this restriction, states, municipalities and
their political subdivisions are not considered to be part of any industry.

Additional investment restrictions adopted by the Fund, which may be changed by
the Board of Directors, provide that the Fund may not:

a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of other
investment companies except if immediately thereafter not more than (i) 3%
of the total outstanding voting stock of such company is owned by the Fund,
(ii) 5% of the Fund's total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, together with other investment companies having the same investment
adviser and companies controlled by such companies, owns not more than 10%
of the total outstanding stock of any one closed-end investment company.

b. Mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the Fund except
as may be necessary in connection with borrowings mentioned in investment
restriction (3) above or except as may be necessary in connection with
transactions in financial futures contracts and options thereon.

c. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts
and options thereon is not considered the purchase of a security on
margin).

d. Make short sales of securities or maintain a short position or
invest in put, call, straddle or spread options, except that the Fund may
write, purchase and sell options and futures on Municipal Bonds, U.S.
Government obligations and related indices or otherwise in connection with
bona fide hedging activities and may purchase and sell Call Rights to
require mandatory tender for the purchase of related Municipal Bonds.

e. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Securities purchased in accordance with Rule 144A under the Securities Act
(each, a "Rule 144A security") and determined to be liquid by the Board of
Directors are not subject to the limitations set forth in this investment
restriction (e). Notwithstanding the fact that the Board may determine that
a Rule 144A security is liquid and not subject to the limitations set forth
in this investment restriction (e), the State of Ohio does not recognize
Rule 144A securities as securities that are free of restrictions as to
resale. To the extent required by Ohio law, the Fund will not invest more
than 50% of its total assets in securities of unseasoned issuers or in
securities that are restricted as to disposition, including Rule 144A
securities.

24
<PAGE> 25

f. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities,
asset-backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.

If a percentage restriction on investment policies or the investment or use
of assets set forth above is adhered to at the time a transaction is effected,
later changes in percentages resulting from changing values will not be
considered a violation.

The Investment Adviser of the Fund and Merrill Lynch are owned and
controlled by ML & Co. Because of the affiliation of Merrill Lynch with the
Fund, the Fund is prohibited from engaging in certain transactions involving
Merrill Lynch except pursuant to an exemptive order or otherwise in compliance
with the provisions of the 1940 Act and the rules and regulations thereunder.
Included among such restricted transactions will be purchases from or sales to
Merrill Lynch of securities in transactions in which it acts as principal. An
exemptive order has been obtained which permits the Fund to effect principal
transactions with Merrill Lynch in high quality, short-term, tax-exempt
securities subject to conditions set forth in such order. The Fund may consider
in the future requesting an order permitting other principal transactions with
Merrill Lynch, but there can be no assurance that such application will be made
and, if made, that such order would be granted.

PURCHASE OF SHARES

SUBSCRIPTION OFFERING

Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
the Investment Adviser, MLAM and Merrill Lynch, acts as the distributor of
shares of Common Stock of the Fund.

The Distributor, and other securities dealers which have entered into
selected dealer agreements with the Distributor, including Merrill Lynch, will
solicit subscriptions for shares of the Fund during a period expected to end on
October 31, 1995. The subscription period may be extended for up to an
additional 30 days upon agreement between the Fund and the Distributor. On the
third business day after the conclusion of the subscription period, the
subscriptions will be payable, the shares will be issued and the Fund will
commence operations. The subscription offering may be terminated by the Fund or
the Distributor any time, in which event no shares will be issued (and,
therefore, the Fund will not commence operations, no amounts will be payable by
subscribers and any payments by subscribers will be refunded in full without
interest) or a limited number of shares will be issued.

The public offering price of the shares during the subscription offering is
$10.00 without a front-end sales charge (although in certain cases a CDSC may
apply as described herein). The minimum initial purchase for shares of Common
Stock during the subscription offering is $1,000.

The proceeds per share to the Fund from the sale of all shares sold during
the subscription period will be $10.00. As set forth below, the Distributor may
make payments to Merrill Lynch or other selected dealers from its own assets.

Due to the administrative complexities associated with the subscription
offering, administrative errors may result in the Distributor or affiliate
inadvertently acquiring nominal numbers (in no event in excess of 5% of the
shares of Common Stock) of shares of Common Stock which it may wish to resell.
Such shares of Common Stock will not be subject to any investment restriction
and may be resold pursuant to this Prospectus.

25
<PAGE> 26

CONTINUOUS OFFERING

After completion of the subscription offering, the Fund expects to engage
in a continuous offering of its shares of Common Stock through the Distributor
and other securities dealers which have entered into selected dealer agreements
with the Distributor, including Merrill Lynch. During the continuous offering,
shares of the Fund may be purchased from the Distributor or selected dealers,
including Merrill Lynch, or by mailing a purchase order directly to Merrill
Lynch Financial Data Services, Inc. (the "Transfer Agent"). The minimum initial
purchase during the continuous offering is $1,000 and the minimum subsequent
purchase is $50.

To permit the Fund to invest the net proceeds from the sale of its shares
of Common Stock in an orderly manner, the Fund may delay the commencement of the
continuous offering of its shares of Common Stock or, from time to time, suspend
the sale of its shares of Common Stock, except for sales to existing holders of
Common Stock and dividend reinvestments.

The Fund is offering its shares of Common Stock during the continuous
offering at a public offering price equal to the next determined net asset value
per share without a front-end sales charge (although in certain cases a CDSC may
apply as described herein). The applicable offering price for purchase orders is
based on the net asset value of the Fund next determined after receipt of the
purchase order by the Distributor. As to purchase orders received by securities
dealers prior to the close of business on the New York Stock Exchange
(generally, 4:00 P.M., New York time), which includes orders received after the
determination of net asset value on the previous day, the applicable offering
price will be based on the net asset value determined as of 15 minutes after the
close of business on the New York Stock Exchange on the day the order is placed
with the Distributor, provided the order is received by the Distributor prior to
30 minutes after the close of business on the New York Stock Exchange on that
day. If the purchase orders are not received by the Distributor prior to 30
minutes after the close of business on the New York Stock Exchange, such orders
shall be deemed received on the next business day. Any order may be rejected by
the Distributor or the Fund. The Fund or the Distributor may suspend the
continuous offering of the Fund's shares to the public at any time in response
to conditions in the securities markets or otherwise and may thereafter resume
such offering from time to time. Neither the Distributor nor the dealers are
permitted to withhold placing orders to benefit themselves by a price change.
The Distributor is required to advise the Fund promptly of all purchase orders
and cause payments for shares of Common Stock to be delivered promptly to the
Fund. Merrill Lynch charges its customers a processing fee (presently, $4.85) to
confirm a purchase of shares by such customers. Purchases directly through the
Distributor [(609) 282-2800] are not subject to the processing fee.

The Distributor compensates Merrill Lynch and other selected dealers at a
rate of 3.0% of amounts subscribed for during the subscription period or
purchased during the continuous offering. If the shares remain outstanding after
one year from the date of their original purchase, the Distributor will
compensate Merrill Lynch and such dealers at an annual rate equal to 0.25% of
the value of Fund shares sold by Merrill Lynch and such dealers and remaining
outstanding. These amounts do not represent an expense to the Fund and its
shareholders since the payments made by the Distributor will be made from its
own assets, which may include amounts received by the Distributor as CDSCs. See
"Contingent Deferred Sales Charge." The net compensation paid to selected
dealers and the Distributor, including the compensation paid at the time of
purchase, the quarterly payments mentioned above and the CDSC, if any, will not
in the aggregate exceed the applicable limit (presently, 8%), as determined from
time to time by the National Association of Securities Dealers, Inc. ("NASD").

26
<PAGE> 27

Upon the transfer of shares out of a Merrill Lynch brokerage account, an
investment account in the transferring shareholder's name will be opened
automatically, without charge, at the Fund's transfer agent, dividend disbursing
agent and shareholder servicing agent. Shareholders should be aware that it will
not be possible to transfer their shares from Merrill Lynch to another brokerage
firm or financial institution. Shareholders interested in transferring their
brokerage accounts from Merrill Lynch and who do not wish to have an account
maintained for such shares at the Transfer Agent must tender the shares for
repurchase by the Fund as described under "Tender Offers" so that the cash
proceeds can be transferred to the account at the new firm.

TENDER OFFERS

In recognition of the possibility that a secondary market for the Fund's
shares will not exist, the Fund may take actions which will provide liquidity to
shareholders. The Fund may from time to time make an offer to purchase its
shares of Common Stock from all beneficial holders of the Fund's Common Stock at
a price per share equal to the net asset value per share of the Common Stock
determined at the close of business on the day an offer terminates (each, a
"Tender Offer"). The Board of Directors presently intends to make Tender Offers
on a quarterly basis, commencing with the second quarter of Fund operations.
There can be no assurance, however, that the Board of Directors will decide to
undertake the making of a Tender Offer. Subject to the Fund's investment
restriction with respect to borrowings, the Fund may borrow money to finance the
repurchase of shares pursuant to any Tender Offers. See "Investment Objective
and Policies-- Other Investment Policies--Borrowings."

The Fund expects that ordinarily there will be no secondary market for the
Fund's Common Stock and that periodic tenders will be the only source of
liquidity for Fund shareholders. Nevertheless, if a secondary market develops
for the Common Stock of the Fund, the market price of the shares may vary from
net asset value from time to time. Such variance may be affected by, among other
factors, relative demand and supply of shares and the performance of the Fund,
especially as it affects the yield on and net asset value of the Common Stock of
the Fund. A Tender Offer for shares of Common Stock of the Fund at net asset
value is expected to reduce any spread between net asset value and market price
that may otherwise develop. However, there can be no assurance that such action
would result in the Fund's Common Stock trading at a price which equals or
approximates net asset value.

Although the Board of Directors believes that the Tender Offers generally
would be beneficial to the Fund's holders of Common Stock, the acquisition of
shares of Common Stock by the Fund will decrease the total assets of the Fund
and therefore have the likely effect of increasing the Fund's expense ratio.
Furthermore, if the Fund borrows to finance the making of Tender Offers,
interest on such borrowing will reduce the Fund's net investment income.

It is the Board's announced policy, which may be changed by the Board, not
to purchase shares pursuant to a Tender Offer if (1) such purchases would impair
the Fund's status as a regulated investment company under the Code (which would
make the Fund a taxable entity, causing the Fund's income to be taxed at the
corporate level in addition to the taxation of shareholders who receive
dividends from the Fund); (2) the Fund would not be able to liquidate portfolio
securities in a manner which is orderly and consistent with the Fund's
investment objective and policies in order to purchase Common Stock tendered
pursuant to the Tender Offer; or (3) there is, in the Board's judgment, any (a)
legal action or proceeding instituted or threatened

27
<PAGE> 28

challenging the Tender Offer or otherwise materially adversely affecting the
Fund, (b) declaration of banking moratorium by Federal or state authorities or
any suspension of payment by banks in the United States or New York State, which
is material to the Fund, (c) limitation imposed by Federal or state authorities
on the extension of credit by lending institutions, (d) commencement of war,
armed hostilities or other international or national calamity directly or
indirectly involving the United States which is material to the Fund, or (e)
other event or condition which would have a material adverse effect on the Fund
or its shareholders if shares of Common Stock tendered pursuant to the Tender
Offer were purchased. Thus, there can be no assurance that the Board will
proceed with any Tender Offer. The Board of Directors may modify these
conditions in light of circumstances existing at the time. If the Board of
Directors determines to purchase the Fund's shares of Common Stock pursuant to a
Tender Offer, such purchases could significantly reduce the asset coverage of
any borrowing or outstanding senior securities, including any preferred stock.
The Fund may not purchase shares of Common Stock to the extent such purchases
would result in the asset coverage with respect to such borrowing or senior
securities, including any preferred stock, being reduced below the asset
coverage requirement set forth in the 1940 Act or, with respect to preferred
stock, the asset coverage requirements of any nationally recognized statistical
rating organization rating the preferred stock. Accordingly, in order to
purchase all shares of Common Stock tendered, the Fund may have to repay all or
part of any then outstanding borrowing or redeem all or part of any then
outstanding senior securities, including any preferred stock, to maintain the
required asset coverage. See "Risks and Special Considerations of Leverage--
Portfolio Management and Other Considerations." In addition, the amount of
shares of Common Stock for which the Fund makes any particular Tender Offer may
be limited for the reasons set forth above or in respect of other concerns
related to liquidity of the Fund's portfolio.

The Fund has obtained an exemption from the Securities and Exchange
Commission relating to Tender Offers which includes representations by the Fund
that no secondary market for shares of the Fund's Common Stock is expected to
develop. The exemption is conditioned on the absence of a secondary market, and
neither the Fund nor Merrill Lynch nor any other broker-dealer is allowed to
conduct any offers or sales of the Fund's Common Stock in the continuous
offering during the last five business days of any Tender Offer. In the event
that circumstances arise under which the Fund does not conduct the Tender Offers
regularly, the Board of Directors would consider alternative means of providing
liquidity for holders of Common Stock. Such action would include an evaluation
of any secondary market that then existed and a determination of whether such
market provided liquidity for holders of Common Stock. If the Board of Directors
determines that such market, if any, fails to provide liquidity for the holders
of Common Stock, the Board expects that it will consider all then available
alternatives to provide such liquidity. Among the alternatives which the Board
of Directors may consider is the listing of the Fund's Common Stock on a major
domestic stock exchange or on the NASDAQ National Market System in order to
provide such liquidity. The Board of Directors also may consider causing the
Fund to repurchase its shares from time to time in open-market or private
transactions when it can do so on terms that represent a favorable investment
opportunity. In any event, the Board of Directors expects it will cause the Fund
to take whatever action it deems necessary or appropriate to provide liquidity
for the holders of Common Stock in light of the facts and circumstances existing
at such time.

To consummate a Tender Offer in order to repurchase its shares of Common
Stock, the Fund may be required to liquidate portfolio securities, and realize
gains or losses, at a time when the Investment Adviser would otherwise consider
it disadvantageous to do so. In such event gains may be realized on securities
held for less than three months. In order to qualify as a regulated investment
company under the Code, the Fund must limit such gains and, accordingly, the
amount of gain that the Fund could realize in the ordinary course

28
<PAGE> 29

of its portfolio management from sales of other securities held for less than
three months would be reduced. This may adversely affect the Fund's yield. See
"Taxes."

Each Tender Offer will be made and shareholders notified in accordance with
the requirements of the Securities Exchange Act of 1934 and the 1940 Act, either
by publication or mailing or both. The offering documents will contain such
information as is prescribed by such laws and the rules and regulations
promulgated thereunder. The repurchase of tendered shares by the Fund is a
taxable event for the tendering shareholder. See "Taxes--Offers to Purchase
Shares". The Fund will pay all costs and expenses associated with the making of
any Tender Offer. A CDSC will be imposed on most shares accepted for tender
which have been held for less than three years. See "Contingent Deferred Sales
Charge." In addition, Merrill Lynch charges its customers a processing fee
(presently, $4.85) to confirm a repurchase of shares from such customers
pursuant to a Tender Offer. Tenders made directly through the Distributor [(609)
282-2800] are not subject to the processing fee.

Shareholders of the Fund have an investment option consisting of the right
to reinvest the net proceeds from a sale of shares of the Fund's Common Stock
(the "Original Shares") pursuant to a tender offer by the Fund in Class D
initial sales charge shares of certain Merrill Lynch-sponsored open-end
investment companies ("Eligible Class D Shares") at their net asset value,
without the imposition of the initial sales charge, if the conditions set forth
below are satisfied: first, net proceeds from the sale of the Original Shares in
the tender offer must be immediately reinvested in Eligible Class D Shares; and
second, the investment option is available only with respect to the proceeds of
shares of the Fund's Common Stock as to which a CDSC is no longer applicable
because of the length of time that the shareholder has held the shares. Before
taking advantage of this investment option, shareholders of the Fund should
obtain a currently effective prospectus of the mutual fund which they intend to
purchase. To exercise this investment option, shareholders should consult their
Merrill Lynch financial consultant. Shareholders who utilize this investment
option will realize a taxable gain or loss in connection with the repurchase of
shares in a Tender Offer in the same manner as if they received cash for their
tendered shares. See "Taxes--Offers to Purchase Shares."

CONTINGENT DEFERRED SALES CHARGE

A CDSC to recover distribution expenses incurred by the Distributor will be
imposed against the shareholder's investment account and paid to the Distributor
in connection with most shares of Common Stock held for less than three years
which are accepted by the Fund for repurchase pursuant to a Tender Offer in the
manner described below. The CDSC will be imposed on those shares of Common Stock
accepted for tender based on an amount equal to the lesser of the then current
net asset value of the shares of Common Stock or the cost of the shares of
Common Stock being tendered. Accordingly, the CDSC is not imposed on increases
in the net asset value above the initial purchase price. In addition, the CDSC
is not imposed on shares derived from reinvestments of dividends or capital
gains distributions. In determining whether a CDSC is payable, it is assumed
that the acceptance of an offer to repurchase pursuant to a Tender Offer would
be made from the earliest purchase of shares of Common Stock. The CDSC imposed
will vary depending on the

29
<PAGE> 30

length of time the Common Stock has been owned since purchase (separate
purchases shall not be aggregated for these purposes), as set forth in the
following table:

YEAR OF REPURCHASE CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
------------------ -------------------
<S> <C>
First........................................... 3.0%
Second.......................................... 2.0%
Third........................................... 1.0%
Fourth and following............................ 0%
</TABLE>

In determining whether a CDSC is applicable to a tender of shares of Common
Stock, the calculation will be determined in the manner that results in the
lowest possible amount being charged. Therefore, it will be assumed that the
tender is first of shares of Common Stock held for over three years and shares
of Common Stock acquired pursuant to reinvestment of dividends or distributions
and then of shares of Common Stock held longest during the three-year period.
The CDSC will not be applied to dollar amounts representing an increase in the
net asset value since the time of purchase.

Example:

Assume an investor purchased 1,000 shares of Common Stock (at a cost of
$10,000) and in the second year after purchase, the net asset value per share is
$12.00 and, during such time, the investor has acquired 100 additional shares of
Common Stock upon dividend reinvestment. If at such time the investor makes his
or her first redemption of 500 shares of Common Stock (proceeds of $6,000), 100
shares will not be subject to the CDSC because of dividend reinvestment. With
respect to the remaining 400 shares of Common Stock, the CDSC is applied only to
the original cost of $10 per share and not to the increase in net asset value of
$2.00 per share. Therefore, $4,000 of the $6,000 redemption proceeds will be
charged at a rate of 2.0% (the applicable rate in the second year after
purchase).

DIRECTORS AND OFFICERS

The Directors and executive officers of the Fund, their ages and their
principal occupations during the last five years are set forth below. Unless
otherwise noted, the address of each Director and executive officer is 800
Scudders Mill Road, Plainsboro, New Jersey 08536.

ARTHUR ZEIKEL (63)--President and Director(1)(2)--President of the
Investment Adviser (which term, as used herein, includes the Investment
Adviser's corporate predecessors) since 1977; President of MLAM (which term, as
used herein, includes MLAM's corporate predecessors) since 1977; President and
Director of Princeton Services, Inc. ("Princeton Services") since 1993;
Executive Vice President of ML & Co. since 1990; Executive Vice President of
Merrill Lynch since 1990 and a Senior Vice President thereof from 1985 to 1990;
Director of the Distributor.

RONALD W. FORBES (54)--Director(2)--1400 Washington Avenue, Albany, New
York 12222. Professor of Finance, School of Business, State University of New
York at Albany, since 1989, and Associate Professor prior thereto; Member, Task
Force on Municipal Securities Markets, Twentieth Century Fund.

CYNTHIA A. MONTGOMERY (42)--Director(2)--Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 02163. Professor, Harvard Business School
since 1989; Associate Professor,

30
<PAGE> 31

J.L. Kellogg Graduate School of Management, Northwestern University, 1985-1989;
Assistant Professor, Graduate School of Business Administration, The University
of Michigan, 1979-1985; Director, UNUM Corporation.

CHARLES C. REILLY (64)--Director(2)--9 Hampton Harbor Road, Hampton Bays,
New York 11946. Self-employed financial consultant since 1990; President and
Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business, 1990; Adjunct
Professor, Wharton School, The University of Pennsylvania, 1990; Partner, Small
Cities CableVision since 1986.

KEVIN A. RYAN (63)--Director(2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder, current Director and Professor of The Boston
University Center for the Advancement of Ethics and Character; Professor of
Education at Boston University from 1982 until 1994; Formerly taught on the
faculties of The University of Chicago, Stanford University and Ohio State
University.

RICHARD R. WEST (57)--Director(2)--482 Tepi Drive, Southbury, Connecticut
06488. Professor of Finance since 1984, and Dean from 1984 to 1993, New York
University Leonard N. Stern School of Business Administration; Professor of
Finance at The Amos Tuck School of Business Administration from 1976 to 1984 and
Dean from 1976 to 1983; Director of Vornado, Inc. (real estate investment
trust), Alexander's Inc. (real estate company), Bowne & Co., Inc. (financial
printer) and Smith Corona Corporation (manufacturer of typewriters and word
processors).

TERRY K. GLENN (54)--Executive Vice President(1)(2)--Executive Vice
President of the Investment Adviser and MLAM since 1983; Executive Vice
President and Director of Princeton Services since 1993; President of the
Distributor since 1986 and Director thereof since 1991.

VINCENT R. GIORDANO (50)--Senior Vice President(1)(2)--Senior Vice
President of the Investment Adviser and MLAM since 1984; Senior Vice President
of Princeton Services since 1993; Vice President of MLAM from 1980 to 1984.

DONALD C. BURKE (35)--Vice President(1)(2)--Vice President and Director of
Taxation of MLAM since 1990; employee of Deloitte & Touche LLP from 1982 to
1990.

KENNETH A. JACOB (44)--Vice President(1)(2)--Vice President of MLAM since
1984.

GERALD M. RICHARD (46)--Treasurer(1)(2)--Senior Vice President and
Treasurer of the Investment Adviser and MLAM since 1984; Senior Vice President
and Treasurer of Princeton Services since 1993; Treasurer of the Distributor
since 1984 and Vice President since 1981.

MARK B. GOLDFUS (48)--Secretary(1)(2)--Vice President of the Investment
Adviser and MLAM since 1985.
- ------------

(1) Interested person, as defined in the 1940 Act, of the Fund.

(2) Such Director or officer is a director, trustee, officer or member of the
advisory board of one or more investment companies for which the Investment
Adviser or MLAM acts as investment adviser.

In the event that the Fund issues preferred stock, in connection with the
election of the Fund's Directors, holders of shares of preferred stock, voting
as a separate class, will be entitled to elect two of the Fund's

31
<PAGE> 32

Directors, and the remaining Directors will be elected by all holders of capital
stock, voting as a single class. See "Description of Capital Stock."

COMPENSATION OF DIRECTORS

The Fund pays each Director not affiliated with the Investment Adviser an
annual fee of $2,000 per year plus $400 per meeting attended, together with such
Director's actual out-of-pocket expenses relating to attendance at meetings. The
Fund also compensates members of its Audit Committee, which consists of all of
the Directors not affiliated with the Investment Adviser, at a rate of $1,000
per meeting attended. The Chairman of the Audit Committee receives an additional
fee of $1,000 per year.

The following table sets forth compensation to be paid by the Fund to the
non-interested Directors projected through the end of the Fund's first fiscal
year and for the calendar year ended December 31, 1994 the aggregate
compensation paid by all investment companies advised by the Investment Adviser
and its affiliate, MLAM ("FAM/MLAM Advised Funds"), to the non-interested
Directors.

<TABLE>
<CAPTION>
TOTAL
COMPENSATION
PENSION OR FROM FUND AND
AGGREGATE RETIREMENT BENEFITS FAM/MLAM ADVISED
COMPENSATION ACCRUED AS PART OF FUNDS PAID TO
NAME OF DIRECTOR FROM FUND FUND EXPENSE DIRECTORS
- ---------------------------------------------- ------------ -------------------- ----------------
<S> <C> <C> <C>
Ronald W. Forbes(1)........................... $6,600 None $154,400
Cynthia A. Montgomery(1)...................... $6,600 None $133,817
Charles C. Reilly(1).......................... $6,600 None $276,900
Kevin A. Ryan(1).............................. $6,600 None $154,400
Richard R. West(1)............................ $7,600 None $300,900
</TABLE>

- ---------------
(1) In addition to the Fund, the Directors serve on the boards of other FAM/MLAM
Advised Funds as follows: Mr. Forbes (36 funds and portfolios); Ms.
Montgomery (36 funds and portfolios); Mr. Reilly (53 funds and portfolios);
Mr. Ryan (36 funds and portfolios); and Mr. West (53 funds and portfolios).

INVESTMENT ADVISORY AND ADMINISTRATIVE ARRANGEMENTS

The Investment Adviser is an affiliate of MLAM and is owned and controlled
by ML & Co., a financial services holding company. The Investment Adviser will
provide the Fund with investment advisory and management services. The
Investment Adviser or MLAM acts as the investment adviser for over 125 other
registered investment companies. The Investment Adviser also offers portfolio
management and portfolio analysis services to individuals and institutions. As
of September 30, 1995, the Investment Adviser and MLAM had a total of
approximately $189.4 billion in investment company and other portfolio assets
under management (approximately $29.8 billion of which were invested in
municipal securities), including accounts of certain affiliates of the
Investment Adviser. The principal business address of the Investment Adviser is
800 Scudders Mill Road, Plainsboro, New Jersey 08536.

The Investment Advisory Agreement with the Investment Adviser (the
"Investment Advisory Agreement") provides that, subject to the direction of the
Board of Directors of the Fund, the Investment Adviser is responsible for the
actual management of the Fund's portfolio. The responsibility for making

32
<PAGE> 33

decisions to buy, sell or hold a particular security rests with the Investment
Adviser, subject to review by the Board of Directors.

The Investment Adviser provides the portfolio management for the Fund. Such
portfolio management will consider analyses from various sources (including
brokerage firms with which the Fund does business), make the necessary
investment decisions, and place orders for transactions accordingly. The
Investment Adviser will also be responsible for the performance of certain
administrative and management services for the Fund.

Robert A. DiMella is the portfolio manager for the Fund and is primarily
responsible for the day-to-day management of the Fund's portfolio. Mr. DiMella
has been an Assistant Vice President of MLAM since 1995 and a portfolio manager
of the Investment Adviser and MLAM since 1993. Prior to joining MLAM, Mr.
DiMella was an investment assistant with The Prudential Insurance Company of
America from 1992 to 1993, a research associate with Portfolio Management Group
from 1991 to 1992, and a financial reviewer with PMG Financial Support from 1989
to 1991.

For the services provided by the Investment Adviser under the Investment
Advisory Agreement, the Fund will pay a monthly fee at an annual rate of 0.50 of
1% of the Fund's average daily net assets (i.e., the average daily value of the
total assets of the Fund, minus the sum of accrued liabilities of the Fund and
accumulated dividends on the shares of preferred stock). For purposes of this
calculation, average daily net assets are determined at the end of each month on
the basis of the average net assets of the Fund for each day during the month.

Under the terms of an administration agreement with the Fund (the
"Administration Agreement"), the Investment Adviser also performs or arranges
for the performance of the administrative services (i.e., services other than
investment advice and related portfolio activities) necessary for the operation
of the Fund, including paying all compensation of and furnishing office space
for officers and employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the
compensation of all Directors of the Fund who are affiliated persons of the
Investment Adviser or any of its affiliates. The Fund pays all other expenses
incurred in the operation of the Fund, including, among other things, expenses
for legal and auditing services, taxes, costs of printing proxies, listing fees,
if any, stock certificates and shareholder reports, charges of the custodian and
the transfer agent, dividend disbursing agent and shareholder servicing agent,
charges of any auction agent and broker-dealers in connection with preferred
stock of the Fund, expenses of registering shares of common stock and preferred
stock under Federal and state securities laws, fees and expenses with respect to
any issuance of preferred stock or any borrowing, Securities and Exchange
Commission fees, fees and expenses of unaffiliated Directors, accounting and
pricing costs, insurance, interest, brokerage costs, litigation and other
extraordinary or non-recurring expenses, mailing and other expenses properly
payable by the Fund. Accounting services are provided to the Fund by the
Investment Adviser, and the Fund reimburses the Investment Adviser for its costs
in connection with such services.

For the administrative services rendered to the Fund and the facilities
furnished, the Fund pays the Investment Adviser a monthly fee at an annual rate
of 0.25 of 1% of the Fund's average daily net assets determined in the same
manner as the fee payable by the Fund under the Investment Advisory Agreement.
The Investment Adviser may pay a portion of the fee received pursuant to the
Administration Agreement to its affiliate, Merrill Lynch, for administrative
services rendered in connection with any preferred stock of the

33
<PAGE> 34

Fund. The combined advisory and administration fees are greater than the
advisory fees paid by most funds, but are similar in amount to the fees paid by
other continuously offered, closed-end funds.

Certain states impose limitations on the expenses of the Fund. California's
limitations require that the Investment Adviser reimburse the Fund in an amount
necessary to prevent the ordinary operating expenses of the Fund (excluding
interest, taxes, distribution fees, brokerage fees and commissions and
extraordinary charges such as litigation costs) from exceeding 2.5% of the
Fund's first $30 million of average daily net assets, 2.0% of the next $70
million of average daily net assets and 1.5% of the remaining average daily net
assets. Under Ohio's limitations, the Investment Adviser must reimburse the Fund
in an amount necessary to prevent the Fund's aggregate annual expenses (subject
to the exclusions set forth above with the exception of distribution fees) from
exceeding 2.0% of the Fund's average daily net assets. The Investment Adviser's
obligation to reimburse the Fund is limited to the amount of the investment
advisory fee. No fee payment will be made to the Investment Adviser during any
fiscal year which will cause such expenses to exceed the most restrictive
expense limitation applicable at the time of such payment.

Unless earlier terminated as described below, the Investment Advisory and
Administration Agreements will continue in effect for a period of two years from
the date of execution and will remain in effect from year to year thereafter if
approved annually (a) by the Board of Directors of the Fund or by a majority of
the outstanding shares of the Fund and (b) by a majority of the Directors who
are not parties to such contracts or interested persons (as defined in the 1940
Act) of any such party. Such contracts are not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party thereto
or by the vote of the shareholders of the Fund.

Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliate act as an adviser. Because of different
objectives or other factors, a particular security may be bought for one or more
clients when one or more clients are selling the same security. If purchases or
sales of securities by the Investment Adviser for the Fund or other funds for
which it acts as investment adviser or for advisory clients arise for
consideration at or about the same time, transactions in such securities will be
made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on behalf of more than
one client of the Investment Adviser or its affiliate during the same period may
increase the demand for securities being purchased or the supply of securities
being sold, there may be an adverse effect on price.

Code of Ethics. The Board of Directors of the Fund has adopted a Code of
Ethics pursuant to Rule 17j-1 under the 1940 Act which incorporates the Code of
Ethics of the Investment Adviser (together, the "Codes"). The Codes
significantly restrict the personal investing activities of all employees of the
Investment Adviser and, as described below, impose additional, more onerous,
restrictions on Fund investment personnel.

The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as U.S. Government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a "hot" initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for

34
<PAGE> 35

purchase or sale, by any fund advised by the Investment Adviser. Furthermore,
the Codes provide for trading "blackout periods" which prohibit trading by
investment personnel of the Fund within periods of trading by the Fund in the
same (or equivalent) security (15 or 30 days depending upon the transaction).

Transfer Agency Services. Merrill Lynch Financial Data Services, Inc. (the
"Transfer Agent"), which is a wholly-owned subsidiary of ML & Co., acts as the
Fund's transfer agent for the Common Stock pursuant to a transfer agency,
dividend disbursing agency and shareholder servicing agency agreement (the
"Transfer Agency Agreement"). Pursuant to the Transfer Agency Agreement, the
Transfer Agent is responsible for the issuance, transfer and tender of shares of
Common Stock and the opening and maintenance of shareholder accounts. Pursuant
to the Transfer Agency Agreement, the Fund pays the Transfer Agent an annual fee
of $14.00 per shareholder account, and the Transfer Agent is entitled to certain
nominal miscellaneous charges and reimbursement for out-of-pocket expenses
incurred by it under the Transfer Agency Agreement.

PORTFOLIO TRANSACTIONS

Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
seeks to obtain the best results for the Fund, taking into account such factors
as price (including the applicable brokerage commission or dealer spread), size
of order, difficulty of execution and operational facilities of the firm
involved and the firm's risk in positioning a block of securities. While the
Investment Adviser generally seeks reasonably competitive commission rates, the
Fund does not necessarily pay the lowest commission or spread available.

The Fund has no obligation to deal with any broker or dealer in the
execution of transactions in portfolio securities. Subject to obtaining the best
price and execution, securities firms which provided supplemental investment
research to the Investment Adviser, including Merrill Lynch, may receive orders
for transactions by the Fund. Information so received will be in addition to and
not in lieu of the services required to be performed by the Investment Adviser
under the Investment Advisory Agreement, and the expenses of the Investment
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information.

The securities in which the Fund primarily will invest are traded in the
over-the-counter markets, and the Fund intends to deal directly with the dealers
who make markets in the securities involved, except in those circumstances where
better prices and execution are available elsewhere. Under the 1940 Act, except
as permitted by exemptive order, persons affiliated with the Fund are prohibited
from dealing with the Fund as principal in the purchase and sale of securities.
Since transactions in the over-the-counter market usually involve transactions
with dealers acting as principals for their own account, the Fund will not deal
with affiliated persons, including Merrill Lynch and its affiliates, in
connection with such transactions except that, pursuant to an exemptive order
obtained by the Investment Adviser, the Fund may engage in principal
transactions with Merrill Lynch in high quality, short-term, tax-exempt
securities. See "Investment Restrictions." An affiliated person of the Fund may
serve as its broker in over-the-counter transactions conducted on an agency
basis.

The Fund may also make loans to tax-exempt borrowers in individually
negotiated transactions with the borrower. Because an active trading market may
not exist for such securities, the prices that the Fund may pay for these
securities or receive on their resale may be lower than that for similar
securities with a more liquid market.

35
<PAGE> 36

PORTFOLIO TURNOVER

Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such action, for defensive or other reasons, appears
advisable to the Investment Adviser. While it is not possible to predict
turnover rates with any certainty, at present it is anticipated that the Fund's
annual portfolio turnover rate, under normal circumstances after the Fund's
portfolio is invested in accordance with its investment objective, will be less
than 100%. The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by the
monthly average of the value of the portfolio securities owned by the Fund
during the particular fiscal year. For purposes of determining this rate, all
securities whose maturities at the time of acquisition are one year or less are
excluded.

DIVIDENDS AND DISTRIBUTIONS

The Fund intends to distribute all of its net investment income. Dividends
from such net investment income will be declared and paid monthly to holders of
Common Stock. It is expected that the Fund will commence paying dividends to
holders of Common Stock within approximately 90 days of the date of this
Prospectus. From and after the issuance of the preferred stock, monthly
distributions to holders of Common Stock normally will consist of substantially
all net investment income remaining after the payment of dividends on the
preferred stock (including any Additional Distribution). All net realized long-
or short-term capital gains, if any, will be distributed at least annually to
holders of Common Stock and, after the issuance of the preferred stock, pro rata
to holders of Common Stock and preferred stock. While any shares of preferred
stock are outstanding, the Fund may not declare any cash dividend or other
distribution on its Common Stock, unless at the time of such declaration (1) all
accumulated preferred stock dividends, including any Additional Distribution,
have been paid, and (2) the net asset value of the Fund's portfolio (determined
after deducting the amount of such dividend or other distribution) is at least
200% of the liquidation value of the outstanding preferred stock (expected to
equal the original purchase price of the outstanding shares of preferred stock
plus any accumulated and unpaid dividends thereon and any accumulated but unpaid
Additional Distribution). This limitation on the Fund's ability to make
distributions on its Common Stock could under certain circumstances impair the
ability of the Fund to maintain its qualification for taxation as a regulated
investment company. See "Taxes."

See "Automatic Dividend Reinvestment Plan" for information concerning the
manner in which dividends and distributions to holders of Common Stock may be
automatically reinvested in shares of Common Stock of the Fund. Dividends may be
taxable to shareholders under certain circumstances as discussed below, whether
they are reinvested in shares of the Fund or received in cash.

TAXES

GENERAL

The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). If it so qualifies, in any taxable year in
which it distributes at least 90% of its taxable net income and 90% of its
tax-exempt net income (see below), the Fund (but not its shareholders) will not
be subject to Federal income tax to the

36
<PAGE> 37

extent that it distributes its net investment income and net realized capital
gains. The Fund intends to distribute substantially all of such income.

The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year-end, plus certain undistributed
amounts from previous years. The required distributions, however, are based only
on the taxable income of a RIC. The excise tax, therefore, generally will not
apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.

The Fund intends to qualify to pay "exempt-interest dividends" as defined
in Section 852(b)(5) of the Code. Under such section if, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be qualified
to pay exempt-interest dividends to its shareholders. Exempt-interest dividends
are dividends or any part thereof paid by the Fund which are attributable to
interest on tax-exempt obligations and designated by the Fund as exempt-interest
dividends in a written notice mailed to the Fund's shareholders within 60 days
after the close of its taxable year. To the extent that the dividends
distributed to the Fund's shareholders are derived from interest income exempt
from tax under Code Section 103(a) and are properly designated as
exempt-interest dividends, they will be excludable from a shareholder's gross
income for Federal income tax purposes. Exempt-interest dividends are included,
however, in determining the portion, if any, of a person's Social Security and
railroad retirement benefits subject to Federal income taxes. Interest on
indebtedness incurred or continued to purchase or carry Fund shares is not
deductible for Federal income tax purposes to the extent attributable to
exempt-interest dividends. Each shareholder is advised to consult a tax adviser
with respect to whether exempt-interest dividends retain the exclusion under
Code Section 103(a) if such shareholder would be treated as a "substantial user"
or "related person" under Code Section 147(a) with respect to property financed
with the proceeds of an issue of "industrial development bonds" or "private
activity bonds," if any, held by the Fund.

To the extent that the Fund's distributions are derived from interest on
its taxable investments or from an excess of net short-term capital gains over
net long-term capital losses ("ordinary income dividends"), such distributions
will be considered ordinary income for Federal income tax purposes.
Distributions, if any, of net long-term capital gains from the sale of
securities or from certain transactions in futures or options ("capital gain
dividends") are taxable as long-term capital gains for Federal income tax
purposes, regardless of the length of time the shareholder has owned Fund
shares. Distributions by the Fund, whether from exempt-interest income, ordinary
income or capital gains, will not be eligible for the dividends received
deduction allowed to corporations under the Code.

All or a portion of the Fund's gain from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders. Distributions in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of Fund shares held for six
months or less will be treated as long-term capital loss to the extent of any
capital gain dividends received by the shareholder. In addition, such loss will
be disallowed to the extent of any exempt-interest dividends received by the
shareholder. If the Fund pays a dividend in

37
<PAGE> 38

January which was declared in the previous October, November or December to
shareholders of record on a specified date in one of such months, then such
dividend will be treated for tax purposes as being paid by the Fund and received
by its shareholders on December 31 of the year in which such dividend was
declared.

The Internal Revenue Service has taken the position in a revenue ruling
that if a RIC has two classes of shares, it may designate distributions made to
each class in any year as consisting of no more than such class's proportionate
share of particular types of income, including exempt-interest income and net
long-term capital gains. A class's proportionate share of a particular type of
income is determined according to the percentage of total dividends paid by the
RIC during such year that was paid to such class. Consequently, when both Common
Stock and preferred stock are outstanding, the Fund intends to designate
distributions made to the classes as consisting of particular types of income in
accordance with the classes' proportionate shares of such income. Thus, the Fund
will designate dividends paid as exempt-interest dividends in a manner that
allocates such dividends between the holders of Common Stock and preferred stock
in proportion to the total dividends paid to each class during the taxable year,
or otherwise as required by applicable law. Capital gain dividends will
similarly be allocated between the two classes in proportion to the total
dividends paid to each class during the taxable year, or otherwise as required
by applicable law. When capital gain or other taxable income is allocated to
holders of preferred stock pursuant to the allocation rules described above, the
terms of the preferred stock may require the Fund to make an additional
distribution to or otherwise compensate such holders for the tax liability
resulting from such allocation.

The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax will apply
to interest received on "private activity bonds" issued after August 7, 1986.
Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non-governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference" which could subject investors in such bonds, including
shareholders of the Fund, to an alternative minimum tax. The Fund intends to
purchase such "private activity bonds" and will report to shareholders within 60
days after its taxable year-end the portion of its dividends declared during the
year which constitutes an item of tax preference for alternative minimum tax
purposes. The Code further provides that corporations are subject to an
alternative minimum tax based, in part, on certain differences between taxable
income as adjusted for other tax preferences and the corporation's "adjusted
current earnings", which more closely reflects a corporation's economic income.
Because an exempt-interest dividend paid by the Fund will be included in
adjusted current earnings, a corporate shareholder may be required to pay an
alternative minimum tax on exempt-interest dividends paid by the Fund.

If at any time when shares of preferred stock are outstanding the Fund does
not meet the asset coverage requirements of the 1940 Act, the Fund will be
required to suspend distributions to holders of Common Stock until the asset
coverage is restored. See "Dividends and Distributions." This may prevent the
Fund from distributing at least 90% of its net income and may, therefore,
jeopardize the Fund's qualification for taxation as a RIC. Upon any failure to
meet the asset coverage requirements of the 1940 Act, the Fund, in its sole
discretion, may redeem shares of preferred stock in order to maintain or restore
the requisite asset coverage and avoid the adverse consequences to the Fund and
its shareholders of failing to qualify as a RIC. There can be no assurance,
however, that any such action would achieve such objectives.

As noted above, the Fund must distribute annually at least 90% of its net
taxable and tax-exempt interest income. A distribution will only be counted for
this purpose if it qualifies for the dividends paid deduction

38
<PAGE> 39

under the Code. Some types of preferred stock that the Fund currently
contemplates issuing may raise an issue as to whether distributions on such
preferred stock are "preferential" under the Code and therefore not eligible for
the dividends paid deduction. The Fund intends to issue preferred stock that
counsel advises will not result in the payment of a preferential dividend and
may seek a private letter ruling from the Internal Revenue Service to that
effect. If the Fund ultimately relies solely on a legal opinion when it issues
such preferred stock, there is no assurance that the Internal Revenue Service
would agree that dividends on the preferred stock are not preferential. If the
Internal Revenue Service successfully disallowed the dividends paid deduction
for dividends on the preferred stock, the Fund could be disqualified as a RIC.
In this case, dividends on the Common Stock would not be exempt from Federal
income taxes. Additionally, the Fund would be subject to the alternative minimum
tax.

The value of shares acquired pursuant to the Fund's dividend reinvestment
plan will generally be excluded from gross income to the extent that the cash
amount reinvested would be excluded from gross income. If, when the Fund's
shares are trading at a premium over net asset value, the Fund issues shares
pursuant to the dividend reinvestment plan which have a greater fair market
value than the amount of cash reinvested, it is possible that all or a portion
of such discount (which may not exceed 5% of the fair market value of the Fund's
shares) could be viewed as a taxable distribution. If the discount is viewed as
a taxable distribution, it is also possible that the taxable character of this
discount would be allocable to all the shareholders, including shareholders who
do not participate in the dividend reinvestment plan. Thus, shareholders who do
not participate in the dividend reinvestment plan might be required to report as
ordinary income a portion of their distributions equal to their allocable share
of the discount.

Ordinary income dividends to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisers concerning the applicability of the United States withholding
tax.

Under certain Code provisions, some taxpayers may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.

The Code provides that every shareholder required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.

ENVIRONMENTAL TAX

The Code imposes a deductible tax (the "Environmental Tax") on a
corporation's modified alternative minimum taxable income (computed without
regard to the alternative minimum tax net operating loss deduction and the
deduction for the Environmental Tax) at a rate of $12 per $10,000 (0.12%) of
alternative minimum taxable income in excess of $2,000,000. The Environmental
Tax is imposed for taxable years beginning after December 31, 1986 and before
January 1, 1996. The Environmental Tax is imposed even if the

39
<PAGE> 40

corporation is not required to pay an alternative minimum tax because the
corporation's regular income tax liability exceeds its minimum tax liability.
The Code provides, however, that a RIC, such as the Fund, is not subject to the
Environmental Tax. However, exempt-interest dividends paid by the Fund that
create alternative minimum taxable income for corporate shareholders (as
described above) may subject corporate shareholders of the Fund to the
Environmental Tax.

TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS

The Fund may purchase or sell municipal bond index financial futures
contracts and interest rate financial futures contracts on U.S. Government
securities. The Fund may also purchase and write call and put options on such
financial futures contracts. In general, unless an election is available to the
Fund or an exception applies, such options and financial futures contracts that
are "Section 1256 contracts" will be "marked to market" for Federal income tax
purposes at the end of each taxable year, i.e., each such option or financial
futures contract will be treated as sold for its fair market value on the last
day of the taxable year and any gain or loss attributable to Section 1256
contracts will be 60% long-term and 40% short-term capital gain or loss.
Application of these rules to Section 1256 contracts held by the Fund may alter
the timing and character of distributions to shareholders. The mark-to-market
rules outlined above, however, will not apply to certain transactions entered
into by the Fund solely to reduce the risk of changes in price or interest rates
with respect to its investments.

Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's transactions in financial futures contracts and related
options. Under Section 1092, the Fund may be required to postpone recognition
for tax purposes of losses incurred in certain closing transactions in financial
futures contracts or the related options.

One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. Accordingly, the Fund may be
restricted in effecting closing transactions within three months after entering
into an option or financial futures contract.

OFFERS TO PURCHASE SHARES

Under current law, a holder of Common Stock, who, pursuant to any Tender
Offer, tenders all shares of Common Stock owned by such shareholder and any
shares considered owned by such shareholder under attribution rules contained in
the Code will realize a taxable gain or loss depending upon such shareholder's
basis in the shares. Such gain or loss will be treated as capital gain or loss
if the shares are held as capital assets in the shareholder's hands and will be
long-term or short-term depending upon the shareholder's holding period for the
shares. Different tax consequences may apply to tendering and non-tendering
holders of Common Stock in connection with a Tender Offer, and these
consequences will be disclosed in the related offering documents. For example,
if a tendering holder of Common Stock tenders less than all shares owned by or
attributed to such shareholder, and if the distribution to such shareholder does
not otherwise qualify as an exchange, the proceeds received will be treated as a
taxable dividend, return of capital or capital gain depending on the Fund's
earnings and profits and the shareholder's basis in the tendered shares. Also,
there is a remote risk that non-tendering holders of Common Stock may be
considered to have received a deemed distribution which may be a taxable
dividend in whole or in part. Holders of Common Stock may wish to consult their
tax advisers prior to tendering. If holders of Common Stock whose shares are
acquired by the

40
<PAGE> 41

Fund in the open market sell less than all shares owned by or attributed to
them, there is a risk that these shareholders will be subject to taxable
dividend treatment, as well as a remote risk that the remaining shareholders may
be considered to have received a deemed distribution.

STATE AND LOCAL TAXES

The exemption from Federal income tax for exempt-interest dividends does
not necessarily result in an exemption for such dividends under the income or
other tax laws of any state or local taxing authority. Shareholders are advised
to consult their own tax advisers concerning state and local tax matters.

------------------------

The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and the Treasury
Regulations are subject to change by legislative or administrative action either
prospectively or retroactively.

Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, state, local or foreign taxes.

AUTOMATIC DIVIDEND REINVESTMENT PLAN

All dividends and capital gains distributions on the Common Stock of the
Fund are reinvested automatically in full and fractional shares of Common Stock
of the Fund at the net asset value per share next determined on the payable date
of such dividend or distribution. A shareholder may at any time, by request to
his Merrill Lynch financial consultant or by written notification to the
Transfer Agent, elect to have subsequent dividends or capital gains
distributions, or both, paid in cash, rather than reinvested, in which event
payment will be mailed on or about the payment date.

The automatic reinvestment of dividends will not relieve participants of
any Federal income tax that may be payable (or required to be withheld) on such
dividends or distributions. See "Taxes."

NET ASSET VALUE

Net asset value per share of Common Stock is determined as of 15 minutes
after the close of business on the New York Stock Exchange (generally, 4:00
P.M., New York time), on each day during which the New York Stock Exchange is
open for trading. For purposes of determining the net asset value of a share of
Common Stock, the value of the securities held by the Fund plus any cash or
other assets (including interest accrued but not yet received) minus all
liabilities (including accrued expenses) and the aggregate liquidation value of
the outstanding shares of preferred stock is divided by the total number of
shares of Common Stock outstanding at such time. Expenses, including the fees
payable to the Investment Adviser, are accrued daily.

The Municipal Bonds and other portfolio securities in which the Fund
invests are traded primarily in the over-the-counter markets. In determining net
asset value, the Fund utilizes the valuations of portfolio securities furnished
by a pricing service approved by the Board of Directors. The pricing service
typically values portfolio securities at the bid price or the yield equivalent
when quotations are readily available. Municipal Bonds for which quotations are
not readily available are valued at fair market value on a consistent

41
<PAGE> 42

basis as determined by the pricing service using a matrix system to determine
valuations. The procedures of the pricing service and its valuations are
reviewed by the officers of the Fund under the general supervision of the Board
of Directors. The Board of Directors has determined in good faith that the use
of a pricing service is a fair method of determining the valuation of portfolio
securities. Obligations with remaining maturities of 60 days or less are valued
at amortized cost, unless this method no longer produces fair valuations.
Positions in financial futures contracts are valued at closing prices for such
contracts established by the exchange on which they are traded, or if market
quotations are not readily available, are valued at fair value on a consistent
basis using methods determined in good faith by the Board of Directors.

DESCRIPTION OF CAPITAL STOCK

The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which shares are initially classified as Common
Stock. The Board of Directors is authorized, however, to classify or reclassify
any unissued shares of capital stock by setting or changing the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of redemption. Within
approximately six months after completion of the offering of Common Stock
described herein, the Fund intends to reclassify an amount of unissued Common
Stock as preferred stock and at that time to offer shares of preferred stock
representing up to approximately 35% of the Fund's capital.

COMMON STOCK

Shares of Common Stock, when issued and outstanding, will be fully paid and
non-assessable. Holders of Common Stock are entitled to share pro rata in the
net assets of the Fund available for distribution to holders of Common Stock
upon liquidation of the Fund. Holders of Common Stock are entitled to one vote
for each share held.

So long as any shares of the Fund's preferred stock are outstanding,
holders of Common Stock will not be entitled to receive any net income of or
other distributions from the Fund unless all accumulated dividends on preferred
stock have been paid and unless asset coverage (as defined in the 1940 Act) with
respect to preferred stock would be at least 200% after giving effect to such
distributions. See "Preferred Stock" below.

The Fund will send unaudited reports at least semi-annually and audited
annual financial statements to all of its shareholders.

The Investment Adviser provided the initial capital for the Fund by
purchasing 10,000 shares of Common Stock of the Fund for $100,000. As of the
date of this Prospectus, the Investment Adviser owned 100% of the outstanding
shares of Common Stock of the Fund. The Investment Adviser may be deemed to
control the Fund until such time as it owns less than 25% of the outstanding
shares of the Fund.

PREFERRED STOCK

It is anticipated that the Fund's shares of preferred stock will be issued
in one or more series, with rights as determined by the Board of Directors, by
action of the Board of Directors without the approval of the holders of Common
Stock. Under the 1940 Act, the Fund is permitted to have outstanding more than
one series of preferred stock so long as no single series has a priority over
another series as to the distributions of assets of the Fund or the payment of
dividends. Holders of Common Stock have no preemptive right to

42
<PAGE> 43

purchase any shares of preferred stock that might be issued. It is anticipated
that the net asset value per share of the preferred stock will equal its
original purchase price per share plus accumulated dividends per share.

The Fund's Board of Directors has indicated its intention to authorize an
offering of shares of preferred stock (representing up to approximately 35% of
the Fund's capital) within approximately six months after completion of the
offering of Common Stock, subject to market conditions and to the Board's
continuing to believe that leveraging the Fund's capital structure through the
issuance of preferred stock is likely to achieve the benefits to the holders of
Common Stock described in the Prospectus. Although the terms of the preferred
stock, including its dividend rate, voting rights, liquidation preference and
redemption provisions will be determined by the Board of Directors (subject to
applicable law and the Fund's Articles of Incorporation), the initial series of
preferred stock will be structured to carry either a relatively short-term
dividend rate, in which case periodic redetermination of the dividend rate will
be made at relatively short intervals (generally seven or 28 days), or a
medium-term dividend rate, in which case periodic redetermination of the
dividend rate will be made at intervals of up to five years. In either case,
such redetermination of the dividend rate will be made through an auction or
remarketing procedure. Additionally, under certain circumstances, when the Fund
is required to allocate taxable income to holders of the preferred stock, it is
anticipated that the terms of the preferred stock will require the Fund to make
an Additional Distribution (as defined in "Risks and Special Considerations of
Leverage--Effects of Leverage") to such holders. The Board also has indicated
that it is likely that the liquidation preference, voting rights and redemption
provisions of the preferred stock will be as stated below. The Fund's Articles
of Incorporation, as amended, together with any Articles Supplementary, are
referred to below as the "Charter."

Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of shares of
preferred stock will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus an
amount equal to accumulated and unpaid dividends whether or not earned or
declared and any accumulated and unpaid Additional Distribution) before any
distribution of assets is made to holders of Common Stock. After payment of the
full amount of the liquidating distribution to which they are entitled, the
preferred stockholders will not be entitled to any further participation in any
distribution of assets by the Fund. A consolidation or merger of the Fund with
or into any other corporation or corporations or a sale of all or substantially
all of the assets of the Fund will not be deemed to be a liquidation,
dissolution or winding up of the Fund.

Voting Rights. Except as otherwise indicated in this Prospectus and except
as otherwise required by applicable law, holders of shares of preferred stock
will have equal voting rights with holders of shares of Common Stock (one vote
per share) and will vote together with holders of Common Stock as a single
class.

In connection with the election of the Fund's directors, holders of shares
of preferred stock, voting as a separate class, will be entitled to elect two of
the Fund's directors, and the remaining directors will be elected by all holders
of capital stock, voting as a single class. So long as any preferred stock is
outstanding, the Fund will have not less than five directors. If at any time
dividends on shares of the Fund's preferred stock shall be unpaid in an amount
equal to two full years' dividends thereon, the holders of all outstanding
shares of preferred stock, voting as a separate class, will be entitled to elect
a majority of the Fund's directors until all dividends in default have been paid
or declared and set apart for payment.

The affirmative vote of the holders of a majority of the outstanding shares
of the preferred stock, voting as a separate class, will be required to (i)
authorize, create or issue (other than the preferred stock authorized by the
Articles Supplementary creating such preferred stock), or increase the
authorized or issued aggregate

43
<PAGE> 44

stated capital amount of (other than the preferred stock authorized by the
Articles Supplementary creating such preferred stock), any class or series of
stock ranking prior to or on a parity with any series of preferred stock with
respect to payment of dividends or the distribution of assets on liquidation, or
increase the authorized amount of preferred stock or (ii) amend, alter or repeal
the provisions of the Charter, whether by merger, consolidation or otherwise, so
as to adversely affect any of the contract rights expressly set forth in the
Charter of holders of preferred stock.

Redemption Provisions. It is anticipated that shares of preferred stock
generally will be redeemable at the option of the Fund at a price equal to their
liquidation preference plus accumulated but unpaid dividends to the date of
redemption plus, under certain circumstances, a redemption premium. Shares of
preferred stock will also be subject to mandatory redemption at a price equal to
their liquidation preference plus accumulated but unpaid dividends to the date
of redemption upon the occurrence of certain specified events, such as the
failure of the Fund to maintain asset coverage requirements for the preferred
stock specified by the rating agencies which issue ratings on the preferred
stock. It is anticipated that the Charter will prohibit the sale or transfer of
preferred stock to any affiliate of the Fund or the Investment Adviser, except
for an affiliate that may be acting as a broker-dealer in connection with the
preferred stock.

CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION

The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors and could
have the effect of depriving shareholders of an opportunity to sell their shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. A director may be removed from office
with or without cause but only by vote of the holders of at least 66 2/3% of the
votes entitled to be voted on the matter. A director elected by all of the
holders of capital stock may be removed only by action of such holders, and a
director elected by the holders of preferred stock may be removed only by action
of such holders.

In addition, the Articles of Incorporation require the favorable vote of
the holders of at least 66 2/3% of the Fund's shares of capital stock, then
entitled to be voted, voting as a single class, to approve, adopt or authorize
the following:

(i) a merger or consolidation or statutory share exchange of the Fund
with any other corporation,

(ii) a sale of all or substantially all of the Fund's assets (other
than in the regular course of the Fund's investment activities), or

(iii) a liquidation or dissolution of the Fund,

unless such action has been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the total number of Directors fixed in accordance
with the by-laws, in which case the affirmative vote of a majority of the Fund's
shares of capital stock is required. Following the proposed issuance of the
preferred stock, it is anticipated that the approval, adoption or authorization
of the foregoing would also require the favorable vote of at least a majority of
the Fund's shares of preferred stock then entitled to be voted, voting as a
separate class.

In addition, conversion of the Fund to an open-end investment company would
require an amendment to the Fund's Articles of Incorporation. The amendment
would have to be declared advisable by the Board of Directors prior to its
submission to shareholders. Such an amendment would require the favorable vote
of the

44
<PAGE> 45

holders of at least 66 2/3% of the Fund's outstanding shares of capital stock
(including any preferred stock) entitled to be voted on the matter, voting as a
single class (or a majority of such shares if the amendment was previously
approved, adopted or authorized by at least two-thirds of the total number of
Directors fixed in accordance with the by-laws), and, assuming preferred stock
is issued, the affirmative vote of at least a majority of outstanding shares of
preferred stock of the Fund, voting as a separate class. Such a vote also would
satisfy a separate requirement in the 1940 Act that the change be approved by
the shareholders. Shareholders of an open-end investment company may require the
company to redeem their shares of common stock at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset value,
less such redemption charge, if any, as might be in effect at the time of a
redemption. All redemptions will be made in cash. If the Fund is converted to an
open-end investment company, it could be required to liquidate portfolio
securities to meet requests for redemption. Conversion to an open-end investment
company would also require redemption of all outstanding shares of preferred
stock and would require changes in certain of the Fund's investment policies and
restrictions, such as those relating to the issuance of senior securities and
the borrowing of money.

The Board of Directors has determined that the 66 2/3% voting requirements
described above, which are greater than the minimum requirements under Maryland
law or the 1940 Act, are in the best interests of shareholders generally.
Reference should be made to the Charter on file with the Securities and Exchange
Commission for the full text of these provisions.

PERFORMANCE DATA

From time to time, the Fund may include its yield and/or total return on
its Common Stock for various specified time periods in advertisements or
information furnished to present or prospective shareholders. The yield of the
Fund refers to the income generated by an investment in the Fund over a stated
period. Yield is calculated by annualizing the distribution over a stated period
and dividing the product by the average per share net value. The Fund also may
quote annual total return and aggregate total return performance data. Total
return quotations for the specified periods will be computed by finding the rate
of return (based on net investment income and any capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the value of such investment at the end of the period.

The calculation of yield and total return does not reflect the imposition
of any CDSC or the amount of any shareholder's tax liability.

Yield and total return figures are based on the Fund's historical
performance and are not intended to indicate further performance. The Fund's
yield is expected to fluctuate, and its total return will vary depending on
market conditions, the Municipal Bonds and other securities comprising the
Fund's portfolio, the Fund's operating expenses and the amount of net realized
and unrealized capital gains or losses during the period.

On occasion, the Fund may compare its yield and tax-equivalent yield to
yield data published by Lipper Analytical Services, Inc. or performance data
published by Morningstar Publications, Inc., Money Magazine, U.S. News & World
Report, Business Week, CDA Investment Technology, Inc., Forbes Magazine and
Fortune Magazine. Yield comparisons should not be considered indicative of the
Fund's yield and tax-equivalent yield or relative performance for any future
period.

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<PAGE> 46

CUSTODIAN

The Fund's securities and cash are held under a custody agreement with The
Bank of New York, 90 Washington Street, New York, New York 10286.

TRANSFER AGENT, DIVIDEND DISBURSING AGENT
AND SHAREHOLDER SERVICING AGENT

The transfer agent, dividend disbursing agent and shareholder servicing
agent for the shares of Common Stock of the Fund is Merrill Lynch Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484, a
wholly owned subsidiary of ML & Co.

Shareholder Reports. Only one copy of each shareholder report and certain
shareholder communications will be mailed to each identified shareholder
regardless of the number of accounts such shareholder has. If a shareholder
wishes to receive separate copies of each report and communication for each of
the shareholder's related accounts the shareholder should notify in writing:

Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289

The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers. If
you have any questions regarding this, please call your Merrill Lynch financial
consultant or Merrill Lynch Financial Data Services, Inc. at 800-637-3863.

LEGAL OPINIONS

Certain legal matters in connection with the Common Stock offered hereby
will be passed on for the Fund by Brown & Wood, One World Trade Center, New
York, New York 10048-0557. Brown & Wood will rely as to matters of Maryland law
on the opinion of Galland, Kharasch, Morse & Garfinkle, P.C., Canal Square, 1054
31st Street, N.W., Washington, D.C. 20007-4492.

EXPERTS

Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, have
been selected as the independent auditors of the Fund. The independent auditors
are responsible for auditing the financial statements of the Fund. The statement
of assets, liabilities and capital of the Fund included in this Prospectus has
been so included in reliance on the report of such independent auditors, given
on their authority as experts in auditing and accounting.

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<PAGE> 47

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholder of
Merrill Lynch Municipal Strategy Fund, Inc.:

We have audited the accompanying statement of assets, liabilities and capital of
Merrill Lynch Municipal Strategy Fund, Inc. as of October 5, 1995. This
financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such statement of assets, liabilities and capital presents
fairly, in all material respects, the financial position of Merrill Lynch
Municipal Strategy Fund, Inc. as of October 5, 1995 in conformity with generally
accepted accounting principles.

Deloitte & Touche LLP
Princeton, New Jersey

October 17, 1995

47
<PAGE> 48

MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
OCTOBER 5, 1995

<TABLE>
<S> <C>
ASSETS
Cash......................................................................... $100,000
Prepaid registration fees (Note 1)........................................... 114,578
Deferred organization expenses (Note 1)...................................... 220,422
--------
Total assets............................................................ $435,000
LIABILITIES
Accrued expenses (Note 1).................................................... 335,000
--------
NET ASSETS........................................................................ $100,000
========
CAPITAL
Common Stock, par value $.10 per share; 200,000,000 shares authorized; 10,000
shares issued and outstanding (Note 1)...................................... $ 1,000
Paid in Capital in excess of par............................................. 99,000
--------
Total Capital--Equivalent to $10.00 net asset value per share of common
stock (Note 1).......................................................... $100,000
========
</TABLE>

NOTES TO STATEMENT OF ASSETS, LIABILITIES AND CAPITAL

NOTE 1. ORGANIZATION

The Fund was incorporated under the laws of the State of Maryland on July
13, 1994 as a closed-end, non-diversified, management investment company and has
had no operations other than the sale to Fund Asset Management, L.P. (the
"Investment Adviser") of an aggregate of 10,000 shares of Common Stock for
$100,000 on October 5, 1995.

Prepaid registration fees are charged to income as the related shares are
issued. Deferred organization costs will be amortized on a straight-line basis
over a five-year period beginning with the commencement of operations of the
Fund.

NOTE 2. MANAGEMENT ARRANGEMENTS

The Fund has engaged the Investment Adviser to provide investment advisory
and administrative services to the Fund. The Investment Adviser will receive a
monthly fee for advisory services, at an annual rate equal to 0.50 of 1% of the
average daily net assets of the Fund and a monthly fee for administrative
services, at an annual rate equal to 0.25 of 1% of the average daily net assets
of the Fund.

NOTE 3. FEDERAL INCOME TAXES

The Fund intends to qualify as a "regulated investment company" and as such
(and by complying with the applicable provisions of the Internal Revenue Code of
1986, as amended) will not be subject to Federal income tax on taxable income
(including realized capital gains) that is distributed to shareholders.

48
<PAGE> 49

APPENDIX I
RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") MUNICIPAL BOND
RATINGS

Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.

A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.

Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

Ca--Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.

C--Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.

Con. (. . .)--Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when

49
<PAGE> 50

facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.

Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.

Short-term Notes and Variable Rate Demand Obligations: The four ratings of
Moody's for short-term notes and VRDOs are MIG-1/VMIG-1, MIG-2/VMIG-2,
MIG-3/VMIG-3, and MIG-4/VMIG-4; MIG-1/VMIG-1 denotes "best quality, enjoying
strong protection from established cash flows"; MIG-2/VMIG-2 denotes "high
quality" with "ample margins of protection"; MIG-3/VMIG-3 instruments are of
"favorable quality . . . but lacking the undeniable strength of the preceding
grades"; MIG-4/VMIG-4 instruments are of "adequate quality, carrying specific
risk but having protection . . . and not distinctly or predominantly
speculative."

DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS

Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:

Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries;
high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal
cash generation; and with established access to a range of financial
markets and assured sources of alternate liquidity.

Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.

Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
in the level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is
maintained.

Issuers rated Not Prime do not fall within any of the Prime rating
categories.

DESCRIPTION OF STANDARD & POOR'S RATING GROUP'S ("STANDARD & POOR'S") MUNICIPAL
DEBT RATINGS

A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.

50
<PAGE> 51

The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.

The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other reasons.

The ratings are based, in varying degrees, on the following considerations:

I. Likelihood of default-capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;

II. Nature of and provisions of the obligation;

III. Protection afforded to, and relative position of, the obligation
in the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.

AAA--Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.

AA--Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest-rated issues only in small
degree.

A--Debt rated "A" has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher-rated categories.

BBB--Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher-rated categories.

BB, B, CCC, CC, C--Debt rated "BB", "B", "CCC", "CC" and "C" is
regarded, on balance, as predominately speculative with respect to capacity
to pay interest and repay principal in accordance with the terms of the
obligation. "BB" indicates the lowest degree of speculation and "C" the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.

BB--Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The "BB" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BBB-" rating.

B--Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will

51
<PAGE> 52

likely impair capacity or willingness to pay interest and repay principal.
The "B" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BB" or "BB-" rating.

CCC--Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial, or economic conditions, it is
not likely to have the capacity to pay interest and repay principal. The
"CCC" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "B" or "B-" rating.

CC--The rating "CC" is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.

C--The rating "C" is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has
been filed but debt service payments are continued.

C1--The rating "C1" is reserved for income bonds on which no interest
is being paid.

D--Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period.
The "D" rating also will be used upon the filing of a bankruptcy petition
if debt service payments are jeopardized.

Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS

A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. The three designations in the
"A" category are as follows:

A-1--This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a "+" designation.

A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."

A-3--Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher
designations.

B--Issues rated "B" are regarded as having only speculative capacity
for timely payment.

C--This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.

52
<PAGE> 53

D--Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period.

A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information.

A Standard & Poor's municipal note rating reflects the liquidity concerns
and market access risks unique to such notes. Notes due in three years or less
will likely receive a note rating. Notes maturing beyond three years will most
likely receive a long-term debt rating. The following criteria will be used in
making that assessment.

Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).

Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).

Note rating symbols are as follows:

<TABLE>
<C> <S>
SP-1 A very strong, or strong, capacity to pay principal and interest. Issues
that possess overwhelming safety characteristics will be given a "+"
designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
</TABLE>

DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S ("FITCH") INVESTMENT GRADE BOND
RATINGS

Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.

The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.

Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guarantees unless otherwise indicated.

Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.

Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.

53
<PAGE> 54

Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.

AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.

AA--Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."

A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.

BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.

Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.

Credit Trend Indicator: Credit trend indicators show whether credit fundamentals
are improving, stable, declining, or uncertain, as follows:

<TABLE>
<S> <C>
Improving
Stable
Declining
Uncertain
</TABLE>

Credit trend indicators are not predictions that any rating change will occur,
and have a longer-term time frame than issues placed on FitchAlert.

NR indicates that Fitch does not rate the specific issue.

CONDITIONAL: A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.

SUSPENDED: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.

WITHDRAWN: A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.

54
<PAGE> 55

FITCHALERT: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive" indicating a potential
upgrade, "Negative" for potential downgrade, or "Evolving" where ratings may be
raised or lowered. FitchAlert is relatively short-term, and should be resolved
within three to 12 months.

DESCRIPTION OF FITCH'S SPECULATIVE GRADE BOND RATINGS

Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or liquidation.

Bonds that have the same rating are of similar but not necessarily
identical credit quality since rating categories cannot fully reflect the
differences in degrees of credit risk.

BB--Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.

B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.

CCC--Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.

CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.

C--Bonds are in imminent default in payment of interest or principal.

DDD, DD, and D--Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.

55
<PAGE> 56

DESCRIPTION OF FITCH'S INVESTMENT GRADE SHORT-TERM RATINGS

Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.

The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.

Fitch short-term ratings are as follows:

<TABLE>
<C> <S>
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are regarded
as having the strongest degree of assurance for timely payment.

F-1 Very Strong Credit Quality. Issues assigned this rating reflect an assurance
of timely payment only slightly less in degree than issues rated "F-1+."

F-2 Good Credit Quality. Issues assigned this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as
for issues assigned "F-1+" and "F-1" ratings.

F-3 Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate;
however, near-term adverse changes could cause these securities to be rated
below investment grade.

F-4 Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are vulnerable
to near-term adverse changes in financial and economic conditions.

D Default. Issues assigned this rating are in actual or imminent payment
default.

LOC The symbol "LOC" indicates that the rating is based on a letter of credit
issued by a commercial bank.

</TABLE>

56
<PAGE> 57

APPENDIX II
TAXABLE EQUIVALENT YIELDS FOR 1995
<TABLE>
<CAPTION>

TAXABLE INCOME* A TAX-EXEMPT YIELD OF
- ------------------------ -------------------------------------------------------------------------------

1995
FEDERAL
SINGLE JOINT TAX
RETURN RETURN BRACKET 5.00% 5.50% 6.00% 6.50% 7.00% 7.50%
- ---------- ---------- --------- --------- --------- --------- --------- --------- ---------
IS EQUAL TO A TAXABLE YIELD OF
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$23,351- $39,001- 28.00% 6.94% 7.64% 8.33% 9.03% 9.72% 10.42%
$56,550 $94,250
$56,551- $94,251- 31.00% 7.25% 7.97% 8.70% 9.42% 10.14% 10.87%
$117,950 $143,600
$117,951- $143,601- 36.00% 7.81% 8.59% 9.38% 10.16% 10.94% 11.72%
$256,500 $256,500
Over Over
$256,500 $256,500 39.60% 8.28% 9.11% 9.93% 10.76% 11.59% 12.42%
</TABLE>

- ------------------
* An investor's marginal tax rates may exceed the rates shown in the above table
due to the reduction, or possible elimination, of the personal exemption
deduction for high-income taxpayers and an overall limit on itemized
deductions. Income also may be subject to certain state and local taxes. For
investors who pay alternative minimum tax, tax-exempt yields may be equivalent
to lower taxable yields than those shown above. The tax rates shown above do
not apply to corporate taxpayers. The tax characteristics of the Fund are
described more fully elsewhere in this Prospectus. Consult your tax adviser
for further details. This chart is for illustrative purposes only and cannot
be taken as an indication of anticipated Fund performance.

57
<PAGE> 58

[This page is intentionally left blank.]

58
<PAGE> 59

MERRILL LYNCH MUNICIPAL STRATEGY FUND, INC.
AUTHORIZATION FORM
- --------------------------------------------------------------------------------

1. SHARE PURCHASE APPLICATION

I, being of legal age, wish to purchase .... shares of Merrill Lynch
Municipal Strategy Fund, Inc. and establish an Investment Account as described
in the Prospectus.

Basis for establishing an Investment Account:

I enclose a check for $.... payable to Merrill Lynch Financial Data
Services, Inc., as an initial investment (minimum $1,000). (Subsequent
investments $50 or more.) I understand that this purchase will be executed at
the applicable offering price next to be determined after this Application is
received by you.

Until you are notified by me in writing, the following options with respect
to dividends and distributions are elected:

<TABLE>
<S> <C> <C> <C> <C>
---------------------------------------- ----------------------------------------
Distribution Elect / / reinvest dividends Elect / / reinvest capital gains
Options One / / pay dividends in cash One / / pay capital gains in cash
---------------------------------------- ----------------------------------------
</TABLE>

IF NO ELECTION IS MADE, DIVIDENDS AND CAPITAL GAINS WILL BE REINVESTED
AUTOMATICALLY AT NET ASSET VALUE WITHOUT A SALES CHARGE.

(PLEASE PRINT) --------------------------------

Name.........................................................
First Name Initial Last Name
--------------------------------
Name of Co-Owner (if any).................................... Social Security No.
First Name Initial Last Name or Taxpayer Identification No.

Address......................................................

............................................................. ........................, 19.....
(Zip Code) Date
</TABLE>

Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security No. or Taxpayer Identification No. and (2) that I am
not subject to backup withholding (as discussed in the Prospectus under "Taxes")
either because I have not been notified that I am subject thereto as a result of
a failure to report all interest or dividends, or the Internal Revenue Service
("IRS") has notified me that I am no longer subject thereto.

INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING, AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH-SPONSORED INVESTMENT COMPANIES.

SIGNATURE OF OWNER .................................... SIGNATURE OF CO-OWNER
(IF ANY)........................................................................
In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.
- --------------------------------------------------------------------------------

2. FOR DEALER ONLY

Branch Office, Address, Stamp

This form when completed should be mailed to:

Merrill Lynch Municipal Strategy Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289.

We guarantee the Shareholder's Signature.

...............................................................................
Dealer Name and Address

By .............................................................................
Authorized Signature of Dealer

<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------- --------------
...................
- ---------- --------------
Branch-Code F/C No. F/C Last Name
- ---------- -----------------
- ---------- -----------------
Dealer's Customer A/C No.
</TABLE>

59
<PAGE> 60

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY STATE
OR JURISDICTION OF THE UNITED STATES OR ANY COUNTRY WHERE SUCH OFFER WOULD BE
UNLAWFUL.
------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Prospectus Summary.................. 3
Risk Factors and Special
Considerations.................... 8
Fee Table........................... 10
The Fund............................ 11
Use of Proceeds..................... 11
Investment Objective and Policies... 11
Risks and Special Considerations of
Leverage.......................... 20
Investment Restrictions............. 23
Purchase of Shares.................. 25
Tender Offers....................... 27
Contingent Deferred Sales Charge.... 29
Directors and Officers.............. 30
Investment Advisory and
Administrative Arrangements....... 32
Portfolio Transactions.............. 35
Dividends and Distributions......... 36
Taxes............................... 36
Automatic Dividend Reinvestment
Plan.............................. 41
Net Asset Value..................... 41
Description of Capital Stock........ 42
Performance Data.................... 45
Custodian........................... 46
Transfer Agent, Dividend Disbursing
Agent and Shareholder Servicing
Agent............................. 46
Legal Opinions...................... 46
Experts............................. 46
Independent Auditors' Report........ 47
Statement of Assets, Liabilities and
Capital........................... 48
Appendix I--Ratings of Municipal
Bonds and Commercial Paper........ 49
Appendix II--Taxable Equivalent
Yields for 1995................... 57
Authorization Form.................. 59
</TABLE>

Code #18302-1095

[Artwork]

[LOGO]

MERRILL LYNCH
MUNICIPAL
STRATEGY
FUND, INC.
PROSPECTUS

October 30, 1995

Distributor:
Merrill Lynch
Funds Distributor, Inc.

This Prospectus should be
retained for future reference.
<PAGE> 61
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL

Pursuant to Rule 304 of Regulation S-T, the following table presents fair
and accurate narrative descriptions of graphic and image material omitted from
this EDGAR Submission File due to ASCII-incompatibility and cross-references
this material to the location of each occurrence in the text.

DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- --------------------
Compass plate, circular Back cover of Prospectus.
graph paper and Merrill Lynch
logo including stylized market
bull.