UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-7899
Merrill Lynch Aggregate Bond Index Fund
Master Aggregate Bond Index Series - file # 811-7885
Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Terry K. Glenn, President, Merrill Lynch
Aggregate Bond Index Fund, 800 Scudders Mill Road, Plainsboro, NJ 08536.
Mailing address: P.O. Box 9011, Princeton, NJ 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 12/31/02
Date of reporting period: 01/01/02 - 12/31/02
Item 1 - Is shareholder report attached? - Y
[LOGO] Merrill Lynch Investment Managers
Annual Report
December 31, 2002
Merrill Lynch
Aggregate Bond
Index Fund
Merrill Lynch Index Funds, Inc.
www.mlim.ml.com
Merrill Lynch Aggregate Bond Index Fund
Custodian
Merrill Lynch Trust Company
800 Scudders Mill Road Plainsboro, NJ 08536
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
Merrill Lynch Aggregate Bond Index Fund, December 31, 2002
DEAR SHAREHOLDER
Merrill Lynch Aggregate Bond Index Fund is designed for investors who have an
investment objective of seeking to achieve investment returns that replicate the
total return of investment-grade fixed income securities. As such, the Fund
seeks to achieve its objective by replicating the total return, before expenses,
of the unmanaged Lehman Brothers Aggregate Bond Index, a widely accepted
investment performance benchmark comprised of U.S. government securities, U.S.
government agency mortgage-backed securities (MBS) and investment-grade
corporate bonds. It is the intent of the Fund to provide returns that are
representative of the bond market as a whole, rather than to focus on or provide
bias to any specific sector. The Fund seeks to achieve its objective by
investing all of its assets in Master Aggregate Bond Index Series. Therefore,
the Series' structure is dependent on the structure of the underlying benchmark.
Sector weighting and security selection in the underlying benchmark are
determined by the market representation that the sectors have in the overall
market.
Fiscal Year in Review
As of December 31, 2002, the Lehman Brothers Aggregate Bond Index was comprised
of 6,978 securities, emphasizing three major investment sectors: U.S. government
and agency securities, U.S. government issued MBS, and investment-grade
corporate bonds. The U.S. government and agency sector of the Index had 1,020
issues and comprised 34.78% of the benchmark. This represents an increase from
33.97% at the beginning of 2002. The MBS sector accounted for 38.96% of the
Index and had 2,114 securities, including asset-backed and commercial
mortgage-backed securities. This is a small decrease from 39.23% at the
beginning of the period. Finally, there were 3,844 securities in the corporate
sector, representing 26.26% of the benchmark, a slight decline from 26.80% at
the beginning of 2002. In order to be eligible for inclusion in the Index, a
security must meet minimum outstanding amount standards and be denominated in
U.S. dollars.
The unmanaged Lehman Brothers Aggregate Bond Index generated a total return of
+10.25% for the year ended December 31, 2002, with government securities being
the superior performer. This sector returned +11.50%, while the corporate and
MBS sectors returned +10.52% and +8.75%, respectively. The year was highlighted
with interest rates declining to levels not seen in decades as economic activity
sputtered. The economy experienced a technical recession which, while mild, has
emerged with continued weakness. At the end of the year, the Federal Reserve
Board had lowered interest rates to 1.25% and mortgages were being originated at
the 5.5% level.
As a result of logistical constraints, it is not practical for us to fully
replicate the 6,978 securities in the Index when attempting to duplicate the
return of the benchmark Index. Therefore, we construct a proxy portfolio of far
fewer securities as we seek to duplicate the return of the benchmark Index. The
investments in the proxy portfolio are determined by stratified sampling
techniques. Under this approach, securities are identified that ensure neutral
Index exposure in all sectors and sub-sectors in the Index. Thus, for example,
the MBS sector of the Series has the identical exposure to 30-year MBS, 15-year
MBS and balloon MBS. Within these subsectors exposure to coupon (6%, 6.5%, 7%,
etc.) and issuer are also matched to its Index counterpart, resulting in a
sector that is anticipated to duplicate the return of the MBS Index with minimal
deviation, referred to as tracking error. Currently, our exposure in the MBS
sector attempts to achieve this objective with 47 positions. Minimizing tracking
error in the U.S. government agency and corporate sectors is accomplished with a
similar approach. The 40 positions in the U.S. government and agency sector are
designed to match the investment characteristics of duration, yield, partial
duration and convexity of its Index counterpart. As such, any change in interest
rates and/or shape of the yield curve will have an identical effect on the
return of this sector. Corporate bond sector management is identical to the
approach of the U.S. government and agency sector in matching investment
characteristics. However, the corporate sector is stratified further by matching
credit rating and industry exposure. There are currently 295 issues in the
Series' corporate bond sector.
For the year ended December 31, 2002, the Fund's Class A and Class D Shares had
total returns of +9.78% and +9.61%, respectively. (Complete performance
information can be found on pages 4 and 5 of this report to shareholders). This
compared to a total return of +10.25% for the unmanaged Lehman Brothers
Aggregate Bond Index for the same period. At December 31, 2002, Master Aggregate
Bond Index Series was comprised of 382 individual investments that in total, by
sector and subsector, was designed to match the market's exposure and investment
characteristics of the Lehman Brothers Aggregate Bond Index. Therefore, it is
anticipated and expected that these identical exposures will result in minimal
total return tracking error in seeking to match the return of the Index.
In Conclusion
We appreciate your investment in Merrill Lynch Aggregate Bond Index Fund, and we
look forward to assisting you with your investment needs in the months and years
ahead.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director/Trustee
/s/ Jeffrey B. Hewson
Jeffrey B. Hewson
Vice President and
Co-Portfolio Manager
/s/ Frank Viola
Frank Viola
Vice President and
Co-Portfolio Manager
February 4, 2003
2 & 3
Merrill Lynch Aggregate Bond Index Fund, December 31, 2002
PERFORMANCE DATA
About Fund
Performance
Investors are able to purchase shares of the Fund through two pricing
alternatives:
o Class A Shares do not incur a maximum initial sales charge (front-end
load) or deferred sales charge and bear no ongoing distribution or account
maintenance fees. Class A Shares are available only to eligible investors.
o Class D Shares do not incur a maximum initial sales charge or deferred
sales charge and bear no ongoing distribution fee. In addition, Class D
Shares are subject to an ongoing account maintenance fee of 0.25%.
None of the past results shown should be considered a representation of
future performance. Performance results do not reflect the deduction of
taxes that a shareholder would pay on fund distributions or the redemption
of fund shares. Figures shown in each of the following tables assume
reinvestment of all dividends and capital gains distributions at net asset
value on the payable date. Investment return and principal value of shares
will fluctuate so that shares, when redeemed, may be worth more or less
than their original cost. Dividends paid to each class of shares will vary
because of the different levels of account maintenance, distribution and
transfer agency fees applicable to each class, which are deducted from the
income available to be paid to shareholders. The Fund's Administrator
voluntarily waived a portion of its administrative fee. Without such
waiver, the Fund's performance would have been lower.
Recent
Performance
Results
6-Month 12-Month Since Inception Standardized
As of December 31, 2002 Total Return Total Return Total Return 30-Day Yield
==================================================================================================================
ML Aggregate Bond Index Fund Class A Shares* +6.12% + 9.78% +54.92% 3.56%
- ------------------------------------------------------------------------------------------------------------------
ML Aggregate Bond Index Fund Class D Shares* +6.08 + 9.61 +52.86 3.31
- ------------------------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index** +6.23 +10.25 +56.30 --
==================================================================================================================
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date. The Fund's inception
date is 4/03/97.
** This unmanaged market-weighted Index is comprised of investment-grade
corporate bonds (rated BBB or better), mortgages and U.S. Treasury and
government agency issues with at least one year to maturity. Since
inception total return is from 4/30/97.
Total Return Based on a $10,000 Investment--Class A & Class D Shares
A line graph depicting the growth of an investment in the Fund's Class A Shares
and Class D Shares compared to growth of an investment in the Lehman Brothers
Aggregate Bond Index. Values are from April 3, 1997 to December 2002.
4/03/97** 12/97 12/98 12/99 12/00 12/01 12/02
ML Aggregate Bond Index
Fund+--Class A Shares* $10,000 $10,949 $11,886 $11,724 $13,080 $14,109 $15,489
ML Aggregate Bond Index
Fund+--Class D Shares* $10,000 $10,929 $11,835 $11,657 $12,960 $13,945 $15,285
4/30/97** 12/97 12/98 12/99 12/00 12/01 12/02
Lehman Brothers Aggregate
Bond Index++ $10,000 $10,864 $11,808 $11,711 $13,072 $14,176 $15,630
* Assuming transaction costs and other operating expenses, including
advisory fees.
** Commencement of operations.
+ The Fund invests all of its assets in Master Aggregate Bond Index Series
of Quantitative Master Series Trust. The Trust may invest in a
statistically selected sample of fixed income securities and other types
of financial instruments.
++ This unmanaged market-weighted Index is comprised of U.S. government and
agency securities, mortgage-backed securities issued by the Government
National Mortgage Association, Freddie Mac or Fannie Mae and
investment-grade (rated BBB or better) corporate bonds. The starting date
for the Index in the Class A and Class D Shares graph is from 4/30/97.
Past performance is not predictive of future performance.
Average Annual
Total Return
% Return
================================================================================
Class A Shares
================================================================================
One Year Ended 12/31/02 +9.78%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/02 +7.19
- --------------------------------------------------------------------------------
Inception (4/03/97) through 12/31/02 +7.92
- --------------------------------------------------------------------------------
% Return
================================================================================
Class D Shares
================================================================================
One Year Ended 12/31/02 +9.61%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/02 +6.94
- --------------------------------------------------------------------------------
Inception (4/03/97) through 12/31/02 +7.67
- --------------------------------------------------------------------------------
4 & 5
Merrill Lynch Aggregate Bond Index Fund, December 31, 2002
STATEMENT OF ASSETS AND LIABILITIES
MERRILL LYNCH
AGGREGATE BOND
INDEX FUND As of December 31, 2002
====================================================================================================================================
Assets: Investment in Master Aggregate Bond Index Series, at value
(identified cost--$402,010,376) .................................................. $422,584,450
Prepaid registration fees and other assets ....................................... 34,025
------------
Total assets ..................................................................... 422,618,475
------------
====================================================================================================================================
Liabilities: Payables:
Dividends to shareholders ...................................................... $ 450,298
Administrative fees ............................................................ 67,364
Distributor .................................................................... 12,675 530,337
----------
Accrued expenses and other liabilities ........................................... 68,450
------------
Total liabilities ................................................................ 598,787
------------
====================================================================================================================================
Net Assets: Net assets ....................................................................... $422,019,688
============
====================================================================================================================================
Net Assets Class A Shares of Common Stock, $.0001 par value, 125,000,000 shares authorized .. $ 3,296
Consist of: Class D Shares of Common Stock, $.0001 par value, 125,000,000 shares authorized .. 557
Paid-in capital in excess of par ................................................. 405,860,075
Accumulated distributions in excess of investment income--net .................... $ (232,244)
Accumulated realized capital losses on investments from the Series--net .......... (4,186,070)
Unrealized appreciation on investments from the Series--net ...................... 20,574,074
----------
Total accumulated earnings--net .................................................. 16,155,760
------------
Net assets ....................................................................... $422,019,688
============
====================================================================================================================================
Net Asset Class A--Based on net assets of $360,991,257 and 32,955,160 shares outstanding ... $ 10.95
Value: ============
Class D--Based on net assets of $61,028,431 and 5,570,290 shares outstanding ..... $ 10.96
============
====================================================================================================================================
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
MERRILL LYNCH
AGGREGATE BOND
INDEX FUND For the Year Ended December 31, 2002
================================================================================================================================
Investment Income Net investment income allocated from the Series:
From the Series--Net: Interest ........................................................... $ 23,398,919
Securities lending--net ............................................ 1,069
Expenses ........................................................... (336,343)
------------
Net investment income from the Series ................................ 23,063,645
------------
================================================================================================================================
Expenses: Administration fee ................................................... $ 807,482
Transfer agent fees .................................................. 255,905
Account maintenance fee--Class D ..................................... 147,152
Registration fees .................................................... 63,824
Printing and shareholder reports ..................................... 34,999
Professional fees .................................................... 18,723
Directors' fees and expenses ......................................... 6,535
Other ................................................................ 7,646
------------
Total expenses before reimbursement .................................. 1,342,266
Reimbursement of expenses ............................................ (72,810)
------------
Total expenses after reimbursement ................................... 1,269,456
------------
Investment income--net ............................................... 21,794,189
------------
================================================================================================================================
Realized & Realized gain on investments from the Series--net .................... 3,143,394
Unrealized Gain Change in unrealized appreciation on investments from the Series--net 15,125,614
From the ------------
Series--Net: Total realized and unrealized gain on investments from the Series--net 18,269,008
------------
Net Increase in Net Assets Resulting from Operations ................. $ 40,063,197
============
================================================================================================================================
See Notes to Financial Statements.
6 & 7
Merrill Lynch Aggregate Bond Index Fund, December 31, 2002
STATEMENTS OF CHANGES IN NET ASSETS
For the
MERRILL LYNCH Year Ended December 31,
AGGREGATE BOND -------------------------------
INDEX FUND Increase (Decrease) in Net Assets: 2002 2001
=================================================================================================================================
Operations: Investment income--net .............................................. $ 21,794,189 $ 19,415,600
Realized gain on investments from the Series--net ................... 3,143,394 2,914,566
Change in unrealized appreciation on investments from the Series--net 15,125,614 2,745,616
------------- -------------
Net increase in net assets resulting from operations ................ 40,063,197 25,075,782
------------- -------------
=================================================================================================================================
Dividends to Investment income--net:
Shareholders: Class A ........................................................... (18,820,545) (15,965,028)
Class D ........................................................... (2,879,105) (3,500,554)
------------- -------------
Net decrease in net assets resulting from dividends to shareholders . (21,699,650) (19,465,582)
------------- -------------
=================================================================================================================================
Capital Share Net increase in net assets derived from capital share transactions .. 18,827,831 99,823,302
Transactions: ------------- -------------
=================================================================================================================================
Net Assets: Total increase in net assets ........................................ 37,191,378 105,433,502
Beginning of year ................................................... 384,828,310 279,394,808
------------- -------------
End of year* ........................................................ $ 422,019,688 $ 384,828,310
============= =============
=================================================================================================================================
*Accumulated distributions in excess of investment income--net ....... $ (232,244) $ (466,465)
============= =============
=================================================================================================================================
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
Class A
The following per share data and ratios have been --------------------------------------------------------
derived from information provided in the financial For the Year Ended
MERRILL LYNCH statements. December 31,
AGGREGATE BOND ---------------------------------------------------------
INDEX FUND Increase (Decrease) in Net Asset Value: 2002 2001 2000 1999 1998
===================================================================================================================================
Per Share Net asset value, beginning of year ................. $ 10.50 $ 10.31 $ 9.85 $ 10.61 $ 10.42
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net ............................. .55* .61 .64 .62 .64
Realized and unrealized gain (loss) on investments
from the Series--net ............................... .45 .19 .46 (.76) .23
--------- --------- --------- --------- ---------
Total from investment operations ................... 1.00 .80 1.10 (.14) .87
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net ........................... (.55) (.61) (.64) (.62) (.64)
Realized gain on investments from the Series--net -- -- -- -- (.04)
In excess of realized gain on investments from the
Series--net ...................................... -- -- -- --+ --
--------- --------- --------- --------- ---------
Total dividends and distributions .................. (.55) (.61) (.64) (.62) (.68)
--------- --------- --------- --------- ---------
Net asset value, end of year ....................... $ 10.95 $ 10.50 $ 10.31 $ 9.85 $ 10.61
========= ========= ========= ========= =========
===================================================================================================================================
Total Investment Based on net asset value per share ................. 9.78% 7.87% 11.57% (1.36%) 8.56%
Return: ========= ========= ========= ========= =========
===================================================================================================================================
Ratios to Average Expenses, net of reimbursement++ ................... .34% .35% .38% .35% .35%
Net Assets: ========= ========= ========= ========= =========
Expenses++ ......................................... .36% .46% .45% .37% .40%
========= ========= ========= ========= =========
Investment income--net ............................. 5.16% 5.72% 6.41% 6.06% 5.99%
========= ========= ========= ========= =========
===================================================================================================================================
Supplemental Net assets, end of year (in thousands) ............. $ 360,991 $ 324,390 $ 214,056 $ 324,254 $ 351,786
Data: ========= ========= ========= ========= =========
===================================================================================================================================
Class D
The following per share data and ratios have been ----------------------------------------------------------
derived from information provided in the financial For the Year Ended
statements. December 31,
----------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2002 2001 2000 1999 1998
===================================================================================================================================
Per Share Net asset value, beginning of year ................. $ 10.50 $ 10.31 $ 9.86 $ 10.61 $ 10.42
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net ............................. .52* .58 .61 .58 .61
Realized and unrealized gain (loss) on investments
from the Series--net ............................... .46 .19 .45 (.75) .23
--------- --------- --------- --------- ---------
Total from investment operations ................... .98 .77 1.06 (.17) .84
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net ........................... (.52) (.58) (.61) (.58) (.61)
Realized gain on investments from the Series--net -- -- -- -- (.04)
In excess of realized gain on investments from the
Series--net ...................................... -- -- -- --+ --
--------- --------- --------- --------- ---------
Total dividends and distributions .................. (.52) (.58) (.61) (.58) (.65)
--------- --------- --------- --------- ---------
Net asset value, end of year ....................... $ 10.96 $ 10.50 $ 10.31 $ 9.86 $ 10.61
========= ========= ========= ========= =========
===================================================================================================================================
Total Investment Based on net asset value per share ................. 9.61% 7.60% 11.18% (1.50%) 8.29%
Return: ========= ========= ========= ========= =========
===================================================================================================================================
Ratios to Average Expenses, net of reimbursement++ ................... .59% .60% .63% .60% .60%
Net Assets: ========= ========= ========= ========= =========
Expenses++ ......................................... .61% .71% .70% .62% .65%
========= ========= ========= ========= =========
Investment income--net ............................. 4.91% 5.50% 6.17% 5.81% 5.75%
========= ========= ========= ========= =========
===================================================================================================================================
Supplemental Net assets, end of year (in thousands) ............. $ 61,029 $ 60,438 $ 65,339 $ 79,743 $ 81,603
Data: ========= ========= ========= ========= =========
===================================================================================================================================
+ Amount is less than $.01 per share.
++ Includes the Fund's share of the Series' allocated expenses.
* Based on average shares outstanding.
See Notes to Financial Statements.
8 & 9
Merrill Lynch Aggregate Bond Index Fund, December 31, 2002
NOTES TO FINANCIAL STATEMENTS
MERRILL LYNCH
AGGREGATE BOND
INDEX FUND
1. Significant Accounting Policies:
Merrill Lynch Aggregate Bond Index Fund (the "Fund") is part of Merrill Lynch
Index Funds, Inc. (the "Corporation"). The Fund is registered under the
Investment Company Act of 1940 as a non-diversified mutual fund. The Fund seeks
to achieve its investment objective by investing all of its assets in the Master
Aggregate Bond Index Series (the "Series") of the Quantitative Master Series
Trust, which has the same investment objective as the Fund. The value of the
Fund's investment in the Series reflects the Fund's proportionate interest in
the net assets of the Series. The performance of the Fund is directly affected
by the performance of the Series. The financial statements of the Series,
including the Schedule of Investments, are included elsewhere in this report and
should be read in conjunction with the Fund's financial statements. The Fund's
financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America, which may require the use of
management accruals and estimates. The percentage of the Series owned by the
Fund at December 31, 2002 was 58.9%. The Fund offers two classes of shares,
Class A and Class D. Shares of Class A and Class D are sold without the
imposition of a front-end or deferred sales charge. Both classes of shares have
identical voting, dividend, liquidation and other rights and the same terms and
conditions, except that Class D Shares bear certain expenses related to the
account maintenance of such shares and have exclusive voting rights with respect
to matters relating to its account maintenance expenditures. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments -- The Fund records its investment in the Series at
fair value. Valuation of securities held by the Series is discussed in Note 1a
of the Series' Notes to Financial Statements, which are included elsewhere in
this report.
(b) Investment income and expenses -- The Fund records daily its proportionate
share of the Series' income, expenses and realized and unrealized gains and
losses. In addition, the Fund accrues its own expenses.
(c) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders. Therefore,
no Federal income tax provision is required.
(d) Prepaid registration fees -- Prepaid registration fees are charged to
expense as the related shares are issued.
(e) Dividends and distributions -- Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates.
(f) Investment transactions -- Investment transactions in the Series are
accounted for on a trade date basis.
(g) Reclassification -- Accounting principles generally accepted in the United
States of America require that certain components of net assets be adjusted to
reflect permanent differences between financial and tax reporting. Accordingly,
the current year's permanent book/tax difference of $139,682 has been
reclassified between accumulated net realized capital losses and accumulated net
investment loss, $34,222 has been reclassified between accumulated net realized
capital losses and paid-in capital in excess of par. Additionally, $636,168 has
been reclassified between unrealized appreciation of investments from the Series
and additional paid-in capital to reflect prior liquidation of certain partners'
investments in the Series. These reclassifications have no effect on net assets
or net asset values per share.
2. Transactions with Affiliates:
The Corporation has entered into an Administration Services Agreement with
Merrill Lynch Investment Managers, L.P. ("MLIM"). The general partner of MLIM is
Princeton Services, Inc. ("PSI"), a wholly-owned subsidiary of Merrill Lynch &
Co., Inc. ("ML & Co."), which is the limited partner. The Fund pays a monthly
fee at an annual rate of .19% of the Fund's average daily net assets for the
performance of administrative services (other than investment advice and related
portfolio activities) necessary for the operation of the Fund. For the year
ended December 31, 2002, MLIM earned fees of $807,482, of which $72,810 was
waived.
The Corporation has also entered into a Distribution Agreement and Distribution
Plan with FAM Distributors, Inc. ("FAMD" or the "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc. Pursuant to the Distribution Plan
adopted by the Corporation in accordance with Rule 12b-1 under the Investment
Company Act of 1940, the Fund pays the Distributor an ongoing account
maintenance fee. The fee is accrued daily and paid monthly at the annual rate of
..25% based upon the average daily net assets of Class D Shares.
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., also provides account
maintenance services to the Fund. The ongoing account maintenance fee
compensates the Distributor and MLPF&S for providing account maintenance
services to Class D shareholders.
Financial Data Services, Inc. ("FDS"), an indirect, wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Certain officers and/or directors of the Fund are officers and/or directors of
MLIM, PSI, FAMD, FDS, and/or ML & Co.
3. Investments:
Increases and decreases in the Fund's investment in the Series for the year
ended December 31, 2002 were $163,310,322 and $167,271,906, respectively.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions were
$18,827,831 and $99,823,302 for the years ended December 31, 2002 and December
31, 2001, respectively.
Transactions in capital shares for each class were as follows:
- -------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended December 31, 2002 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .......................... 22,467,900 $ 237,667,287
Shares issued to shareholders
in reinvestment of dividends ......... 1,471,997 15,676,326
------------- -------------
Total issued ......................... 23,939,897 253,343,613
Shares redeemed ...................... (21,884,225) (232,549,154)
------------- -------------
Net increase ......................... 2,055,672 $ 20,794,459
============= =============
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended December 31, 2001 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .......................... 18,529,179 $ 193,786,325
Shares issued to shareholders
in reinvestment of dividends ......... 1,301,060 13,635,879
------------- -------------
Total issued ......................... 19,830,239 207,422,204
Shares redeemed ...................... (9,692,116) (101,554,770)
------------- -------------
Net increase ......................... 10,138,123 $ 105,867,434
============= =============
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Class D Shares for the Year Dollar
Ended December 31, 2002 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .......................... 1,746,539 $ 18,629,821
Shares issued to shareholders
in reinvestment of dividends ......... 222,051 2,365,502
------------- -------------
Total issued ......................... 1,968,590 20,995,323
Shares redeemed ...................... (2,153,732) (22,961,951)
------------- -------------
Net decrease ......................... (185,142) $ (1,966,628)
============= =============
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Class D Shares for the Year Dollar
Ended December 31, 2001 Shares Amount
- -------------------------------------------------------------------------------
Shares sold .......................... 1,428,693 $ 14,954,073
Shares issued to shareholders
in reinvestment of dividends ......... 274,315 2,872,989
------------- -------------
Total issued ......................... 1,703,008 17,827,062
Shares redeemed ...................... (2,283,050) (23,871,194)
------------- -------------
Net decrease ......................... (580,042) $ (6,044,132)
============= =============
- -------------------------------------------------------------------------------
5. Distributions to Shareholders:
The tax character of distributions paid during the fiscal years ended December
31, 2002 and December 31, 2001 was as follows:
- -------------------------------------------------------------------------------
12/31/2002 12/31/2001
- -------------------------------------------------------------------------------
Distributions paid from:
Ordinary income .................... $ 21,699,650 $ 19,465,582
------------- -------------
Total taxable distributions .......... $ 21,699,650 $ 19,465,582
============= =============
- -------------------------------------------------------------------------------
10 & 11
Merrill Lynch Aggregate Bond Index Fund, December 31, 2002
NOTES TO FINANCIAL STATEMENTS (concluded)
MERRILL LYNCH
AGGREGATE BOND
INDEX FUND
As of December 31, 2002, the components of accumulated earnings on a tax basis
were as follows:
- -----------------------------------------------------------------------------
Undistributed ordinary income--net ...................... $ 149,956
Undistributed long-term capital gains--net .............. --
------------
Total undistributed earnings--net ....................... 149,956
Capital loss carryforward ............................... (3,872,833)*
Unrealized gains--net ................................... 19,878,637**
------------
Total accumulated earnings--net ......................... $(16,155,760)
============
- -----------------------------------------------------------------------------
* On December 31, 2002, the Fund had a net capital loss carryforward of
$3,872,833, all of which expires in 2008. This amount will be available to
offset like amounts of any future taxable gains.
** The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the tax deferral of losses on wash sales, the
tax deferral of losses on straddles and the difference between book and
tax amortization methods for premiums and discounts on fixed income
securities.
INDEPENDENT AUDITORS' REPORT
MERRILL LYNCH
AGGREGATE BOND
INDEX FUND
The Board of Directors and Shareholders,
Merrill Lynch Aggregate Bond Index Fund
(One of the series constituting
Merrill Lynch Index Funds, Inc.):
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch Aggregate Bond Index Fund (one of the series constituting Merrill Lynch
Index Funds, Inc.) as of December 31, 2002, the related statements of operations
for the year then ended and changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
presented. These financial statements and the financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Aggregate Bond Index Fund of the Merrill Lynch Index Funds, Inc. as of December
31, 2002, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with
accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Princeton, New Jersey
February 20, 2003
SCHEDULE OF INVESTMENTS (in U.S. dollars)
Master Aggregate Bond Index Series
---------------------------------------------------------------------------------------------------------
Face Interest Maturity
Issue Amount Rate Date(s) Value
==================================================================================================================================
U.S. Government & Fannie Mae $ 290,000 5.45% 10/10/2003 $ 299,243
Agency Obligations-- 210,000 6.85 4/05/2004 223,909
35.2% 29,225,000 3.50 9/15/2004 30,128,637
3,000,000 3.875 3/15/2005 3,134,172
21,625,000 5.75 2/15/2008 24,229,320
8,900,000 6.625 11/15/2010 10,449,668
1,240,000 7.25 5/15/2030 1,559,822
==================================================================================================================================
Financing Corp. 670,000 9.80 11/30/2017 1,003,388
==================================================================================================================================
Freddie Mac 16,845,000 5.75 7/15/2003 17,248,269
1,245,000 7.18 6/27/2006 1,446,298
14,560,000 4.875 3/15/2007 15,731,949
8,655,000 6.75 9/15/2029 10,249,563
1,680,000 6.25 7/15/2032 1,903,148
==================================================================================================================================
Tennessee Valley Authority, Series E 1,915,000 6.25 12/15/2017 2,161,315
==================================================================================================================================
United States Treasury Bonds 765,000 8.75 11/15/2008 812,783
15,820,000 8.75 5/15/2017 22,872,255
250,000 8.875 8/15/2017 365,381
1,875,000 8.125 8/15/2019 2,611,671
7,800,000 8.50 2/15/2020 11,243,879
1,560,000 8.125 8/15/2021 2,195,335
5,180,000 6.25 8/15/2023 6,085,692
3,450,000 6.375 8/15/2027 4,146,738
830,000 5.375 2/15/2031 904,829
==================================================================================================================================
United States Treasury Notes 4,335,000 4.75 2/15/2004 4,504,676
7,450,000 5.25 5/15/2004 7,847,234
5,615,000 6.00 8/15/2004 6,029,106
7,815,000 5.875 11/15/2004 8,440,505
2,735,000 6.75 5/15/2005 3,049,205
18,735,000 5.75 11/15/2005 20,710,231
9,175,000 5.875 11/15/2005 10,174,213
595,000 3.25 8/15/2007 609,736
10,095,000 3.00 11/15/2007 10,216,453
2,050,000 5.75 8/15/2010 2,357,020
6,925,000 4.00 11/15/2012 7,022,926
==================================================================================================================================
Total Investments in U.S. Government & Agency Obligations (Cost--$239,645,808)--35.2% 251,968,569
==================================================================================================================================
12 & 13
Merrill Lynch Aggregate Bond Index Fund, December 31, 2002
SCHEDULE OF INVESTMENTS (continued) (in U.S. dollars)
Master Aggregate Bond Index Series (continued)
---------------------------------------------------------------------------------------------------------
Face Interest Maturity
Issue Amount Rate Date(s) Value
==================================================================================================================================
U.S. Government Agency Fannie Mae $ 737,394 5.50% 6/01/2011-2/01/2014 $ 772,143
Mortgage-Backed 2,885,812 6.00 2/01/2013-6/01/2015 3,031,798
Obligations**--36.8% 5,898,000 6.00 TBA(1) 6,106,441
2,300,000 6.00 TBA(1) 2,405,168
2,601,327 6.50 1/01/2013-5/01/2016 2,755,583
6,929,106 6.50 12/01/2025-1/01/2030 7,226,045
2,796,190 7.00 4/01/2027-3/01/2031 2,948,009
2,115,675 7.50 10/01/2027-5/01/2032 2,248,354
54,382 8.00 9/01/2015 58,750
3,493,793 8.00 11/01/2029-9/01/2031 3,764,092
121,375 8.50 5/01/2030-1/01/2031 130,399
193,007 9.50 7/01/2017 215,008
80,598 10.00 10/01/2018-5/01/2022 91,799
34,890 10.50 12/01/2016 39,502
==================================================================================================================================
Freddie Mac--Gold Program 7,950,000 5.00 TBA(1) 8,163,799
496,155 5.50 11/01/2017 515,204
14,316,000 5.50 TBA(1) 14,867,409
10,040,164 5.50 TBA(1) 10,250,656
13,095,509 6.00 4/01/2016-10/01/2017 13,714,048
41,104,000 6.00 TBA(1) 42,569,522
2,634,038 6.50 4/01/2015-3/01/2017 2,784,485
43,750,341 6.50 1/01/2026-9/01/2032 45,596,170
2,230,000 6.50 TBA(1) 2,350,362
16,385,000 6.50 TBA(1) 17,051,624
2,068,769 7.00 1/01/2011-6/01/2016 2,202,272
18,983,847 7.00 9/01/2025-7/01/2032 19,966,046
700,000 7.00 TBA(1) 742,547
900,000 7.00 TBA(1) 943,295
685,843 7.50 5/01/2007-4/01/2016 731,151
7,284,859 7.50 1/01/2023-9/01/2032 7,756,668
2,052,417 8.00 6/01/2024-3/01/2032 2,208,225
260,094 8.50 5/01/2028-8/01/2030 279,892
24,879 9.00 9/01/2014 27,278
390,079 9.50 2/01/2019 434,245
149,601 10.00 3/01/2010-9/01/2017 167,361
103,315 10.50 4/01/2016 115,928
51,974 11.00 9/01/2016-3/01/2018 58,834
16,928 11.50 8/01/2015 19,281
45,347 12.50 2/01/2014 53,738
==================================================================================================================================
Government National Mortgage Corporation 2,567,674 6.00 4/20/2026-10/15/2032 2,677,314
4,544,000 6.00 TBA(1) 4,738,220
208,087 6.50 2/15/2014-5/15/2014 221,035
14,061,795 6.50 4/15/2026-5/15/2032 14,772,198
115,477 7.00 4/15/2013 123,884
9,207,868 7.00 7/15/2027-9/15/2031 9,769,852
3,223,453 7.50 3/15/2024-11/15/2031 3,443,886
1,914,973 8.00 12/15/2022-6/15/2031 2,077,026
376,401 8.50 11/15/2017-3/15/2031 410,536
352,788 9.00 11/15/2016-11/15/2024 392,375
28,306 9.50 9/15/2021 31,870
50,531 12.00 2/15/2015 59,785
==================================================================================================================================
Total U.S. Government Agency Mortgage-Backed Obligations (Cost--$257,938,664)--36.8% 264,081,112
==================================================================================================================================
S&P Moody's Face
INDUSTRIES Ratings+ Ratings+ Amount Corporate Bonds & Notes
==================================================================================================================================
Banking--2.5% A- A2 $ 465,000 BB&T Corporation, 6.50% due 8/01/2011 525,184
Bank of America Corp.:
A+ Aa2 1,900,000 5.875% due 2/15/2009 2,084,891
A+ Aa2 410,000 4.875% due 9/15/2012 414,424
A+ Aa3 325,000 The Bank of New York, 5.20% due 7/01/2007 349,854
Bank One Corp.:
A Aa3 700,000 6.875% due 8/01/2006 786,899
A- A1 378,000 8% due 4/29/2027 474,587
A A2 535,000 Corp Andina de Fomento, 6.875% due 3/15/2012 560,866
A+ A1 400,000 Deutsche Bank Financial, 7.50% due 4/25/2009 464,939
A A1 765,000 FleetBoston Financial Corp., 7.25% due 9/15/2005 847,068
A A1 615,000 HSBC Holding PLC, 7.50% due 7/15/2009 728,272
Inter-American Development Bank:
AAA Aaa 1,290,000 4.375% due 9/20/2012 1,310,938
AAA Aaa 1,000,000 6.80% due 10/15/2025 1,190,467
International Bank for Reconstruction and Development:
AAA Aaa 1,865,000 4.75% due 4/30/2004 1,948,117
AAA Aaa 250,000 3.50% due 10/22/2004 257,738
A+ Aa3 395,000 Marshall & Ilsley Bank, 4.125% due 9/04/2007 407,858
A A2 722,000 Mellon Financial Co., 6.875% due 3/01/2003 727,899
A+ Aa3 595,000 National City Bank of Indiana, 4% due 9/28/2007 609,586
A- A2 350,000 Regions Financial Corporation, 6.375% due 5/15/2012 390,342
A+ Aa3 610,000 Suntrust Bank, 5.45% due 12/01/2017 602,375
A Aa3 700,000 U.S. Bancorp, 1.56% due 9/16/2005 700,441
A+ Aa2 470,000 Wachovia Bank NA, 4.85% due 7/30/2007 500,390
Washington Mutual Inc.:
BBB+ A3 600,000 7.50% due 8/15/2006 674,677
BBB Baa1 90,000 8.25% due 4/01/2010 107,190
A+ Aa2 250,000 Wells Fargo Bank NA, 6.45% due 2/01/2011 280,648
Wells Fargo & Co.:
A+ Aa2 600,000 7.25% due 8/24/2005 673,513
A+ Aa2 400,000 5.125% due 2/15/2007 429,606
-----------
18,048,769
==================================================================================================================================
14 & 15
Merrill Lynch Aggregate Bond Index Fund, December 31, 2002
SCHEDULE OF INVESTMENTS (continued) (in U.S. dollars)
Master Aggregate Bond Index Series (continued)
--------------------------------------------------------------------------------------------------------------
S&P Moody's Face
INDUSTRIES Ratings+ Ratings+ Amount Corporate Bonds & Notes Value
====================================================================================================================================
Financial Services-- A+ A2 $ 400,000 AXA Financial Inc., 7.75% due 8/01/2010 $ 452,618
8.1% A+ A1 400,000 American Express Corporation, 6.875% due 11/01/2005 447,090
A+ A1 235,000 American General Finance, 5.875% due 7/14/2006 252,967
A+ A2 600,000 American Honda Finance, 1.65% due 10/03/2005 (a) 599,426
A A2 600,000 Bear Stearns Companies, Inc., 7.625% due 2/01/2005 662,726
A+ A3 200,000 Boeing Capital Corporation, 7.10% due 9/27/2005 216,643
CIT Group Inc.:
A A2 660,000 5.625% due 5/17/2004 678,496
A A2 450,000 6.50% due 2/07/2006 473,903
BBB- Baa2 420,000 Capital One Bank, 6.875% due 2/01/2006 406,330
A+ A2 265,000 Caterpillar Financial Services Corporation, 4.875% due 6/15/2007 281,882
A+ Aa2 90,000 Citicorp, 6.375% due 11/15/2008 100,710
Citigroup Inc.:
AA- Aa1 1,400,000 5.70% due 2/06/2004 1,456,220
AA- Aa1 155,000 5.75% due 5/10/2006 168,265
A+ Aa2 565,000 7.25% due 10/01/2010 655,891
AA- Aa1 125,000 6.50% due 1/18/2011 140,250
AA- Aa1 35,000 6% due 2/21/2012 38,409
Commercial Credit Co.:
AA- Aa1 500,000 6.75% due 7/01/2007 559,439
AA- Aa1 450,000 10% due 5/15/2009 571,843
A- A3 3,220,000 Core Investment Grade Trust, 4.727% due 11/30/2007 3,285,688
A A3 2,005,000 Countrywide Home Loans, Inc., 5.625% due 7/15/2009 2,121,579
A+ Aa3 500,000 Credit Suisse First Boston Inc., 5.875% due 8/01/2006 535,489
A+ A1 140,000 Diageo Capital PLC, 3.50% due 11/19/2007 140,713
A- Baa1 450,000 Equifax Inc., 4.95% due 11/01/2007 (a) 457,874
A- A2 100,000 FPL Group Capital Inc., 7.625% due 9/15/2006 112,012
Ford Motor Credit Company:
BBB A3 1,890,000 6.875% due 2/01/2006 1,893,311
BBB A3 200,000 7.25% due 10/25/2011 194,335
AAA Aaa 1,760,000 General Electric Capital Corp., 6.75% due 3/15/2032 1,945,838
General Motors Acceptance Corp.:
BBB A2 674,000 6.85% due 6/17/2004 701,924
BBB A2 692,000 7.75% due 1/19/2010 724,448
BBB A2 140,000 6.875% due 9/15/2011 139,616
BBB A2 970,000 7% due 2/01/2012 974,109
BBB A2 1,298,000 8% due 11/01/2031 1,305,068
Goldman Sachs Group, Inc.:
A+ Aa3 800,000 7.625% due 8/17/2005 902,208
A+ Aa3 890,000 6.875% due 1/15/2011 993,454
A+ Aa3 135,000 6.60% due 1/15/2012 149,174
International Lease Finance Corporation:
AA- A1 570,000 4.75% due 1/18/2005 584,109
AA- A1 650,000 4.375% due 12/15/2005 657,769
AA- A1 236,000 5.625% due 6/01/2007 247,070
A A2 1,285,000 J.P. Morgan Chase & Company, 6.625% due 3/15/2012 1,392,704
AAA Aaa 700,000 KFW International Finance, 4.75% due 1/24/2007 752,133
Lehman Brothers Holdings, Inc.:
A A2 800,000 6.625% due 4/01/2004 843,388
A A2 350,000 7% due 2/01/2008 395,695
A A2 245,000 7.875% due 8/15/2010 289,884
A A2 425,000 6.625% due 1/18/2012 470,403
NR* Baa3 1,512,000 Lehman Brothers, TRAINS-BBB-5-02, 6.539% due 8/15/2008 (a)(b)(c) 1,556,997
BBB Baa2 500,000 Liberty Property LP, 7.25% due 3/15/2011 547,362
MBNA America Bank NA:
BBB+ Baa1 500,000 6.875% due 7/15/2004 (a) 520,110
BBB+ Baa1 25,000 7.75% due 9/15/2005 27,437
BBB+ Baa1 110,000 6.50% due 6/20/2006 116,388
BBB Baa2 545,000 7.125% due 11/15/2012 570,348
Morgan Stanley, Dean Witter, Discover & Co.:
A+ Aa3 1,300,000 7.125% due 1/15/2003 1,301,834
A+ Aa3 450,000 6.60% due 4/01/2012 498,743
NR* A3 16,650,000 Morgan Stanley, TRACERS, 5.878% due 3/01/2007 (a)(b)(d) 17,741,074
AA Aa3 265,000 Principal Life Global, 6.25% due 2/15/2012 (a) 280,898
BBB+ Baa1 500,000 ProLogis Trust, 7% due 10/01/2003 514,087
AA- Aa1 1,000,000 Salomon Smith Barney Holdings, Inc., 6.25% due 5/15/2003 1,016,684
BBB Baa2 500,000 Simon Debartolo, 6.75% due 7/15/2004 527,280
AA Aa3 250,000 Texaco Capital Inc., 8.625% due 6/30/2010 314,947
Verizon Global Funding Corporation:
A+ A2 1,000,000 6.75% due 12/01/2005 1,104,907
A+ A2 650,000 7.375% due 9/01/2012 747,850
-----------
57,760,049
====================================================================================================================================
Financial Services-- A- A2 330,000 ACE INA Holdings, 8.30% due 8/15/2006 373,253
Consumer--2.7% A+ A1 250,000 Allstate Corporation, 5.375% due 12/01/2006 266,274
A- A3 125,000 Aristar Inc., 7.375% due 9/01/2004 134,771
BBB+ Baa1 215,000 Avalonbay Communities, 6.625% due 9/15/2011 229,271
A+ A1 730,000 Golden West Financial Corporation, 4.75% due 10/01/2012 734,040
A- A2 400,000 Hartford Life Inc., 7.375% due 3/01/2031 445,462
Household Finance Corporation:
A- A2 1,800,000 5.875% due 2/01/2009 1,847,531
A- A2 1,250,000 7% due 5/15/2012 1,369,111
A A3 470,000 John Hancock Financial Services, 5.625% due 12/01/2008 492,761
AA- A2 210,000 Marsh & McLennan Companies Inc., 6.625% due 6/15/2004 224,297
A A2 400,000 MetLife Inc., 6.125% due 12/01/2011 431,745
A- Baa3 500,000 Provident Companies Inc., 7% due 7/15/2018 443,442
NR* NR* 12,000,000 Security Life of Denver, 4.66% due 3/31/2003 12,418,840
-----------
19,410,798
====================================================================================================================================
16 & 17
Merrill Lynch Aggregate Bond Index Fund, December 31, 2002
SCHEDULE OF INVESTMENTS (continued) (in U.S. dollars)
Master Aggregate Bond Index Series (continued)
--------------------------------------------------------------------------------------------------------------
S&P Moody's Face
INDUSTRIES Ratings+ Ratings+ Amount Corporate Bonds & Notes Value
====================================================================================================================================
Foreign Government AAA Aaa $2,000,000 Canada Government Bond, 5.25% due 11/05/2008 $ 2,210,364
Obligations--1.7% AA- Aa2 400,000 Province of British Columbia, 4.625% due 10/03/2006 424,517
AA- Aa3 1,000,000 Province of Manitoba, 5.50% due 10/01/2008 1,107,230
Province of Ontario:
AA Aa2 328,000 7.375% due 1/27/2003 329,159
AA Aa2 750,000 5.50% due 10/01/2008 829,189
A+ Aa3 603,000 Province of Saskatchewan, 8% due 7/15/2004 656,135
A+ A1 1,500,000 Quebec Province, 7.50% due 9/15/2029 1,870,722
AAA Aaa 1,000,000 Republic of Finland, 5.875% due 2/27/2006 1,095,203
AA Aa2 1,050,000 Republic of Italy, 4.375% due 10/25/2006 1,107,904
BBB- Baa2 1,950,000 United Mexican States, 9.875% due 2/01/2010 2,393,820
-----------
12,024,243
====================================================================================================================================
Industrial--Consumer BBB+ Baa1 60,000 Albertson's Inc., 7.50% due 2/15/2011 69,031
Goods--1.3% A+ A1 350,000 Anheuser-Busch Companies, Inc., 6% due 11/01/2041 369,728
A A2 855,000 Coca-Cola Enterprises, 6.75% due 9/15/2028 954,087
BBB+ Baa1 350,000 Conagra Foods Inc., 6.75% due 9/15/2011 398,006
BBB Baa2 515,000 International Paper Company, 8.125% due 7/08/2005 576,438
BBB Baa2 567,000 Kellogg Company, 6% due 4/01/2006 614,590
AA Aa2 294,000 Kimberly-Clark Corporation, 7.10% due 8/01/2007 342,646
A- A2 360,000 Kraft Foods Inc., 4.625% due 11/01/2006 378,488
Kroger Company:
BBB- Baa3 160,000 7.625% due 9/15/2006 179,200
BBB- Baa3 550,000 6.80% due 4/01/2011 602,887
BBB- Baa3 200,000 6.20% due 6/15/2012 213,535
BBB- Baa3 85,000 7.70% due 6/01/2029 97,194
BBB- Baa3 250,000 7.50% due 4/01/2031 279,647
A A2 500,000 Nabisco, Inc., 6.375% due 2/01/2005 539,986
A A1 92,000 Pepsi Bottling Holdings Inc., 5.625% due 2/17/2009 (a) 100,252
A A1 500,000 PepsiCo Inc., 4.50% due 9/15/2004 519,665
Philip Morris Companies, Inc.:
A- A2 340,000 6.375% due 2/01/2006 365,247
A- A2 365,000 6.95% due 6/01/2006 398,507
BBB- Baa2 270,000 RJ Reynolds Tobacco Holdings, 6.50% due 6/01/2007 281,697
Safeway Inc.:
BBB Baa2 300,000 6.15% due 3/01/2006 324,911
BBB Baa2 80,000 5.80% due 8/15/2012 83,712
BBB Baa2 324,000 7.25% due 2/01/2031 366,605
BBB Baa2 290,000 Sappi Papier Holdings AG, 6.75% due 6/15/2012 (a) 317,840
A+ A3 420,000 Sara Lee Corporation, 6.25% due 9/15/2011 471,053
BBB Baa3 390,000 SuperValu Inc., 7.50% due 5/15/2012 420,380
BBB Baa3 250,000 Tyson Foods, Inc., 6.625% due 10/01/2004 265,815
-----------
9,531,147
====================================================================================================================================
Industrial--Energy-- Anadarko Finance Company:
1.5% BBB+ Baa1 390,000 6.75% due 5/01/2011 439,442
BBB+ Baa1 190,000 7.50% due 5/01/2031 225,921
Apache Corporation:
A- A3 270,000 6.25% due 4/15/2012 302,656
A- A3 190,000 7.625% due 7/01/2019 225,589
AA+ Aa1 350,000 Atlantic Richfield, 5.90% due 4/15/2009 389,623
BBB+ Baa1 330,000 Chevron Phillips Chemical Company, 5.375% due 6/15/2007 345,826
AA Aa2 150,000 ChevronTexaco Capital Company, 3.50% due 9/17/2007 152,692
BB- Ba2 785,000 The Coastal Corporation, 6.50% due 6/01/2008 588,750
A A2 325,000 Colonial Pipeline, 7.63% due 4/15/2032 (a) 387,890
Conoco Inc.:
A- A3 800,000 5.90% due 4/15/2004 837,435
A- A3 320,000 6.35% due 4/15/2009 359,444
A- A3 75,000 6.95% due 4/15/2029 85,004
Consolidated Natural Gas:
BBB+ A3 500,000 5.375% due 11/01/2006 528,543
NR* A3 75,000 6.25% due 11/01/2011 81,168
A A3 550,000 Duke Energy Corporation, 6.25% due 1/15/2012 574,018
BBB- Baa2 825,000 FirstEnergy Corp., 6.45% due 11/15/2011 820,745
Kinder Morgan Energy:
BBB+ Baa1 840,000 6.75% due 3/15/2011 912,450
BBB Baa2 425,000 6.50% due 9/01/2012 444,155
A+ A1 350,000 Motiva Enterprises LLC, 5.20% due 9/15/2012 (a) 349,416
A- Baa1 100,000 Murphy Oil Corporation, 6.375% due 5/01/2012 109,900
A- A3 225,000 Nabors Industries Inc., 5.375% due 8/15/2012 230,501
BBB Baa3 430,000 NiSource Finance Corporation, 7.625% due 11/15/2005 449,117
BBB- Baa3 450,000 Ocean Energy Inc., 7.25% due 10/01/2011 513,128
A- A3 650,000 Phillips Petroleum Company, 8.50% due 5/25/2005 739,127
A- Baa2 290,000 Transocean Sedco Forex, 6.50% due 4/15/2003 292,952
BBB Baa2 300,000 Valero Energy Corporation, 6.875% due 4/15/2012 312,422
-----------
10,697,914
====================================================================================================================================
Industrial-- BBB- Ba1 450,000 Abitibi Consolidated Inc., 8.55% due 8/01/2010 499,441
Manufacturing--1.9% A- A2 340,000 Alcan Inc., 6.45% due 3/15/2011 379,795
A A2 400,000 Alcoa Inc., 6% due 1/15/2012 440,356
Centex Corporation:
BBB Baa2 90,000 7.875% due 2/01/2011 101,400
BBB Baa2 45,000 7.50% due 1/15/2012 50,048
A- A3 450,000 Cooper Industries Inc., 5.50% due 11/01/2009 469,012
18 & 19
Merrill Lynch Aggregate Bond Index Fund, December 31, 2002
SCHEDULE OF INVESTMENTS (continued) (in U.S. dollars)
Master Aggregate Bond Index Series (continued)
--------------------------------------------------------------------------------------------------------------
S&P Moody's Face
INDUSTRIES Ratings+ Ratings+ Amount Corporate Bonds & Notes Value
====================================================================================================================================
Industrial-- DaimlerChrysler NA Holdings:
Manufacturing BBB+ A3 $1,370,000 6.40% due 5/15/2006 $ 1,476,804
(concluded) BBB+ A3 250,000 7.30% due 1/15/2012 280,537
BBB+ A3 10,000 8.50% due 1/18/2031 12,307
A- A3 635,000 Deere & Co., 7.85% due 5/15/2010 759,703
BBB Baa2 500,000 Delphi Auto Systems Corporation, 6.55% due 6/15/2006 527,193
BBB- Baa3 270,000 Domtar Inc., 7.875% due 10/15/2011 315,565
Emerson Electric Company:
A A2 335,000 7.875% due 6/01/2005 376,472
A A2 525,000 6% due 8/15/2032 533,010
BBB Baa1 1,600,000 Ford Motor Company, 7.45% due 7/16/2031 1,391,790
A A2 205,000 Honeywell International, 6.125% due 11/01/2011 222,639
IBM Corporation:
A+ A1 335,000 6.45% due 8/01/2007 379,107
A+ A1 200,000 4.75% due 11/29/2012 200,774
Lockheed Martin Corp.:
BBB Baa2 300,000 7.25% due 5/15/2006 337,863
BBB Baa2 135,000 7.75% due 5/01/2026 164,048
BBB Baa2 350,000 8.50% due 12/01/2029 469,575
BBB Baa2 325,000 Martin Marietta Corp., 7.375% due 4/15/2013 381,250
Masco Corporation:
BBB+ Baa1 365,000 6% due 5/03/2004 381,024
BBB+ Baa1 45,000 6.50% due 8/15/2032 46,259
BBB+ Baa1 250,000 Newell Rubbermaid Inc., 4.625% due 12/15/2009 255,029
Raytheon Company:
BBB- Baa3 160,000 8.20% due 3/01/2006 179,764
BBB- Baa3 35,000 6.15% due 11/01/2008 37,759
BBB- Baa3 550,000 8.30% due 3/01/2010 653,754
BBB- Baa3 350,000 6.75% due 3/15/2018 366,783
A A2 225,000 Stanley Works, 4.90% due 11/01/2012 (a) 229,736
BBB- Baa3 325,000 Toll Brothers Inc., 6.875% due 11/15/2012 (a) 334,697
BBB Baa2 310,000 Visteon Corp., 8.25% due 8/01/2010 328,926
BBB Baa2 740,000 Weyerhaeuser Company, 5.95% due 11/01/2008 789,946
-----------
13,372,366
====================================================================================================================================
Industrial--Other-- AA Aa3 396,000 Abbott Laboratories, 5.625% due 7/01/2006 432,920
1.3% A+ A1 255,000 Archer-Daniels-Midland, 5.935% due 10/01/2032 254,439
BBB Baa2 200,000 BRE Properties, 5.95% due 3/15/2007 210,744
BBB+ Baa2 500,000 Burlington Northern Santa Fe, 6.75% due 7/15/2011 567,550
BBB Baa2 360,000 CSX Corporation, 6.75% due 3/15/2011 401,887
AAA Aaa 1,140,000 Continental Airlines, 6.563% due 2/15/2012 1,218,474
EOP Operating LP:
BBB+ Baa1 200,000 6.75% due 2/15/2012 214,910
BBB+ Baa1 145,000 7.25% due 6/15/2028 146,849
BBB+ Baa1 25,000 7.50% due 4/19/2029 26,057
AA Aa3 600,000 Eli Lilly & Company, 7.125% due 6/01/2025 708,217
BBB- Ba1 500,000 HCA Inc., 6.30% due 10/01/2012 504,270
BBB+ Baa2 350,000 Health Care Properties Investors Inc., 6.45% due 6/25/2012 352,596
BBB- Baa3 375,000 Highwoods Realty LP, 8% due 12/01/2003 392,280
BBB- Ba1 450,000 Hilton Hotels Corporation, 7.625% due 12/01/2012 454,433
BBB Baa2 235,000 New Plan Excel Realty Trust, 5.875% due 6/15/2007 246,137
BBB- Baa3 237,000 Northrop Grumman Corporation, 7.125% due 2/15/2011 269,373
Praxair Inc.:
BBB+ A3 235,000 6.50% due 3/01/2008 264,895
BBB+ A3 135,000 6.375% due 4/01/2012 150,915
A Baa1 400,000 Southwest Airlines Co., 8% due 3/01/2005 442,610
BBB- Baa3 170,000 Tenet Healthcare Corporation, 6.875% due 11/15/2031 145,350
Union Pacific Corp.:
BBB Baa3 150,000 6.34% due 11/25/2003 155,368
NR* Baa3 250,000 5.75% due 10/15/2007 273,602
United Technology Corporation:
A+ A2 675,000 6.35% due 3/01/2011 760,448
A+ A2 300,000 6.10% due 5/15/2012 335,430
A- Baa1 100,000 Wellpoint Health Network, 6.375% due 6/15/2006 109,091
-----------
9,038,845
====================================================================================================================================
Industrial-- BBB+ Baa1 375,000 AOL Time Warner Inc., 6.875% due 5/01/2012 396,039
Services--2.1% BBB- Baa3 400,000 Aramark Services Inc., 6.375% due 2/15/2008 414,141
BBB Baa1 200,000 Cendant Corporation, 6.875% due 8/15/2006 207,532
BBB Baa3 450,000 Comcast Cable Communications, 8.875% due 5/01/2017 524,289
Dayton Hudson Corp.:
A+ A2 888,000 10% due 1/01/2011 1,189,222
A+ A2 100,000 6.75% due 1/01/2028 111,458
Federated Department Stores:
BBB+ Baa1 25,000 6.625% due 9/01/2008 27,692
BBB+ Baa1 135,000 6.30% due 4/01/2009 144,048
BBB+ Baa1 270,000 6.625% due 4/01/2011 294,916
A+ A1 835,000 First Data Corporation, 6.375% due 12/15/2007 948,322
A A2 515,000 Gannett Company Inc., 5.50% due 4/01/2007 560,059
20 & 21
Merrill Lynch Aggregate Bond Index Fund, December 31, 2002
SCHEDULE OF INVESTMENTS (continued) (in U.S. dollars)
Master Aggregate Bond Index Series (continued)
Master Aggregate Bond Index Series (continued)
--------------------------------------------------------------------------------------------------------------
S&P Moody's Face
INDUSTRIES Ratings+ Ratings+ Amount Corporate Bonds & Notes Value
====================================================================================================================================
Industrial-- BBB Baa2 $1,000,000 Hertz Corp., 7% due 1/15/2028 $ 794,083
Services A- A3 235,000 Kohl's Corporation, 6.30% due 3/01/2011 260,540
(concluded) BBB- Baa3 635,000 Liberty Media Corporation, 7.875% due 7/15/2009 688,667
BBB+ Baa1 450,000 Limited Brands Inc., 6.125% due 12/01/2012 473,688
Lowe's Companies Inc.:
A A3 215,000 6.875% due 2/15/2028 239,492
A A3 65,000 6.50% due 3/15/2029 69,527
BBB- Baa3 550,000 News America Inc., 7.25% due 5/18/2018 542,759
NR* Baa1 500,000 Sears Discover Credit Corp., 9.14% due 3/13/2012 520,471
Sears Roebuck Acceptance Corporation:
A- Baa1 500,000 6% due 3/20/2003 500,270
A- Baa1 205,000 7% due 6/01/2032 171,850
Tele-Communications Inc.:
BBB Baa3 1,275,000 8.25% due 1/15/2003 1,275,374
BBB Baa3 200,000 9.80% due 2/01/2012 240,405
Time Warner Inc.:
BBB+ Baa1 870,000 7.75% due 6/15/2005 926,950
BBB+ Baa1 352,000 6.875% due 6/15/2018 351,946
BBB- Baa3 715,000 USA Interactive, 7% due 1/15/2013 (a) 739,327
AAA Aaa 500,000 United Parcel Service, 8.375% due 4/01/2020 650,896
A- A3 635,000 Viacom Inc., 7.75% due 6/01/2005 711,424
AA Aa2 900,000 Wal-Mart Stores, Inc., 6.875% due 8/10/2009 1,060,171
BBB NR* 375,000 Waste Management Inc., 6.50% due 5/15/2004 386,701
-----------
15,422,259
====================================================================================================================================
Utilities-- BBB Baa3 770,000 AT&T Broadband Corporation, 8.375% due 3/15/2013 874,659
Communications-- BBB+ Baa2 76,000 AT&T Corporation, 6% due 3/15/2009 75,891
1.7% BBB Baa2 790,000 AT&T Wireless Services Inc., 8.75% due 3/01/2031 774,200
A A2 315,000 Alltel Corporation, 7% due 7/01/2012 363,024
AA- Aa3 800,000 Ameritech Capital Funding, 6.45% due 1/15/2018 866,860
A+ Aa3 959,000 BellSouth Corporation, 6% due 10/15/2011 1,051,624
A- Baa1 855,000 British Telecom PLC, 8.375% due 12/15/2010 1,025,058
BBB+ Baa2 400,000 CenturyTel Inc., 7.875% due 8/15/2012 (a) 473,429
BBB Baa2 275,000 Citizens Communications Company, 7.625% due 8/15/2008 304,470
BBB- Baa3 710,000 Clear Channel Communications, 7.65% due 9/15/2010 804,325
BBB Baa2 350,000 Cox Communications Inc., 7.125% due 10/01/2012 388,757
Deutsche Telekom International Finance:
BBB+ Baa1 400,000 8.25% due 6/15/2005 437,362
BBB+ Baa1 660,000 8.50% due 6/15/2010 760,144
BBB- Baa3 300,000 France Telecom, 10% due 3/01/2031 365,200
GTE Corporation:
A+ A3 800,000 6.84% due 4/15/2018 830,870
A+ A3 220,000 6.94% due 4/15/2028 230,836
Sprint Capital Corporation:
BBB- Baa3 1,100,000 5.70% due 11/15/2003 1,094,500
BBB- Baa3 675,000 8.375% due 3/15/2012 671,625
A+ A2 450,000 Verizon New York Inc., 6.875% due 4/01/2012 505,525
-----------
11,898,359
====================================================================================================================================
Utilities--Gas & BBB+ Baa2 270,000 AmerenEnergy Generating, 7.95% due 6/01/2032 298,499
Electric--1.3% BBB Baa1 815,000 Cincinnati Gas & Electric Company, 5.70% due 9/15/2012 835,415
BBB+ Baa1 500,000 Commonwealth Edison Company, 6.95% due 7/15/2018 550,141
BBB Baa1 135,000 Conectiv Inc., 5.30% due 6/01/2005 140,558
A+ A1 750,000 Consolidated Edison Company of New York, 4.875% due 2/01/2013 760,399
BBB+ Baa1 595,000 Constellation Energy Group, 6.125% due 9/01/2009 608,430
BBB+ Baa1 481,000 Dominion Resources Inc., 8.125% due 6/15/2010 559,596
BBB+ Baa2 450,000 Exelon Corporation, 6.75% due 5/01/2011 492,572
A Aa3 470,000 Florida Power and Light, 6.875% due 12/01/2005 524,079
A A2 160,000 Georgia Power Company, 5.125% due 11/15/2012 165,565
BBB Baa2 170,000 Houston Lighting and Power, 8.75% due 3/01/2022 176,743
BBB- Baa3 510,000 Mid-American Energy Holdings, 5.875% due 10/01/2012 (a) 517,003
BBB Baa1 475,000 Oncor Electric Delivery, 6.375% due 5/01/2012 (a) 489,232
BBB Baa1 560,000 Progress Energy Inc., 7.10% due 3/01/2011 617,174
A- A3 670,000 Public Service Electric & Gas, 5.125% due 9/01/2012 689,236
A- A1 170,000 South Carolina Electric & Gas, 6.70% due 2/01/2011 192,830
A+ A1 700,000 Southern California Gas Company, 4.80% due 10/01/2012 704,955
BBB+ Baa1 740,000 Southern Power Company, 6.25% due 7/15/2012 781,828
A+ Aa3 277,000 Union Electric Company, 5.25% due 9/01/2012 290,227
-----------
9,394,482
====================================================================================================================================
Yankee--Corporate-- A A2 365,000 BHP Finance USA Limited, 6.42% due 3/01/2026 386,947
1.0% A- A2 200,000 BSCH Issuances Ltd., 7.625% due 9/14/2010 227,486
BBB+ Baa2 500,000 Canadian National Railways, 6.375% due 10/15/2011 557,479
A- A2 220,000 Codelco Inc., 6.375% due 11/30/2012 (a) 230,595
A+ A1 1,000,000 Hydro-Quebec, 8.875% due 3/01/2026 1,415,536
Korea Development Bank:
A- A3 500,000 7.125% due 4/22/2004 531,515
A- A3 800,000 4.25% due 11/13/2007 812,267
A A2 400,000 Norsk Hydro A/S, 6.36% due 1/15/2009 433,917
Pemex Project Funding Master Trust:
BBB- Baa1 905,000 9.125% due 10/13/2010 1,036,225
BBB- Baa1 40,000 8.625% due 2/01/2022 42,200
BBB+ Baa2 345,000 Potash Corporation of Saskatchewan, 7.75% due 5/31/2011 402,190
A+ A1 500,000 Unilever Capital Corporation, 7.125% due 11/01/2010 590,150
A A2 530,000 Vodafone Group PLC, 7.75% due 2/15/2010 625,074
-----------
7,291,581
====================================================================================================================================
Total Investments in Corporate Bonds & Notes (Cost--$185,360,013)--27.1% 193,890,812
====================================================================================================================================
22 & 23
Merrill Lynch Aggregate Bond Index Fund, December 31, 2002
SCHEDULE OF INVESTMENTS (concluded) (in U.S. dollars)
Master Aggregate Bond Index Series (concluded)
----------------------------------------------------------------------------------------------------------
Face
Amount Short-Term Securities Value
====================================================================================================================================
Repurchase Morgan Stanley & Co., Inc.:
Agreements***-- $57,835,000 purchased on 12/31/2002 to yield 1.17% to 7/01/2016 $ 57,835,000
13.6% 29,885,000 purchased on 12/31/2002 to yield 1.17% to 9/01/2032 29,885,000
9,880,000 purchased on 12/31/2002 to yield 1.17% to 12/01/2032 9,880,000
====================================================================================================================================
Total Investments in Short-Term Securities (Cost--$97,600,000)--13.6% 97,600,000
====================================================================================================================================
Total Investments (Cost--$780,544,485)--112.7% 807,540,493
Liabilities in Excess of Other Assets--(12.7%) (90,972,450)
------------
Net Assets--100.0% $716,568,043
============
====================================================================================================================================
* Not Rated.
** Mortgage-Backed Obligations are subject to principal paydowns as a result
of prepayments or refinancing of the underlying mortgage instruments. As a
result, the average life may be substantially less than the original
maturity.
*** Repurchase Agreements are fully collateralized by U.S. Government Agency
Obligations.
+ Ratings of issues shown are unaudited.
(a) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(b) Floating rate note.
(c) Target Return Index Securities (TRAINS).
(d) Traded Custody Receipts (TRACERS).
(1) Represents or includes a "to-be-announced" (TBA) transaction. The Series
has committed to purchase securities for which all specific information is
not available at this time.
See Notes to Financial Statements.
STATEMENT OF ASSETS AND LIABILITIES
MASTER
AGGREGATE BOND
INDEX SERIES As of December 31, 2002
========================================================================================================================
Assets: Investments, at value (including securities loaned of $552,450)
(identified cost--$780,544,485) ............................... $807,540,493
Investments held as collateral for loaned securities, at value 572,584
Receivables:
Contributions ............................................... $ 45,704,795
Securities sold ............................................. 31,522,825
Interest .................................................... 7,559,749
Loaned securities income .................................... 91 84,787,460
------------
Prepaid expenses and other assets ............................. 19,861
------------
Total assets .................................................. 892,920,398
------------
========================================================================================================================
Liabilities: Collateral on securities loaned, at value ..................... 572,584
Payables:
Securities purchased ........................................ 169,921,378
Custodian bank .............................................. 3,355,232
Withdrawals ................................................. 2,338,804
Investment adviser .......................................... 5,517 175,620,931
------------
Accrued expenses and other liabilities ........................ 158,840
------------
Total liabilities ............................................. 176,352,355
------------
========================================================================================================================
Net Assets: Net assets .................................................... $716,568,043
============
========================================================================================================================
Net Assets Investors' capital ............................................ $689,572,035
Consist of: Unrealized appreciation on investments--net ................... 26,996,008
------------
Net assets .................................................... $716,568,043
============
========================================================================================================================
See Notes to Financial Statements.
24 & 25
Merrill Lynch Aggregate Bond Index Fund, December 31, 2002
STATEMENT OF OPERATIONS
MASTER
AGGREGATE BOND
INDEX SERIES For the Year Ended December 31, 2002
========================================================================================================================
Investment Income: Interest ................................................... $ 28,848,909
Securities lending--net .................................... 1,336
-------------
Total income ............................................... 28,850,245
-------------
========================================================================================================================
Expenses: Professional fees .......................................... $ 151,746
Accounting services ........................................ 116,498
Custodian fees ............................................. 63,414
Investment advisory fees ................................... 52,943
Pricing fees ............................................... 10,598
Trustees' fees and expenses ................................ 7,496
Printing and shareholder reports ........................... 1,256
Other ...................................................... 13,487
-------------
Total expenses ............................................. 417,438
-------------
Investment income--net ..................................... 28,432,807
-------------
========================================================================================================================
Realized & Realized gain from investments--net ........................ 3,541,654
Unrealized Gain on Change in unrealized appreciation on investments--net ...... 20,353,079
Investments--Net: -------------
Total realized and unrealized gain on investments--net ..... 23,894,733
-------------
Net Increase in Net Assets Resulting from Operations ....... $ 52,327,540
=============
========================================================================================================================
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended
MASTER December 31,
AGGREGATE BOND -------------------------------
INDEX SERIES Increase in Net Assets: 2002 2001
========================================================================================================================
Operations: Investment income--net ..................................... $ 28,432,807 $ 24,638,002
Realized gain on investments--net .......................... 3,541,654 3,530,237
Change in unrealized appreciation on investments--net ...... 20,353,079 3,620,323
------------- -------------
Net increase in net assets resulting from operations ....... 52,327,540 31,788,562
------------- -------------
========================================================================================================================
Capital Proceeds from contributions ................................ 414,370,731 297,187,588
Transactions: Fair value of withdrawals .................................. (216,281,419) (171,169,747)
------------- -------------
Net increase in net assets derived from capital transactions 198,089,312 126,017,841
------------- -------------
========================================================================================================================
Net Assets: Total increase in net assets ............................... 250,416,852 157,806,403
Beginning of year .......................................... 466,151,191 308,344,788
------------- -------------
End of year ................................................ $ 716,568,043 $ 466,151,191
============= =============
========================================================================================================================
See Notes to Financial Statements.
26 & 27
Merrill Lynch Aggregate Bond Index Fund, December 31, 2002
FINANCIAL HIGHLIGHTS
For the Year Ended
MASTER December 31,
AGGREGATE BOND The following ratios have been derived from ---------------------------------------------------------
INDEX SERIES information provided in the financial statements. 2002 2001 2000 1999 1998
===================================================================================================================================
Total Investment 10.13% 8.07% -- -- --
Return:* ========= ========= ========= ========= =========
===================================================================================================================================
Ratios to Average Expenses, net of reimbursement ............. .08% .13% .14% .10% .12%
Net Assets: ========= ========= ========= ========= =========
Expenses ................................... .08% .13% .14% .10% .13%
========= ========= ========= ========= =========
Investment income--net ..................... 5.37% 5.93% 6.62% 6.30% 6.20%
========= ========= ========= ========= =========
===================================================================================================================================
Supplemental Net assets, end of year (in thousands) ..... $ 716,568 $ 466,151 $ 308,345 $ 406,148 $ 434,935
Data: ========= ========= ========= ========= =========
Portfolio turnover ......................... 112.18% 144.23% 43.24% 61.82% 27.89%
========= ========= ========= ========= =========
===================================================================================================================================
* Total return is required to be disclosed for fiscal years beginning after
December 15, 2000.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
MASTER
AGGREGATE BOND
INDEX SERIES
1. Significant Accounting Policies:
Master Aggregate Bond Index Series (the "Series") is part of Quantitative Master
Series Trust (the "Trust"). The Trust is registered under the Investment Company
Act of 1940 and is organized as a Delaware business trust. The Declaration of
Trust permits the Trustees to issue nontransferable interests in the Series,
subject to certain limitations. The Series' financial statements are prepared in
conformity with accounting principles generally accepted in the United States of
America, which may require the use of management accruals and estimates. The
following is a summary of significant accounting policies followed by the
Series.
(a) Valuation of investments -- Portfolio securities that are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued or, lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
quoted bid price at the close of trading on the New York Stock Exchange on each
day by brokers that make markets in the securities. Securities traded in the
NASDAQ National Market System are valued at the last sale price prior to the
time of valuation. Securities that are traded both in the over-the-counter
market and on a stock exchange are valued according to the broadest and most
representative market. Options written or purchased are valued at the last sale
price in the case of exchange-traded options. In the case of options traded in
the over-the-counter market, valuation is the last asked price (options written)
or the last bid price (options purchased). Other investments, including futures
contracts and related options, are stated at market value. Short-term securities
are valued at amortized cost, which approximates market value. Securities and
assets for which market quotations are not readily available are valued at fair
market value, as determined in good faith by or under the direction of the
Trust's Board of Trustees.
(b) Repurchase agreements -- The Series invests in securities pursuant to
repurchase agreements. Under such agreements, the counterparty agrees to
repurchase the security at a mutually agreed upon time and price. The Series
takes possession of the underlying securities, marks to market such securities
and, if necessary, receives additional securities daily to ensure that the
contract is fully collateralized. If the counterparty defaults and the fair
value of the collateral declines, liquidation of the collateral by the Series
may be delayed or limited.
(c) Derivative financial instruments -- The Series may engage in various
portfolio investment strategies to increase or decrease the level of risk to
which the Series is exposed more quickly and efficiently than transactions in
other types of instruments. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
28 & 29
Merrill Lynch Aggregate Bond Index Fund, December 31, 2002
NOTES TO FINANCIAL STATEMENTS (continued)
MASTER
AGGREGATE BOND
INDEX SERIES
o Financial futures contracts -- The Series may purchase or sell financial
futures contracts and options on such futures contracts as a proxy for a direct
investment in securities underlying the Series' index. Upon entering into a
contract, the Series deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected. Pursuant to the
contract, the Series agrees to receive from or pay to the broker an amount of
cash equal to the daily fluctuation in the value of the contract. Such receipts
or payments are known as variation margin and are recorded by the Series as
unrealized gains or losses. When the contract is closed, the Series records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
o Options -- The Series is authorized to purchase and write call and put
options. When the Series writes an option, an amount equal to the premium
received by the Series is reflected as an asset and an equivalent liability. The
amount of the liability is subsequently marked to market to reflect the current
market value of the option written. When a security is purchased or sold through
an exercise of an option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from (or added to)
the proceeds of the security sold. When an option expires (or the Series enters
into a closing transaction), the Series realizes a gain or loss on the option to
the extent of the premiums received or paid (or a gain or loss to the extent
that the cost of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(d) Income taxes -- The Series is classified as a partnership for Federal income
tax purposes. As such, each investor in the Series is treated as owner of its
proportionate share of the net assets, income, expenses and realized and
unrealized gains and losses of the Series. Accordingly, as a "pass through"
entity, the Series pays no income dividends or capital gains distributions.
Therefore, no Federal income tax provision is required. It is intended that the
Trust's assets will be managed so an investor in the Trust can satisfy the
requirements of Subchapter M of the Internal Revenue Code.
(e) Security transactions and investment income -- Security transactions are
accounted for on the date the securities are purchased or sold (the trade
dates). Realized gains and losses on security transactions are determined on the
identified cost basis. Interest income is recognized on the accrual basis.
(f) Dollar rolls -- The Series may sell securities for delivery in the current
month and simultaneously contract to repurchase substantially similar (same
type, coupon and maturity) securities on a specific future date.
(g) Securities lending -- The Series may lend securities to financial
institutions that provide cash or securities issued or guaranteed by the U.S.
government as collateral, which will be maintained at all times in an amount
equal to at least 100% of the current market value of the loaned securities.
Where the Series receives securities as collateral for the loaned securities, it
collects a fee from the borrower. The Series typically receives the income on
the loaned securities but does not receive the income on the collateral. Where
the Series receives cash collateral, it may invest such collateral and retain
the amount earned on such investments, net of any amount rebated to the
borrower. Loans of securities are terminable at any time and the borrower, after
notice, is required to return borrowed securities within five business days. The
Series may pay reasonable finder's, lending agent, administrative and custodial
fees in connection with its loans. In the event that the borrower defaults on
its obligation to return borrowed securities because of insolvency or for any
other reason, the Series could experience delays and costs in gaining access to
the collateral. The Series also could suffer a loss where the value of the
collateral falls below the market value of the borrowed securities, in the event
of borrower default or in the event of losses on investments made with cash
collateral.
(h) Custodian bank -- The Series recorded an amount payable to the Custodian
Bank reflecting an overnight overdraft which resulted from management estimates
of available cash.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Trust has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner.
FAM is responsible for the management of the Series' portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Series. For such services, the Series pays a monthly
fee at an annual rate of .01% of the average daily value of the Series' net
assets.
The Trust has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., or its
affiliates. Pursuant to that order, the Trust also has retained Merrill Lynch
Investment Advisors, LLC ("MLIA"), an affiliate of FAM, as the securities
lending agent for a fee based on a share of the returns on investment of cash
collateral. MLIA may, on behalf of the Series, invest cash collateral received
by the Series for such loans, among other things, in a private investment
company managed by MLIA or in registered money market funds advised by FAM or
its affiliates. As of December 31, 2002, cash collateral of $303,426 was
invested in the Money Market Series of the Merrill Lynch Liquidity Series, LLC
and $269,158 was invested in the Merrill Lynch Premier Institutional Fund. For
the year ended December 31, 2002, MLIA received $565 in securities lending agent
fees for the Series.
During the year ended December 31, 2002, the Series paid Merrill Lynch Security
Pricing Service, an affiliate of MLPF&S, $14,360 for security price quotations
to compute the net asset value of the Series.
Merrill Lynch Trust Company, an indirect, wholly-owned subsidiary of ML & Co.,
is the Series' custodian.
For the year ended December 31, 2002, the Series reimbursed FAM $13,588 for
certain accounting services.
Certain officers and/or trustees of the Series are officers and/or directors of
FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended December 31, 2002 were $817,084,764 and $589,673,965, respectively.
Net realized gains (losses) for the year ended December 31, 2002 and net
unrealized gains as of December 31, 2002 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains
- --------------------------------------------------------------------------------
Long-term investments ................... $ 3,984,070 $26,996,008
Financial futures contracts ............. (442,416) --
----------- -----------
Total ................................... $ 3,541,654 $26,996,008
=========== ===========
- --------------------------------------------------------------------------------
As of December 31, 2002, net unrealized appreciation for Federal income tax
purposes aggregated $26,253,323, of which $27,131,593 related to appreciated
securities and $878,270
30 & 31
Merrill Lynch Aggregate Bond Index Fund, December 31, 2002
NOTES TO FINANCIAL STATEMENTS (concluded)
MASTER
AGGREGATE BOND
INDEX SERIES
related to depreciated securities. At December 31, 2002, the aggregate cost of
investments for Federal income tax purposes was $781,287,170.
4. Short-Term Borrowings:
The Series, along with certain other funds managed by FAM and its affiliates, is
a party to a credit agreement with Bank One, N.A. and certain other lenders.
Effective November 29, 2002, in conjunction with the renewal for one year at the
same terms, the total commitment was reduced from $1,000,000,000 to
$500,000,000. The Series may borrow under the credit agreement to fund
shareholder redemptions and for other lawful purposes other than for leverage.
The Series may borrow up to the maximum amount allowable under the Series'
current prospectus and statement of additional information, subject to various
other legal, regulatory or contractual limits. The Series pays a commitment fee
of .09% per annum based on the Series' pro rata share of the unused portion of
the credit agreement. Amounts borrowed under the credit agreement bear interest
at a rate equal to, at each fund's election, the Federal Funds rate plus .50% or
a base rate as determined by Bank One, N.A. The Series did not borrow under the
credit agreement during the year ended December 31, 2002.
INDEPENDENT AUDITORS' REPORT
MASTER
AGGREGATE BOND
INDEX SERIES
The Board of Trustees and Investors,
Master Aggregate Bond Index Series
(One of the series constituting
Quantitative Master Series Trust):
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Master Aggregate Bond Index Series (one of the
series constituting Quantitative Master Series Trust) as of December 31, 2002,
the related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years presented. These financial statements
and the financial highlights are the responsibility of the Trust's management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned at December 31, 2002 by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Master Aggregate
Bond Index Series of the Quantitative Master Series Trust as of December 31,
2002, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with
accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Princeton, New Jersey
February 20, 2003
32 & 33
Merrill Lynch Aggregate Bond Index Fund, December 31, 2002
OFFICERS AND DIRECTORS/TRUSTEES
Number of Other
Portfolios in Directorships
Position(s) Length Fund Complex Held by
Held with of Time Overseen by Director/
Name Address & Age Fund/Trust Served Principal Occupation(s) During Past 5 Years Director/Trustee Trustee
====================================================================================================================================
Interested Director/Trustee
====================================================================================================================================
Terry K. P.O. Box 9011 President 1999 to Chairman, Americas Region since 2001 and 117 Funds None
Glenn* Princeton, NJ and present Executive Vice President since 1983 of Fund 162 Portfolios
08543-9011 Director/ and 1997 Asset Management, L.P. ("FAM") and Merrill Lynch
Age: 62 Trustee to present Investment Managers, L.P. ("MLIM"); President of
Merrill Lynch Mutual Funds since 1999; President
of FAM Distributors, Inc. ("FAMD") since 1986
and Director thereof since 1991; Executive Vice
President and Director of Princeton Services,
Inc. ("Princeton Services") since 1993;
President of Princeton Administrators, L.P.
since 1988; Director of Financial Data Services,
Inc. since 1985.
======================================================================================================================
* Mr. Glenn is a director, trustee or member of an advisory board of certain other investment companies for which FAM
or MLIM act as investment advisers. Mr. Glenn is an "interested person," as described in the Investment Company
Act, of each Fund based on his positions as Chairman (Americas Region) and Executive Vice President of FAM and
MLIM; President of FAMD; Executive Vice President of Princeton Services; and President of Princeton Administrators,
L.P. The Director's/Trustee's term is unlimited. Directors/Trustees serve until their resignation, removal or
death, or until December 31 of the year in which they turn 72. As Fund President, Mr. Glenn serves at the pleasure
of the Board of Directors/Trustees.
====================================================================================================================================
Number of Other
Portfolios in Directorships
Position(s) Length Fund Complex Held by
Held with of Time Overseen by Director/
Name Address & Age Fund/Trust Served* Principal Occupation(s) During Past 5 Years Director/Trustee Trustee
====================================================================================================================================
Independent Directors/Trustees
====================================================================================================================================
Donald W. P.O. Box 9095 Director/ 2002 to General Partner of The Burton Partnership, 23 Funds ITC Delta-
Burton Princeton, NJ Trustee present Limited Partnership since 1979; Managing General 34 Portfolios Com, Inc.;
08543-9095 Partner of the South Atlantic Venture Fund II and ITC Holding
Age: 58 III, Limited Partnerships and Chairman of South Company,
Atlantic Private Equity Fund IV, Limited Partner- Inc.;
ship since 1983; Member of the Investment Knology,
Advisory Council of the Florida State Board Inc.; Main-
of Administration since 2001. Bancorp,
N.A.; Pri-
Care, Inc.;
Symbion,
Inc.
====================================================================================================================================
M. Colyer P.O. Box 9095 Director/ 1997 to James R. Williston Professor of Investment 23 Funds Cambridge
Crum Princeton, NJ Trustee present Management Emeritus, Harvard Business School 34 Portfolios Bancorp
08543-9095 since 1996.
Age: 70
====================================================================================================================================
Laurie Simon P.O. Box 9095 Director/ 2000 to Professor of Finance and Economics, Graduate 23 Funds None
Hodrick Princeton, NJ Trustee present School of Business, Columbia University since 34 Portfolios
08543-9095 1998; Associate Professor of Finance and
Age: 40 Economics, Graduate School of Business,
Columbia University from 1996 to 1998.
====================================================================================================================================
J. Thomas P.O. Box 9095 Director/ 1997 to Managing Partner of The Witt Touchton Company 23 Funds TECO
Touchton Princeton, NJ Trustee present and its predecessor, The Witt Co., since 1972; 34 Portfolios Energy, Inc.
08543-9095 Trustee Emeritus of Washington and Lee
Age: 64 University.
====================================================================================================================================
Fred G. P.O. Box 9095 Director/ 2000 to Managing Director of FGW Associates since 1997. 23 Funds Watson
Weiss Princeton, NJ Trustee present 34 Portfolios Pharma-
08543-9095 ceuticals,
Age: 61 Inc.
======================================================================================================================
* The Director's/Trustee's term is unlimited. Directors/Trustees serve until their resignation, removal or death, or
until December 31 of the year in which they turn 72.
====================================================================================================================================
Position(s) Length
Held with of Time
Name Address & Age Fund/Trust Served* Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund/Trust Officers
====================================================================================================================================
Donald C. P.O. Box 9011 Vice 1997 to First Vice President of FAM and MLIM since 1997 and Treasurer thereof
Burke Princeton, NJ President present since 1999; Senior Vice President and Treasurer of Princeton Services
08543-9011 and and 1999 since 1999; Vice President of FAMD since 1999; Director of MLIM Taxation
Age: 42 Treasurer to present since 1990.
====================================================================================================================================
Robert C. P.O. Box 9011 Senior 1999 to President and Global Chief Investment Officer of MLIM and member of the
Doll, Jr. Princeton, NJ Vice present Executive Management Committee of ML & Co., Inc. since 2001; Chief
08543-9011 President Investment Officer, Senior Vice President and Co-Head of MLIM Americas
Age: 49 from 1999 to 2001; Chief Investment Officer of Oppenheimer Funds, Inc.
from 1987 to 1999 and Executive Vice President from 1991 to 1999.
====================================================================================================================================
Jeffrey B. P.O. Box 9011 Vice 1999 to Director (Global Fixed Income) of MLIM since 2000; Vice President of MLIM
Hewson Princeton, NJ President present from 1989 to 2000.
08543-9011
Age: 51
====================================================================================================================================
Frank P.O. Box 9011 Vice 2002 to Managing Director of MLIM and head of the Global Fixed Income
Viola Princeton, NJ President present Structured Asset Team since 2002; Director (Global Fixed Income) of MLIM
08543-9011 from 2000 to 2002 and Vice President from 1996 to 2000.
Age: 38
====================================================================================================================================
Stephen M. P.O. Box 9011 Secretary 2002 to Vice President (Legal Advisory) of MLIM since 2000; Associate with
Benham Princeton, NJ present Kirkpatrick & Lockhart LLP from 1997 to 2000.
08543-9011
Age: 43
======================================================================================================================
* Officers of the Fund serve at the pleasure of the Board of Directors/Trustees.
====================================================================================================================================
Further information about the Fund's Officers and Directors/Trustees is
available in the Fund's Statement of Additional Information, which can be
obtained without charge by calling 1-800-MER-FUND.
- --------------------------------------------------------------------------------
Effective January 1, 2003, J. Thomas Touchton, Director/Trustee of Merrill Lynch
Aggregate Bond Index Fund, retired. The Fund's Board of Directors/Trustees
wishes Mr. Touchton well in his retirement.
- --------------------------------------------------------------------------------
34 & 35
[LOGO] Merrill Lynch Investment Managers
[GRAPHICS OMITTED]
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.
Merrill Lynch Index Funds, Inc.
Box 9011
Princeton, NJ
08543-9011
[RECYCLED LOGO] Printed on post-consumer recycled paper #Index 1--12/02
Item 2 - Did registrant adopt a code of ethics, as of the end of the period
covered by this report, that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant
or a third party? If not, why not? Briefly describe any amendments or
waivers that occurred during the period. State here if code of
ethics/amendments/waivers are on website and give website address-.
State here if fund will send code of ethics to shareholders without
charge upon request-- N/A (not answered until July 15, 2003 and only
annually for funds)
Item 3 - Did the registrant's board of directors determine that the registrant
either: (i) has at least one audit committee financial expert serving
on its audit committee; or (ii) does not have an audit committee
financial expert serving on its audit committee? If yes, disclose name
of financial expert and whether he/she is "independent," (fund may, but
is not required, to disclose name/independence of more than one
financial expert) If no, explain why not. -N/A (not answered until July
15, 2003 and only annually for funds)
Item 4 - Disclose annually only (not answered until December 15, 2003)
(a) Audit Fees - Disclose aggregate fees billed for each of the last two
fiscal years for professional services rendered by the
principal accountant for the audit of the registrant's
annual financial statements or services that are
normally provided by the accountant in connection with
statutory and regulatory filings or engagements for
those fiscal years. N/A.
(b) Audit-Related Fees - Disclose aggregate fees billed in each of the
last two fiscal years for assurance and related
services by the principal accountant that are
reasonably related to the performance of the
audit of the registrant's financial statements
and are not reported under paragraph (a) of this
Item. Registrants shall describe the nature of
the services comprising the fees disclosed under
this category. N/A.
(c) Tax Fees - Disclose aggregate fees billed in each of the last two
fiscal years for professional services rendered by the
principal accountant for tax compliance, tax advice, and
tax planning. Registrants shall describe the nature of the
services comprising the fees disclosed under this category.
N/A.
(d) All Other Fees - Disclose aggregate fees billed in each of the last
two fiscal years for products and services provided
by the principal accountant, other than the services
reported in paragraphs (a) through (c) of this Item.
Registrants shall describe the nature of the
services comprising the fees disclosed under this
category. N/A.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X. N/A.
(e)(2) Disclose the percentage of services described in each of paragraphs
(b) through (d) of this Item that were approved by the audit
committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X. N/A.
(f) If greater than 50%, disclose the percentage of hours expended on
the principal accountant's engagement to audit the registrant's
financial statements for the most recent fiscal year that were
attributed to work performed by persons other than the principal
accountant's full-time, permanent employees. N/A.
(g) Disclose the aggregate non-audit fees billed by the registrant's
accountant for services rendered to the registrant, and rendered to
the registrant's investment adviser (not including any sub-adviser
whose role is primarily portfolio management and is subcontracted
with or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the adviser
that provides ongoing services to the registrant for each of the
last two fiscal years of the registrant. N/A.
(h) Disclose whether the registrant's audit committee has considered
whether the provision of non-audit services that were rendered to
the registrant's investment adviser (not including any subadviser
whose role is primarily portfolio management and is subcontracted
with or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal
accountant's independence. N/A.
Items 5-6 - Reserved
Item 7 - For closed-end funds that contain voting securities in their portfolio,
describe the policies and procedures that it uses to determine how to
vote proxies relating to those portfolio securities. N/A.
Item 8 -- Reserved
Item 9(a) - Disclose the conclusions of the registrant's principal executive
officer or officers and principal financial officer or officers, or
persons performing similar functions, about the effectiveness of the
registrant's disclosure controls and procedures (as defined in Rule
30a-2(c) under the Act (17 CFR 270.30a-2(c))) based on their
evaluation of these controls and procedures as of a date within 90
days of the filing date of the report that includes the disclosure
required by this paragraph. N/A.
Item 9(b) -- There were no significant changes in the registrant's internal
controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Item 10 - Exhibits
10(a) - Attach code of ethics or amendments/waivers, unless code of ethics or
amendments/waivers is on website or offered to shareholders upon request
without charge. N/A.
10(b) - Attach certifications (4 in total pursuant to Sections 302 and 906 for
CEO/CFO). Attached hereto.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Merrill Lynch Aggregate Bond Index Fund
By: /s/ Terry K. Glenn
---------------------------
Terry K. Glenn,
President of
Merrill Lynch Aggregate Bond Index Fund
Date: February 24, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Terry K. Glenn
---------------------------
Terry K. Glenn,
President of
Merrill Lynch Aggregate Bond Index Fund
Date: February 24, 2003
By: /s/ Donald C. Burke
---------------------------
Donald C. Burke
Chief Financial Officer of
Merrill Lynch Aggregate Bond Index Fund
Date: February 24, 2003