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Prospectus
October 14, 2003
Merrill Lynch Municipal Bond Fund, Inc.
This Prospectus contains information you should know before investing,
including information about risks. Please read it before you invest and keep
it for future reference.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
Table of Contents
PAGE
KEY FACTS
[GRAPHIC] ---------------------------------------
Merrill Lynch Municipal Bond Fund at a Glance 3
Risk/Return Bar Chart 6
Fees and Expenses 9
DETAILS ABOUT THE FUND
---------------------------------------
[GRAPHIC]
How Each Portfolio Invests 15
Investment Risks 19
[GRAPHIC] YOUR ACCOUNT
---------------------------------------
Merrill Lynch Select Pricing/SM/ System 24
How to Buy, Sell, Transfer and Exchange Shares. 30
Participation in Fee-Based Programs 34
MANAGEMENT OF THE FUND
[GRAPHIC] ---------------------------------------
Fund Asset Management 37
Financial Highlights 38
[Graphic] FOR MORE INFORMATION
---------------------------------------
Shareholder Reports Back Cover
Statement of Additional Information Back Cover
MERRILL LYNCH MUNICIPAL BOND FUND, INC.
[GRAPHIC]
Key Facts
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this prospectus
in the sidebar.
Municipal Bonds -- debt obligations issued by or on behalf of a governmental
entity or other qualifying issuer that pay interest exempt from Federal income
tax.
Investment Grade -- any of the four highest debt obligation ratings by
recognized rating agencies, including Standard & Poor's, Moody's Investors
Service, Inc. and Fitch Ratings.
MERRILL LYNCH MUNICIPAL BOND FUND AT A GLANCE
- --------------------------------------------------------------------------------
What is the Fund's investment objective?
The Fund consists of three separate portfolios -- the Insured Portfolio, the
National Portfolio and the Limited Maturity Portfolio. Each Portfolio is, in
effect, a separate fund that issues its own shares. The investment objective of
each Portfolio is to provide shareholders with as high a level of income exempt
from Federal income taxes as is consistent with the investment policies of such
Portfolio.
What are the Fund's main investment strategies?
Under normal circumstances, each Portfolio seeks to achieve its objective by
investing at least 80% of its assets in municipal bonds. In choosing
investments, each Portfolio's management analyzes the credit quality of issuers
(and insurers, in the case of the Insured Portfolio) and considers the yields
available on municipal bonds with different maturities. The investment
strategies of the Portfolios differ primarily in the quality and maturity of the
municipal bonds in which they invest.
The Insured Portfolio invests primarily in investment grade municipal bonds
that are covered by insurance that guarantees the timely payment of principal at
maturity and interest when due. The Portfolio will usually invest a majority of
its assets in municipal bonds that have a maturity of five years or longer.
While insurance reduces the credit risk of the Portfolio's investments, it may
also reduce the yield on insured bonds. Therefore, the Portfolio's yield may be
lower than it would be if the Portfolio invested in uninsured municipal bonds.
Insurance does not guarantee the market value of municipal bonds in the
Portfolio or the value of the Portfolio's shares.
The National Portfolio may invest in municipal bonds rated in any rating
category or in unrated municipal bonds. The Portfolio will usually invest in
municipal bonds that have a maturity of five years or longer. Portfolio
management chooses municipal bonds that it believes offer a relatively high
potential for total return relative to their total risk. Although the Portfolio
may invest in municipal bonds in any rating category, Portfolio management does
not presently intend to invest more than 35% of the Portfolio's assets in
municipal bonds rated below investment grade (below BBB by Standard & Poor's
("S&P") or Fitch Ratings ("Fitch") or below Baa by Moody's Investors Service,
Inc. ("Moody's")) or in unrated municipal bonds that Portfolio management
believes are of comparable quality. These lower-rated obligations are commonly
known as "junk bonds." The 35% limitation on junk bond
MERRILL LYNCH MUNICIPAL BOND FUND, INC. 3
[GRAPHIC] Key Facts
Municipal Notes -- shorter-term municipal debt obligations that pay interest
exempt from Federal income tax and that have a maturity that is generally one
year or less.
investments reflects only the present intention of Portfolio management, and may
be changed at any time. Therefore, it is possible that the Portfolio could
invest up to 100% of its assets in junk bonds. Portfolio management does not
presently intend to invest in municipal bonds that are in default or that it
believes will be in default.
The Limited Maturity Portfolio invests primarily in investment grade
municipal bonds that have a maturity of less than four years or municipal notes.
Because of their shorter maturities, the Portfolio's investments will not
usually be as sensitive to changes in prevailing interest rates as are long-term
municipal bonds. Fluctuations in interest rates on short-term municipal bonds
may, however, vary more widely than those on long-term municipal bonds from time
to time.
None of the Portfolios currently contemplates investing more than 25% of its
total assets in municipal bonds whose issuers are located in the same state.
What are the main risks of investing in the Portfolios?
No Portfolio can guarantee that it will achieve its investment objective.
As with any fund, the value of each Portfolio's investments -- and therefore
the value of the Portfolio's shares -- may fluctuate. These changes may occur in
response to interest rate changes or other developments that may affect the
municipal bond market generally, or a particular issuer or obligation.
Generally, when interest rates go up, the value of municipal bonds goes down.
Bonds with longer maturities are affected more by changes in interest rates than
bonds with shorter maturities. Also, Portfolio management may select securities
that underperform the bond market, the relevant indices or other funds with
similar investment objectives and investment strategies. Derivatives and high
yield bonds may be volatile and subject to liquidity, leverage and credit risks.
If the value of a Portfolio's investments goes down, you may lose money.
4 MERRILL LYNCH MUNICIPAL BOND FUND, INC.
The National Portfolio is generally subject to greater risk than the other
Portfolios because it may invest in junk bonds. Investing in junk bonds is
riskier than investing in higher quality municipal bonds -- price fluctuations
may be larger and more frequent, and there is greater risk of losing both income
and principal. In addition, the National Portfolio may also invest to a greater
extent in municipal bonds with longer maturities.
Who should invest?
One of the Portfolios of the Fund may be an appropriate investment for you if
you:
. Are looking for an investment that provides current income exempt from
Federal income tax
. Want a professionally managed and diversified portfolio without the
administrative burdens of direct investments in municipal bonds
. Are looking for liquidity
. Can tolerate the risk of loss caused by changes in interest rates or
adverse changes in the price of municipal bonds in general
The National Portfolio may be an appropriate investment for you if, in
addition to the first four factors outlined above, you:
. Are willing to accept the risk of greater loss of income and principal
The Limited Maturity Portfolio may be an appropriate investment for you if,
in addition to the first four factors outlined above, you:
. Are investing with shorter-term goals in mind
MERRILL LYNCH MUNICIPAL BOND FUND, INC. 5
[GRAPHIC] Key Facts
RISK/RETURN BAR CHART FOR THE INSURED PORTFOLIO
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Insured Portfolio. The bar chart shows changes in the Insured
Portfolio's performance for Class B shares for each of the past ten calendar
years. Sales charges are not reflected in the bar chart. If these amounts were
reflected, returns would be less than those shown. The table compares the
average annual total returns for each class of the Insured Portfolio's shares
with those of the Lehman Brothers Municipal Bond Index, a broad measure of
market performance. How the Insured Portfolio performed in the past (before and
after taxes) is not necessarily an indication of how the Insured Portfolio will
perform in the future.
[CHART]
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
- ----- ------ ----- ----- ----- ----- ------ ------ ----- -----
11.88% -7.36% 16.41% 2.77% 7.94% 4.96% -6.07% 11.59% 4.09% 9.14%
During the ten-year period shown in the bar chart, the highest return for a
quarter was 7.31% (quarter ended March 31, 1995) and the lowest return for a
quarter was -6.55% (quarter ended March 31, 1994). The Portfolio's year-to-date
return as of September 30, 2003 was 2.90%.
After-tax returns are shown only for Class B shares and will vary for other
classes. The after-tax returns are calculated using the historical highest
marginal Federal individual income tax rates in effect during the periods
measured and do not reflect the impact of state and local taxes. Actual
after-tax returns depend on an investor's tax situation and may differ from
those shown. The after-tax returns shown are not relevant to investors who hold
their Insured Portfolio shares through tax-deferred arrangements, such as 401(k)
plans or individual retirement accounts or through tax advantaged education
savings accounts.
Ten Years/
Average Annual Total Returns Life of
(for the periods ended December 31, 2002) One Year Five Years Portfolio
- ------------------------------------------------------------------------------------
Municipal Bond Insured Portfolio -- Class A#
Return Before Taxes* 5.31% 4.24% 5.97%+
- ------------------------------------------------------------------------------------
Municipal Bond Insured Portfolio -- Class B
Return Before Taxes* 5.14% 4.24% 5.28%
Return After Taxes on Distributions* 5.14% 4.06% 5.05%
Return After Taxes on Distributions and Sale of
Portfolio Shares* 4.99% 4.22% 5.08%
- ------------------------------------------------------------------------------------
Municipal Bond Insured Portfolio -- Class C
Return Before Taxes* 8.09% 4.51% 5.91%+
- ------------------------------------------------------------------------------------
Municipal Bond Insured Portfolio -- Class I#
Return Before Taxes* 5.57% 4.50% 5.65%
- ------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index** 9.60% 6.06% 6.71%/7.49%++
- ------------------------------------------------------------------------------------
# Prior to April 14, 2003, Class A shares were designated Class D and Class I
shares were designated Class A.
* Includes all applicable fees and sales charges.
** This unmanaged Index consists of revenue bonds, prerefunded bonds, general
obligation bonds and insured bonds, all of which mature within 30 years.
Performance does not reflect the deduction of fees, expenses or taxes. Past
performance is not predictive of future performance.
+ Class inception date is October 21, 1994. ++ Past ten years and since October
31, 1994.
6 MERRILL LYNCH MUNICIPAL BOND FUND, INC.
RISK/RETURN BAR CHART FOR THE NATIONAL PORTFOLIO
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the National Portfolio. The bar chart shows changes in the National
Portfolio's performance for Class B shares for each of the past ten calendar
years. Sales charges are not reflected in the bar chart. If these amounts were
reflected, returns would be less than those shown. The table compares the
average annual total returns for each class of the National Portfolio's shares
with those of the Lehman Brothers Municipal Bond Index, a broad measure of
market performance. How the National Portfolio performed in the past (before and
after taxes) is not necessarily an indication of how the National Portfolio will
perform in the future.
[CHART]
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
- ------ ------ ------ ----- ----- ----- ------ ------ ------ -----
11.65% -7.27% 17.07% 4.14% 8.53% 4.53% -6.13% 11.42% 4.34% 8.50%
During the ten-year period shown in the bar chart, the highest return for a
quarter was 6.95% (quarter ended March 31, 1995) and the lowest return for a
quarter was -6.07% (quarter ended March 31, 1994). The Portfolio's year-to-date
return as of September 30, 2003 was 3.78%.
After-tax returns are shown only for Class B shares and will vary for other
classes. The after-tax returns are calculated using the historical highest
marginal Federal individual income tax rates in effect during the periods
measured and do not reflect the impact of state and local taxes. Actual
after-tax returns depend on an investor's tax situation and may differ from
those shown. The after-tax returns shown are not relevant to investors who hold
their National Portfolio shares through tax-deferred arrangements, such as
401(k) plans or individual retirement accounts or through tax advantaged
education savings accounts.
Ten Years/
Average Annual Total Returns Life of
(for the periods ended December 31, 2002) One Year Five Years Portfolio
- ------------------------------------------------------------------------------------
Municipal Bond National Portfolio -- Class A#
Return Before Taxes* 4.68% 4.05% 6.03%+
- ------------------------------------------------------------------------------------
Municipal Bond National Portfolio -- Class B
Return Before Taxes* 4.50% 4.02% 5.42%
Return After Taxes on Distributions* 4.49% 4.02% 5.26%
Return After Taxes on Distributions and Sale of
Portfolio Shares* 4.67% 4.15% 5.26%
- ------------------------------------------------------------------------------------
Municipal Bond National Portfolio -- Class C
Return Before Taxes* 7.55% 4.33% 5.97%+
- ------------------------------------------------------------------------------------
Municipal Bond National Portfolio -- Class I#
Return Before Taxes* 5.04% 4.31% 5.80%
- ------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index** 9.60% 6.06% 6.71%/7.49%++
- ------------------------------------------------------------------------------------
# Prior to April 14, 2003, Class A shares were designated Class D and Class I
shares were designated Class A.
* Includes all applicable fees and sales charges.
** This unmanaged Index consists of revenue bonds, prerefunded bonds, general
obligation bonds and insured bonds, all of which mature within 30 years.
Performance does not reflect the deduction of fees, expenses or taxes. Past
performance is not predictive of future performance.
+ Class inception date is October 21, 1994. ++ Past ten years and since October
31, 1994.
MERRILL LYNCH MUNICIPAL BOND FUND, INC. 7
[GRAPHIC] Key Facts
RISK/RETURN BAR CHART FOR THE LIMITED MATURITY PORTFOLIO
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Limited Maturity Portfolio. The bar chart shows changes in the
Limited Maturity Portfolio's performance for Class I shares for each of the past
ten calendar years. Sales charges are not reflected in the bar chart. If these
amounts were reflected, returns would be less than those shown. The table
compares the average annual total returns for each class of the Limited Maturity
Portfolio's shares with those of the Lehman Brothers Municipal Bond Index and
the Lehman Brothers 3-year General Obligation Bond Index, each a broad measure
of market performance. How the Limited Maturity Portfolio performed in the past
(before and after taxes) is not necessarily an indication of how the Limited
Maturity Portfolio will perform in the future.
[CHART]
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
4.30% 1.35% 6.13% 3.72% 4.21% 4.62% 2.04% 5.04% 5.20% 3.80%
During the ten-year period shown in the bar chart, the highest return for a
quarter was 1.88% (quarter ended March 31, 2001) and the lowest return for a
quarter was -0.20% (quarter ended March 31, 1994). The Portfolio's year-to-date
return as of September 30, 2003 was 1.35%.
After-tax returns are shown only for Class I shares and will vary for other
classes. The after-tax returns are calculated using the historical highest
marginal Federal individual income tax rates in effect during the periods
measured and do not reflect the impact of state and local taxes. Actual
after-tax returns depend on an investor's tax situation and may differ from
those shown. The after-tax returns shown are not relevant to investors who hold
their Limited Maturity Portfolio shares through tax-deferred arrangements, such
as 401(k) plans or individual retirement accounts or through tax advantaged
education savings accounts.
Ten Years/
Average Annual Total Returns Life of
(for the periods ended December 31, 2002) One Year Five Years Portfolio
- -----------------------------------------------------------------------------------------
Municipal Bond Limited Maturity Portfolio -- Class
A#
Return Before Taxes* 2.65% 3.82% 4.03%+
- -----------------------------------------------------------------------------------------
Municipal Bond Limited Maturity Portfolio -- Class B
Return Before Taxes* 0.43% 3.74% 3.67%
- -----------------------------------------------------------------------------------------
Municipal Bond Limited Maturity Portfolio -- Class C
Return Before Taxes* 2.43% 3.74% 3.82%+
- -----------------------------------------------------------------------------------------
Municipal Bond Limited Maturity Portfolio -- Class I#
Return Before Taxes* 2.76% 3.92% 3.93%
Return After Taxes on Distributions* 2.76% 3.92% 3.92%
Return After Taxes on Distributions and
Sale of Portfolio Shares* 2.80% 3.86% 3.90%
- -----------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index** 9.60% 6.06% 6.71%/7.49%++
Lehman Brothers 3-year General Obligation Bond
Index*** 6.65% 5.25% 5.66%/5.54%++
- -----------------------------------------------------------------------------------------
# Prior to April 14, 2003, Class A shares were designated Class D and Class I
shares were designated Class A.
* Includes all applicable fees and sales charges.
** This unmanaged Index consists of revenue bonds, prerefunded bonds, general
obligation bonds and insured bonds, all of which mature within 30 years.
Performance does not reflect the deduction of fees, expenses or taxes. Past
performance is not predictive of future performance.
*** This unmanaged Index consists of state and local government obligation bonds
that mature in 3 to 4 years, rated Baa or better. Performance does not
reflect the deduction of fees, expenses or taxes. Past performance is
not predictive of future performance.
+ Class inception date is October 21, 1994.
++ Past ten years, and since October 31, 1994.
8 MERRILL LYNCH MUNICIPAL BOND FUND, INC.
FEES AND EXPENSES FOR THE INSURED PORTFOLIO
- --------------------------------------------------------------------------------
UNDERSTANDING EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, that each Portfolio may
charge:
Expenses paid directly by the shareholder:
Shareholder Fees -- these include sales charges that you may pay when you buy or
sell shares of a Portfolio.
Expenses paid indirectly by the shareholder:
Annual Portfolio Operating Expenses -- expenses that cover the costs of
operating a Portfolio.
Management Fee -- a fee paid to the Investment Adviser for managing a Portfolio.
Distribution Fees -- fees used to support the Fund's marketing and distribution
efforts, such as compensating financial advisers and other financial
intermediaries, advertising and promotion.
Service (Account Maintenance) Fees -- fees used to compensate securities dealers
and other financial intermediaries for account maintenance activities.
Each Portfolio offers four different classes of shares. Although your money
will be invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not everyone
is eligible to buy every class. After determining which classes you are eligible
to buy, decide which class best suits your needs. Your Merrill Lynch Financial
Advisor can help you with this decision.
These tables show the different fees and expenses that you may pay if you buy
and hold the different classes of shares of each Portfolio. Future expenses may
be greater or less than those indicated below.
Insured Portfolio
-------------------------------------
Shareholder Fees (fees paid directly from your
investment)(a): Class A* Class B(b) Class C Class I*
- ---------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on purchases
(as a percentage of offering price) 4.00%(c) None None 4.00%(c)
- ---------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or redemption
proceeds, whichever is lower) None(d) 4.00%(c) 1.00%(c) None(d)
- ---------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on Dividend
Reinvestments None None None None
- ---------------------------------------------------------------------------------------------
Redemption Fee None None None None
- ---------------------------------------------------------------------------------------------
Exchange Fee None None None None
- ---------------------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets):
- ---------------------------------------------------------------------------------------------
Management Fee 0.36% 0.36% 0.36% 0.36%
- ---------------------------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees(e) 0.25% 0.75% 0.80% None
- ---------------------------------------------------------------------------------------------
Other Expenses (including transfer agency fees)(f) 0.10% 0.11% 0.11% 0.10%
- ---------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.71% 1.22% 1.27% 0.46%
- ---------------------------------------------------------------------------------------------
* Prior to April 14, 2003, Class A shares were designated Class D and Class I
shares were designated Class A.
(a)In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares. See "Your Account -- How to Buy,
Sell, Transfer and Exchange Shares."
(b)Class B shares automatically convert to Class A shares approximately ten
years after you buy them and will no longer be subject to distribution fees.
(c)Some investors may qualify for reductions in or waivers of the sales charge
(load).
(d)You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(e)The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used elsewhere in this Prospectus and in all
other Fund materials. If you hold Class B or Class C shares over time, it may
cost you more in distribution and account maintenance (12b-1) fees than the
maximum sales charge that you would have paid if you had bought one of the
other classes.
(f)Financial Data Services, Inc., an affiliate of the Investment Adviser,
provides transfer agency services to the Fund. The Fund pays a fee for these
services. The Investment Adviser or its affiliates also provide certain
accounting services to the Fund and the Fund reimburses the Investment
Adviser or its affiliates for such services.
MERRILL LYNCH MUNICIPAL BOND FUND, INC. 9
[GRAPHIC] Key Facts
Examples:
These examples are intended to help you compare the cost of investing in the
Insured Portfolio with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the Insured Portfolio for
the time periods indicated, that your investment has a 5% return each year, that
you pay the sales charges, if any, that apply to the particular class and that
the Insured Portfolio's operating expenses remain the same. These assumptions
are not meant to indicate you will receive a 5% annual rate of return. Your
annual return may be more or less than the 5% used in this example. Although
your actual costs may be higher or lower, based on these assumptions your costs
would be:
EXPENSES IF YOU DID REDEEM YOUR SHARES:
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------
Class A* $470 $618 $779 $1,247
- ------------------------------------------
Class B $524 $687 $870 $1,477
- ------------------------------------------
Class C $229 $403 $697 $1,534
- ------------------------------------------
Class I* $445 $542 $647 $956
- ------------------------------------------
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------
Class A* $470 $618 $779 $1,247
- ------------------------------------------
Class B $124 $387 $670 $1,477
- ------------------------------------------
Class C $129 $403 $697 $1,534
- ------------------------------------------
Class I* $445 $542 $647 $956
- ------------------------------------------
* Prior to April 14, 2003, Class A shares were designated Class D and Class I
shares were designated Class A.
10 MERRILL LYNCH MUNICIPAL BOND FUND, INC.
FEES AND EXPENSES FOR THE NATIONAL PORTFOLIO
- --------------------------------------------------------------------------------
National Portfolio
-------------------------------------
Shareholder Fees (fees paid directly from your
investment)(a): Class A* Class B(b) Class C Class I*
- -----------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on purchases (as
a percentage of offering price) 4.00%(c) None None 4.00%(c)
- -----------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a percentage
of original purchase price or redemption proceeds,
whichever is lower) None(d) 4.00%(c) 1.00%(c) None(d)
- -----------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on
Dividend Reinvestments None None None None
- -----------------------------------------------------------------------------------------------
Redemption Fee None None None None
- -----------------------------------------------------------------------------------------------
Exchange Fee None None None None
- -----------------------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets):
- -----------------------------------------------------------------------------------------------
Management Fee 0.48% 0.48% 0.48% 0.48%
- -----------------------------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees(e) 0.25% 0.75% 0.80% None
- -----------------------------------------------------------------------------------------------
Other Expenses (including transfer agency
fees)(f) 0.11% 0.12% 0.12% 0.11%
- -----------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.84% 1.35% 1.40% 0.59%
- -----------------------------------------------------------------------------------------------
* Prior to April 14, 2003, Class A shares were designated Class D and Class I
shares were designated Class A.
(a)In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares. See "Your Account -- How to Buy,
Sell, Transfer and Exchange Shares."
(b)Class B shares automatically convert to Class A shares approximately ten
years after you buy them and will no longer be subject to distribution fees.
(c)Some investors may qualify for reductions in or waivers of the sales charge
(load).
(d)You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(e)The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used elsewhere in this Prospectus and in all
other Fund materials. If you hold Class B or Class C shares over time, it may
cost you more in distribution and account maintenance (12b-1) fees than the
maximum sales charge that you would have paid if you had bought one of the
other classes.
(f)Financial Data Services, Inc., an affiliate of the Investment Adviser,
provides transfer agency services to the Fund. The Fund pays a fee for these
services. The Investment Adviser or its affiliates also provide certain
accounting services to the Fund and the Fund reimburses the Investment
Adviser or its affiliates for such services.
MERRILL LYNCH MUNICIPAL BOND FUND, INC. 11
[GRAPHIC] Key Facts
Examples:
These examples are intended to help you compare the cost of investing in the
National Portfolio with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the National Portfolio for
the time periods indicated, that your investment has a 5% return each year, that
you pay the sales charges, if any, that apply to the particular class and that
the National Portfolio's operating expenses remain the same. These assumptions
are not meant to indicate you will receive a 5% annual rate of return. Your
annual return may be more or less than the 5% used in this example. Although
your actual costs may be higher or lower, based on these assumptions your costs
would be:
EXPENSES IF YOU DID REDEEM YOUR SHARES:
1 Year 3 Years 5 Years 10 Years
------------------------------------------
Class A* $482 $657 $847 $1,396
------------------------------------------
Class B $537 $728 $939 $1,624
------------------------------------------
Class C $243 $443 $766 $1,680
------------------------------------------
Class I* $458 $581 $716 $1,108
------------------------------------------
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
1 Year 3 Years 5 Years 10 Years
------------------------------------------
Class A* $482 $657 $847 $1,396
------------------------------------------
Class B $137 $428 $739 $1,624
------------------------------------------
Class C $143 $443 $766 $1,680
------------------------------------------
Class I* $458 $581 $716 $1,108
------------------------------------------
* Prior to April 14, 2003, Class A shares were designated Class D and Class I
shares were designated Class A.
12 MERRILL LYNCH MUNICIPAL BOND FUND, INC.
FEES AND EXPENSES FOR THE LIMITED MATURITY PORTFOLIO
- --------------------------------------------------------------------------------
Limited Maturity Portfolio
-------------------------------------
Shareholder Fees (fees paid directly from your
investment)(a): Class A* Class B(b) Class C Class I*
- ---------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on purchases
(as a percentage of offering price) 1.00%(c) None None 1.00%(c)
- ---------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or redemption
proceeds, whichever is lower) None(d) 1.00%(c) 1.00%(c) None(d)
- ---------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on Dividend
Reinvestments None None None None
- ---------------------------------------------------------------------------------------------
Redemption Fee None None None None
- ---------------------------------------------------------------------------------------------
Exchange Fee None None None None
- ---------------------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets):
- ---------------------------------------------------------------------------------------------
Management Fee 0.33% 0.33% 0.33% 0.33%
- ---------------------------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees(e) 0.10% 0.35% 0.35% None
- ---------------------------------------------------------------------------------------------
Other Expenses (including transfer agency fees)(f) 0.10% 0.11% 0.11% 0.10%
- ---------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.53% 0.79% 0.79% 0.43%
- ---------------------------------------------------------------------------------------------
* Prior to April 14, 2003, Class A shares were designated Class D and Class I
shares were designated Class A.
(a)In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares. See "Your Account -- How to Buy,
Sell, Transfer and Exchange Shares."
(b)Class B shares automatically convert to Class A shares approximately ten
years after you buy them and will no longer be subject to distribution fees.
(c)Some investors may qualify for reductions in or waivers of the sales charge
(load).
(d)You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(e)The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used elsewhere in this Prospectus and in all
other Fund materials. If you hold Class B or Class C shares over time, it may
cost you more in distribution and account maintenance (12b-1) fees than the
maximum sales charge that you would have paid if you had bought one of the
other classes.
(f)Financial Data Services, Inc., an affiliate of the Investment Adviser,
provides transfer agency services to the Fund. The Fund pays a fee for these
services. The Investment Adviser or its affiliates also provide certain
accounting services to the Fund and the Fund reimburses the Investment
Adviser or its affiliates for such services.
MERRILL LYNCH MUNICIPAL BOND FUND, INC. 13
[GRAPHIC] Key Facts
Examples:
These examples are intended to help you compare the cost of investing in the
Limited Maturity Portfolio with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the Limited Maturity
Portfolio for the time periods indicated, that your investment has a 5% return
each year, that you pay the sales charges, if any, that apply to the particular
class and that the Limited Maturity Portfolio's operating expenses remain the
same. These assumptions are not meant to indicate you will receive a 5% annual
rate of return. Your annual return may be more or less than the 5% used in this
example. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
EXPENSES IF YOU DID REDEEM YOUR SHARES:
1 Year 3 Years 5 Years 10 Years
------------------------------------------
Class A* $154 $268 $393 $758
------------------------------------------
Class B $181 $277 $439 $978
------------------------------------------
Class C $181 $252 $439 $978
------------------------------------------
Class I* $144 $237 $339 $637
------------------------------------------
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
1 Year 3 Years 5 Years 10 Years
------------------------------------------
Class A* $154 $268 $393 $758
------------------------------------------
Class B $ 81 $252 $439 $978
------------------------------------------
Class C $ 81 $252 $439 $978
------------------------------------------
Class I* $144 $237 $339 $637
------------------------------------------
*Prior to April 14, 2003, Class A shares were designated Class D and Class I
shares were designated Class A.
14 MERRILL LYNCH MUNICIPAL BOND FUND, INC.
[GRAPHIC]
Details About the Fund
HOW EACH PORTFOLIO INVESTS
- --------------------------------------------------------------------------------
The main objective of each Portfolio is current income exempt from Federal
income tax.
Outlined below are the main strategies each Portfolio uses in seeking to achieve
its objectives:
Each Portfolio invests primarily in a diversified portfolio of municipal
bonds. Under normal circumstances, each Portfolio invests at least 80% of its
assets in municipal bonds. Municipal bonds may be obligations of a variety of
issuers, including governmental entities or other qualifying issuers. Issuers
may be states, territories and possessions of the United States and the District
of Columbia and their political subdivisions, agencies and instrumentalities.
Municipal bonds also include short-term tax-exempt obligations like municipal
notes and variable rate demand obligations.
Portfolio management considers a variety of factors when choosing
investments, such as:
. Credit Quality Of Issuers -- based on bond ratings and other factors
including economic and financial conditions.
. Yield Analysis -- takes into account factors such as the different yields
available on different types of obligations and the shape of the yield
curve (longer term obligations typically have higher yields).
. Maturity Analysis -- the weighted average maturity of the portfolio will
be maintained within a desirable range as determined from time to time.
Factors considered include portfolio activity, maturity of the supply of
available bonds and the shape of the yield curve.
In addition, Portfolio management considers the availability of features that
protect against an early call of a bond by the issuer.
Each Portfolio's investments may consist of private activity bonds that may
subject certain shareholders to an alternative minimum tax.
Other Strategies. In addition to the main strategies discussed above, the
Portfolios may use certain other investment strategies.
Each Portfolio may invest up to 20% of its assets on a temporary basis in
taxable money market securities that have a maturity of one year or less. The
MERRILL LYNCH MUNICIPAL BOND FUND, INC. 15
[GRAPHIC] Details About the Program
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Fund Asset Management, L.P.
ABOUT THE PORTFOLIO MANAGER OF THE INSURED PORTFOLIO
Robert A. DiMella is a Vice President and the portfolio manager of the Insured
Portfolio. Mr. DiMella has been a Director of Merrill Lynch Investment Managers
since 2002 and was a Vice President from 1997 to 2001. He has been a portfolio
manager therewith since 1994 and has managed the Insured Portfolio since 1999.
Portfolios may make these investments for liquidity purposes or as a temporary
investment pending an investment in municipal bonds. As a temporary measure for
defensive purposes, each Portfolio may invest without limitation in taxable
money market securities. These investments may prevent a Portfolio from meeting
its investment objective.
Investments in taxable money market securities may cause a Portfolio to have
taxable investment income. Each Portfolio may also realize capital gains on the
sale of its municipal bonds (and other securities it holds). These capital gains
will be taxable regardless of whether they are derived from a sale of municipal
bonds.
Each of the Portfolios is permitted to engage in transactions in certain
derivatives, such as financial futures contracts and options thereon, for
hedging purposes. Each of the Portfolios may also invest in other derivatives,
such as indexed and inverse floating rate obligations and swap agreements, for
hedging purposes or to enhance income. Derivatives are financial instruments
whose value is derived from another security or an index such as the Lehman
Brothers Municipal Bond Index.
The Portfolios may invest uninvested cash balances in affiliated money market
funds.
INSURED PORTFOLIO
- --------------------------------------------------------------------------------
Outlined below are other main strategies Insured Portfolio uses in seeking to
achieve its objective:
The Insured Portfolio invests in investment grade municipal bonds covered by
insurance guaranteeing the timely payment of principal at maturity and interest
when due. Under normal circumstances, the Portfolio will invest at least 80% of
its assets in municipal bonds covered by insurance. This policy is a
non-fundamental policy of the Portfolio and may only be changed with 60 days
prior notice to shareholders. Either the issuer of the bond or the Portfolio
purchases the insurance. The Portfolio will usually invest a majority of its
assets in municipal bonds that have a maturity of five years or longer.
While insurance reduces the credit risk of the Portfolio's investments, it
may also reduce the yield on the insured bonds; therefore, the Portfolio's yield
may
16 MERRILL LYNCH MUNICIPAL BOND FUND, INC.
ABOUT THE PORTFOLIO MANAGER OF THE NATIONAL PORTFOLIO
Walter O'Connor is a Vice President and the portfolio manager of the National
Portfolio. Mr. O'Connor has been a Managing Director (Municipal Tax-Exempt) of
Merrill Lynch Investment Managers since 2003 and was a Director from 1997 to
2002. He has been a portfolio manager therewith since 1991 and has managed the
National Portfolio since 1996.
be lower than it would be if the Portfolio invested in uninsured municipal
bonds. Insurance does not guarantee the market value of municipal bonds in the
Portfolio or the value of the Portfolio's shares.
NATIONAL PORTFOLIO
- --------------------------------------------------------------------------------
Outlined below are other main strategies National Portfolio uses in seeking to
achieve its objective:
The National Portfolio may invest in municipal bonds rated in any rating
category or in unrated municipal bonds. The Portfolio will usually invest in
municipal bonds that have a maturity of five years or longer. Portfolio
management will choose municipal bond investments that it believes offer a
relatively high potential for total return relative to their total risk.
Although the Portfolio's investment policies are not governed by specific rating
categories, Portfolio management does not presently intend to invest more than
35% of the Portfolio's assets in municipal bonds rated below investment grade
(below BBB by S&P or Fitch, or below Baa by Moody's) or in unrated municipal
bonds that Portfolio management believes are of comparable quality. These
lower-rated obligations are commonly known as "junk bonds." The
35% limitation on junk bond investments reflects only the present intention of
Portfolio management, and may be changed at any time. Therefore, it is possible
that the Portfolio could invest up to 100% of its assets in junk bonds. The
Portfolio will not invest in municipal bonds rated in the lowest rating
categories (CC or lower by S&P or Fitch, or Ca or lower by Moody's) unless
Portfolio management believes those ratings do not accurately reflect the
financial condition of the issuer or other factors affecting the
creditworthiness of the bonds. Portfolio management does not presently intend to
invest in municipal bonds that are in default or that it believes will be in
default.
MERRILL LYNCH MUNICIPAL BOND FUND, INC. 17
[GRAPHIC] Details About the Program
ABOUT THE PORTFOLIO MANAGER OF THE LIMITED MATURITY PORTFOLIO Peter J. Hayes is
a Vice President and the portfolio manager of the Limited Maturity Portfolio.
Mr. Hayes has been a Managing Director of Merrill Lynch Investment Managers
since 2001 and was a First Vice President from 1997 to 2001. He has been a
portfolio manager therewith since 1987 and has managed the Limited Maturity
Portfolio since 1996.
LIMITED MATURITY PORTFOLIO
- --------------------------------------------------------------------------------
Outlined below are other main strategies Limited Maturity Portfolio uses in
seeking to achieve its objective:
The Limited Maturity Portfolio invests primarily in investment grade
municipal bonds or notes, including variable rate demand obligations, that have
a maturity of less than four years. Under normal circumstances, the Portfolio
expects to invest all of its assets in such bonds or notes. Certain municipal
bonds that the Portfolio purchases may have a maturity of greater than four
years, but allow the Portfolio to require the issuer to redeem the bonds within
four years. The Portfolio treats these bonds as having a maturity of less than
four years. Because of their shorter maturities, the Portfolio's investments
generally will not be as sensitive to changes in prevailing interest rates as
are investments in long-term municipal bonds. Fluctuations in interest rates on
short-term municipal bonds may, however, vary more widely than those on
long-term municipal bonds from time to time.
18 MERRILL LYNCH MUNICIPAL BOND FUND, INC.
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This section contains a summary discussion of the general risks of investing
in the Portfolios. As with any fund, there can be no guarantee that any
Portfolio will meet its objective or that any Portfolio's performance will be
positive for any period of time.
Set forth below are the main risks of investing in a Portfolio:
Bond Market Risk and Selection Risk -- Bond market risk is the risk that the
bond markets in which the Portfolios invest will go down in value, including the
possibility that the markets will go down sharply and unpredictably. Selection
risk is the risk that the securities that Portfolio management selects will
underperform the markets, the relevant indices or other funds with similar
investment objectives and investment strategies.
Credit Risk -- Credit risk is the risk that the issuer will be unable to pay
the interest or principal when due. The degree of credit risk depends on both
the financial condition of the issuer and the terms of the obligation.
Interest Rate Risk -- Interest rate risk is the risk that prices of municipal
bonds generally increase when interest rates decline and decrease when interest
rates increase. Prices of longer term securities generally change more in
response to interest rate changes than prices of shorter term securities.
Call and Redemption Risk -- A bond's issuer may call a bond for redemption
before it matures. If this happens to a bond a Portfolio holds, the Portfolio
may lose income and may have to invest the proceeds in bonds with lower yields.
General Obligation Bonds -- The faith, credit and taxing power of the
municipality that issues a general obligation bond secures payment of interest
and repayment of principal. Timely payments depend on the issuer's credit
quality, ability to raise tax revenues and ability to maintain an adequate tax
base.
Revenue Bonds -- Payments of interest and principal on revenue bonds are made
only from the revenues generated by a particular facility, class of facilities
or the proceeds of a special tax or other revenue source. These payments depend
on the money earned by the particular facility or class of facilities.
Industrial Development Bonds -- Municipalities and other public authorities
issue industrial development bonds to finance development of industrial
MERRILL LYNCH MUNICIPAL BOND FUND, INC. 19
[GRAPHIC] Details About the Program
facilities for use by a private enterprise. The private enterprise pays the
principal and interest on the bond, and the issuer does not pledge its faith,
credit and taxing power for repayment. If the private enterprise defaults on its
payments, a Portfolio may not receive any income or get its money back from the
investment.
Insured Municipal Bonds (Insured Portfolio) -- Insurance guarantees that
interest payments on a bond will be made on time and that the principal will be
repaid when the bond matures. Either the issuer of the bond or the Portfolio
purchases the insurance. Insurance is expected to protect a Portfolio against
losses caused by a bond issuer's failure to make interest and principal
payments. However, insurance does not protect a Portfolio or its shareholders
against losses caused by declines in a bond's value. Also, a Portfolio cannot be
certain that any insurance company will make the payments it guarantees. A
Portfolio may lose money on its investment if the insurance company does not
make these payments. In addition, if a Portfolio purchases the insurance, it
must pay the premiums, which will reduce the Portfolio's yield. Each Portfolio
intends to use only insurance companies that have an AAA credit rating from S&P
or Fitch, or an Aaa credit rating from Moody's. However, if insurance with these
ratings is not available, a Portfolio may use insurance companies with lower
ratings or stop purchasing insurance or insured bonds. If a bond's insurer fails
to fulfill its obligations or loses its credit rating, the value of the bond
could drop.
Moral Obligation Bonds -- Moral obligation bonds are generally issued by
special purpose public authorities of a state or municipality. If the issuer is
unable to meet its obligations, the repayment of these bonds becomes a moral
commitment, but not a legal obligation, of the state or municipality.
Municipal Notes -- Municipal notes are shorter term municipal debt
obligations. They may provide interim financing in anticipation of tax
collection, bond sales or revenue receipts. If there is a shortfall in the
anticipated proceeds, the notes may not be fully repaid and a Portfolio may lose
money.
Municipal Lease Obligations -- In a municipal lease obligation, the issuer
agrees to make payments when due on the lease obligation. The issuer will
generally appropriate municipal funds for that purpose, but is not obligated to
do so. Although the issuer does not pledge its unlimited taxing power for
payment of the lease obligation, the lease obligation is secured by the leased
property. However, it may be difficult to sell the property and the proceeds of
a sale may not cover the Portfolio's loss.
20 MERRILL LYNCH MUNICIPAL BOND FUND, INC.
Variable Rate Demand Obligations -- Variable rate demand obligations (VRDOs)
are floating rate securities that combine an interest in a long term municipal
bond with a right to demand payment before maturity from a bank or other
financial institution. If the bank or financial institution is unable to pay, a
Portfolio may lose money.
Each Portfolio may also be subject to certain other risks associated with its
investments and investment strategies, including:
Borrowing Risk and Leverage Risk -- Each Portfolio may borrow for temporary
emergency purposes including to meet redemptions. Borrowing may exaggerate
changes in the net asset value of a Portfolio's shares and in the yield on a
Portfolio's holdings. Borrowing will cost a Portfolio interest expense and other
fees. The costs of borrowing may reduce a Portfolio's return. Certain securities
that a Portfolio buys may create leverage including, for example, when-issued
securities, forward commitments and options.
Derivatives -- Each Portfolio may use derivative instruments, including
indexed and inverse floating rate securities, options on portfolio positions,
options on securities or other financial indices, financial futures and options
on such futures and swap agreements. Derivatives allow the Portfolio to increase
or decrease its risk exposure more quickly and efficiently than other types of
instruments.
Derivatives are volatile and involve significant risks, including:
. Credit risk -- the risk that the counterparty (the party on the other
side of the transaction) on a derivative transaction will be unable to
honor its financial obligation to the Portfolio.
. Leverage risk -- the risk associated with certain types of investments or
trading strategies that relatively small market movements may result in
large changes in the value of an investment. Certain investments or
trading strategies that involve leverage can result in losses that
greatly exceed the amount originally invested.
. Liquidity Risk -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the price
that the seller believes the security is currently worth.
MERRILL LYNCH MUNICIPAL BOND FUND, INC. 21
[GRAPHIC] Details About the Program
Each Portfolio may use derivatives for hedging purposes, including
anticipatory hedges. Hedging is a strategy in which the Portfolio uses a
derivative to offset the risks associated with other Portfolio holdings. While
hedging can reduce losses, it can also reduce or eliminate gains or cause losses
if the market moves in a different manner than anticipated by the Portfolio or
if the cost of the derivative outweighs the benefit of the hedge. Hedging also
involves the risk that changes in the value of the derivative will not match
those of the holdings being hedged as expected by the Portfolio, in which case
any losses on the holdings being hedged may not be reduced. There can be no
assurance that the Portfolio's hedging strategy will reduce risk or that hedging
transactions will be either available or cost effective. None of the Portfolios
is required to use hedging and each may choose not to do so.
Junk Bonds -- Only the National Portfolio may invest in junk bonds. Junk
bonds are debt securities that are rated below investment grade by the major
rating agencies or are unrated securities that Portfolio management believes are
of comparable quality. Although junk bonds generally pay higher rates of
interest than investment grade bonds, they are high risk investments that may
cause income and principal losses for the Portfolio. Junk bonds generally are
less liquid and experience more price volatility than higher rated debt
securities. The issuers of junk bonds may have a larger amount of outstanding
debt relative to their assets than issuers of investment grade bonds. In the
event of an issuer's bankruptcy, claims of other creditors may have priority
over the claims of junk bond holders, leaving few or no assets available to
repay junk bond holders. Junk bonds may be subject to greater call and
redemption risk than higher rated debt securities.
Indexed and Inverse Floating Rate Securities -- Each of the Portfolios may
invest in securities whose potential returns are directly related to changes in
an underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. The Portfolios may also invest
in securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, income on inverse floaters will decrease when
short term interest rates increase and increase when short term interest rates
decrease. Investments in inverse floaters may subject the Portfolios to the
risks of reduced or eliminated interest payments and losses of principal. In
addition, certain indexed securities and inverse floaters may increase or
decrease in value at a greater rate than the underlying interest rate, which
effectively leverages the Portfolio's investment. As a result, the market value
of such securities will generally be more volatile than that of fixed rate,
tax-exempt securities.
22 MERRILL LYNCH MUNICIPAL BOND FUND, INC.
Indexed securities and inverse floaters are derivative securities and can be
considered speculative.
When-Issued Securities, Delayed-Delivery Securities and Forward Commitments
- -- When-issued and delayed-delivery securities and forward commitments involve
the risk that the security a Portfolio buys will lose value prior to its
delivery. There also is the risk that the security will not be issued or that
the other party will not meet its obligation, in which case the Portfolio loses
the investment opportunity of the assets it has set aside to pay for the
security and any gain in the security's price.
Illiquid Investments -- Each Portfolio may invest up to 15% of its net assets
in illiquid securities that it cannot easily sell within seven days at current
value or that have contractual or legal restrictions on resale. If the Portfolio
buys illiquid securities, it may be unable to quickly sell them or may be able
to sell them only at a price below current value.
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
If you would like further information about the Fund, including how it
invests, please see the Statement of Additional Information.
MERRILL LYNCH MUNICIPAL BOND FUND, INC. 23
[GRAPHIC]
Your Account
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
- --------------------------------------------------------------------------------
Each Portfolio offers four share classes, each with its own sales charge and
expense structure, allowing you to invest in the way that best suits your needs.
Each share class represents the same ownership interest in the portfolio
investments of the particular Portfolio. When you choose your class of shares,
you should consider the size of your investment and how long you plan to hold
your shares. Your Merrill Lynch Financial Advisor can help you determine which
share class is best suited to your personal financial goals.
For example, if you select Class A or Class I shares, you generally pay a
sales charge at the time of purchase. If you buy Class A shares, you also pay an
ongoing account maintenance fee of 0.25% for the Insured Portfolio and National
Portfolio, and an account maintenance fee of 0.10% for the Limited Maturity
Portfolio. You may be eligible for a sales charge reduction or waiver.
Certain financial intermediaries may charge additional fees in connection
with transactions in Portfolio shares. The Investment Adviser, the Distributor
or their affiliates may make payments out of their own resources to selected
securities dealers and other financial intermediaries for providing services
intended to result in the sale of Portfolio shares or for shareholder servicing
activities.
If you select Class B or Class C shares, you will invest the full amount of
your purchase price, but you will be subject to an account maintenance fee of
0.25% for the Insured Portfolio and National Portfolio and 0.15% for the Limited
Maturity Portfolio on an ongoing basis. In addition, if you select Class B or
Class C shares of the Insured Portfolio or National Portfolio you will be
subject to a distribution fee of 0.50% for Class B shares and 0.55% for Class C
shares. If you select Class B or Class C shares of the Limited Maturity
Portfolio you will be subject to a distribution fee of 0.20%. Because these fees
are paid out of each Portfolio's assets on an ongoing basis, over time these
fees increase the cost of your investment and may cost you more than paying
other types of sales charges. In addition, you may be subject to a deferred
sales charge when you sell Class B or Class C shares of a Portfolio.
Each Portfolio's shares are distributed by FAM Distributors, Inc., an
affiliate of Merrill Lynch.
24 MERRILL LYNCH MUNICIPAL BOND FUND, INC.
The table below summarizes key features of the Merrill Lynch Select PricingSM
System.
Class A Class B Class C
- ------------------------------------------------------------------------------------------------------------
Availability Generally available Generally available Generally available
through Merrill Lynch. through Merrill Lynch. through Merrill Lynch.
Limited availability Limited availability Limited availability
through selected through selected securities through selected securities
securities dealers and dealers and other financial dealers and other financial
other financial intermediaries. intermediaries.
intermediaries.
- ------------------------------------------------------------------------------------------------------------
Initial Sales Yes. Payable at time of No. Entire purchase price No. Entire purchase price
Charge? purchase. Lower sales is invested in shares of the is invested in shares of the
charges available for Fund. Fund.
larger investments.
- ------------------------------------------------------------------------------------------------------------
Deferred Sales Charge? No. (May be charged for Yes. Payable if you redeem Yes. Payable if you redeem
purchases over $1 million within six years of within one year of
that are redeemed within purchase for the Insured purchase.
one year.) Portfolio and the National
Portfolio or within three
years of purchase for the
Limited Maturity Portfolio.
- ------------------------------------------------------------------------------------------------------------
Account 0.25% Account 0.25% Account 0.25% Account
Maintenance and Maintenance Fee for the Maintenance Fee for the Maintenance Fee for the
Distribution Fees? Insured Portfolio and Insured Portfolio and Insured Portfolio and
National Portfolio and National Portfolio and National Portfolio and
0.10% Account 0.15% for the Limited 0.15% for the Limited
Maintenance Fee for the Maturity Portfolio. 0.50% Maturity Portfolio. 0.55%
Limited Maturity Distribution Fee for the Distribution Fee for the
Portfolio. No Distribution Insured Portfolio and Insured Portfolio and
Fee. National Portfolio and National Portfolio and
0.20% Distribution Fee for 0.20% Distribution Fee for
the Limited Maturity the Limited Maturity
Portfolio. Portfolio.
- ------------------------------------------------------------------------------------------------------------
Conversion to N/A. Yes, automatically after No.
Class A shares? approximately ten years.
- ------------------------------------------------------------------------------------------------------------
Class I
- ------------------------------------------------
Availability Limited to certain
investors including:
.Current Class I
shareholders
.Participants in certain
Merrill Lynch-sponsored
programs
.Certain affiliates of
Merrill Lynch, selected
securities dealers and
other financial
intermediaries
- ------------------------------------------------
Initial Sales Yes. Payable at time of
Charge? purchase. Lower sales
charges available for
larger investments.
- ------------------------------------------------
Deferred Sales Charge? No. (May be charged for
purchases over $1 million
that are redeemed within
one year.)
- ------------------------------------------------
Account No.
Maintenance and
Distribution Fees?
- ------------------------------------------------
Conversion to No.
Class A shares?
- ------------------------------------------------
MERRILL LYNCH MUNICIPAL BOND FUND, INC. 25
[GRAPHIC] Your Account
Class A and Class I Shares -- Initial Sales Charge Options If you select Class A
or Class I shares, you will pay a sales charge at the
time of purchase as shown in the following tables.
Insured Portfolio and National Portfolio
---------------------------------------------------------
Dealer
As a % of Compensation
Offering As a % of Your as a % of
Your Investment Price Investment* Offering Price
---------------------------------------------------------
Less than $25,000 4.00% 4.17% 3.75%
---------------------------------------------------------
$25,000 but less
than $50,000 3.75% 3.90% 3.50%
---------------------------------------------------------
$50,000 but less
than $100,000 3.25% 3.36% 3.00%
---------------------------------------------------------
$100,000 but less
than $250,000 2.50% 2.56% 2.25%
---------------------------------------------------------
$250,000 but less
than $1,000,000. 1.50% 1.52% 1.25%
---------------------------------------------------------
$1,000,000 and
over** 0.00% 0.00% 0.00%
---------------------------------------------------------
Limited Maturity Portfolio
----------------------------------------------------------
Dealer
As a % of Compensation
Offering As a % of Your as a % of
Your Investment Price Investment* Offering Price
----------------------------------------------------------
Less than $100,000 1.00% 1.01% 0.95%
----------------------------------------------------------
$100,000 but less
than $250,000 0.75% 0.76% 0.70%
----------------------------------------------------------
$250,000 but less
than $500,000 0.50% 0.50% 0.45%
----------------------------------------------------------
$500,000 but less
than $1,000,000 0.30% 0.30% 0.27%
----------------------------------------------------------
$1,000,000 and
over** 0.00% 0.00% 0.00%
----------------------------------------------------------
*Rounded to the nearest one-hundredth percent.
**If you invest $1,000,000 or more in Class A or Class I shares, you may not pay
an initial sales charge. In that case, the Investment Adviser compensates the
selling dealer or other financial intermediary from its own funds. However, if
you redeem your shares within one year after purchase, you may be charged a
deferred sales charge. This charge is 1.00% (for the Insured Portfolio and
National Portfolio) or 0.20% (for the Limited Maturity Portfolio). Such
deferred sales charge may be waived in connection with certain fee-based
programs.
26 MERRILL LYNCH MUNICIPAL BOND FUND, INC.
Right of Accumulation -- permits you to pay the sales charge that would apply to
the cost or value (whichever is higher) of all qualifying shares you own in the
Merrill Lynch mutual funds that offer Select PricingSM options.
Letter of Intent -- permits you to pay the sales charge that would be applicable
if you add up all qualifying shares of Merrill Lynch Select PricingSM System
funds that you agree to buy within a 13 month period. Certain restrictions
apply.
No initial sales charge applies to Class A or Class I shares that you buy
through reinvestment of dividends.
A reduced or waived sales charge on a purchase of Class A or Class I shares
may apply for:
. Purchases under a Right of Accumulation or Letter of Intent . Merrill
Lynch BlueprintSM Program participants . TMASM Managed Trusts . Certain
Merrill Lynch investment or central asset accounts . Purchases using
proceeds from the sale of certain Merrill Lynch
closed-end funds under certain circumstances
. Certain investors, including directors or trustees of Merrill Lynch
mutual funds and Merrill Lynch employees
. Certain fee-based programs of Merrill Lynch and other financial
intermediaries that have agreements with the Distributor or its
affiliates
Only certain investors are eligible to buy Class I shares. Your Merrill Lynch
Financial Advisor can help you determine whether you are eligible to buy Class I
shares or to participate in any of these programs.
If you decide to buy shares under the initial sales charge alternative and
you are eligible to buy both Class A and Class I shares, you should buy Class I
shares since Class A shares are subject to an account maintenance fee, while
Class I shares are not.
If you redeem Class A or Class I shares and within 30 days buy new shares of
the same class, you will not pay a sales charge on the new purchase amount. The
amount eligible for this "Reinstatement Privilege" may not exceed the amount of
your redemption proceeds. To exercise the privilege, contact your Merrill Lynch
Financial Advisor, selected securities dealer, other financial intermediary or
the Fund's Transfer Agent at 1-800-MER-FUND.
Class B and Class C Shares -- Deferred Sales Charge Options
If you select Class B or Class C shares, you do not pay an initial sales
charge at the time of purchase. However, if you redeem your Class B shares
within six years (or within three years for the Limited Maturity Portfolio)
after purchase, or your Class C shares within one year after purchase, you may
be required to pay a deferred sales charge. You will also pay account
maintenance fees of 0.25% (or 0.15% for Class B and Class C shares of the
Limited Maturity
MERRILL LYNCH MUNICIPAL BOND FUND, INC. 27
Limited Maturity Portfolio
----------------------------------
Years Since Purchase Sales Charge*
----------------------------------
0 - 1 1.00%
----------------------------------
1 - 2 0.50%
----------------------------------
2 - 3 0.25%
----------------------------------
3 and thereafter 0.00%
----------------------------------
* The percentage charge will apply to the lesser of the original cost of the
shares being redeemed or the proceeds of your redemption. Shares acquired
through reinvestment of dividends are not subject to a deferred sales charge.
For shares acquired before December 1, 2002, the four-year deferred sales
charge schedule in effect at that time for Insured Portfolio and National
Portfolio and the one-year deferred sales charge schedule in effect at that
time for Limited Maturity Portfolio will apply. Not all Merrill Lynch funds
have identical deferred sales charge schedules. If you exchange your shares
for shares of another fund, the higher charge will apply.
The deferred sales charge relating to Class B shares may be reduced or waived in
certain circumstances, such as:
. Redemption in connection with participation in certain fee-based programs
of Merrill Lynch or other financial intermediaries that have agreements
with the Distributor or its affiliates or in connection with involuntary
termination of an account in which Portfolio shares are held
. Withdrawals following shareholder death or disability as long as the
waiver request is made within one year of death or disability or, if
later, reasonably promptly following completion of probate
. Withdrawal through the Merrill Lynch Systematic Withdrawal Plan of up to
10% per year of your Class B account value at the time the plan is
established
Your Class B shares convert automatically into Class A shares approximately ten
years after purchase. Any Class B shares received through reinvestment of
dividends paid on converting shares will also convert at that time. Class A
shares are subject to lower annual expenses than Class B shares. The conversion
of Class B to Class A shares is not a taxable event for Federal income tax
purposes.
Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund typically
convert approximately ten years after purchase compared to approximately eight
years for equity funds. If you acquire your Class B shares in an exchange from
another fund with a shorter conversion schedule, the Portfolio's ten year
conversion schedule will apply. If you exchange your Class
MERRILL LYNCH MUNICIPAL BOND FUND, INC. 29
[GRAPHIC] Your Account
Portfolio) and distribution fees each year under a distribution plan that the
Fund has adopted under Rule 12b-1. If you invest in the Insured Portfolio or
National Portfolio, you will pay distribution fees for your Class B and Class C
shares in the amount of 0.50% or 0.55%, respectively, of your investment each
year. Distribution fees for Class B and Class C shares of the Limited Maturity
Portfolio are 0.20% each year. Because these fees are paid out of each
Portfolio's assets on an ongoing basis, over time these fees increase the cost
of your investment and may cost you more than paying other types of sales
charges. The Distributor uses the money that it receives from the deferred sales
charges and the distribution fees to cover the costs of marketing, advertising
and compensating the Merrill Lynch Financial Advisor, selected securities dealer
or other financial intermediary who assists you in purchasing Portfolio shares.
Class B Shares
If you redeem Class B shares of Insured Portfolio or National Portfolio
within six years after purchase or Limited Maturity Portfolio within three years
after purchase, you may be charged a deferred sales charge. The amount of the
charge gradually decreases as you hold your shares over time, according to the
following schedule:
Insured Portfolio and National Portfolio
----------------------------------------
Years Since Purchase Sales Charge*
----------------------------------------
0 - 1 4.00%
----------------------------------------
1 - 2 4.00%
----------------------------------------
2 - 3 3.00%
----------------------------------------
3 - 4 3.00%
----------------------------------------
4 - 5 2.00%
----------------------------------------
5 - 6 1.00%
----------------------------------------
6 and thereafter 0.00%
----------------------------------------
(Footnote on following page)
28 MERRILL LYNCH MUNICIPAL BOND FUND, INC.
[GRAPHIC] Your Account
B shares in a Portfolio for Class B shares of a fund with a longer conversion
schedule, the other fund's conversion schedule will apply. The length of time
that you hold both the original and exchanged Class B shares in both funds will
count toward the conversion schedule. The conversion schedule may be modified in
certain other cases as well.
Class C Shares
If you redeem Class C shares within one year after purchase, you may be charged
a deferred sales charge of 1.00%. The charge will apply to the lesser of the
original cost of the shares being redeemed or the proceeds of your redemption.
You will not be charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends. The deferred sales charge
relating to Class C shares may be reduced or waived in connection with
involuntary termination of an account in which Portfolio shares are held and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan.
Class C shares do not offer a conversion privilege.
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- --------------------------------------------------------------------------------
The chart on the following pages summarizes how to buy, sell, transfer and
exchange shares through Merrill Lynch, a selected securities dealer, broker,
investment adviser, service provider or other financial intermediary. You may
also buy, sell, transfer and exchange shares through the Transfer Agent. To
learn more about buying, selling, transferring or exchanging shares through the
Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund
involves many considerations, your Merrill Lynch Financial Advisor may help you
with this decision.
Because of the high costs of maintaining smaller shareholder accounts, the Fund
may redeem the shares in your account (without charging any deferred sales
charge) if the net asset value of your account falls below $500 due to
redemptions you have made. You will be notified that the value of your account
is less than $500 before the Fund makes an involuntary redemption. You will then
have 60 days to make an additional investment to bring the value of your account
to at least $500 before the Fund takes any action. The involuntary redemption
does not apply to retirement plans or Uniform Gifts or Transfers to Minors Act
accounts.
30 MERRILL LYNCH MUNICIPAL BOND FUND, INC.
If You Want to Your Choices Information Important for You to Know
- ----------------------------------------------------------------------------------------------------------------------------------
Buy Shares First, select the share class Refer to the Merrill
Lynch Select PricingSM System table on page 25. Be sure
appropriate for you to read this prospectus carefully.
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
Next, determine the amount of The minimum initial investment
for a Portfolio is $1,000 for all accounts your investment
except:
. $500 for Employee AccessSM
Accounts . $250 for certain
Merrill Lynch fee-based
programs . $100 for Merrill
Lynch BlueprintSM Program
(The minimums for initial
investments may be waived
under certain
circumstances.)
---------------------------------------------------------------------------------------------------------------
Have your Merrill Lynch The price of your shares is based on
the next calculation of net asset value Financial Advisor,
selected after your order is placed. Any purchase orders
placed prior to the close of securities dealer or other
business on the New York Stock Exchange (generally 4:00 pm
Eastern time) financial intermediary submit will be priced at
the net asset value determined that day. Certain financial
your purchase order intermediaries, however, may require
submission of orders prior to that time.
Purchase orders placed after
that time will be priced at
the net asset value
determined on the next
business day. Each Portfolio
may reject any order to buy
shares and may suspend the
sale of shares at any time.
Selected securities dealers
or other financial
intermediaries, including
Merrill Lynch, may charge a
processing fee to confirm a
purchase. Merrill Lynch
currently charges a fee of
$5.35.
---------------------------------------------------------------------------------------------------------------
Or contact the Transfer Agent
To purchase shares directly,
call the Transfer Agent at
1-800-MER-FUND and request a
purchase application. Mail
the completed purchase
application to the Transfer
Agent at the address on the
inside back cover of this
Prospectus.
- ----------------------------------------------------------------------------------------------------------------------------------
Add to Your Purchase additional shares The minimum investment for additional
purchases is generally $50 except that Investment certain programs, such as
automatic investment programs, may have higher
minimums.
(The minimums for additional
purchases may be waived
under certain
circumstances.)
---------------------------------------------------------------------------------------------------------------
Acquire additional shares All dividends and capital gains distributions are automatically reinvested
through the automatic dividend without a sales charge.
reinvestment plan
---------------------------------------------------------------------------------------------------------------
Participate in the automatic You may invest a specific amount
on a periodic basis through certain Merrill investment plan
Lynch investment or central asset accounts.
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Transfer Shares to Transfer to a participating You may transfer your shares of a
Portfolio only to another securities dealer Another Securities securities dealer
or other that has entered into an agreement with the Distributor. Certain
shareholder Dealer or Other financial intermediary services may not be available
for the transferred shares. You may only Financial purchase additional shares of
funds previously owned before the transfer. All Intermediary future trading of
these assets must be coordinated by the receiving firm.
- ----------------------------------------------------------------------------------------------------------------------------------
Information Important for You to Know
- ------------------------------------------------------------------------------
Refer to the Merrill Lynch Select PricingSM System table on page 25. Be sure to
read this prospectus carefully.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
The minimum initial investment for a Portfolio is $1,000 for all accounts
except: . $500 for Employee AccessSM Accounts . $250 for certain Merrill Lynch
fee-based programs . $100 for Merrill Lynch BlueprintSM Program
(The minimums for initial investments may be waived under certain
circumstances.)
- ------------------------------------------------------------------------------
The price of your shares is based on the next calculation of net asset value
after your order is placed. Any purchase orders placed prior to the close of
business on the New York Stock Exchange (generally 4:00 pm Eastern time) will be
priced at the net asset value determined that day. Certain financial
intermediaries, however, may require submission of orders prior to that time.
Purchase orders placed after that time will be priced at the net asset value
determined on the next business day. Each Portfolio may reject any order to buy
shares and may suspend the sale of shares at any time. Selected securities
dealers or other financial intermediaries, including Merrill Lynch, may charge a
processing fee to confirm a purchase. Merrill Lynch currently charges a fee of
$5.35.
- ------------------------------------------------------------------------------
To purchase shares directly, call the Transfer Agent at 1-800-MER-FUND and
request a purchase application. Mail the completed purchase application to the
Transfer Agent at the address on the inside back cover of this Prospectus.
- ------------------------------------------------------------------------------
The minimum investment for additional purchases is generally $50 except that
certain programs, such as automatic investment programs, may have higher
minimums.
(The minimums for additional purchases may be waived under certain
circumstances.)
- ------------------------------------------------------------------------------
All dividends and capital gains distributions are automatically reinvested
without a sales charge.
- ------------------------------------------------------------------------------
You may invest a specific amount on a periodic basis through certain Merrill
Lynch investment or central asset accounts.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
You may transfer your shares of a Portfolio only to another securities dealer
that has entered into an agreement with the Distributor. Certain shareholder
services may not be available for the transferred shares. You may only purchase
additional shares of funds previously owned before the transfer. All future
trading of these assets must be coordinated by the receiving firm.
- ------------------------------------------------------------------------------
MERRILL LYNCH MUNICIPAL BOND FUND, INC. 31
[GRAPHIC] Your Account
If You Want to Your Choices Information Important for You to Know
- ------------------------------------------------------------------------------------------------------------------------------------
Transfer Shares to Transfer to a non-participating You must either:
Another Securities securities dealer or other . Transfer your shares to an account with the Transfer Agent; or
Dealer or Other financial intermediary . Sell your shares, paying any applicable deferred sales charge.
Financial
Intermediary
(continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Sell Your Shares Have your Merrill Lynch The price of your shares is based on the next calculation of net asset value
Financial Advisor, selected after your order is placed. For your redemption request to be priced at the net
securities dealer or other asset value on the day of your request, you must submit your request to your
financial intermediary submit dealer or other financial intermediary prior to that day's close of business on
your sales order the New York Stock Exchange (generally 4:00 p.m. Eastern time). Certain
financial intermediaries,
however, may require
submission of orders prior
to that time. Any
redemption request placed
after that time will be
priced at the net asset
value at the close of
business on the next
business day.
Securities dealers or other
financial intermediaries,
including Merrill Lynch,
may charge a fee to process
a redemption of shares.
Merrill Lynch currently
charges a fee of $5.35. No
processing fee is charged
if you redeem shares
directly through the
Transfer Agent.
The Fund may reject an order to sell shares under certain circumstances.
- --------------------------------------------------------------------------------------------------------------------
Sell through the Transfer Agent
You may sell shares held at
the Transfer Agent by
writing to the Transfer
Agent at the address on the
inside back cover of this
prospectus. All
shareholders on the account
must sign the letter. A
signature guarantee will
generally be required but
may be waived in certain
limited circumstances. You
can obtain a signature
guarantee from a bank,
securities dealer,
securities broker, credit
union, savings association,
national securities
exchange or registered
securities association. A
notary public seal will not
be acceptable.
If you hold stock certificates, return the certificates with the letter.
The Transfer Agent will normally mail
redemption proceeds within
seven days following
receipt of a properly
completed request. If you
make a redemption request
before the Fund has
collected payment for the
purchase of shares, the
Fund or the Transfer Agent
may delay mailing your
proceeds. This delay will
usually not exceed ten
days.
You may also sell shares
held at the Transfer Agent by telephone request if the
amount being sold is less
than $50,000 and if certain
other conditions are met.
Contact the Transfer Agent
at 1-800-MER-FUND for
details.
- ------------------------------------------------------------------------------------------------------------------------------------
Information Important for You to Know
- --------------------------------------------------------------------------------
You must either:
.. Transfer your shares to an account with the Transfer Agent; or . Sell your
shares, paying any applicable deferred sales charge.
- --------------------------------------------------------------------------------
The price of your shares is based on the next calculation of net asset value
after your order is placed. For your redemption request to be priced at the net
asset value on the day of your request, you must submit your request to your
dealer or other financial intermediary prior to that day's close of business on
the New York Stock Exchange (generally 4:00 p.m. Eastern time). Certain
financial intermediaries, however, may require submission of orders prior to
that time. Any redemption request placed after that time will be priced at the
net asset value at the close of business on the next business day.
Securities dealers or other financial intermediaries, including Merrill Lynch,
may charge a fee to process a redemption of shares. Merrill Lynch currently
charges a fee of $5.35. No processing fee is charged if you redeem shares
directly through the Transfer Agent.
The Fund may reject an order to sell shares under certain circumstances.
- --------------------------------------------------------------------------------
You may sell shares held at the Transfer Agent by writing to the Transfer Agent
at the address on the inside back cover of this prospectus. All shareholders on
the account must sign the letter. A signature guarantee will generally be
required but may be waived in certain limited circumstances. You can obtain a
signature guarantee from a bank, securities dealer, securities broker, credit
union, savings association, national securities exchange or registered
securities association. A notary public seal will not be acceptable. If you hold
stock certificates, return the certificates with the letter. The Transfer Agent
will normally mail redemption proceeds within seven days following receipt of a
properly completed request. If you make a redemption request before the Fund has
collected payment for the purchase of shares, the Fund or the Transfer Agent may
delay mailing your proceeds. This delay will usually not exceed ten days.
You may also sell shares held at the Transfer Agent by telephone request if the
amount being sold is less than $50,000 and if certain other conditions are met.
Contact the Transfer Agent at 1-800-MER-FUND for details.
- --------------------------------------------------------------------------------
32 MERRILL LYNCH MUNICIPAL BOND FUND, INC.
If You Want to Your Choices Information Important for You to Know
- -----------------------------------------------------------------------------------------------------------------------------------
Sell Shares Participate in the Fund's You can choose to receive systematic
payments from your Fund account either Systematically Systematic Withdrawal Plan
by check or through direct deposit to your bank account on a monthly or
quarterly basis. If you hold
your Portfolio shares in a
Merrill Lynch CMA(R) Account
you can arrange for
systematic redemptions of a
fixed dollar amount on a
monthly, bi-monthly,
quarterly, semi-annual or
annual basis, subject to
certain conditions. Under
either method you must have
dividends and other
distributions automatically
reinvested. For Class B and
Class C shares your total
annual withdrawals cannot be
more than 10% per year of the
value of your shares at the
time your plan is
established. The deferred
sales charge is waived for
systematic redemptions. Ask
your Merrill Lynch Financial
Advisor or other financial
intermediary for details.
- -----------------------------------------------------------------------------------------------------------------------------------
Exchange Your Select the fund into which you You can exchange your shares of a
Portfolio for shares of many other Merrill Shares want to exchange. Be sure to
read Lynch mutual funds. You must have held the shares used in the exchange for
that fund's prospectus at least 15 calendar days before you can exchange to another fund.
Each class of Portfolio
shares is generally
exchangeable for shares of
the same class of another
fund. If you own Class I
shares and wish to exchange
into a
fund in which you have no
Class I shares (and are not
eligible to buy Class I
shares), you will exchange
into Class A shares.
Some of the Merrill Lynch
mutual funds impose a
different initial or deferred
sales charge schedule. If you
exchange Class A or Class I
shares for shares of a fund
with a higher initial sales
charge than you originally
paid, you will be charged the
difference at the time of
exchange. If you exchange
Class B shares for shares of
a fund with a different
deferred sales charge
schedule, the higher schedule
will apply. The time you hold
Class B or Class C shares in
both funds will count when
determining your holding
period for calculating a
deferred sales charge at
redemption. If you exchange
Class A or Class I shares for
money market fund shares, you
will receive Class A shares
of Summit Cash Reserves Fund.
Class B or Class C shares of
a Portfolio will be exchanged
for Class B shares of Summit
Cash Reserves Fund.
To exercise the exchange
privilege contact your
Merrill Lynch Financial
Advisor or other financial
intermediary or call the
Transfer Agent at 1-800-
MER-FUND.
Although there is currently
no limit on the number of
exchanges that you can make,
the exchange privilege may be
modified or terminated at any
time in the future.
- -----------------------------------------------------------------------------------------------------------------------------------
Information Important for You to Know
- --------------------------------------------------------------------------------
You can choose to receive systematic payments from your Fund account either by
check or through direct deposit to your bank account on a monthly or quarterly
basis. If you hold your Portfolio shares in a Merrill Lynch CMA(R) Account you
can arrange for systematic redemptions of a fixed dollar amount on a monthly,
bi-monthly, quarterly, semi-annual or annual basis, subject to certain
conditions. Under either method you must have dividends and other distributions
automatically reinvested. For Class B and Class C shares your total annual
withdrawals cannot be more than 10% per year of the value of your shares at the
time your plan is established. The deferred sales charge is waived for
systematic redemptions. Ask your Merrill Lynch Financial Advisor
or other financial intermediary for details.
- --------------------------------------------------------------------------------
You can exchange your shares of a Portfolio for shares of many other Merrill
Lynch mutual funds. You must have held the shares used in the exchange for at
least 15 calendar days before you can exchange to another fund.
Each class of Portfolio shares is generally exchangeable for shares of the same
class of another fund. If you own Class I shares and wish to exchange into a
fund in which you have no Class I shares (and are not eligible to buy Class I
shares), you will exchange into Class A shares.
Some of the Merrill Lynch mutual funds impose a different initial or deferred
sales charge schedule. If you exchange Class A or Class I shares for shares of a
fund with a higher initial sales charge than you originally paid, you will be
charged the difference at the time of exchange. If you exchange Class B shares
for shares of a fund with a different deferred sales charge schedule, the higher
schedule will apply. The time you hold Class B or Class C shares in both funds
will count when determining your holding period for calculating a deferred sales
charge at redemption. If you exchange Class A or Class I shares for money market
fund shares, you will receive Class A shares of Summit Cash Reserves Fund. Class
B or Class C shares of a Portfolio will be exchanged for Class B shares of
Summit Cash Reserves Fund.
To exercise the exchange privilege contact your Merrill Lynch Financial Advisor
or other financial intermediary or call the Transfer Agent at 1-800- MER-FUND.
Although there is currently no limit on the number of exchanges that you can
make, the exchange privilege may be modified or terminated at any time in the
future.
- --------------------------------------------------------------------------------
The Fund reserves the right to reject any purchase order, including
exchanges. Short-term or excessive trading into and out of the Fund,
particularly in larger amounts, may harm performance by disrupting portfolio
management strategies and by increasing expenses. Accordingly, the Fund may
reject purchase orders, including exchanges, from market timers or investors
that Fund management has determined are short-term or excessive or that will be
disruptive to the Fund. For these purposes, Fund management may consider an
investor's trading history in the Fund or other Merrill Lynch funds, and
accounts under common ownership or control.
MERRILL LYNCH MUNICIPAL BOND FUND, INC. 33
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
[GRAPHIC] Your Account
Net Asset Value -- the market value of a Portfolio's total assets after
deducting liabilities, divided by the number of shares outstanding.
When you buy shares, you pay the net asset value, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value, minus any applicable deferred sales charge. Each Portfolio calculates its
net asset value (generally by using market quotations) each day the New York
Stock Exchange is open, as of the close of business on the Exchange based on
prices at the time of closing. The Exchange generally closes at 4:00 p.m.
Eastern time. The net asset value used in determining your share price is the
next one calculated after your purchase or redemption order is placed.
The Fund may accept orders from certain authorized financial intermediaries
or their designees. The Fund will be deemed to receive an order when accepted by
the intermediary or designee and the order will receive the net asset value next
computed by the Fund after such acceptance. If the payment for a purchase order
is not made by a designated later time, the order will be canceled and the
financial intermediary could be held liable for any losses.
Generally, Class I shares will have the highest net asset value because that
class has the lowest expenses, and Class A shares will have a higher net asset
value than Class B or Class C shares. Class B shares will have a higher NAV than
Class C shares because Class B shares have lower distribution expenses than
Class C shares. Also, dividends paid on Class A and Class I shares will
generally be higher than dividends paid on Class B and Class C shares because
Class A and Class I shares have lower expenses.
PARTICIPATION IN FEE-BASED PROGRAMS
- --------------------------------------------------------------------------------
If you participate in certain fee-based programs offered by Merrill Lynch or
other financial intermediaries, you may be able to buy Class I shares at net
asset value, including by exchanges from other share classes. Sales charges on
the shares being exchanged may be reduced or waived under certain circumstances.
You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.
34 MERRILL LYNCH MUNICIPAL BOND FUND, INC.
Dividends -- exempt interest, ordinary income and capital gains paid to
shareholders. Dividends may be reinvested in additional Portfolio shares as they
are paid.
If you leave one of these programs, your shares may be redeemed or
automatically exchanged into another class of the particular Portfolio or into a
money market fund. The class you receive may be the class you originally owned
when you entered the program, or in certain cases, a different class. If the
exchange is into Class B shares, the period before conversion to Class A shares
may be modified. Any redemption or exchange will be at net asset value. However,
if you participate in the program for less than a specified period, you may be
charged a fee in accordance with the terms of the program.
Details about these features and the relevant charges are included in the
client agreement for each fee-based program and are available from your Merrill
Lynch Financial Advisor, selected securities dealer or other financial
intermediary.
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
Each Portfolio will distribute net investment income, if any, monthly and net
realized capital gains, if any, at least annually. Each Portfolio may also pay a
special distribution at the end of the calendar year to comply with Federal tax
requirements. If you would like to receive dividends in cash, contact your
Merrill Lynch Financial Advisor, selected securities dealer, other financial
intermediary or the Transfer Agent.
To the extent that the dividends distributed by a Portfolio are from
municipal bond interest income, they are exempt from Federal income tax but may
be subject to state and local taxes. Certain investors may be subject to a
Federal alternative minimum tax on dividends received from a Portfolio. Interest
income from other investments may produce taxable dividends. Dividends derived
from capital gains realized by a Portfolio will be subject to Federal tax.
Generally, within 60 days after the end of the Fund's taxable year, each
Portfolio will tell you the amount of exempt-interest dividends and capital gain
dividends you received that year. Capital gain dividends are taxable as long
term capital gains to you, regardless of how long you have held your shares. The
tax treatment of dividends from a Portfolio is the same whether you choose to
receive them in cash or to have them reinvested in shares of the Portfolio.
MERRILL LYNCH MUNICIPAL BOND FUND, INC. 35
[GRAPHIC] Your Account
"BUYING A DIVIDEND"
You may want to avoid buying shares shortly before a Portfolio pays a dividend
although the impact on you will be significantly less than if you were invested
in a fund paying fully taxable dividends. The reason? If you buy shares when a
Portfolio has realized but not yet distributed taxable ordinary income or
capital gains, you will pay the full price for the shares and then receive a
portion of the price back in the form of a taxable dividend. Before investing
you may want to consult your tax adviser.
If you redeem Portfolio shares or exchange them for shares of another fund,
you generally will be treated as having sold your shares and any gain on the
transaction may be subject to tax. Capital gains are generally taxed at
different rates than ordinary income dividends.
By law, your dividends and redemption proceeds will be subject to a
withholding tax if you have not provided a taxpayer identification number or
social security number or if the number you have provided is incorrect.
This section summarizes some of the consequences under current Federal tax
law of an investment in a Portfolio. It is not a substitute for personal tax
advice. Consult your personal tax adviser about the potential tax consequences
of an investment in a Portfolio under all applicable tax laws.
ELECTRONIC DELIVERY
- --------------------------------------------------------------------------------
The Fund is now offering electronic delivery of communications to its
shareholders. In order to receive this service, you must register your account
and provide us with e-mail information. To sign up for this service, simply
access the web site http://www.icsdelivery.com/live/ and follow the
instructions. When you visit the site, you will obtain a personal identification
number (PIN). You will need this PIN should you wish to update your e-mail
address, choose to discontinue this service and/or make any other changes to the
service.
36 MERRILL LYNCH MUNICIPAL BOND FUND, INC.
[GRAPHIC]
Management of the Fund
FUND ASSET MANAGEMENT
- --------------------------------------------------------------------------------
Fund Asset Management, L.P., the Fund's Investment Adviser, manages the
Fund's investments and its business operations under the overall supervision of
the Fund's Board of Directors. The Investment Adviser has the responsibility for
making all investment decisions for the Portfolios.
The Fund pays the Investment Adviser fees at annual rates that decrease as
the total assets of the Fund's three Portfolios increase above certain levels.
The fee rates are applied to the average daily net assets of each Portfolio,
with the reduced rates applicable to portions of the assets of each Portfolio to
the extent that the aggregate average daily net assets of the three combined
Portfolios exceeds $250 million, $400 million, $550 million and $1.5 billion
(each such amount being a "breakpoint level"). These annual fee rates range from
0.40% to 0.35% for the Insured Portfolio, 0.50% to 0.475% for the National
Portfolio and 0.40% to 0.325% for the Limited Maturity Portfolio.
For the fiscal year ended June 30, 2003 the Investment Adviser received a fee
from each Portfolio at the annual rates (as a percentage of the average daily
net assets of the relevant Portfolio) shown below:
Advisory Fee
Paid For Fiscal
Year Ended
June 30, 2003
------------------------------------------
Insured Portfolio 0.36%
------------------------------------------
National Portfolio 0.48%
------------------------------------------
Limited Maturity Portfolio 0.33%
------------------------------------------
Fund Asset Management was organized as an investment adviser in 1977 and
offers investment advisory services to more than 50 registered investment
companies. Fund Asset Management and its affiliates had approximately 473
billion in investment company and other portfolio assets under management as of
September 2003.
MERRILL LYNCH MUNICIPAL BOND FUND, INC. 37
[GRAPHIC] Management of the Program
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand each
Portfolio's financial performance for the periods shown. Certain information
reflects the financial results for a single Portfolio share. The total returns
in the table represent the rate that an investor would have earned or lost on an
investment in the indicated Portfolio (assuming reinvestment of all dividends).
The information has been audited by Deloitte & Touche LLP, whose report, along
with each Portfolio's financial statements, is included in the Fund's Annual
Report, which is available upon request.
Insured Portfolio
-----------------------------------------------------------
Class A#
----------------------------------------------- ----------
For the Year Ended June 30,
Increase (Decrease) ----------------------------------------------- ----------
in Net Asset Value: 2003 2002 2001 2000 1999 2003
- - ------------------------------------------------------------
Per Share Operating Performance:
- ----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 7.79 $ 7.69 $ 7.36 $ 7.79 $ 8.24 $ 7.79
- ----------------------------------------------------------------------------------------------------------------------
Investment income -- net .39++ .39 .37 .38 .39 .35++
- ----------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments -- net .28 .10 .33 (.32) (.26) .28
- ----------------------------------------------------------------------------------------------------------------------
Total from investment operations .67 .49 .70 .06 .13 .63
- ----------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.39) (.39) (.37) (.38) (.39) (.35)
Realized gain on investments -- net -- --+ -- -- (.19) --
In excess of realized gain on investments -- net -- -- -- (.11) -- --
- ----------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (.39) (.39) (.37) (.49) (.58) (.35)
- ----------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 8.07 $ 7.79 $ 7.69 $ 7.36 $ 7.79 $ 8.07
- ----------------------------------------------------------------------------------------------------------------------
Total Investment Return:*
- ----------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 8.77% 6.63% 9.74% .96% 1.43% 8.21%
- ----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ----------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver .71% .72% .70% .68% .67% 1.22%
- ----------------------------------------------------------------------------------------------------------------------
Expenses .71% .72% .70% .68% .67% 1.22%
- ----------------------------------------------------------------------------------------------------------------------
Investment income -- net 4.88% 5.10% 4.94% 5.10% 4.77% 4.38%
- ----------------------------------------------------------------------------------------------------------------------
Supplemental Data:
- ----------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $187,805 $161,110 $145,688 $99,326 $81,238 $160,177
- ----------------------------------------------------------------------------------------------------------------------
Portfolio turnover 38.17% 32.78% 64.39% 94.08% 86.35% 38.17%
- ----------------------------------------------------------------------------------------------------------------------
---------------------------------------
Class B
---------------------------------------
For the Year Ended June 30,
Increase (Decrease) ---------------------------------------
in Net Asset Value: 2002 2001 2000 1999
- - ---------------------------------------
Per Share Operating Performance:
- -------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 7.68 $ 7.36 $ 7.78 $ 8.24
- -------------------------------------------------------------------------------------------------
Investment income -- net .36 .34 .34 .35
- -------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments -- net .11 .32 (.31) (.27)
- -------------------------------------------------------------------------------------------------
Total from investment operations .47 .66 .03 .08
- -------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.36) (.34) (.34) (.35)
Realized gain on investments -- net --+ -- -- (.19)
In excess of realized gain on investments -- net -- -- (.11) --
- -------------------------------------------------------------------------------------------------
Total dividends and distributions (.36) (.34) (.45) (.54)
- -------------------------------------------------------------------------------------------------
Net asset value, end of year $ 7.79 $ 7.68 $ 7.36 $ 7.78
- -------------------------------------------------------------------------------------------------
Total Investment Return:*
- -------------------------------------------------------------------------------------------------
Based on net asset value per share 6.23% 9.04% .57% .79%
- -------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -------------------------------------------------------------------------------------------------
Expenses, net of waiver 1.23% 1.21% 1.19% 1.18%
- -------------------------------------------------------------------------------------------------
Expenses 1.23% 1.21% 1.19% 1.18%
- -------------------------------------------------------------------------------------------------
Investment income -- net 4.58% 4.43% 4.56% 4.26%
- -------------------------------------------------------------------------------------------------
Supplemental Data:
- -------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $182,241 $223,710 $276,154 $414,135
- -------------------------------------------------------------------------------------------------
Portfolio turnover 32.78% 64.39% 94.08% 86.35%
- -------------------------------------------------------------------------------------------------
# Prior to April 14, 2003, Class A shares were designated Class D. * Total
investment returns exclude the effects of sales charges. + Amount is less than
($.01) per share.
++Based on average shares outstanding.
38 MERRILL LYNCH MUNICIPAL BOND FUND, INC.
FINANCIAL HIGHLIGHTS (continued)
- --------------------------------------------------------------------------------
------------------------------------
Class C
------------------------------------
For the Year Ended June 30,
Increase (Decrease) ------------------------------------
in Net Asset Value: 2003 2002 2001 2000
Per Share Operating Performance:
- -----------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 7.79 $ 7.68 $ 7.36 $ 7.78
- -----------------------------------------------------------------------------------------------
Investment income -- net .34++ .35 .33 .34
- -----------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments -- net .28 .11 .32 (.31)
- -----------------------------------------------------------------------------------------------
Total from investment operations .62 .46 .65 .03
- -----------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.34) (.35) (.33) (.34)
Realized gain on investments -- net -- --+ -- --
In excess of realized gain on
investments -- net -- -- -- (.11)
- -----------------------------------------------------------------------------------------------
Total dividends and distributions (.34) (.35) (.33) (.45)
- -----------------------------------------------------------------------------------------------
Net asset value, end of year $ 8.07 $ 7.79 $ 7.68 $ 7.36
- -----------------------------------------------------------------------------------------------
Total Investment Return:*
- -----------------------------------------------------------------------------------------------
Based on net asset value per share 8.16% 6.18% 8.99% .52%
- -----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------
Expenses, net of waiver 1.27% 1.28% 1.26% 1.24%
- -----------------------------------------------------------------------------------------------
Expenses 1.27% 1.28% 1.26% 1.24%
- -----------------------------------------------------------------------------------------------
Investment income -- net 4.31% 4.56% 4.38% 4.52%
- -----------------------------------------------------------------------------------------------
Supplemental Data:
- -----------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $66,089 $34,541 $14,392 $12,856
- -----------------------------------------------------------------------------------------------
Portfolio turnover 38.17% 32.78% 64.39% 94.08%
- -----------------------------------------------------------------------------------------------
Insured Portfolio
-------------------------------------------------------------
Class I#
-------- ---------------------------------------------------
For the Year Ended June 30,
Increase (Decrease) -------- ---------------------------------------------------
in Net Asset Value: 1999 2003 2002 2001 2000 1999
Per Share Operating Performance:
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 8.24 $ 7.80 $ 7.69 $ 7.36 $ 7.79 $ 8.25
- -----------------------------------------------------------------------------------------------------------------------
Investment income -- net .34 .41++ .41 .39 .40 .41
- -----------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments -- net (.27) .27 .11 .33 (.32) (.27)
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations .07 .68 .52 .72 .08 .14
- -----------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.34) (.41) (.41) (.39) (.40) (.41)
Realized gain on investments -- net (.19) -- --+ -- -- (.19)
In excess of realized gain on
investments -- net -- -- -- -- (.11) --
- -----------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (.53) (.41) (.41) (.39) (.51) (.60)
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 7.78 $ 8.07 $ 7.80 $ 7.69 $ 7.36 $ 7.79
- -----------------------------------------------------------------------------------------------------------------------
Total Investment Return:*
- -----------------------------------------------------------------------------------------------------------------------
Based on net asset value per share .74% 8.88% 7.03% 10.01% 1.21% 1.56%
- -----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver 1.23% .46% .47% .45% .43% .42%
- -----------------------------------------------------------------------------------------------------------------------
Expenses 1.23% .46% .47% .45% .43% .42%
- -----------------------------------------------------------------------------------------------------------------------
Investment income -- net 4.21% 5.13% 5.35% 5.19% 5.33% 5.02%
- -----------------------------------------------------------------------------------------------------------------------
Supplemental Data:
- -----------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $16,850 $855,757 $878,018 $920,597 $972,420 $1,216,346
- -----------------------------------------------------------------------------------------------------------------------
Portfolio turnover 86.35% 38.17% 32.78% 64.39% 94.08% 86.35%
- -----------------------------------------------------------------------------------------------------------------------
# Prior to April 14, 2003, Class I shares were designated Class A. * Total
investment returns exclude the effects of sales charges. + Amount is less than
($.01) per share.
++Based on average shares outstanding.
MERRILL LYNCH MUNICIPAL BOND FUND, INC. 39
[GRAPHIC] Management of the Program
FINANCIAL HIGHLIGHTS (continued)
- --------------------------------------------------------------------------------
National Portfolio
-----------------------------------------------------------
Class A#
----------------------------------------------- ----------
For the Year Ended June 30,
Increase (Decrease) ----------------------------------------------- ----------
in Net Asset Value: 2003 2002 2001 2000 1999 2003
Per Share Operating Performance:
- --------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 10.27 $ 10.15 $ 9.71 $ 10.22 $ 10.64 $ 10.26
- --------------------------------------------------------------------------------------------------------------------
Investment income -- net .53++ .53 .52 .54 .53 .48++
- --------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments --
net .27 .12 .44 (.51) (.42) .27
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations .80 .65 .96 .03 .11 .75
- --------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.53) (.53) (.52) (.54) (.53) (.48)
Realized gain on investments -- net -- --+ -- -- -- --
In excess of realized gain on investments -- net -- -- -- -- --+ --
- --------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (.53) (.53) (.52) (.54) (.53) (.48)
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 10.54 $ 10.27 $ 10.15 $ 9.71 $ 10.22 $ 10.53
- --------------------------------------------------------------------------------------------------------------------
Total Investment Return:*
- --------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 7.98% 6.72% 10.04% .43% 1.03% 7.43%
- --------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- --------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver .84% .87% .83% .81% .81% 1.34%
- --------------------------------------------------------------------------------------------------------------------
Expenses .84% .87% .83% .81% .81% 1.35%
- --------------------------------------------------------------------------------------------------------------------
Investment income -- net 5.10% 5.30% 5.16% 5.50% 5.01% 4.59%
- --------------------------------------------------------------------------------------------------------------------
Supplemental Data:
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $200,108 $137,225 $124,082 $86,701 $93,201 $321,477
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover 37.75% 35.75% 80.88% 108.43% 125.75% 37.75%
- --------------------------------------------------------------------------------------------------------------------
----------------------------------------
Class B
----------------------------------------
For the Year Ended June 30,
Increase (Decrease) ----------------------------------------
in Net Asset Value: 2002 2001 2000 1999
Per Share Operating Performance:
- ------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 10.14 $ 9.70 $ 10.21 $ 10.63
- ------------------------------------------------------------------------------------------------
Investment income -- net .53 .46 .49 .48
- ------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments --
net .12 .44 (.51) (.42)
- ------------------------------------------------------------------------------------------------
Total from investment operations .65 .90 (.02) .06
- ------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.53) (.46) (.49) (.48)
Realized gain on investments -- net --+ -- -- --
In excess of realized gain on investments -- net -- -- -- --+
- ------------------------------------------------------------------------------------------------
Total dividends and distributions (.53) (.46) (.49) (.48)
- ------------------------------------------------------------------------------------------------
Net asset value, end of year $ 10.26 $ 10.14 $ 9.70 $ 10.21
- ------------------------------------------------------------------------------------------------
Total Investment Return:*
- ------------------------------------------------------------------------------------------------
Based on net asset value per share 6.18% 9.49% (.09)% .51%
- ------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------
Expenses, net of waiver 1.38% 1.34% 1.32% 1.31%
- ------------------------------------------------------------------------------------------------
Expenses 1.38% 1.34% 1.32% 1.31%
- ------------------------------------------------------------------------------------------------
Investment income -- net 4.80% 4.67% 4.98% 4.50%
- ------------------------------------------------------------------------------------------------
Supplemental Data:
- ------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $295,827 $227,592 $254,860 $374,642
- ------------------------------------------------------------------------------------------------
Portfolio turnover 35.75% 80.88% 108.43% 125.75%
- ------------------------------------------------------------------------------------------------
# Prior to April 14, 2003, Class A shares were designated Class D. * Total
investment returns exclude the effects of sales charges. + Amount is less than
($.01) per share.
++Based on average shares outstanding.
40 MERRILL LYNCH MUNICIPAL BOND FUND, INC.
[GRAPHIC] Management of the Program
FINANCIAL HIGHLIGHTS (continued)
- --------------------------------------------------------------------------------
National Portfolio
-----------------------------------------------------------
Class A#
----------------------------------------------- ----------
For the Year Ended June 30,
Increase (Decrease) ----------------------------------------------- ----------
in Net Asset Value: 2003 2002 2001 2000 1999 2003
Per Share Operating Performance:
- --------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 10.27 $ 10.15 $ 9.71 $ 10.22 $ 10.64 $ 10.26
- --------------------------------------------------------------------------------------------------------------------
Investment income -- net .53++ .53 .52 .54 .53 .48++
- --------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments --
net .27 .12 .44 (.51) (.42) .27
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations .80 .65 .96 .03 .11 .75
- --------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.53) (.53) (.52) (.54) (.53) (.48)
Realized gain on investments -- net -- --+ -- -- -- --
In excess of realized gain on investments -- net -- -- -- -- --+ --
- --------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (.53) (.53) (.52) (.54) (.53) (.48)
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 10.54 $ 10.27 $ 10.15 $ 9.71 $ 10.22 $ 10.53
- --------------------------------------------------------------------------------------------------------------------
Total Investment Return:*
- --------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 7.98% 6.72% 10.04% .43% 1.03% 7.43%
- --------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- --------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver .84% .87% .83% .81% .81% 1.34%
- --------------------------------------------------------------------------------------------------------------------
Expenses .84% .87% .83% .81% .81% 1.35%
- --------------------------------------------------------------------------------------------------------------------
Investment income -- net 5.10% 5.30% 5.16% 5.50% 5.01% 4.59%
- --------------------------------------------------------------------------------------------------------------------
Supplemental Data:
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $200,108 $137,225 $124,082 $86,701 $93,201 $321,477
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover 37.75% 35.75% 80.88% 108.43% 125.75% 37.75%
- --------------------------------------------------------------------------------------------------------------------
----------------------------------------
Class B
----------------------------------------
For the Year Ended June 30,
Increase (Decrease) ----------------------------------------
in Net Asset Value: 2002 2001 2000 1999
Per Share Operating Performance:
- ------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 10.14 $ 9.70 $ 10.21 $ 10.63
- ------------------------------------------------------------------------------------------------
Investment income -- net .53 .46 .49 .48
- ------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments --
net .12 .44 (.51) (.42)
- ------------------------------------------------------------------------------------------------
Total from investment operations .65 .90 (.02) .06
- ------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.53) (.46) (.49) (.48)
Realized gain on investments -- net --+ -- -- --
In excess of realized gain on investments -- net -- -- -- --+
- ------------------------------------------------------------------------------------------------
Total dividends and distributions (.53) (.46) (.49) (.48)
- ------------------------------------------------------------------------------------------------
Net asset value, end of year $ 10.26 $ 10.14 $ 9.70 $ 10.21
- ------------------------------------------------------------------------------------------------
Total Investment Return:*
- ------------------------------------------------------------------------------------------------
Based on net asset value per share 6.18% 9.49% (.09)% .51%
- ------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------
Expenses, net of waiver 1.38% 1.34% 1.32% 1.31%
- ------------------------------------------------------------------------------------------------
Expenses 1.38% 1.34% 1.32% 1.31%
- ------------------------------------------------------------------------------------------------
Investment income -- net 4.80% 4.67% 4.98% 4.50%
- ------------------------------------------------------------------------------------------------
Supplemental Data:
- ------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $295,827 $227,592 $254,860 $374,642
- ------------------------------------------------------------------------------------------------
Portfolio turnover 35.75% 80.88% 108.43% 125.75%
- ------------------------------------------------------------------------------------------------
# Prior to April 14, 2003, Class A shares were designated Class D. * Total
investment returns exclude the effects of sales charges. + Amount is less than
($.01) per share.
++Based on average shares outstanding.
40 MERRILL LYNCH MUNICIPAL BOND FUND, INC.
FINANCIAL HIGHLIGHTS (continued)
- --------------------------------------------------------------------------------
National Portfolio
---------------------------------------------------------
Class C
--------------------------------------------- ----------
For the Year Ended June 30,
Increase (Decrease) --------------------------------------------- ----------
in Net Asset Value: 2003 2002 2001 2000 1999 2003
Per Share Operating Performance:
- --------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 10.26 $ 10.14 $ 9.71 $ 10.22 $ 10.64 $ 10.26
- --------------------------------------------------------------------------------------------------------------------
Investment income -- net .47++ .53 .46 .48 .47 .56++
- --------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments -- net .28 .12 .43 (.51) (.42) .28
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations .75 .65 .89 (.03) .05 .84
- --------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.47) (.53) (.46) (.48) (.47) (.56)
Realized gain on investments -- net -- --+ -- -- -- --
In excess of realized gain on
investments --net -- -- -- -- --+ --
- --------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (.47) (.53) (.46) (.48) (.47) (.56)
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 10.54 $ 10.26 $ 10.14 $ 9.71 $ 10.22 $ 10.54
- --------------------------------------------------------------------------------------------------------------------
Total Investment Return:*
- --------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 7.48% 6.13% 9.33% (.13)% .47% 8.34%
- --------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- --------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver 1.39% 1.43% 1.39% 1.37% 1.36% .59%
- --------------------------------------------------------------------------------------------------------------------
Expenses 1.40% 1.43% 1.39% 1.37% 1.36% .59%
- --------------------------------------------------------------------------------------------------------------------
Investment income -- net 4.54% 4.76% 4.61% 4.92% 4.45% 5.35%
- --------------------------------------------------------------------------------------------------------------------
Supplemental Data:
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $77,906 $52,822 $31,880 $30,303 $47,901 $624,192
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover 37.75% 35.75% 80.88% 108.43% 125.75% 37.75%
- --------------------------------------------------------------------------------------------------------------------
---------------------------------------
Class I#
---------------------------------------
For the Year Ended June 30,
Increase (Decrease) ---------------------------------------
in Net Asset Value: 2002 2001 2000 1999
Per Share Operating Performance:
- -------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 10.14 $ 9.70 $ 10.22 $ 10.64
- -------------------------------------------------------------------------------------------------
Investment income -- net .62 .54 .56 .56
- -------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments -- net .12 .44 (.52) (.42)
- -------------------------------------------------------------------------------------------------
Total from investment operations .74 .98 .04 .14
- -------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.62) (.54) (.56) (.56)
Realized gain on investments -- net --+ -- -- --
In excess of realized gain on
investments --net -- -- -- --+
- -------------------------------------------------------------------------------------------------
Total dividends and distributions (.62) (.54) (.56) (.56)
- -------------------------------------------------------------------------------------------------
Net asset value, end of year $ 10.26 $ 10.14 $ 9.70 $ 10.22
- -------------------------------------------------------------------------------------------------
Total Investment Return:*
- -------------------------------------------------------------------------------------------------
Based on net asset value per share 6.98% 10.32% .58% 1.28%
- -------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -------------------------------------------------------------------------------------------------
Expenses, net of waiver .62% .58% .56% .55%
- -------------------------------------------------------------------------------------------------
Expenses .62% .58% .56% .55%
- -------------------------------------------------------------------------------------------------
Investment income -- net 5.55% 5.42% 5.74% 5.26%
- -------------------------------------------------------------------------------------------------
Supplemental Data:
- -------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $626,935 $653,685 $682,553 $877,841
- -------------------------------------------------------------------------------------------------
Portfolio turnover 35.75% 80.88% 108.43% 125.75%
- -------------------------------------------------------------------------------------------------
# Prior to April 14, 2003, Class I shares were designated Class A. * Total
investment returns exclude the effects of sales charges. + Amount is less than
($.01) per share.
++Based on average shares outstanding.
MERRILL LYNCH MUNICIPAL BOND FUND, INC. 41
[GRAPHIC] Management of the Program
FINANCIAL HIGHLIGHTS (continued)
- --------------------------------------------------------------------------------
---------
---------
Increase (Decrease) ---------
in Net Asset Value: 2003
- - ----------
Per Share Operating Performance:
- --------------------------------------------------------------------
Net asset value, beginning of year $ 10.14
- --------------------------------------------------------------------
Investment income -- net .24+
- --------------------------------------------------------------------
Realized and unrealized gain (loss) on investments -- net .04
- --------------------------------------------------------------------
Total from investment operations .28
- --------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.24)
In excess of realized gain on
investments -- net --
- --------------------------------------------------------------------
Total dividends and distributions (.24)
- --------------------------------------------------------------------
Net asset value, end of year $ 10.18
- --------------------------------------------------------------------
Total Investment Return:*
- --------------------------------------------------------------------
Based on net asset value per share 2.77%
- --------------------------------------------------------------------
Ratios to Average Net Assets:
- --------------------------------------------------------------------
Expenses, net of waiver .52%
- --------------------------------------------------------------------
Expenses .53%
- --------------------------------------------------------------------
Investment income -- net 2.31%
- --------------------------------------------------------------------
Supplemental Data:
- --------------------------------------------------------------------
Net assets, end of year (in thousands) $248,454
- --------------------------------------------------------------------
Portfolio turnover 44.61%
- --------------------------------------------------------------------
Limited Maturity Portfolio
- ---------------------------------------------------------------------------------
Class A# Class B
------------------------------------ -----------------------------------
For the Year Ended June 30, For the Year Ended June 30,
Increase (Decrease) ------------------------------------ -----------------------------------
in Net Asset Value: 2002 2001 2000 1999 2003 2002 2001 2000
- - -------------------------------------------------------------------------
Per Share Operating Performance:
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 10.06 $ 9.86 $ 9.92 $ 9.97 $ 10.13 $ 10.06 $ 9.86 $ 9.92
- -----------------------------------------------------------------------------------------------------------------------------------
Investment income -- net .32 .38 .37 .37 .21+ .29 .35 .35
- -----------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments -- net .08 .20 (.06) (.04) .04 .07 .20 (.06)
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .40 .58 .31 .33 .25 .36 .55 .29
- -----------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.32) (.38) (.37) (.37) (.21) (.29) (.35) (.35)
In excess of realized gain on
investments -- net -- -- -- (.01) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (.32) (.38) (.37) (.38) (.21) (.29) (.35) (.35)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 10.14 $ 10.06 $ 9.86 $ 9.92 $ 10.17 $ 10.13 $ 10.06 $ 9.86
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investment Return:*
- -----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 3.99% 5.96% 3.20% 3.27% 2.51% 3.62% 5.69% 2.94%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver .56% .54% .50% .53% .78% .82% .80% .76%
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses .56% .54% .50% .53% .79% .82% .80% .76%
- -----------------------------------------------------------------------------------------------------------------------------------
Investment income -- net 3.13% 3.80% 3.72% 3.65% 2.10% 2.87% 3.55% 3.47%
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Data:
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $140,744 $42,619 $39,090 $83,177 $83,886 $81,967 $31,480 $32,742
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 74.74% 51.94% 51.42% 40.28% 44.61% 74.74% 51.94% 51.42%
- -----------------------------------------------------------------------------------------------------------------------------------
--------
--------
Increase (Decrease) --------
in Net Asset Value: 1999
- - --------
Per Share Operating Performance:
- ------------------------------------------------------------------
Net asset value, beginning of year $ 9.97
- ------------------------------------------------------------------
Investment income -- net .34
- ------------------------------------------------------------------
Realized and unrealized gain (loss) on investments -- net (.04)
- ------------------------------------------------------------------
Total from investment operations .30
- ------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.34)
In excess of realized gain on
investments -- net (.01)
- ------------------------------------------------------------------
Total dividends and distributions (.35)
- ------------------------------------------------------------------
Net asset value, end of year $ 9.92
- ------------------------------------------------------------------
Total Investment Return:*
- ------------------------------------------------------------------
Based on net asset value per share 3.01%
- ------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------
Expenses, net of waiver .78%
- ------------------------------------------------------------------
Expenses .78%
- ------------------------------------------------------------------
Investment income -- net 3.39%
- ------------------------------------------------------------------
Supplemental Data:
- ------------------------------------------------------------------
Net assets, end of year (in thousands) $42,930
- ------------------------------------------------------------------
Portfolio turnover 40.28%
- ------------------------------------------------------------------
# Prior to April 14, 2003, Class A shares were designated Class D. * Total
investment returns exclude the effects of sales charges. + Based on average
shares outstanding.
42 MERRILL LYNCH MUNICIPAL BOND FUND, INC.
FINANCIAL HIGHLIGHTS (continued)
- --------------------------------------------------------------------------------
Increase (Decrease)
in Net Asset Value:
Per Share Operating Performance:
- --------------------------------------------------
Net asset value, beginning of year
- --------------------------------------------------
Investment income -- net
- --------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net
- --------------------------------------------------
Total from investment operations
- --------------------------------------------------
Less dividends and distributions:
Investment income -- net
In excess of realized gain on investments -- net
- --------------------------------------------------
Total dividends and distributions
- --------------------------------------------------
Net asset value, end of year
- --------------------------------------------------
Total Investment Return:*
- --------------------------------------------------
Based on net asset value per share
- --------------------------------------------------
Ratios to Average Net Assets:
- --------------------------------------------------
Expenses, net of waiver
- --------------------------------------------------
Expenses
- --------------------------------------------------
Investment income -- net
- --------------------------------------------------
Supplemental Data:
- --------------------------------------------------
Net assets, end of year (in thousands)
- --------------------------------------------------
Portfolio turnover
- --------------------------------------------------
Limited Maturity Portfolio
---------------------------------------------------------------------------------
Class C Class I#
---------------------------------------- ---------------------------------------
For the Year Ended June 30, For the Year Ended June 30,
Increase (Decrease) ---------------------------------------- ---------------------------------------
in Net Asset Value: 2003 2002 2001 2000 1999 2003 2002 2001 2000
Per Share Operating Performance:
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 10.09 $10.01 $ 9.82 $ 9.88 $ 9.94 $ 10.13 $ 10.05 $ 9.85 $ 9.91
- ------------------------------------------------------------------------------------------------------------------------------------
Investment income -- net .19+ .29 .35 .34 .34 .27+ .34 .39 .38
- ------------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net .06 .08 .19 (.06) (.05) .02 .08 .20 (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .25 .37 .54 .28 .29 .29 .42 .59 .32
- ------------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.21) (.29) (.35) (.34) (.34) (.25) (.34) (.39) (.38)
In excess of realized gain on investments -- net -- -- -- -- (.01) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (.21) (.29) (.35) (.34) (.35) (.25) (.34) (.39) (.38)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 10.13 $10.09 $10.01 $ 9.82 $ 9.88 $ 10.17 $ 10.13 $ 10.05 $ 9.85
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Return:*
- ------------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 2.52% 3.72% 5.59% 2.93% 2.89% 2.87% 4.10% 6.07% 3.31%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver .78% .82% .81% .76% .79% .42% .46% .44% .40%
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses .79% .82% .81% .76% .79% .43% .46% .44% .40%
- ------------------------------------------------------------------------------------------------------------------------------------
Investment income -- net 1.92% 2.91% 3.53% 3.46% 3.37% 2.44% 3.30% 3.91% 3.83%
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $135,782 $1,596 $ 602 $ 308 $ 437 $251,137 $204,936 $191,481 $215,421
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 44.61% 74.74% 51.94% 51.42% 40.28% 44.61% 74.74% 51.94% 51.42%
- ------------------------------------------------------------------------------------------------------------------------------------
---------
---------
Increase (Decrease) ---------
in Net Asset Value: 1999
Per Share Operating Performance:
- -----------------------------------------------------------
Net asset value, beginning of year $ 9.96
- -----------------------------------------------------------
Investment income -- net .37
- -----------------------------------------------------------
Realized and unrealized gain (loss) on
investments -- net (.04)
- -----------------------------------------------------------
Total from investment operations .33
- -----------------------------------------------------------
Less dividends and distributions:
Investment income -- net (.37)
In excess of realized gain on investments -- net (.01)
- -----------------------------------------------------------
Total dividends and distributions (.38)
- -----------------------------------------------------------
Net asset value, end of year $ 9.91
- -----------------------------------------------------------
Total Investment Return:*
- -----------------------------------------------------------
Based on net asset value per share 3.37%
- -----------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------
Expenses, net of waiver .43%
- -----------------------------------------------------------
Expenses .43%
- -----------------------------------------------------------
Investment income -- net 3.75%
- -----------------------------------------------------------
Supplemental Data:
- -----------------------------------------------------------
Net assets, end of year (in thousands) $261,970
- -----------------------------------------------------------
Portfolio turnover 40.28%
- -----------------------------------------------------------
# Prior to April 14, 2003, Class I shares were designated Class A. * Total
investment returns exclude the effects of sales charges. + Based on average
shares outstanding.
MERRILL LYNCH MUNICIPAL BOND FUND, INC. 43
[FLOW CHART]
MERRILL LYNCH MUNICIPAL BOND FUND, INC.
[Graphic] For More Information
Shareholder Reports
Additional information about each Portfolio's investments is available in the
Fund's Annual and Semi-Annual Reports. In the Fund's Annual Report you will find
a discussion of the market conditions and investment strategies that
significantly affected each Portfolio's performance during its last fiscal year.
You may obtain these reports at no cost by calling 1-800-MER-FUND.
The Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive
separate shareholder reports for each account, call your Merrill Lynch Financial
Advisor or other financial intermediary or write to the Transfer Agent at its
mailing address. Include your name, address, tax identification number and
Merrill Lynch brokerage or mutual fund account number. If you have any
questions, please call your Merrill Lynch Financial Advisor, or other financial
intermediary or call the Transfer Agent at 1-800-MER-FUND.
Statement of Additional Information
The Statement of Additional Information contains further information about the
Fund. The portions of the Statement of Additional Information relating to the
Fund are incorporated by reference into (legally considered part of) this
Prospectus. The portions of the Statement of Additional Information that do not
relate to the Fund are not incorporated by reference, are not part of this
Prospectus, and should not be relied on by investors in the Fund. You may
request a free copy by writing the Fund at Financial Data Services, Inc., P.O.
Box 45289, Jacksonville, Florida 32232-5289 or by calling 1-800-MER-FUND.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-202-942-8090 for information on the operation of the Public
Reference Room. This information is also available on the SEC's Internet site at
http://www.sec.gov and copies may be obtained, after payment of a
duplicating fee, by electronic request at the following e-mail address:
publicinfo@sec.gov, or by writing the Public Reference Section of the SEC,
Washington, D.C. 20549-0102.
You should rely only on the information contained in this Prospectus. No one is
authorized to provide you with information that is different from the
information contained in this Prospectus.
Investment Company Act File #811-02688 Code #10051-10-03 /(C)/ Fund Asset
Management, L.P.
[LOGO]
Merrill Lynch Investment Managers
Prospectus
October 14, 2003
Merrill Lynch Municipal Bond Fund, Inc.
This Prospectus contains information you should know before investing, including
information about risks. Please read it before you invest and keep it for future
reference.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
www.mlim.ml.com
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH MUNICIPAL BOND FUND, INC.
P.O. Box 9011, Princeton, New Jersey 08543-9011. Phone No. (609) 282-2800
This Statement of Additional Information of Merrill Lynch Municipal Bond Fund,
Inc. (the "Fund") is not a prospectus and should be read in conjunction with the
Prospectus of the Fund, dated October 14, 2003, which has been filed with the
Securities and Exchange Commission (the "Commission") and can be obtained,
without charge, by calling 1-800-MER-FUND or by writing to the Fund at the above
address. The Fund's Prospectus is incorporated by reference into this Statement
of Additional Information, and Part I of this Statement of Additional
Information and the portions of Part II of this Statement of Additional
Information that relate to the Fund have been incorporated by reference into the
Fund's Prospectus. The portions of Part II of this Statement of Additional
Information that do not relate to the Fund do not form a part of the Fund's
Statement of Additional Information, have not been incorporated by reference
into the Fund's Prospectus and should not be relied upon by investors in the
Fund. The Fund's audited financial statements are incorporated by reference into
this Statement of Additional Information by reference to the Fund's 2003 Annual
Report. You may request a copy of the Annual Report at no charge by calling
1-800-637-3863 between 8:30 a.m. and 5:30 p.m. Eastern time on any business day.
FUND ASSET MANAGEMENT, L.P. - INVESTMENT ADVISER
FAM DISTRIBUTORS, INC. - DISTRIBUTOR
The date of this Statement of Additional Information is October 14, 2003
Table Of Contents
Part I
Investment Objectives and Policies I-1
Investment Restrictions I-4
Information on Officers and Directors I-6
Management and Advisory Arrangements I-10
Information on Sales Charges and Distribution Related Expenses I-12
Computation of Offering Price I-15
Portfolio Transactions and Brokerage I-16
Fund Performance I-17
Additional Information I-19
Financial Statements I-19
Part II
Risks and Considerations II-1
Management and other Service Arrangements II-32
Purchase of Shares II-34
Redemption of Shares II-42
Shareholder Services II-44
Pricing of Shares II-48
Portfolio Transactions and Brokerage Commissions II-50
Dividends and Taxes II-53
Performance Data II-57
Proxy Voting Policies and Procedures II-59
General Information II-61
Appendix A A-1
Appendix B B-1
PART I: SPECIAL INFORMATION ABOUT MERRILL LYNCH MUNICIPAL BOND FUND, INC.
Part I of this Statement of Additional Information sets forth information about
Merrill Lynch Municipal Bond Fund, Inc. (the "Fund"). The Fund is comprised of
three separate Portfolios: the Insured Portfolio, the National Portfolio and the
Limited Maturity Portfolio (each, a "Portfolio"). This Part I includes
information about the Fund's Board of Directors, the advisory services provided
to and the management fees paid by the Fund, performance data for the Fund, and
information about other fees paid by and services provided to the Fund. This
Part I should be read in conjunction with the Fund's Prospectus and those
portions of Part II of this Statement of Additional Information that pertain to
the Fund.
I. Investment Objectives and Policies
The investment objective of the Fund is to provide shareholders with as high a
level of income exempt from Federal income taxes as is consistent with the
investment policies of each Portfolio. The Fund is comprised of three separate
portfolios: Insured Portfolio, National Portfolio and Limited Maturity
Portfolio, each of which is, in effect, a separate fund issuing its own shares.
Each Portfolio seeks to achieve its objective by investing in a diversified
portfolio of obligations issued by or on behalf of states, territories and
possessions of the United States and their political subdivisions, agencies and
instrumentalities, the interest on which, in the opinion of bond counsel to the
issuer, is exempt from Federal income tax (such obligations are herein referred
to as "Municipal Bonds"). Municipal Bonds include general obligations bonds,
revenue or special obligation bonds, industrial development bonds, variable rate
demand notes, and short-term tax-exempt municipal obligations such as tax
anticipation notes. Under normal circumstances, each Portfolio invests at least
80% of its net assets in Municipal Bonds. For this purpose, net assets include
any borrowings for investment purposes. These are fundamental policies of each
Portfolio and may not be changed without a vote of the majority of the
outstanding shares of the Portfolio as defined in the Investment Company Act of
1940, as amended (the "Investment Company Act"). Each Portfolio may not purchase
securities other than Municipal Bonds and certain temporary investments
described below. The Fund is classified as diversified under the Investment
Company Act. Each Portfolio currently contemplates that it 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. There can be no assurance that the
objective of any Portfolio can be attained.
While the Fund does not intend to realize taxable investment income, each
Portfolio has the authority to invest as much as 20% of its assets on a
temporary basis in taxable money market securities with remaining maturities not
in excess of one year from the date of purchase ("Temporary Investments") for
liquidity purposes or as a temporary investment of cash pending investment of
such cash in Municipal Bonds. In addition, the Fund reserves the right to invest
temporarily a greater portion of its assets in Temporary Investments for
defensive purposes, when, in the judgment of Fund Asset Management, L.P. (the
"Investment Adviser" or "FAM"), market conditions warrant. Temporary Investments
consist of U.S. Government securities, U.S. Government Agency securities,
domestic bank certificates of deposit and bankers' acceptances, short-term
corporate debt securities such as commercial paper and repurchase agreements.
From time to time, the Fund may realize capital gains that will constitute
taxable income.
Each Portfolio may invest in certain tax-exempt securities that are classified
as "private activity bonds," which may subject certain investors to an
alternative minimum tax.
Certain instruments in which the Fund may invest may be characterized as
derivative instruments. The Insured Portfolio, the National Portfolio and the
Limited Maturity Portfolio are authorized to engage in transactions in financial
futures contracts and options thereon only for hedging purposes. Each Portfolio
is also authorized to invest in indexed and inverse floating rate obligations
and swap agreements both for hedging purposes and to enhance income.
I-1
Investment Policies of the Portfolios
Each Portfolio pursues its investment objective through the separate investment
policies described below. These policies differ with respect to the maturity and
quality of portfolio securities in which a Portfolio may invest, and these
policies can be expected to affect the yield on each Portfolio and the degree of
market, financial and interest rate risk to which the Portfolio is subject.
Generally, Municipal Bonds with longer maturities tend to produce higher yields
and are subject to greater market fluctuations as a result of changes in
interest rates ("interest rate risk") than are Municipal Bonds with shorter
maturities. In addition, lower rated Municipal Bonds generally will provide a
higher yield than higher rated Municipal Bonds of similar maturity but are also
generally subject to greater market risk and to a greater degree of risk with
respect to the ability of the issuer to meet its principal and interest
obligations ("credit risk"). A Portfolio's net asset value may fall when
interest rates rise and rise when interest rates fall. Because of its emphasis
on investments in Municipal Bonds, each Portfolio should be considered as a
means of diversifying an investment portfolio and not in itself a balanced
investment plan.
Insured Portfolio
The Insured Portfolio invests at least 80% of its assets in investment grade
Municipal Bonds that are covered by portfolio insurance guaranteeing the timely
payment of principal at maturity and interest when due. Although it invests
primarily in insured Municipal Bonds, the Portfolio may invest its uninvested
cash balances in uninsured municipal money market securities. Investment grade
Municipal Bonds are those rated at the date of purchase in the four highest
rating categories of Standard & Poor's ("S&P") (AAA, AA, A and BBB), Fitch
Ratings ("Fitch") (AAA, AA, A and BBB) or Moody's Investors Services, Inc.
("Moody's) (Aaa, Aa, A and Baa) in the case of long-term debt, rated MIG 1
through MIG 3 by Moody's, rated F-1+ through F-3 by Fitch, or rated SP-1 through
SP-2 by S&P in the case of short-term notes, and rated P-1 or P-2 in the case of
Moody's, rated F-1+ through F-3 by Fitch or A-1 through A-3 by S&P in the case
of tax-exempt commercial paper. Depending on market conditions, it is expected
that Municipal Bonds with maturities beyond five years will comprise a major
portion of this Portfolio. See Appendix B -- "Insurance on Portfolio Securities"
to this Statement of Additional Information for more information.
The Insured Portfolio will invest in Municipal Bonds that, at the time of
purchase, either (1) are insured under an insurance policy obtained by the
issuer thereof or any other party or (2) are insured under an insurance policy
purchased by the Fund. Such policies may only be purchased from an insurance
carrier ("eligible insurance carrier") meeting the criteria of the Fund set
forth below. The Fund has purchased from eligible insurance carriers, such as
AMBAC Assurance Corporation ("AMBAC"), Municipal Bond Investors Assurance
Corporation ("MBIA"), Financial Guaranty Insurance Company ("FGIC") and
Financial Security Assurance Inc. ("FSA"), separate Mutual Fund Insurance
Policies (the "Policies"), each of which guarantees the timely payment of
principal and interest on specified eligible Municipal Bonds purchased by the
Insured Portfolio ("Insured Municipal Bonds"). Consequently, some of the Insured
Municipal Bonds in the Insured Portfolio may be insured by AMBAC, while others
may be insured by MBIA, FGIC, FSA or another eligible insurance carrier. The
Policies generally have the same characteristics and features. A Municipal Bond
is eligible for coverage if it meets certain requirements of the insurance
company set forth in a Policy. In the event interest or principal on an Insured
Municipal Bond is not paid when due, AMBAC, MBIA, FGIC or FSA (depending on
which Policy covers the bond) is obligated under its Policy to make payment not
later than 30 days after it has been notified by, and provided with
documentation from, the Fund that such nonpayment has occurred. The insurance
feature reduces financial risk, but the cost thereof and the restrictions on
investments imposed by the guidelines in the insurance policy may reduce the
yield to shareholders.
The Policies guarantee the payment of principal at maturity and interest on
Municipal Bonds that are purchased by the Insured Portfolio at a time when they
are eligible for insurance. Municipal Bonds are eligible for insurance if they
are, at the time of purchase by the Insured Portfolio, identified separately or
by category in qualitative guidelines furnished by AMBAC, MBIA, FGIC or FSA and
are in compliance with the aggregate limitations on amounts set forth in such
guidelines. AMBAC, MBIA, FGIC and/or FSA may withdraw particular securities from
the classifications of securities eligible for insurance while continuing to
insure previously acquired bonds of such ineligible issues so long as they
remain in the Insured Portfolio and may limit the aggregate amount of each issue
or category of municipal securities thereof. The restrictions on investment
imposed by the eligibility requirement of the Policies may reduce the yield of
the Insured Portfolio.
I-2
The Policies will be effective only as to Insured Municipal Bonds beneficially
owned by the Insured Portfolio. In the event of a sale of any Municipal Bonds
held by the Insured Portfolio, the issuer of the relevant Policy is liable only
for those payments of interest and principal that are then due and owing. The
Policies do not guarantee the market value of the Insured Municipal Bonds or the
value of the shares of the Insured Portfolio. It is the intention of the Insured
Portfolio to retain any Insured Municipal Bonds that are in default or in
significant risk of default and to place a value on the insurance, which
ordinarily will be the difference between the market value of the defaulted
security and the market value of similar securities that are not in default. In
certain circumstances, however, Portfolio management may determine that an
alternate value for the insurance, such as the difference between the market
value of the defaulted security and its par value, is more appropriate. As the
result of the value placed on the insurance with respect to securities held in
the Insured Portfolio that were in default at the end of the Fund's last fiscal
year, such Insured Municipal Bonds were effectively valued at par. The Insured
Portfolio's ability to manage its portfolio will be limited to the extent it
holds defaulted Insured Municipal Bonds, which may limit its ability in certain
circumstances to purchase other Municipal Bonds.
AMBAC, MBIA, FGIC and FSA or such other eligible insurance carrier may not
withdraw coverage on securities insured by their Policies and held by the
Insured Portfolio so long as they remain in the Insured Portfolio. AMBAC, MBIA,
FGIC and FSA, among others, may not cancel their Policies for any reason except
failure to pay premiums when due. AMBAC and FSA have reserved the right at any
time upon written notice to the Fund to refuse to insure any additional
Municipal Bonds purchased by the Insured Portfolio after the effective date of
such notice. The Board of Directors of the Fund has reserved the right to
terminate any of the Policies if it determines that the benefits to the Insured
Portfolio of having its portfolio insured are not justified by the expense
involved.
The premiums for the Policies are paid by the Insured Portfolio and the yield on
the Portfolio is reduced thereby. The Investment Adviser estimates that the cost
of insurance on bonds currently in the Portfolio will range from approximately
..05% to .40% of the Portfolio's average net assets during the
upcoming year. The estimate is based on the expected composition of the
Portfolio.
National Portfolio
The National Portfolio may invest in Municipal Bonds rated in any rating
category or unrated Municipal Bonds, with maturities beyond five years. The
Investment Adviser considers ratings as one of several factors in its
independent credit analysis of issuers. This Portfolio normally can be expected
to offer the highest yields of the three Portfolios, but also be subject to the
highest market and financial risks.
The investment policies of the National Portfolio are not governed by specific
rating categories. The National Portfolio may invest in Municipal Bonds rated in
any rating category or unrated Municipal Bonds. The Portfolio will usually
invest in Municipal Bonds having a maturity of five years or longer. Portfolio
management will choose Municipal Bond investments that it believes offer a
relatively high potential for total return relative to their total risk.
Although the Portfolio's investment policies are not governed by specific rating
categories, Portfolio management does not presently intend to invest more than
35% of the Portfolio's assets in Municipal Bonds rated below investment grade
(below BBB by S&P or Fitch or below Baa by Moody's) or unrated Municipal Bonds
that Portfolio management believes are of comparable quality. These lower-rated
obligations are commonly known as "junk bonds." Junk bonds have a high level of
financial risk and there is a greater potential for the Portfolio to lose income
and principal on these investments. The 35% limitation on junk bond investments
reflects only the present intention of Portfolio management, and may be changed
by the Board of Directors of the Fund without shareholder approval. Therefore,
it is possible that the Portfolio could invest up to 100% of its assets in junk
bonds. Because investment in medium to lower rated Municipal Bonds entails
relatively greater risks of loss of income or principal than an investment in
higher rated securities, an investment in the National Portfolio may not be
appropriate for all investors. Investors should consider these risks before
investing.
Limited Maturity Portfolio
The Limited Maturity Portfolio invests primarily in a portfolio of short-term
investment grade Municipal Bonds. Municipal Bonds in the Limited Maturity
Portfolio will be either Municipal Bonds with a remaining maturity of less than
four years or short-term municipal notes, which typically are issued with a
maturity of not more than one year. The Limited Maturity Portfolio will treat
Municipal Bonds that it has the option to require the issuer to redeem within
I-3
four years as having a remaining maturity of less than four years, even if the
period to the stated maturity date of such Bonds is greater than four years.
Municipal notes include tax anticipation notes, bond anticipation notes and
revenue anticipation notes. The Limited Maturity Portfolio may generally be
expected to offer a lower yield than the other Portfolios. Interest rates on
short-term Municipal Bonds may fluctuate more widely from time to time than
interest rates on longer term Municipal Bonds. However, because of the shorter
maturities, the market value of the Municipal Bonds held by the Limited Maturity
Portfolio may generally be expected to fluctuate less as a result of changes in
prevailing interest rates.
The Limited Maturity Portfolio will invest primarily in Municipal Bonds rated at
the date of purchase in the four highest rating categories by S&P (AAA, AA, A
and BBB), Fitch (AAA, AA, A and BBB) or Moody's (Aaa, Aa, A and Baa) in the case
of long-term debt, rated by Moody's as MIG 1 through MIG 3, F-1+ through F-3 by
Fitch, or rated SP-1+ through SP-2 by S&P in the case of short-term tax-exempt
notes, and rated by Moody's P-1 through P-2, F-1+ through F-3 by Fitch or rated
A-1+ through A-3 by S&P in the case of tax-exempt commercial paper. The Limited
Maturity Portfolio will primarily invest in other Municipal Bonds deemed to
qualify for such ratings and in variable rate tax-exempt demand notes.
Securities rated in the lowest of these categories are considered to have some
speculative characteristics. The Limited Maturity Portfolio may continue to hold
securities that, after being purchased by the Portfolio, are downgraded to a
rating lower than those set forth above.
II. Investment Restrictions
The Fund has adopted restrictions and policies relating to the investment of
each Portfolio's assets and its activities. Certain of the restrictions are
fundamental policies of the Fund and may not be changed without the approval of
the holders of a majority of the Fund's outstanding voting securities (which for
this purpose and under the Investment Company Act, means the lesser of (i) 67%
of the shares represented at a meeting at which more than 50% of the outstanding
shares are represented or (ii) more than 50% of the outstanding shares). The
Fund has also adopted certain non-fundamental investment restrictions, which may
be changed by the Board of Directors without shareholder approval.
Set forth below are the Fund's fundamental and non-fundamental investment
restrictions. Unless otherwise provided, all references below to the assets of a
Portfolio are in terms of current market value.
Under the Fund's fundamental investment restrictions, each Portfolio may not:
1. Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the securities
of issuers in any particular industry (excluding the U.S. Government and its
agencies and instrumentalities).
3. Make investments for the purpose of exercising control or management.
4. Purchase or sell real estate, except that, to the extent permitted by
applicable law, each Portfolio of the Fund may invest in securities directly or
indirectly secured by real estate or interests therein or issued by companies
which invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds, debentures
or other corporate debt securities and investments in government obligations,
commercial paper, pass-through instruments, certificates of deposit, bankers'
acceptances, repurchase agreements or any similar instruments shall not be
deemed to be the making of a loan, and except further that each Portfolio of the
Fund may lend its portfolio securities, provided that the lending of portfolio
securities may be made only in accordance with applicable law and the guidelines
set forth in the Fund's Prospectus and Statement of Additional Information, as
they may be amended from time to time.
6. Issue senior securities to the extent such issuance would violate applicable
law.
I-4
7. Borrow money, except that (i) each Portfolio of the Fund may borrow from
banks (as defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) each Portfolio of the Fund
may, to the extent permitted by applicable law, borrow up to an additional 5% of
its total assets for temporary purposes, (iii) each Portfolio of the Fund may
obtain such short term credit as may be necessary for the clearance of purchases
and sales of portfolio securities and (iv) each Portfolio of the Fund may
purchase securities on margin to the extent permitted by applicable law. The
Fund may not pledge its assets other than to secure such borrowings or, to the
extent permitted by the Fund's investment policies as set forth in its
Prospectus and Statement of Additional Information, as they may be amended from
time to time, in connection with hedging transactions, short sales, when-issued
and forward commitment transactions and similar investment strategies.
8. Underwrite securities of other issuers except insofar as a Portfolio of the
Fund technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to the
extent that a Portfolio of the Fund may do so in accordance with applicable law
and the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the Fund's non-fundamental investment restrictions, each Portfolio may
not:
a. Purchase securities of other investment companies, except to the extent such
purchases are permitted by applicable law. As a matter of policy, however, the
Fund will not purchase shares of any registered open-end investment company or
registered unit investment trust, in reliance on Section 12 (d)(1)(F) or (G)
(the "fund of funds" provisions) of the Investment Company Act, at any time its
shares are owned by another investment company that is part of the same group of
investment companies as the Fund.
b. Make short sales of securities or maintain a short position, except to the
extent permitted by applicable law. The Fund currently does not intend to engage
in short sales, except short sales "against the box."
c. Invest in securities that cannot be readily resold because of legal or
contractual restrictions or that 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 net assets would be invested in such securities. This restriction
shall not apply to securities that mature within seven days or securities that
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 (a "Rule 144A Security") and determined to be liquid by
the Fund's Board of Directors are not subject to the limitations set forth in
this investment restriction.
d. Notwithstanding fundamental investment restriction (7) above, the Fund
currently does not intend to borrow amounts in any Portfolio in excess of 10%
of the total assets of such Portfolio, taken at market value, and then only from
banks as a temporary measure for extraordinary or emergency purposes such as the
redemption of Fund shares. In addition, the Fund will not purchase securities
while borrowings are outstanding.
e. With respect to the Insured Portfolio, change its policy of investing at
least 80% of its assets in municipal bonds that are covered by insurance without
providing shareholders with at least 60 days' prior written notice of such
change.
If a percentage restriction on 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.
For purposes of investment restriction (2) above, industry means any one or more
of the industry sub-classifications used by one or more widely recognized market
indices or ratings group indices, and/or as defined by Fund management.
I-5
III. Information on Officers and Directors
The Board of Directors of the Fund consists of eight individuals, seven of whom
are not "interested persons" of the Fund as defined in the Investment Company
Act (the "non-interested Directors"). The Directors are responsible for the
overall supervision of the operations of the Fund and perform the various duties
imposed on the directors of investment companies by the Investment Company Act.
Each non-interested Director is a member of the Fund's Audit and Oversight
Committee (the "Committee"). The principal responsibilities of the Committee are
the appointment, compensation and oversight of the Fund's independent
accountants, including the resolution of disagreements regarding financial
reporting between Fund management and such independent accountants. The
Committee's responsibilities include, without limitation, to (i) review with the
independent accountants the arrangements for and scope of annual and special
audits and any other services provided by the independent accountants to the
Fund; (ii) discuss with the independent accountants certain matters relating to
the Fund's financial statements, including any adjustment to such financial
statements recommended by such independent accountants or any other results of
any audit; (iii) ensure that the independent accountants submit on a periodic
basis a formal written statement with respect to their independence, discuss
with the independent accountants any relationships or services disclosed in the
statement that may impact the objectivity and independence of the Fund's
independent accountants and recommend that the Board take appropriate action in
response thereto to satisfy itself of the independent accountants' independence;
and (iv) consider the comments of the independent accountants with respect to
the quality and adequacy of the Fund's accounting and financial reporting
policies and practices and internal controls and Fund management's responses
thereto. The Board of each Fund has adopted a written charter for the Committee.
The Committee also reviews and nominates candidates to serve as non-interested
Directors. The Committee generally will not consider nominees recommended by
shareholders. The Committee has retained independent legal counsel to assist it
in connection with these duties. The Committee met four times during the fiscal
year ended June 30, 2003.
Biographical Information
Certain biographical and other information relating to the non-interested
Directors of the Fund is set forth below, including their ages, their principal
occupations for at least the last five years, the length of time served, the
total number of portfolios overseen in the complex of funds advised by FAM and
its affiliate, Merrill Lynch Investment Managers, L.P. ("MLIM")
("MLIM/FAM-advised funds"), and other public directorships.
Term of Number of
Position(s) Office** MLIM/FAM-
Name, Address* and Held with and Length of Principal Occupation(s) Advised Funds and
Age of Director the Fund Time Served During Past Five Years Portfolios Overseen
- ------------------ ----------- -------------- ---------------------------------------- -------------------
Ronald W. Forbes (63) Director Director since Professor Emeritus of Finance School of 48 registered
1977 Business, State University of New York investment
at Albany since 2000 and professor companies
thereof from 1989 to 2000; International consisting of 49
Consultant, Urban Institute, Washington, portfolios
D.C. from 1995 to 1999.
Cynthia A. Montgomery (51) Director Director since Professor, Harvard Business School since 48 registered
1994 1989; Associate Professor, J.L. Kellogg investment
Graduate School of
Management, companies
Northwestern University
from 1985 to consisting of
49 1989; Associate
Professor, Graduate
portfolios School of
Business Administration,
University of Michigan
from 1979 to 1985.
Principal Occupation(s) Public
During Past Five Years Directorships
- ---------------------------------------- ---------------
Professor Emeritus of Finance School of None Business, State University
of New York at Albany since 2000 and professor thereof from 1989 to 2000;
International Consultant, Urban Institute, Washington, D.C. from 1995 to 1999.
Professor, Harvard Business School since UnumProvident
1989; Associate Professor, J.L. Kellogg Corporation
Graduate School of Management, (insurance
Northwestern University from 1985 to products);
1989; Associate Professor, Graduate Newell
School of Business Administration, Rubbermaid
University of Michigan from 1979 to Inc.
1985. (manufacturing)
I-6
Term of Number of
Position(s) Office** MLIM/FAM-
Name, Address* and Held with and Length of Principal Occupation(s) Advised Funds and
Age of Director the Fund Time Served During Past Five Years Portfolios Overseen
- ------------------ ----------- -------------- -------------------------------------- -------------------
Charles C. Reilly (72) Director Director since Self-employed financial consultant 48 registered
1990 since 1990; President and Chief investment
Investment Officer of Verus Capital, companies
Inc. from 1979 to 1990; Senior Vice consisting of 49
President of Arnhold and S. portfolios
Bleichroeder, Inc. from 1973 to 1990;
Adjunct Professor, Columbia
University Graduate School of
Business from 1990 to 1991; Adjunct
Professor, Wharton School,
University of Pennsylvania from 1989
to 1990; Partner, Small Cities Cable
Television from 1986 to 1997.
Kevin A. Ryan (71) Director Director since Founder and currently Director 48 registered
1992 Emeritus of the Boston University investment
Center for the Advancement of Ethics companies
and Character and Director thereof consisting of 49
from 1989 to 1999; Professor from portfolios
1982 to 1999 and currently Professor
Emeritus of Education of Boston
University; formerly taught on the
faculties of The University of
Chicago, Stanford University and
Ohio State University.
Roscoe S. Suddarth (68) Director Director since President, Middle East Institute, from 48 registered
2000 1995 to 2001; Foreign Service investment
Officer, United States Foreign companies
Service, from 1961 to 1995; Career consisting of 49
Minister, from 1989 to 1995; Deputy portfolios
Inspector General, U.S. Department
of State, from 1991 to 1994; U.S.
Ambassador to the Hashemite
Kingdom of Jordan, from 1987 to
1990.
Richard R. West (65) Director Director since Professor of Finance since 1984, 48 registered
1981 Dean from 1984 to 1993 and investment
currently Dean Emeritus of New companies
York University Leonard N. Stern consisting of 49
School of Business Administration. portfolios
Edward D. Zinbarg (68) Director Director since Self-employed financial consultant 48 registered
2000 since 1994; Executive Vice President investment
of the Prudential Insurance
Company companies of America
from 1988 to 1994; consisting
of 49 Former Director of
Prudential portfolios
Reinsurance Company and
former Trustee of the
Prudential Foundation.
Principal Occupation(s) Public
During Past Five Years Directorships
- -------------------------------------- ---------------------
Self-employed financial consultant None
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 from 1990 to 1991; Adjunct Professor, Wharton
School, University of Pennsylvania from 1989 to 1990; Partner, Small Cities
Cable Television from 1986 to 1997.
Founder and currently Director None
Emeritus of the Boston University
Center for the Advancement of Ethics
and Character and Director thereof
from 1989 to 1999; Professor from
1982 to 1999 and currently Professor
Emeritus of Education of Boston
University; formerly taught on the
faculties of The University of
Chicago, Stanford University and
Ohio State University.
President, Middle East Institute, from None 1995 to 2001; Foreign Service
Officer, United States Foreign Service, from 1961 to 1995; Career Minister, from
1989 to 1995; Deputy Inspector General, U.S. Department of State, from 1991 to
1994; U.S. Ambassador to the Hashemite Kingdom of Jordan, from 1987 to 1990.
Professor of Finance since 1984, Bowne & Co., Inc.
Dean from 1984 to 1993 and (financial printers);
currently Dean Emeritus of New Vornado Operating
York University Leonard N. Stern Company (real
School of Business Administration. estate company);
Vornado Realty
Trust (real estate);
Alexander's, Inc.
(real estate
company)
Self-employed financial consultant None
since 1994; Executive Vice President
of the Prudential Insurance Company
of America from 1988 to 1994; Former Director of Prudential Reinsurance Company
and former Trustee of the Prudential Foundation.
- --------
* The address of each non-interested Director is P.O. Box 9095, Princeton, New
Jersey 08543-9095.
** Each Director serves until his or her successor is elected and qualified,
until December 31 of the year in which he or she turns 72, or until his or
her death, resignation, or removal as provided in the Fund's by-laws, charter
or by statute.
I-7
Certain biographical and other information relating to the Director who is an
officer and an "interested person" of the Fund as defined in the Investment
Company Act (the "interested Director") and to the other officers of the Fund is
set forth below, including their ages, their principal occupations for at least
the last five years, the length of time served, the total number of portfolios
overseen in MLIM/FAM-advised funds and public directorships held.
Term of Number of
Position(s) Office** and MLIM/FAM-
Held with Length of Principal Occupation(s) Advised Funds and
Name, Address* and Age the Fund Time Served During Past Five Years Portfolios Overseen
- ---------------------- ----------- ------------- ------------------------------------------- -------------------
Terry K. Glenn***(63) President President**** President and Chairman of the MLIM/ 122 registered
And and Director FAM-advised funds since 1999; Chairman investment
Director since 1999 (Americas Region) of MLIM from 2000 to companies
2002; Executive Vice President of MLIM consisting of
and FAM (which terms as used herein 163 portfolios
include their corporate predecessors) from
1983 to 2002; President of FAM
Distributors, Inc. ("FAMD") from 1986 to
2002 and Director thereof from 1991 to
2002; Executive Vice President and
Director of Princeton Services, Inc.
("Princeton Services") from 1993 to 2000;
President of Princeton Administrators, L.P.
from 1988 to 2002; Director of Financial
Data Services, Inc. from 1985 to 2002.
Kenneth A. Jacob (52) Senior Senior Vice Managing Director of MLIM since 2000; 39 registered
Vice President First Vice President of MLIM from 1997 to investment
President since 2002 2000; Vice President of MLIM from 1984 companies
to 1997; Vice President of the Investment consisting of
Adviser since 1984. 51 portfolios
John Loffredo (39) Senior Senior Vice Managing Director of MLIM since 2000; 39 registered
Vice President First Vice President of MLIM from 1997 to investment
President since 2002 2000; Vice President of MLIM from 1991 companies
to 1997; Portfolio Manager of the consisting of
Investment Adviser since 1997. 51 portfolios
Peter J. Hayes (43) Vice Vice Managing Director of MLIM since 1997; 3 registered
President President Vice President of MLIM from 1994 to investment
and since 1997 1997. companies
Portfolio consisting of
Manager of 2 portfolios
Limited
Maturity
Portfolio
Robert A. DiMella, CFA (36) Vice Vice Director of MLIM since 2002; Vice 5 Registered
President President President of MLIM from 1997 to 2002; Investment
and since 1997 Assistant Vice President of MLIM from Companies
Portfolio 1995 to 1997. consisting of
Manager of 5 portfolios
Insured
Portfolio
Walter O'Connor (40) Vice Vice Director (Municipal Tax-Exempt) of MLIM 6 Registered
President President since 1997; Vice President of MLIM from Investment
and since 1997 1993 to 1997; Assistant Vice President of Companies
Portfolio MLIM from 1991 to 1993. consisting of
Manager of 6 portfolios
National
Portfolio
Principal Occupation(s) Public
During Past Five Years Directorships
- ------------------------------------------- -------------
President and Chairman of the MLIM/ None FAM-advised funds since 1999;
Chairman (Americas Region) of MLIM from 2000 to 2002; Executive Vice President
of MLIM and FAM (which terms as used herein include their corporate
predecessors) from 1983 to 2002; President of FAM Distributors, Inc. ("FAMD")
from 1986 to 2002 and Director thereof from 1991 to 2002; Executive Vice
President and Director of Princeton Services, Inc. ("Princeton Services") from
1993 to 2000; President of Princeton Administrators, L.P. from 1988 to 2002;
Director of Financial Data Services, Inc. from 1985 to 2002.
Managing Director of MLIM since 2000; None
First Vice President of MLIM from 1997 to 2000; Vice President of MLIM from 1984
to 1997; Vice President of the Investment Adviser since 1984.
Managing Director of MLIM since 2000; None First Vice President of MLIM from
1997 to 2000; Vice President of MLIM from 1991 to 1997; Portfolio Manager of the
Investment Adviser since 1997.
Managing Director of MLIM since 1997; None Vice President of MLIM from 1994 to
1997.
Director of MLIM since 2002; Vice None President of MLIM from 1997 to 2002;
Assistant Vice President of MLIM from 1995 to 1997.
Director (Municipal Tax-Exempt) of MLIM None since 1997; Vice President of MLIM
from 1993 to 1997; Assistant Vice President of MLIM from 1991 to 1993.
I-8
Number of
Position(s) Term of Office** MLIM/FAM- Held with and
Length of Principal Occupation(s) Advised Funds and
Public
Name, Address* and Age the Fund Time Served During Past Five Years Portfolios Overseen Directorships
- ---------------------- ----------- ---------------- -------------------------------------- ------------------- -------------
Donald C. Burke (43) Vice Vice President First Vice President of FAM and 121 registered None
President since 1993 and MLIM since 1997 and Treasurer investment
And Treasurer since thereof since 1999; Senior Vice companies
Treasurer 1999 President and Treasurer of Princeton consisting of 162
Services since 1999; Vice
President of portfolios FAMD
since 1999; Vice President
of FAM and MLIM from 1990 to
1997; Director of Taxation
of MLIM since 1990.
Brian D. Stewart (34) Secretary Secretary since Vice President of MLIM since 2002; 39 registered None
2003 Attorney associated with Reed Smith investment
LLP from 2001 to 2002; Attorney companies
associated with Saul Ewing LLP from consisting of 53
1999 to 2001. portfolios
- --------
* The address for each officer is P.O. Box 9011, Princeton, New Jersey
08543-9011.
** Elected by and serves at the pleasure of the Board of Directors of the Fund.
*** Mr. Glenn is an "interested person," as defined in the Investment Company
Act, of the Fund based on his former positions with MLIM, FAM, FAMD,
Princeton Services and Princeton Administrators, L.P.
****As a Director, Mr. Glenn serves until his successor is elected and
qualified, until December 31 of the year in which he turns 72 or, until his
death or resignation, or removal as provided in the Fund's by-laws or
charter or by statute.
Share Ownership
Information relating to each Director's share ownership in the Fund and in all
registered funds in the Merrill Lynch family of funds that are overseen by the
respective Director ("Supervised Merrill Lynch Funds") as of December 31, 2002
is set forth in the chart below.
Aggregate Dollar Range Aggregate Dollar Range of Securities in
Name of Equity in the Fund Supervised Merrill Lynch Funds
- ---- ---------------------- ---------------------------------------
Interested Director:
Terry K. Glenn None Over $100,000
Non-Interested Directors:
Ronald W. Forbes $10,001 to $50,000 Over $100,000
Cynthia A. Montgomery. None $50,001-$100,000
Charles C. Reilly None Over $100,000
Kevin A. Ryan None Over $100,000
Roscoe S. Suddarth None Over $100,000
Richard R. West None Over $100,000
Edward D. Zinbarg Over $100,000 Over $100,000
As of September 26, 2003 the Directors and Officers of the Fund as a group owned
an aggregate of less than 1% of the outstanding shares of the Fund. As of
December 31, 2002, none of the non-interested Directors of the Fund or their
immediate family members owned beneficially or of record any securities in
Merrill Lynch & Co., Inc. ("ML & Co.").
Compensation of Directors
The Fund pays each non-interested Director a combined fee of $5,900 per year for
service on the Board and the Committee plus $200 per in-person Board meeting
attended and $200 per in-person Committee meeting attended. Each Co-Chairman of
the Committee receives an additional fee of $1,000 per year. The Fund reimburses
each non-interested Director for his or her out-of-pocket expenses relating to
attendance at Board and Committee meetings.
The following table shows the compensation earned by the non-interested
Directors for the fiscal year ended June 30, 2003 and the aggregate compensation
paid to them by all MLIM/FAM-advised funds for the calendar year ended December
31, 2002.
I-9
Aggregate
Compensation
Pension or from Fund
Retirement Benefits and Other
Compensation Accrued as Part of MLIM/FAM-
Name from Fund Fund Expense Advised Funds**
---- ------------ ------------------- ---------------
Ronald W. Forbes* $8,500 None $308,400
Cynthia A. Montgomery $7,500 None $266,400
Charles C. Reilly* $8,500 None $308,400
Kevin A. Ryan $7,500 None $266,400
Roscoe S. Suddarth $7,500 None $266,400
Richard R. West $7,500 None $275,400
Edward D. Zinbarg $7,500 None $266,400
- --------
* Co-Chairman of the Committee.
** For the number of MLIM/FAM-advised funds from which each Director receives
compensation, see the table beginning on page I-6.
IV. Management and Advisory Arrangements
Pursuant to the investment advisory agreement between Fund Asset Management,
L.P., a subsidiary of ML & Co., and the Fund (the "Investment Advisory
Agreement"), FAM acts as the investment adviser for the Fund and provides the
Fund with management services.
As compensation for its services to the Portfolios, the Investment Adviser
receives at the end of each month a fee with respect to each Portfolio. The fee
for each Portfolio is determined based on the annual advisory fee rates for that
Portfolio set forth in the table below. These fee rates are applied to the
average daily net assets of each Portfolio, with the reduced rates shown below
applicable to portions of the assets of each Portfolio to the extent that the
aggregate average daily net assets of the three combined Portfolios exceeds $250
million, $400 million, $550 million and $1.5 billion (each such amount being a
"breakpoint level"). The portion of the assets of a Portfolio to which the rate
at each breakpoint level applies will be determined on a "uniform percentage"
basis. The uniform percentage applicable to a breakpoint level is determined by
dividing the amount of the aggregate average daily net assets of the three
combined Portfolios that falls within that breakpoint level by the aggregate
average daily net assets of the three combined Portfolios. The amount of the fee
for a Portfolio at each breakpoint level is determined by multiplying the
average daily net assets of that Portfolio by the uniform percentage applicable
to that breakpoint level and multiplying the product by the advisory fee rate.
Advisory Fee Rate
----------------------------
Limited
Aggregate of average daily net assets Insured National Maturity
Of the three combined Portfolios Portfolio Portfolio Portfolio
- ------------------------------------- --------- --------- ---------
Not exceeding $250 million 0.40% 0.50% 0.40%
In excess of $250 million but not exceeding $400 million 0.375% 0.475% 0.375%
In excess of $400 million but not exceeding $550 million 0.375% 0.475% 0.350%
In excess of $550 million but not exceeding $1.5 billion 0.375% 0.475% 0.325%
In excess of $1.5 billion 0.350% 0.475% 0.325%
The table below sets forth information about the total advisory fees paid by
each Portfolio to FAM for the periods indicated.
Advisory Fees
--------------------------------
Limited
Insured National Maturity
Fiscal Year Ended June 30, Portfolio Portfolio Portfolio
-------------------------- ---------- ---------- ----------
2003 $4,630,741 $5,902,334 $1,962,052
2002 $4,695,844 $4,853,493 $1,117,531
2001 $4,865,278 $5,011,968 $ 922,155
In connection with its consideration of the Investment Advisory Agreement and
its ongoing review of Fund performance, the Board reviewed information derived
from a number of sources and covering a range of issues. The Board considered
the services provided to the Fund by the Investment Adviser under the Investment
Advisory Agreement, as well as other services provided by the Investment Adviser
and its affiliates under other agreements, and the personnel who provide these
services. In addition to investment advisory services, the Investment Adviser
I-10
and its affiliates provide administrative services, shareholder services,
oversight of fund accounting, marketing services, assistance in meeting legal
and regulatory requirements, and other services necessary for the operation of
the Fund. The Board also considered the Investment Adviser's costs of providing
services, and the direct and indirect benefits to the Investment Adviser from
its relationship with the Fund. The benefits considered by the Board included
not only the Investment Adviser's compensation for investment advisory services
under the Investment Advisory Agreement, and the Fund's profitability to the
Investment Adviser, but also compensation paid to the Investment Adviser or its
affiliates for other non-advisory services provided to the Fund. The Board
compared the Fund's advisory fee rate, expense ratios and historical performance
to those of comparable funds. The Board took into account the various services
provided to the Fund by the Investment Adviser and its affiliates, as well as
the services required to manage portfolios of municipal securities of varying
maturity and quality from across the United States, including the need to
perform independent credit analysis on the issuers and, where applicable, the
insurers of the obligations on an ongoing basis. The Board noted that advisory
fee rate for Insured Portfolio and Limited Maturity Portfolio each was the
lowest in its category, while that of the National Portfolio was below median,
and that each Portfolio's overall operating expenses were at or below median.
The Board also reviewed each Portfolio's historical performance in comparison to
other funds in their respective categories. The Board concluded that the
advisory fee rate and other expenses compared well with those of other, similar
funds. Based on the information reviewed and their discussions, the Board,
including a majority of the non-interested Directors, concluded that the
advisory fee rate was reasonable in relation to the services provided.
The Board considered whether there should be changes in the advisory fee rate or
structure in order to enable the Fund to participate in any economies of scale
that the Investment Adviser may experience as a result of growth in the Fund's
assets. The Board determined that the current advisory fee structure, which is
based on the Fund's total assets across all the Portfolios, already allows the
Fund to participate in such economies of scale. The non-interested Directors
were represented by independent counsel who assisted them in their
deliberations.
Transfer Agency Services
The table below sets forth information about the total amounts paid by the Fund
to the transfer agent for the periods indicated:
Limited
Insured National Maturity
Fiscal Year Ended June 30, Portfolio Portfolio Portfolio
-------------------------- --------- --------- ---------
2003 $480,081 $605,922 $136,497
2002 $551,141 $553,535 $ 73,557
2001* $436,170 $445,860 $ 61,578
- --------
* During the fiscal year ended June 30, 2001, the Fund paid fees to the transfer
agent at lower rates than the ones currently in effect. If the current rates
had been in effect for the period shown, the fees paid would have been higher.
The current rates became effective on July 1, 2001.
Accounting Services
The table below shows the amounts paid by the Fund to State Street Bank and
Trust Company ("State Street") and to the Investment Adviser for accounting
services for the periods indicated:
Paid to the
Paid to Investment
Fiscal Year Ended June 30, State Street Adviser
-------------------------- ------------ -----------
2003 $849,822 $ 78,014
2002 $798,399 $103,743
2001 $362,706* $265,020
- --------
* Represents payments pursuant to the agreement with State Street effective
January 1, 2001.
I-11
V. Information on Sales Charges and Distribution Related Expenses
Set forth below is information on sales charges (including any contingent
deferred sales charges ("CDSCs")) received by the Portfolios, including amounts
paid to Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") for
the periods indicated.
Class A and Class I Sales Charge Information
Class A Shares*
Gross Sales Sales Charges Sales Charges CDSCs Received on
Charges Retained by Paid to Redemption of
For the Fiscal Year Ended June 30, Collected Distributor Merrill Lynch Load-Waived Shares
- ---------------------------------- ----------- ------------- ------------- ------------------
Insured Portfolio
2003 $155,181 $15,459 $139,722 $ 795
2002 $170,940 $25,050 $145,890 $ 0
2001 $ 79,400 $10,264 $ 69,136 $ 0
National Portfolio
2003 $141,145 $15,390 $125,755 $2,206
2002 $ 97,956 $11,177 $ 86,779 $ 0
2001 $ 75,835 $11,883 $ 63,952 $ 0
Limited Maturity Portfolio
2003 $120,509 $ 8,951 $111,606 $ 0
2002 $ 8,575 $ 901 $ 7,674 $ 0
2001 $ 4,047 $ 416 $ 3,631 $ 0
Class I Shares*
Gross Sales Sales Charges Sales Charges CDSCs Received on
Charges Retained by Paid to Redemption of
For the Fiscal Year Ended June 30, Collected Distributor Merrill Lynch Load-Waived Shares
- ---------------------------------- ----------- ------------- ------------- ------------------
Insured Portfolio
2003 $158,885 $19,230 $139,654 $ 0
2002 $126,110 $11,447 $114,663 $1,176
2001 $ 46,859 $ 6,019 $ 40,840 $ 451
National Portfolio
2003 $ 91,377 $ 9,537 $ 81,840 $5,348
2002 $103,740 $ 9,584 $ 94,156 $ 0
2001 $ 75,888 $ 6,922 $ 68,966 $ 0
Limited Maturity Portfolio
2003 $ 6,266 $ 586 $ 5,680 $ 0
2002 $ 69,559 $ 5,488 $ 64,071 $ 0
2001 $ 9,654 $ 962 $ 8,692 $ 400
- --------
* Prior to April 14, 2003, Class A shares were designated Class D and Class I
shares were designated Class A.
I-12
Class B and Class C Sales Charge Information
Class B Shares*
For the Fiscal Year CDSC's Received by CDSC's paid to
Ended June 30, Distributor Merrill Lynch
------------------- ------------------ --------------
Insured Portfolio
2003 $149,848 $149,848
2002 $162,642 $162,642
2001 $206,769 $206,769
National Portfolio
2003 $355,259 $355,259
2002 $342,861 $342,861
2001 $258,500 $258,500
Limited Maturity Portfolio
2003 $ 73,800 $ 73,800
2002 $ 31,493 $ 31,493
2001 $ 16,533 $ 16,533
- --------
* Additional Class B CDSCs payable to the Distributor may have been waived or
converted to a contingent obligation in connection with a shareholder's
participation in certain fee-base programs.
Class C Shares
For the Fiscal Year CDSC's Received by CDSC's paid to
Ended June 30, Distributor Merrill Lynch
------------------- ------------------ --------------
Insured Portfolio
2003 $26,374 $26,374
2002 $ 4,572 $ 4,572
2001 $ 525 $ 525
National Portfolio
2003 $25,394 $25,394
2002 $17,045 $17,045
2001 $ 7,422 $ 7,422
Limited Maturity Portfolio
2003 $52,144 $52,144
2002 $ 388 $ 388
2001 $ 0 $ 0
As of June 30, 2003, direct cash distribution revenues for the Insured, National
and Limited Maturity Portfolios for the period since the commencement of
operations of Class B shares exceeded direct cash distribution expenses by
$43,106,372 (25.35% of Class B average daily net assets at that date),
$40,829,567 (11.39% of Class B average daily net assets at that date) and
$2,929,901 (3.22% of Class B average daily net assets at that date),
respectively.
As of June 30, 2003, direct cash distribution revenues for the Insured and
National Portfolios for the period since the commencement of operations of Class
C shares exceeded direct cash distribution expenses by $808,519 (1.52% of Class
C average daily net assets at that date), $2,149,584 (3.03% of Class C average
daily net assets at that date), respectively. As of June 30, 2003, direct cash
distribution expenses for the Limited Maturity Portfolio for the period since
the commencement of operations of Class C shares exceeded direct cash
distributions revenues by $190,104 (.27% of Class C average daily net assets at
that date).
For the fiscal year ended June 30, 2003, the Insured, National and Limited
Maturity Portfolios paid the Distributor $440,803, $452,203 and $199,341,
respectively, pursuant to the Class A Distribution Plan (based on average net
assets subject to the Class A Distribution Plan of approximately $176.3 million,
$180.9 million and $199.3 million, respectively), all of which were paid to
Merrill Lynch for providing account maintenance services in connection with
Class A shares. For the fiscal year ended June 30, 2003, the Insured, National
and Limited Maturity Portfolios paid the Distributor $1,274,785, $2,624,333 and
$318,898, respectively, pursuant to the Class B Distribution Plan (based on
average net assets subject to the Class B Distribution Plan of approximately
$170.0 million, $349.9 million and
I-13
$91.1 million, respectively), all of which were paid to Merrill Lynch for
providing account maintenance and distribution-related activities and services
in connection with Class B shares. For the fiscal year ended June 30, 2003, the
Insured, National and Limited Maturity Portfolios paid the Distributor $425,392,
$559,858 and $236,188, respectively, pursuant to the Class C Distribution Plan
(based on average net assets subject to the Class C Distribution Plan of
approximately $53.2 million, $70.0 million and $67.5 million, respectively), all
of which were paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class C shares.
Limitations on the Payment of Deferred Sales Charge
The following tables set forth comparative information as of June 30, 2003 with
respect to the Class B and Class C shares of each Portfolio indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule, and with respect to Class B shares only, the Distributor's voluntary
maximum.
Insured Portfolio
Data Calculated as of June 30, 2003
(in thousands)
Annual
Distribution
Fee at
Allowable Allowable Amounts Current
Eligible Aggregate Interest on Maximum Previously Aggregate Net
Gross Sales Unpaid Amount Paid to Unpaid Asset
Sales(1) Charges(2) Balance(3) Payable Distributor (4) Balance Level (5)
---------- ---------- ----------- -------- --------------- --------- ------------
Class B Shares
for the period October 21, 1988
(commencement of operations)
to June 30, 2003
Under NASD Rule as Adopted $1,411,622 $87,392 $84,062 $171,454 $49,818 $121,636 $809
Under Distributor's Voluntary Waiver $1,411,622 $87,392 $ 7,892 $ 95,284 $49,818 $ 45,466 $809
Class C Shares
for the period October 21, 1994
(commencement of operations)
to June 30, 2003
Under NASD Rule as Adopted $ 93,538 $ 5,828 $ 1,564 $ 7,392 $ 973 $ 6,419 $362
National Portfolio
Data Calculated as of June 30, 2003
(in thousands)
Annual
Distribution
Allowable Allowable Amounts Fee At
Eligible Aggregate Interest Maximum Previously Aggregate Current
Gross Sales On Unpaid Amount Paid To Unpaid Net Asset
Sales(1) Charges Balance(2) Payable Distributor(3) Balance Level(4)
---------- --------- ---------- -------- -------------- --------- ------------
Class B Shares
for the period October 21, 1988
(commencement of operations).
to June 30, 2003
Under NASD Rule as Adopted $1,765,300 $109,511 $91,755 $201,266 $50,239 $151,027 $1,630
Under Distributor's Voluntary
Waiver $1,765,300 $109,511 $ 9,646 $119,157 $50,239 $ 68,918 $1,630
Class C Shares
for the period October 21, 1994
(commencement of operations).
to June 30, 2003
Under NASD Rule as Adopted $ 169,614 $ 10,577 $ 4,189 $ 14,766 $ 2,359 $ 12,407 $ 428
I-14
Limited Maturity Portfolio
Data Calculated as of June 30, 2003
(in thousands)
Annual
Distribution
Allowable Allowable Amounts Fee At
Eligible Aggregate Interest Maximum Previously Aggregate Current
Gross Sales On Unpaid Amount Paid To Unpaid Net Asset
Sales(6) Charges Balance(2) Payable Distributor(7) Balance Level(4)
-------- --------- ---------- ------- -------------- --------- ------------
Class B Shares
for the period November 2, 1992
(commencement of operations)
to June 30, 2003
Under NASD Rule as Adopted $299,453 $19,189 $14,855 $34,044 $3,234 $30,810 $170
Under Distributor's Voluntary Waiver $299,453 $19,189 $ 1,024 $20,213 $3,234 $16,979 $170
Class C Shares
for the period October 21, 1994
(commencement of operations)
to June 30, 2003
Under NASD Rule as Adopted $134,776 $ 8,484 $ 439 $ 8,923 $ 203 $ 8,720 $260
- --------
(1)Purchase price of all eligible Class B shares sold since October 21, 1988
(commencement of Class B operations) other than shares acquired through
dividend reinvestment and the exchange privilege.
(2)Includes amounts attributable to exchanges from Summit Cash Reserves Fund
("Summit") which are not reflected in Eligible Gross Sales. Shares of Summit
can only be purchased by exchange from another fund (the "redeemed fund").
Upon such an exchange, the maximum allowable sales charge payment to the
redeemed fund is reduced in accordance with the amount of the redemption.
This amount is then added to the maximum allowable sales charge payment with
respect to Summit. Upon an exchange out of Summit, the remaining balance of
this amount is deducted from the maximum allowable sales charge payment to
Summit and added to the maximum allowable sales charge payment to the fund
into which the exchange is made.
(3)Interest is computed on a monthly average Prime Rate basis based upon the
prime rate as reported in The Wall Street Journal, plus 1.0%, as permitted
under the NASD Rule.
(4)Consists of CDSC payments, distribution fee payments and accruals. Of these
distribution fee payments made prior to July 6, 1993 under the Prior Plan at
the 0.75% rate, 0.50% of average daily net assets has been treated as a
distribution fee and 0.25% of average daily net assets has been deemed to
have been a service fee and not subject to the NASD maximum sales charge
rule. This figure may include CDSCs that were deferred when a shareholder
redeemed shares prior to the expiration of the applicable CDSC period and
invested the proceeds, without the imposition of a sales charge, in Class I
shares in conjunction with the Shareholder's participation in the Merrill
Lynch Mutual Fund Advisor ("MFA") Program. The CDSC is booked as a contingent
obligation that may be payable if the shareholder terminates participation in
the MFA Program.
(5)Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee will
reach either the voluntary maximum or the NASD maximum.
(6)Purchase price of all eligible Class B shares sold since November 2, 1992
(commencement of Class B operations) other than shares acquired through
dividend reinvestment and the exchange privilege.
(7)Consists of CDSC payments, distribution fee payments and accruals. Of these
distribution fee payments made prior to July 6, 1993 under the prior plan at
the 0.35% rate, 0.25% of average daily net assets has been treated as a
distribution fee and 0.10% of average daily net assets has been deemed to
have been a service fee and not subject to the NASD maximum sales charge
rule.
VI. Computation of Offering Price
The offering price for Class A, Class B, Class C and Class I shares of the
Insured Portfolio, National Portfolio and Limited Maturity Portfolio, based on
the value of each Portfolio's net assets and the number of shares outstanding as
of June 30, 2003, is calculated as set forth below.
I-15
Insured Portfolio
Class A* Class B Class C Class I*
------------ ------------ ----------- ------------
Net Assets $187,804,892 $160,176,942 $66,088,984 $855,757,084
Number of Shares Outstanding 23,270,243 19,854,213 8,189,828 105,997,160
Net Asset Value Per Share (net assets divided by number of shares
outstanding) $ 8.07 $ 8.07 $ 8.07 $ 8.07 Sales Charge (Class A and Class I
shares: 4.00% of offering price
(4.17% of net asset value per share)) ** .34 *** *** .34
------------ ------------ ----------- ------------
Offering Price $ 8.41 $ 8.07 $ 8.07 $ 8.41
National Portfolio
Class A* Class B Class C Class I*
------------ ------------ ----------- ------------
Net Assets $200,108,040 $321,477,018 $77,906,185 $624,191,903
Number of Shares Outstanding 18,984,524 30,523,856 7,393,187 59,244,079
Net Asset Value Per Share (net assets divided by number of shares
outstanding) $ 10.54 $ 10.53 $ 10.54 $ 10.54 Sales Charge (Class A and Class I
shares: 4.00% of offering price
(4.17% of net asset value per share)) ** .44 *** *** .44
------------ ------------ ----------- ------------
Offering Price $ 10.98 $ 10.53 $ 10.54 $ 10.98
Limited Maturity Portfolio
Class A* Class B Class C Class I*
------------ ----------- ------------ ------------
Net Assets $248,454,571 $83,885,597 $135,782,576 $251,136,748
Number of Shares Outstanding 24,409,606 8,247,346 13,407,675 24,693,007
Net Asset Value Per Share (net assets divided by number of shares
outstanding) $ 10.18 $ 10.17 $ 10.13 $ 10.17 Sales Charge (Class A and Class I
shares: 1.00% of offering price
(1.01% of the net asset value per share)) ** .10 *** *** .10
------------ ----------- ------------ ------------
Offering Price $ 10.28 $ 10.17 $ 10.13 $ 10.27
- --------
* Prior to April 14, 2003, Class A shares were designated Class D and Class I
shares were designated Class A.
** Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
***Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption of shares within six years of purchase
(for Class B shares of the Insured Portfolio and National Portfolio) or
within three years of purchase (for Class B shares of the Limited Maturity
Portfolio) or within one year of purchase (Class C shares). See "Purchase of
Shares - Deferred Sales Charge Alternatives - Class B and Class C Shares" in
the Prospectus and "Redemption of Shares - Deferred Sales Charge - Class B
and Class C Shares" herein.
VII. Portfolio Transactions and Brokerage
See "Portfolio Transactions and Brokerage" in Part II of this Statement of
Additional Information for more information.
For the periods indicated, each Portfolio paid total brokerage commissions as
set forth below, none of which was paid to Merrill Lynch.
I-16
Total Brokerage
For the Fiscal Year Ended June 30, Commissions Paid
---------------------------------- ----------------
Insured Portfolio
2003 $ 0
2002 $22,100
2001 $ 0
National Portfolio
2003 $ 0
2002 $ 3,250
2001 $ 0
Limited Maturity Portfolio
2003 $ 0
2002 $ 0
2001 $ 0
VIII. Fund Performance
Set forth in the tables below is total return information, before and after
taxes, for the Class A, Class B, Class C and Class I shares of each Portfolio
for the periods indicated, expressed as a percentage based on a hypothetical
$1,000 investment.
Insured Portfolio
-------------------------------------------
Period Class A* Class B Class C Class I*
- ------ -------- ------- ------- --------
Average Annual Total Return
(including maximum applicable sales charges)
One Year Ended June 30, 2003 4.41% 4.21% 7.16% 4.53%
Five Years Ended June 30, 2003 4.58% 4.58% 4.86% 4.81%
Ten Years Ended June 30, 2003 -- 4.91% -- 5.26%
Inception (October 21, 1994) to June 30, 2003 6.03% -- 5.94% --
Average Annual Total Return
After Taxes on Dividends
(including maximum applicable sales charges)
One Year Ended June 30, 2003 4.41% 4.21% 7.16% 4.53%
Five Years Ended June 30, 2003 4.40% 4.40% 4.67% 4.63%
Ten Years Ended June 30, 2003 -- 4.67% -- 5.02%
Inception (October 21, 1994) to June 30, 2003 5.86% -- 5.77% --
Average Annual Total Return
After Taxes on Dividends and Redemptions
(including maximum applicable sales charges)
One Year Ended June 30, 2003 4.59% 4.34% 6.23% 4.74%
Five Years Ended June 30, 2003 4.52% 4.47% 4.70% 4.76%
Ten Years Ended June 30, 2003 -- 4.72% -- 5.11%
Inception (October 21, 1994) to June 30, 2003 5.83% -- 5.69% --
I-17
National Portfolio
-------------------------------------------
Period Class A* Class B Class C Class I*
- ------ -------- ------- ------- --------
Average Annual Total Return
(including maximum applicable sales charges)
One Year Ended June 30, 2003 3.66% 3.43% 6.48% 4.00%
Five Years Ended June 30, 2003 4.31% 4.30% 4.58% 4.57%
Ten Years Ended June 30, 2003 -- 5.04% -- 5.41%
Inception (October 21, 1994) to June 30, 2003 6.11% -- 6.02% --
Average Annual Total Return
After Taxes on Dividends
(including maximum applicable sales charges)
One Year Ended June 30, 2003 3.66% 3.43% 6.48% 4.00%
Five Years Ended June 30, 2003 4.31% 4.30% 4.58% 4.56%
Ten Years Ended June 30, 2003 -- 4.88% -- 5.25%
Inception (October 21, 1994) to June 30, 2003 6.04% -- 5.94% --
Average Annual Total Return
After Taxes on Dividends and Redemptions
(including maximum applicable sales charges)
One Year Ended June 30, 2003 4.15% 3.89% 5.86% 4.46%
Five Years Ended June 30, 2003 4.41% 4.35% 4.58% 4.66%
Ten Years Ended June 30, 2003 -- 4.91% -- 5.31%
Inception (October 21, 1994) to June 30, 2003 5.98% -- 5.84% --
Limited Maturity Portfolio
-------------------------------------------
Period Class A* Class B Class C Class I*
- ------ -------- ------- ------- --------
Average Annual Total Return
(including maximum applicable sales charges)
One Year Ended June 30, 2003 1.75% -0.49% 1.52% 1.84%
Five Years Ended June 30, 2003 3.63% 3.55% 3.52% 3.73%
Ten Years Ended June 30, 2003 -- 3.52% -- 3.79%
Inception (October 21, 1994) to June 30, 2003 3.91% -- 3.70% --
Average Annual Total Return
After Taxes on Dividends
(including maximum applicable sales charges)
One Year Ended June 30, 2003 1.75% -0.49% 1.51% 1.84%
Five Years Ended June 30, 2003 3.62% 3.54% 3.52% 3.72%
Ten Years Ended June 30, 2003 -- 3.52% -- 3.78%
Inception (October 21, 1994) to June 30, 2003 3.91% -- 3.69% --
Average Annual Total Return
After Taxes on Dividends and Redemptions
(including maximum applicable sales charges)
One Year Ended June 30, 2003 1.96% 0.42% 1.73% 2.06%
Five Years Ended June 30, 2003 3.58% 3.48% 3.46% 3.69%
Ten Years Ended June 30, 2003 -- 3.49% -- 3.77%
Inception (October 21, 1994) to June 30, 2003 3.86% -- 3.64% --
- --------
* Prior to April 14, 2003, Class A shares were designated Class D and Class I
shares were designated Class A.
I-18
IX. Additional Information
Description of Shares
The Fund is a diversified, open-end management investment company organized
under the laws of the State of Maryland that commenced operations on October 21,
1977. Prior to September 21, 1979, the Fund consisted solely of the Insured
Portfolio. Currently, the Fund is comprised of three separate Portfolios:
Insured Portfolio, National Portfolio and Limited Maturity Portfolio.
The authorized capital stock of the Fund consists of 3,850,000 shares of Common
Stock, divided into three series, each of which is divided into four classes,
designated Class A, Class B, Class C and Class I Common Stock, having a par
value of $0.10 per share. The authorized shares of each series are as follows:
Insured Portfolio Series Common Stock (500,000,000 Class A, 375,000,000 Class B
shares, 375,000,000 Class C shares, 500,000,000 Class I shares), National
Portfolio Series Common Stock (375,000,000 Class A, 375,000,000 Class B shares,
375,000,000 Class C shares, 375,000,000 Class I shares), and Limited Maturity
Portfolio Series Common Stock (150,000,000 Class A, 150,000,000 Class B shares,
150,000,000 Class C shares, 150,000,000 Class I shares). Each Class A, Class B,
Class C and Class I share of common stock of each of the Portfolios represents
an interest in the same assets of such Portfolio and are identical in all
respects to the shares of the other classes except that the Class A, Class B and
Class C shares bear certain expenses related to the account maintenance
associated with such shares, and Class B and Class C shares bear certain
expenses related to the distribution of such shares. Each Class of shares of a
Portfolio has exclusive voting rights with respect to matters relating to
account maintenance services and distribution expenditures relative to that
Portfolio, as applicable (except that Class B shareholders have certain voting
rights with respect to the Class A Distribution Plan). Only shares of each
respective Portfolio are entitled to vote on matters concerning only that
Portfolio.
Principal Shareholders
To the knowledge of the Fund, the following entities owned beneficially or of
record 5% or more of a class of each Portfolio's shares as of September 26,
2003.
Limited Maturity Portfolio
Name Address Percent of Class
---- ------- ----------------
Onstead Interests, LTD. 800 Scudders Mill Road
Plainsboro, New Jersey
08536 6.54% of Class A
Mr. Frank Novak 800 Scudders Mill Road
Plainsboro, New Jersey
08536 5.17% of Class A
X. Financial Statements
The Fund's audited financial statements are incorporated in the Fund's Statement
of Additional Information by reference to its 2003 Annual Report. You may
request a copy of the Annual Report at no charge by calling 1-800-637-3863
between 8:30 a.m. and 5:30 p.m. Eastern time on any business day.
I-19