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
811-7885
Name of Fund: Merrill Lynch Aggregate Bond Index Fund
Master Aggregate Bond Index Series
Fund 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 and Master Aggregate Bond Index Series, 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: 12/31/03
Date of reporting period: 01/01/03 - 12/31/03
Item 1 - Report to Shareholders
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
Merrill Lynch
Aggregate Bond Index Fund
Of Merrill Lynch Index Funds, Inc.
Annual Report
December 31, 2003
[LOGO] Merrill Lynch Investment Managers
Merrill Lynch Aggregate Bond Index Fund
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this website
http://www.icsdelivery.com/live and follow the instructions. When you visit this
site, you will obtain a personal identification number (PIN). You will need this
PIN should you wish to update your e-mail address, choose to discontinue this
service and/or make any other changes to the service. This service is not
available for certain retirement accounts at this time.
2 MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003
A Letter From the President
Dear Shareholder
In my 35 years in the asset management business, 2003 was among the more
memorable. The year, which opened with unrelenting economic uncertainty and a
dismal continuation of a three-year equity market slump, vigorously reversed
course in the months that followed. However, amid the good economic news, fixed
income investments, which had become the asset class of choice during the
preceding three-year equity market decline, faced new challenges.
Throughout 2003, the Federal Reserve Board remained focused on averting
deflation and ensuring a sustained economic recovery. This translated into an
uninterrupted easing monetary policy and the lowest interest rates in decades.
The Federal Funds rate, which opened the year at 1.25%, ended it at 1% -- the
lowest level since 1958.
For fixed income investors, the markets seemed to reward those who were willing
to accept the greatest risk. The high yield sector, supported by improving
corporate earnings, posted the best results for the year with the Credit Suisse
First Boston High Yield Index providing a total return of +27.94% for the 12
months ended December 31, 2003. These results were comparable to the impressive
performance of equity markets this year, with the S&P 500 Index returning
+28.68%. In other areas of fixed income, investment-grade corporate bonds, as
measured by the unmanaged Merrill Lynch U.S. Corporate Master Index, returned
+8.31%, and Treasury issues, as measured by the unmanaged Merrill Lynch U.S.
Treasury Master Index, returned +2.26% for the year. Yields on 10-year
Treasuries -- which move opposite of price levels -- rose from 3.83% at December
31, 2002 to 4.27% at December 31, 2003.
In closing, I wish to share one final note regarding the look of our shareholder
communications. Our portfolio manager commentaries have been trimmed and
organized in such a way that you can get the information you need at a glance,
in plain language. Today's markets can be confusing. We want to help you put it
all in perspective. The report's new size also allows us certain mailing
efficiencies. Any cost savings in production or postage are passed on to the
Fund and, ultimately, to Fund shareholders.
We thank you for trusting Merrill Lynch Investment Managers with your investment
assets, and we look forward to serving you in the New Year and beyond.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director/Trustee
MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003 3
[LOGO] Merrill Lynch Investment Managers
A Discussion With Your Fund's Portfolio Managers
We continued to invest in a statistically selected sample of bonds
correlated to the Lehman Brothers Aggregate Bond Index in an effort to offer
investors returns consistent with the broader investment grade bond market.
How did the Fund perform during the period in light of the existing market
conditions?
For the 12-month period ended December 31, 2003, Merrill Lynch Aggregate Bond
Index Fund's Class A and Class I Shares had total returns of +3.35% and +3.70%,
respectively. This compared to a return of +4.10% for the Fund's unmanaged
benchmark, the Lehman Brothers Aggregate Bond Index, for the same period.
(Complete performance information can be found on pages 6 and 7 of this report
to shareholders.) Although the Fund uses a stratified sampling approach to mimic
the composition and performance of the Index, minimal total return tracking
error is expected in seeking to match the return of the benchmark. This often
will account for the variance in returns relative to the Index.
The Lehman Brothers Aggregate Bond Index is comprised of three major investment
sectors: government and agency issues, agency-guaranteed mortgage-backed
securities (MBS) and investment-grade corporate bonds. Sector weighting and
security selection in the Index are determined by the market representation that
each sector has in the overall market. For the year ended December 31, 2003, the
corporate sector of the Index was the best performer, with a return of +7.70%.
Improving economic conditions in the United States, highlighted by 8.2% gross
domestic product growth in the third quarter, lent support to this sector. For
the same period, the government and agency sector returned +2.36% and the MBS
sector returned +3.07%.
These returns were realized in a challenging fixed income investment
environment, as an improving economy this year put pressure on bond markets. The
Federal Reserve Board, in an effort to stimulate economic growth and stave off
deflation, brought its target Federal Funds rate to 1% in June 2003. While
short-term interest rates remained at historic lows, long-term interest rates
were volatile as investors struggled to anticipate the Federal Reserve Board's
subsequent moves. Yields on ten-year Treasury bonds ranged from a low of 3.11%
to a high of 4.60% during the year.
In the mortgage market, record-low interest rates during the year triggered a
massive refinancing phenomenon far exceeding investors' expectations. This
resulted in an unusually large number of mortgages being paid off early, which
had a dramatic impact on mortgage debt securities.
How was the portfolio managed during the period?
The Fund seeks to replicate 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. Because
it is not practical or logistically possible to create a portfolio with all of
the Index positions, we construct a proxy portfolio (Master Aggregate Bond Index
Series) of far fewer securities.
The investments in the Series are determined by implementing stratified sampling
techniques. Through this approach, we select securities that collectively mimic
the investment characteristics of the Index at the sector and sub-sector levels.
At December 31, 2003, the Lehman Brothers Aggregate Bond Index was comprised of
6,766 securities. The Series was comprised of 501 individual investments,
designed to match the market exposure and investment characteristics of the
Index.
What changes occurred in the Index, and the portfolio, during the period?
In seeking to provide returns that are representative of the bond market as a
whole, we track the sector and sub-sector weightings of our benchmark Index
rather than maintaining a bias to any specific area of the market.
4 MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003
At December 31, 2003, the government and agency sector of the Lehman Brothers
Aggregate Bond Index was comprised of 802 securities, accounting for 33.73% of
the Index. This compared to 1,020 issues representing 34.78% of the benchmark at
December 31, 2002. The portfolio's position in this sector is designed to match
the duration, yield and convexity of its Index counterpart. As such, any change
in interest rates or the shape of the yield curve will have an identical effect
on the Fund's return of this sector.
The MBS sector included 2,482 securities and accounted for 39.91% of the Index
at December 31, 2003 versus 2,114 securities, representing 38.96% of the Index a
year earlier. The MBS sector of the portfolio has the same exposure to 30-year,
15-year and balloon MBS as the Index. Within these sub-sectors, exposure to
coupon and issuer also are matched to that of the Index in an effort to
duplicate the return of the Index's MBS sector with minimal deviation.
In the corporate sector, there were 3,482 securities representing 26.36% of the
Index at December 31, 2003, compared to 3,844 securities representing 26.26% of
the benchmark as of December 31, 2002. As with the government sector, we seek to
match investment characteristics in the portfolio's corporate sector with those
of the Index. However, in the corporate sector, we also seek to mirror the
credit rating and industry exposure of the benchmark.
How was the portfolio positioned at the close of the period?
We continued to use our stratified sampling techniques to create a proxy
portfolio of our benchmark and offer comparable returns. With that in mind, we
expect the Fund to continue to meet its goal of providing fixed income returns
consistent with the broader market.
Jeffrey B. Hewson
Vice President and Co-Portfolio Manager
Frank Viola
Vice President and Co-Portfolio Manager
January 13, 2004
MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003 5
[LOGO] Merrill Lynch Investment Managers
Performance Data
About Fund Performance
Effective April 14, 2003, Class A Shares were redesignated Class I Shares and
Class D Shares were redesignated Class A Shares. Investors are able to purchase
shares of the Fund through two pricing alternatives:
o Class A Shares do not incur an initial sales charge or deferred sales
charge and bear no ongoing distribution fee. In addition, Class A Shares
are subject to an ongoing account maintenance fee of 0.25%.
o Class I Shares do not incur an initial sales charge (front-end load) or
deferred sales charge and bear no ongoing distribution or account
maintenance fees. Class I Shares are available only to eligible investors.
None of the past results shown should be considered a representation of future
performance. Current performance may be lower or higher than the performance
data quoted. Refer to www.mlim.ml.com to obtain more current performance
information. 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, 2003 Total Return Total Return Total Return 30-Day Yield
====================================================================================================================
ML Aggregate Bond Index Fund Class A Shares* - 0.18% + 3.35% + 57.98% + 3.31%
- --------------------------------------------------------------------------------------------------------------------
ML Aggregate Bond Index Fund Class I Shares* - 0.05 + 3.70 + 60.65 + 3.56
- --------------------------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index** + 0.17 + 4.10 + 64.57 --
- --------------------------------------------------------------------------------------------------------------------
* 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 4/03/97.
6 MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003
Performance Data (concluded)
Total Return Based on a $10,000 Investment--Class A & Class I Shares
A line graph depicting the growth of an investment in the Fund's Class A Shares
and Class I Shares compared to growth of an investment in the Lehman Brothers
Aggregate Bond Index. Values are from April 3, 1997 to December 2003.
4/03/97** 12/97 12/98 12/99 12/00 12/01 12/02 12/03
ML Aggregate Bond Index
Fund+--Class A Shares* $10,000 $10,929 $11,832 $11,656 $12,961 $13,946 $15,286 $15,798
ML Aggregate Bond Index
Fund+--Class I Shares* $10,000 $10,949 $11,883 $11,724 $13,082 $14,112 $15,492 $16,065
4/30/97** 12/97 12/98 12/99 12/00 12/01 12/02 12/03
Lehman Brothers Aggregate
Bond Index++ $10,000 $10,988 $11,943 $11,845 $13,222 $14,338 $15,808 $16,457
* 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, mortgaged-backed securities issued by the Government
National Mortgage Association, Freddie Mac or Fannie Mae and
investment-grade (rated BBB or better) corporate bonds.
Past performance is not predictive of future performance.
Average Annual Total Return
Class A Shares % Return
================================================================================
One Year Ended 12/31/03 + 3.35%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/03 + 5.95
- --------------------------------------------------------------------------------
Inception (4/03/97) through 12/31/03 + 7.01
- --------------------------------------------------------------------------------
Class I Shares % Return
================================================================================
One Year Ended 12/31/03 + 3.70%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/03 + 6.21
- --------------------------------------------------------------------------------
Inception (4/03/97) through 12/31/03 + 7.28
- --------------------------------------------------------------------------------
MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003 7
[LOGO] Merrill Lynch Investment Managers
Statement of Assets and Liabilities Merrill Lynch Aggregate Bond Index Fund
As of December 31, 2003
==============================================================================================================
Assets
- --------------------------------------------------------------------------------------------------------------
Investment in Master Aggregate Bond Index Series, at value
(identified cost--$415,056,580) ........................... $430,304,246
Prepaid registration fees ................................... 12,376
------------
Total assets ................................................ 430,316,622
------------
==============================================================================================================
Liabilities
- --------------------------------------------------------------------------------------------------------------
Payables:
Dividends to shareholders ................................ $ 478,160
Distributor .............................................. 13,992
Administrator ............................................ 6,877 499,029
----------
Accrued expenses ............................................ 48,155
------------
Total liabilities ........................................... 547,184
------------
==============================================================================================================
Net Assets
- --------------------------------------------------------------------------------------------------------------
Net assets .................................................. $429,769,438
============
==============================================================================================================
Net Assets Consist of
- --------------------------------------------------------------------------------------------------------------
Class A Shares of Common Stock, $.0001 par value,
125,000,000 shares authorized ............................. $ 585
Class I Shares of Common Stock, $.0001 par value,
125,000,000 shares authorized ............................. 3,354
Paid-in capital in excess of par ............................ 415,502,274
Accumulated distributions in excess of investment income--net $ (106,150)
Accumulated realized capital losses on investments allocated
from the Series--net ...................................... (878,291)
Unrealized appreciation on investments allocated from the
Series--net ............................................... 15,247,666
----------
Total accumulated earnings--net ............................. 14,263,225
------------
Net Assets .................................................. $429,769,438
============
==============================================================================================================
Net Asset Value
- --------------------------------------------------------------------------------------------------------------
Class A--Based on net assets of $63,871,758 and
5,853,172 shares outstanding .............................. $ 10.91
============
Class I--Based on net assets of $365,897,680 and
33,535,861 shares outstanding ............................. $ 10.91
============
See Notes to Financial Statements.
8 MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003
Statement of Operations Merrill Lynch Aggregate Bond Index Fund
For the Year Ended December 31, 2003
===============================================================================================================
Investment Income Allocated from the Series--Net
- ---------------------------------------------------------------------------------------------------------------
Net investment income allocated from the Series:
Interest ............................................... $ 18,985,841
Securities lending--net ................................ 38,769
Expenses ............................................... (285,748)
------------
Net investment income allocated from the Series ........... 18,738,862
------------
===============================================================================================================
Expenses
- ---------------------------------------------------------------------------------------------------------------
Administration fees ....................................... $ 840,353
Transfer agent fees ....................................... 270,713
Account maintenance fees--Class A ......................... 164,012
Printing and shareholder reports .......................... 116,894
Registration fees ......................................... 61,568
Professional fees ......................................... 26,076
Directors' fees and expenses .............................. 7,228
Other ..................................................... 9,598
------------
Total expenses before waiver .............................. 1,496,442
Waiver of expenses ........................................ (75,156)
------------
Total expenses after waiver ............................... 1,421,286
------------
Investment income--net .................................... 17,317,576
------------
===============================================================================================================
Realized & Unrealized Gain (Loss) Allocated from the Series--Net
- ---------------------------------------------------------------------------------------------------------------
Realized gain on investments allocated from the Series--net 3,656,667
Change in unrealized appreciation on investments allocated
from the Series--net .................................... (5,518,907)
------------
Total realized and unrealized loss allocated from the
Series--net ............................................. (1,862,240)
------------
Net Increase in Net Assets Resulting from Operations ...... $ 15,455,336
============
See Notes to Financial Statements.
MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003 9
[LOGO] Merrill Lynch Investment Managers
Statements of Changes in Net Assets Merrill Lynch Aggregate Bond Index Fund
For the Year Ended
December 31,
-------------------------------
Increase (Decrease) in Net Assets: 2003 2002
============================================================================================================
Operations
- ------------------------------------------------------------------------------------------------------------
Investment income--net ............................... $ 17,317,576 $ 21,794,189
Realized gain on investments allocated from the
Series--net ........................................ 3,656,667 3,143,394
Change in unrealized appreciation on investments
allocated from the Series--net ..................... (5,518,907) 15,125,614
-------------------------------
Net increase in net assets resulting from operations . 15,455,336 40,063,197
-------------------------------
============================================================================================================
Dividends to Shareholders
- ------------------------------------------------------------------------------------------------------------
Investment income--net:
Class A ........................................... (2,458,643) (2,879,105)
Class I ........................................... (15,084,612) (18,820,545)
-------------------------------
Net decrease in net assets resulting from dividends to
shareholders ....................................... (17,543,255) (21,699,650)
-------------------------------
============================================================================================================
Capital Share Transactions
- ------------------------------------------------------------------------------------------------------------
Net increase in net assets derived from capital share
transactions ....................................... 9,837,669 18,827,831
-------------------------------
============================================================================================================
Net Assets
- ------------------------------------------------------------------------------------------------------------
Total increase in net assets ......................... 7,749,750 37,191,378
Beginning of year .................................... 422,019,688 384,828,310
-------------------------------
End of year* ......................................... $ 429,769,438 $ 422,019,688
===============================
* Accumulated distributions in excess of investment
income--net ................................... $ (106,150) $ (232,244)
===============================
See Notes to Financial Statements.
10 MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003
Financial Highlights Merrill Lynch Aggregate Bond Index Fund
Class A@
---------------------------------------------------------------------
The following per share data and ratios have been derived For the Year Ended
from information provided in the financial statements. December 31,
---------------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2003 2002 2001 2000 1999
==================================================================================================================================
Per Share Operating Performance
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ... $ 10.96 $ 10.50 $ 10.31 $ 9.86 $ 10.61
---------------------------------------------------------------------
Investment income--net ............... .41@@ .52@@ .58 .61 .58
Realized and unrealized gain (loss) on
investments from the Series--net ... (.05) .46 .19 .45 (.75)
---------------------------------------------------------------------
Total from investment operations ..... .36 .98 .77 1.06 (.17)
---------------------------------------------------------------------
Less dividends and distributions:
Investment income--net ............ (.41) (.52) (.58) (.61) (.58)
In excess of realized gain on
investments from the Series--net -- -- -- -- --+
---------------------------------------------------------------------
Total dividends and distributions .... (.41) (.52) (.58) (.61) (.58)
---------------------------------------------------------------------
Net asset value, end of year ......... $ 10.91 $ 10.96 $ 10.50 $ 10.31 $ 9.86
=====================================================================
==================================================================================================================================
Total Investment Return
- ----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ... 3.35% 9.61% 7.60% 11.18% (1.50%)
=====================================================================
==================================================================================================================================
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver++ ............ .60% .59% .60% .63% .60%
=====================================================================
Expenses++ ........................... .62% .61% .71% .70% .62%
=====================================================================
Investment income--net ............... 3.70% 4.91% 5.50% 6.17% 5.81%
=====================================================================
==================================================================================================================================
Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ 63,872 $ 61,029 $ 60,438 $ 65,339 $ 79,743
=====================================================================
Portfolio turnover of the Series ..... 136.76% 112.18% 144.23% 43.24% 61.82%
=====================================================================
+ Amount is less than $(.01) per share.
++ Includes the Fund's share of the Series' allocated expenses.
@ Effective April 14, 2003, Class D Shares were redesignated Class A Shares.
@@ Based on average shares outstanding.
See Notes to Financial Statements.
MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003 11
[LOGO] Merrill Lynch Investment Managers
Financial Highlights (concluded) Merrill Lynch Aggregate Bond Index Fund
Class I@
----------------------------------------------------------------------
The following per share data and ratios have been derived For the Year Ended
from information provided in the financial statements. December 31,
----------------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2003 2002 2001 2000 1999
==================================================================================================================================
Per Share Operating Performance
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ... $ 10.95 $ 10.50 $ 10.31 $ 9.85 $ 10.61
----------------------------------------------------------------------
Investment income--net ............... .43@@ .55@@ .61 .64 .62
Realized and unrealized gain (loss) on
investments from the Series--net ... (.03) .45 .19 .46 (.76)
----------------------------------------------------------------------
Total from investment operations ..... .40 1.00 .80 1.10 (.14)
----------------------------------------------------------------------
Less dividends and distributions:
Investment income--net ............ (.44) (.55) (.61) (.64) (.62)
In excess of realized gain on
investments from the Series--net -- -- -- -- --+
----------------------------------------------------------------------
Total dividends and distributions .... (.44) (.55) (.61) (.64) (.62)
----------------------------------------------------------------------
Net asset value, end of year ......... $ 10.91 $ 10.95 $ 10.50 $ 10.31 $ 9.85
======================================================================
==================================================================================================================================
Total Investment Return
- ----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ... 3.70% 9.78% 7.87% 11.57% (1.36%)
======================================================================
==================================================================================================================================
Ratios to Average Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver++ ............ .35% .34% .35% .38% .35%
======================================================================
Expenses++ ........................... .37% .36% .46% .45% .37%
======================================================================
Investment income--net ............... 3.95% 5.16% 5.72% 6.41% 6.06%
======================================================================
==================================================================================================================================
Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ 365,898 $ 360,991 $ 324,390 $ 214,056 $ 324,254
======================================================================
Portfolio turnover of the Series ..... 136.76% 112.18% 144.23% 43.24% 61.82%
======================================================================
+ Amount is less than $(.01) per share.
++ Includes the Fund's share of the Series' allocated expenses.
@ Effective April 14, 2003, Class A Shares were redesignated Class I Shares.
@@ Based on average shares outstanding.
See Notes to Financial Statements.
12 MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003
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 amended, as a non-diversified mutual fund.
The Fund seeks to achieve its investment objective by investing all of its
assets in 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, 2003 was 48.7%. The Fund offers two
classes of shares. Effective April 14, 2003, Class A Shares were redesignated
Class I Shares and Class D Shares were redesignated Class A Shares. The Fund's
financial statements and financial highlights contained within this report
reflect the new share class redesignation. Shares of Class A and Class I 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 A 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. Income, expenses (other than expenses attributable to a specific
class) and realized gains and losses on investments are allocated daily to each
class based on its relative net assets. 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 differences of $351,773 have been
reclassified between accumulated net realized capital losses and accumulated
distributions in excess of investment income and $2,885 has been reclassified
between paid-in capital in excess of par and accumulated net realized capital
losses. Additionally, $192,499 has been reclassified between additional paid-in
capital to reflect the liquidation of certain partners' investments in the
Series and unrealized appreciation on investments from 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 Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM 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, 2003, FAM earned fees of $840,353, of which $75,156 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
MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003 13
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (concluded)
Merrill Lynch Aggregate Bond Index Fund
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 A 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 A 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
FAM, PSI, FAMD, FDS, and/or ML & Co.
3. Capital Share Transactions:
Net increase in net assets derived from capital share transactions were
$9,837,669 and $18,827,831 for the years ended December 31, 2003 and December
31, 2002, respectively.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended December 31, 2003+ Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 2,487,650 $ 27,213,151
Shares issued to shareholders
in reinvestment of dividends ......... 184,332 2,017,562
-------------------------------
Total issued ........................... 2,671,982 29,230,713
Shares redeemed ........................ (2,389,100) (26,075,348)
-------------------------------
Net increase ........................... 282,882 $ 3,155,365
===============================
+ Effective April 14, 2003, Class D Shares were redesignated Class A Shares.
- --------------------------------------------------------------------------------
Class A 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)
===============================
+ Effective April 14, 2003, Class D Shares were redesignated Class A Shares.
- --------------------------------------------------------------------------------
Class I Shares for the Year Dollar
Ended December 31, 2003+ Shares Amount
- --------------------------------------------------------------------------------
Shares sold ............................ 10,665,367 $ 116,847,001
Shares issued to shareholders
in reinvestment of dividends ......... 1,030,875 11,278,131
-------------------------------
Total issued ........................... 11,696,242 128,125,132
Shares redeemed ........................ (11,115,541) (121,442,828)
-------------------------------
Net increase ........................... 580,701 $ 6,682,304
===============================
+ Effective April 14, 2003, Class A Shares were redesignated Class I Shares.
- --------------------------------------------------------------------------------
Class I 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
===============================
+ Effective April 14, 2003, Class A Shares were redesignated Class I Shares.
4. Distributions to Shareholders:
The tax character of distributions paid during the fiscal years ended December
31, 2003 and December 31, 2002 was as follows:
- --------------------------------------------------------------------------------
12/31/2003 12/31/2002
- --------------------------------------------------------------------------------
Distributions paid from:
Ordinary income ...................... $ 17,543,255 $ 21,699,650
---------------------------------
Total taxable distributions ............ $ 17,543,255 $ 21,699,650
=================================
As of December 31, 2003, the components of accumulated earnings on a tax basis
were as follows:
- --------------------------------------------------------------------------------
Undistributed ordinary income--net ...................... $ 225,571
Undistributed long-term capital gains--net .............. --
------------
Total undistributed earnings--net ....................... 225,571
Capital loss carryforward ............................... (559,843)*
Unrealized gains--net ................................... 14,597,497**
------------
Total accumulated earnings--net ......................... $ 14,263,225
============
* On December 31, 2003, the Fund had a net capital loss carryforward of
$559,843, 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.
14 MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003
Independent Auditors' Report Merrill Lynch Aggregate Bond Index Fund
To the Shareholders and Board of Directors of
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. (the "Fund"), as of December 31, 2003, and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and 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 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Merrill Lynch Aggregate Bond Index Fund of Merrill Lynch Index Funds, Inc. as of
December 31, 2003, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and its financial highlights for each of the five years in the period then
ended, in conformity with accounting principles generally accepted in the United
States of America.
Deloitte & Touche LLP
Princeton, New Jersey
February 13, 2004
MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003 15
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments
Master Aggregate Bond Index Series (in U.S. dollars)
Interest Maturity
Issue Face Amount Rate Date Value
===============================================================================================================================
U.S. Government & Fannie Mae $ 210,000 6.85 % 4/05/2004 $ 213,095
Agency Obligations-- 29,225,000 3.50 9/15/2004 29,683,248
32.7% 8,625,000 3.875 3/15/2005 8,877,057
320,000 2.25 5/15/2006 319,998
8,810,000 5.25 6/15/2006 9,424,286
29,355,000 5.75 2/15/2008 32,247,642
215,000 2.875 5/19/2008 209,752
7,170,000 2.50 6/15/2008 6,928,335
6,105,000 6.625 9/15/2009 6,980,939
14,710,000 6.625 11/15/2010 16,901,437
3,970,000 4.375 3/15/2013 3,899,032
1,340,000 7.25 5/15/2030 1,636,267
---------------------------------------------------------------------------------------------------------
Federal Home Loan Bank 15,000 2.30 3/10/2006 15,022
200,000 4.625 8/15/2012 201,069
---------------------------------------------------------------------------------------------------------
Financing Corp. 670,000 9.80 11/30/2017 981,663
---------------------------------------------------------------------------------------------------------
Freddie Mac 1,245,000 7.18 6/27/2006 1,393,481
14,560,000 4.875 3/15/2007 15,499,309
2,000,000 5.75 4/15/2008 2,195,976
1,500,000 6.625 9/15/2009 1,715,357
700,000 4.875 11/15/2013 707,726
8,655,000 6.75 9/15/2029 9,958,772
2,345,000 6.25 7/15/2032 2,550,216
---------------------------------------------------------------------------------------------------------
Tennessee Valley Authority 1,915,000 6.25 12/15/2017 2,109,970
---------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds 300,000 6.25 2/15/2007 334,406
1,000,000 5.50 5/15/2009 1,112,070
2,050,000 5.75 8/15/2010 2,298,563
250,000 5.00 8/15/2011 267,539
6,690,000 4.00 11/15/2012 6,625,716
3,665,000 3.625 5/15/2013 3,522,838
300,000 7.50 11/15/2016 381,938
15,820,000 8.75 5/15/2017 22,170,243
1,875,000 8.125 8/15/2019 2,532,714
7,800,000 8.50 2/15/2020 10,894,104
350,000 8.75 8/15/2020 500,500
6,080,000 8.125 8/15/2021 8,291,837
5,390,000 6.25 8/15/2023 6,143,549
3,000,000 6.375 8/15/2027 3,484,218
1,500,000 5.25 2/15/2029 1,513,242
620,000 5.375 2/15/2031 646,568
---------------------------------------------------------------------------------------------------------
U.S. Treasury Notes 5,520,000 5.875 11/15/2004 5,741,231
390,000 1.75 12/31/2004 391,965
2,735,000 6.75 5/15/2005 2,932,005
25,835,000 5.75 11/15/2005 27,738,316
9,175,000 5.875 11/15/2005 9,872,805
400,000 6.50 10/15/2006 445,547
1,070,000 4.375 5/15/2007 1,133,071
595,000 3.25 8/15/2007 606,923
9,970,000 3.00 11/15/2007 10,055,682
2,000,000 3.00 2/15/2008 2,009,296
2,225,000 2.625 5/15/2008 2,191,538
---------------------------------------------------------------------------------------------------------
Total U.S. Government & Agency Obligations (Cost--$280,813,063)--32.7% 288,488,073
=========================================================================================================
16 MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003
Schedule of Investments (continued)
Master Aggregate Bond Index Series (in U.S. dollars)
Interest Maturity
Issue Face Amount Rate Date(s) Value
===================================================================================================================================
U.S. Government Fannie Mae $10,262,912 5.00 % 3/25/2018 $10,262,141
Agency Mortgage- 415,074 5.50 6/01/2011 - 2/01/2014 432,205
Backed Obligations** 1,440,793 6.00 2/01/2013 - 6/01/2015 1,514,424
- --38.3% 2,938,627 6.00 11/01/2032 3,038,915
1,044,544 6.50 1/01/2013 - 5/01/2016 1,108,100
2,352,492 6.50 12/01/2025 - 1/01/2030 2,462,968
925,500 7.00 4/01/2027 - 3/01/2031 981,293
874,039 7.50 10/01/2027 - 5/01/2032 934,530
25,095 8.00 9/01/2015 26,923
1,497,245 8.00 11/01/2029 - 9/01/2031 1,618,431
55,997 8.50 5/01/2030 - 1/01/2031 60,462
109,689 9.50 7/01/2017 122,756
49,715 10.00 10/01/2018 - /01/2022 55,502
23,707 10.50 12/01/2016 26,361
-------------------------------------------------------------------------------------------------------------
Freddie Mac 9,600,000 4.00 1/01/2019 - 3/01/2019 9,363,840
24,978,939 4.50 8/01/2018 - 1/01/2019 24,999,064
2,100,000 4.50 1/15/2034 2,010,095
27,272,599 5.00 11/01/2017 - 10/01/2018 27,814,468
43,004,154 5.00 3/15/2033 - 1/15/2034 42,451,518
11,598,195 5.50 8/01/2017 - 2/01/2018 (g) 12,030,312
55,982,477 5.50 8/01/2033 - 1/15/2034 56,683,619
8,562,341 6.00 4/01/2016 - 10/01/2017 8,984,430
36,735,286 6.00 4/01/2033 - 1/15/2034 37,953,333
3,230,852 6.50 4/01/2015 - 5/01/2017 3,422,706
29,578,448 6.50 1/01/2026 - 9/01/2032 (g) 30,985,827
1,398,257 7.00 1/01/2011 - 7/01/2017 1,492,709
11,738,245 7.00 1/01/2020 - 11/01/2032 12,422,839
325,479 7.50 5/01/2007 - 4/01/2016 347,389
2,644,593 7.50 1/01/2023 - 9/01/2032 2,841,833
891,504 8.00 6/01/2024 - 3/01/2032 964,817
127,762 8.50 5/01/2028 - 8/01/2030 138,583
20,092 9.00 9/01/2014 21,979
288,062 9.50 2/01/2019 322,495
104,577 10.00 3/01/2010 - 9/01/2017 114,794
70,311 10.50 4/01/2016 77,500
30,338 11.00 9/01/2016 - 3/01/2018 33,783
11,622 11.50 8/01/2015 13,011
38,187 12.50 2/01/2014 43,679
-------------------------------------------------------------------------------------------------------------
Government National Mortgage Association 4,487,391 4.50 10/15/2033 4,298,921
13,260,394 5.50 8/15/2033 - 10/15/2033 13,494,937
7,509,352 6.00 4/20/2026 - 4/15/2033 7,810,358
100,737 6.50 2/15/2014 - 5/15/2014 107,392
6,485,622 6.50 4/15/2026 - 5/15/2032 6,842,351
65,960 7.00 4/15/2013 70,841
3,403,628 7.00 7/15/2027 - 10/15/2031 3,630,810
2,217,588 7.50 3/15/2024 - 3/15/2032 2,381,660
805,874 8.00 12/15/2022 - 6/15/2031 878,953
245,302 8.50 11/15/2017 - 3/15/2031 267,998
187,365 9.00 4/15/2018 - 11/15/2024 209,495
13,187 9.50 9/15/2021 14,765
-------------------------------------------------------------------------------------------------------------
Total U.S. Government Agency Mortgage-Backed Obligations (Cost--$334,386,534)--38.3% 338,188,115
==============================================================================================================
MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003 17
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued)
Master Aggregate Bond Index Series (in U.S. dollars)
S&P Moody's Face
Industry+ Ratings@ Ratings@ Amount Corporate Bonds & Notes Value
================================================================================================================================
Banking--2.8% A- Aa1 $ 125,000 Aristar Inc., 7.375% due 9/01/2004 $ 129,949
A- A2 525,000 BB&T Corporation, 6.50% due 8/01/2011 589,225
Banc One Corp.:
A Aa3 830,000 6.875% due 8/01/2006 917,853
A- A1 378,000 8% due 4/29/2027 474,988
Bank of America Corporation:
A+ Aa2 2,200,000 5.875% due 2/15/2009 2,410,531
A+ Aa2 410,000 4.875% due 9/15/2012 412,100
A+ Aa2 350,000 4.875% due 1/15/2013 349,431
A+ Aa3 365,000 The Bank of New York, 5.20% due 7/01/2007 391,024
A+ Aa2 90,000 Citicorp, 6.375% due 11/15/2008 99,546
A- A3 665,000 Comerica Inc., 4.80% due 5/01/2015 639,671
A+ A1 460,000 Deutsche Bank Financial, 7.50% due 4/25/2009 535,445
A Aa3 975,000 First Union Corporation, 7.55% due 8/18/2005 1,062,885
BB+ Baa3 300,000 Firstbank Puerto Rico, 7.625% due 12/20/2005 322,233
FleetBoston Financial Corporation:
A A1 585,000 7.25% due 9/15/2005 636,135
A A1 700,000 4.20% due 11/30/2007 722,834
A A1 900,000 3.85% due 2/15/2008 914,857
A+ A1 230,000 Golden West Financial Corporation, 4.75% due 10/01/2012 230,185
A Aa3 250,000 HBOS PLC, 5.375% (a)(b)(c) 249,235
A A1 765,000 HSBC Holding PLC, 7.50% due 7/15/2009 894,474
A- A3 500,000 M & T Bank, 3.85% due 4/01/2013 (c) 496,600
MBNA America Bank NA:
BBB+ Baa1 500,000 6.875% due 7/15/2004 (a) 513,093
BBB+ Baa1 25,000 7.75% due 9/15/2005 27,264
BBB+ Baa1 110,000 6.50% due 6/20/2006 119,767
BBB Baa2 675,000 7.125% due 11/15/2012 771,911
A+ Aa3 395,000 Marshall & Ilsley Bank, 4.125% due 9/04/2007 414,690
A+ A1 216,000 Mellon Bank NA, 7% due 3/15/2006 238,671
A A2 500,000 Mellon Funding Corporation, 5% due 12/01/2014 501,261
A+ Aa3 295,000 National City Bank of Indiana, 4% due 9/28/2007 302,139
A Aa3 113,000 NationsBank Corp., 6.60% due 5/15/2010 125,097
BBB+ A3 900,000 PNC Funding Corporation, 5.25% due 11/15/2015 891,889
A- A2 350,000 Regions Financial Corporation, 6.375% due 5/15/2012 385,038
BBB- Baa3 450,000 Sovereign Bank, 5.125% due 3/15/2013 446,778
A+ Aa3 705,000 SunTrust Bank, 5.45% due 12/01/2017 725,584
A- A3 400,000 Synovus Financial, 4.875% due 2/15/2013 393,487
A+ Aa3 700,000 U.S. Bancorp, 1.318% due 9/16/2005 (c) 700,711
BBB+ A3 400,000 UnionBanCal Corporation, 5.25% due 12/16/2013 403,990
A+ Aa2 525,000 Wachovia Bank NA, 4.85% due 7/30/2007 566,031
Wachovia Corporation:
A Aa3 1,170,000 4.95% due 11/01/2006 1,242,211
A- A1 195,000 5.625% due 12/15/2008 210,883
Washington Mutual Finance Corporation:
A- Aa1 760,000 8.25% due 6/15/2005 829,046
A- Aa1 145,000 6.875% due 5/15/2011 166,471
Washington Mutual Inc.:
BBB+ A3 600,000 7.50% due 8/15/2006 670,285
BBB Baa1 90,000 8.25% due 4/01/2010 108,218
AA- Aa1 450,000 Wells Fargo Bank, NA, 6.45% due 2/01/2011 505,278
Wells Fargo & Company:
AA- Aa1 600,000 7.25% due 8/24/2005 651,779
AA- Aa1 400,000 5.125% due 2/15/2007 426,743
------------
24,817,516
18 MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003
Schedule of Investments (continued)
Master Aggregate Bond Index Series (in U.S. dollars)
S&P Moody's Face
Industry+ Ratings@ Ratings@ Amount Corporate Bonds & Notes Value
================================================================================================================================
Financial Services-- BBB+ A3 $ 330,000 ACE INA Holdings, 8.30% due 8/15/2006 $ 373,332
3.8% A A3 400,000 AXA Financial Inc., 7.75% due 8/01/2010 473,806
A+ A1 250,000 Allstate Corporation, 5.375% due 12/01/2006 269,072
A+ A1 295,000 American Express Corporation, 6.875% due 11/01/2005 321,265
AAA Aaa 575,000 American General Corporation, 7.50% due 7/15/2025 683,885
A+ A1 235,000 American General Finance, 5.875% due 7/14/2006 253,595
BBB+ Baa1 215,000 Avalonbay Communities, 6.625% due 9/15/2011 238,079
Bear Stearns Companies, Inc.:
A A1 700,000 7.625% due 2/01/2005 744,753
A A1 250,000 6.875% due 10/01/2005 270,495
CIT Group Inc.:
A A2 340,000 5.625% due 5/17/2004 345,367
A A2 450,000 6.50% due 2/07/2006 487,346
Capital One Bank:
BBB- Baa2 570,000 6.875% due 2/01/2006 616,625
BBB- Baa2 600,000 4.875% due 5/15/2008 617,492
Citigroup Inc.:
AA- Aa1 2,965,000 5.75% due 5/10/2006 3,191,016
A+ Aa2 565,000 7.25% due 10/01/2010 658,540
AA- Aa1 125,000 6.50% due 1/18/2011 140,935
A+ Aa2 740,000 6.625% due 6/15/2032 801,632
Commercial Credit Co.:
AA- Aa1 500,000 6.75% due 7/01/2007 559,348
AA- Aa1 450,000 10% due 5/15/2009 574,322
A A3 2,240,000 Countrywide Home Loan, 5.625% due 7/15/2009 2,404,241
Credit Suisse First Boston (USA) Inc.:
A+ Aa3 1,000,000 5.875% due 8/01/2006 1,079,432
A+ Aa3 250,000 4.625% due 1/15/2008 260,251
A+ Aa3 800,000 6.50% due 1/15/2012 890,417
BBB Baa3 530,000 Developers Diversified Realty, 6.625% due 1/15/2008 573,167
BBB+ Baa1 750,000 Duke Realty Corporation, 5.25% due 1/15/2010 784,004
EOP Operating LP:
BBB+ Baa1 200,000 6.75% due 2/15/2012 220,907
BBB+ Baa1 145,000 7.25% due 6/15/2028 157,655
BBB+ Baa1 25,000 7.50% due 4/19/2029 27,979
The Goldman Sachs Group, Inc.:
A+ Aa3 800,000 7.625% due 8/17/2005 874,365
A+ Aa3 420,000 4.125% due 1/15/2008 430,627
A+ Aa3 1,310,000 6.875% due 1/15/2011 1,487,646
A+ Aa3 315,000 6.60% due 1/15/2012 352,022
A+ Aa3 405,000 6.125% due 2/15/2033 407,853
A- A3 450,000 Hartford Life Inc., 7.375% due 3/01/2031 527,617
International Lease Finance Corporation:
AA- A1 650,000 4.375% due 12/15/2005 674,660
AA- A1 386,000 5.625% due 6/01/2007 415,658
A A2 1,445,000 J.P. Morgan Chase & Co., 6.625% due 3/15/2012 1,614,225
A A3 275,000 John Hancock Financial Services, 5.625% due 12/01/2008 297,058
Lehman Brothers Holdings, Inc.:
A A1 800,000 6.625% due 4/01/2004 810,450
A A1 1,000,000 6.25% due 5/15/2006 1,086,400
A A1 600,000 7% due 2/01/2008 677,663
A A1 245,000 7.875% due 8/15/2010 293,451
A A1 725,000 6.625% due 1/18/2012 818,174
BBB Baa2 500,000 Liberty Property LP, 7.25% due 3/15/2011 570,303
Marsh & McLennan Companies Inc.:
AA- A2 210,000 6.625% due 6/15/2004 214,836
AA- A2 175,000 6.25% due 3/15/2012 190,103
A A2 150,000 MetLife Inc., 6.125% due 12/01/2011 163,590
MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003 19
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued)
Master Aggregate Bond Index Series (in U.S. dollars)
S&P Moody's Face
Industry+ Ratings@ Ratings@ Amount Corporate Bonds & Notes Value
================================================================================================================================
Financial Services A+ Aa3 $ 845,000 Morgan Stanley, Dean Witter, 6.60% due 4/01/2012 $ 943,729
(concluded) AA- Aa3 445,000 New York Life Insurance, 5.875% due 5/15/2033 (a) 442,276
AA Aa3 265,000 Principal Life Global, 6.25% due 2/15/2012 (a) 288,637
A+ A1 425,000 Progressive Corporation, 6.25% due 12/01/2032 443,668
BBB Baa2 500,000 Simon Debartolo, 6.75% due 7/15/2004 513,010
AAA Aaa 150,000 SunAmerica Inc., 5.60% due 7/31/2097 129,434
A- A2 500,000 Travelers Property Casualty, 6.375% due 3/15/2033 521,385
A- Baa1 750,000 Vectren Utility Holdings, 5.25% due 8/01/2013 751,854
------------
33,959,652
================================================================================================================================
Financial Services-- Household Finance Corporation:
Consumer--0.5% A A1 2,015,000 5.875% due 2/01/2009 2,188,217
A A1 750,000 7% due 5/15/2012 855,276
BBB+ Baa3 250,000 NLV Financial Corporation, 7.50% due 8/15/2033 (a) 259,620
AA A2 750,000 Western & Southern Financial Group Inc., 5.75%
due 7/15/2033 (a) 706,822
------------
4,009,935
================================================================================================================================
Foreign Government AAA Aaa 2,240,000 Canadian Government Bond, 5.25% due 11/05/2008 2,427,737
Obligations--2.2% BBB A2 500,000 People's Republic of China, 7.30% due 12/15/2008 580,353
BBB- Baa1 1,025,000 Petroleos Mexicanos, 8.85% due 9/15/2007 1,186,438
AA- Aa2 445,000 Province of British Columbia, 4.625% due 10/03/2006 469,104
AA- Aa2 1,120,000 Province of Manitoba, 5.50% due 10/01/2008 1,208,041
Province of Ontario:
AA NR* 3,000,000 6% due 2/21/2006 3,232,656
AA Aa2 840,000 5.50% due 10/01/2008 912,497
A+ A1 1,025,000 Province of Quebec, 7.50% due 9/15/2029 1,276,708
A+ Aa3 603,000 Province of Saskatchewan, 8% due 7/15/2004 623,556
AAA Aaa 1,120,000 Republic of Finland, 5.875% due 2/27/2006 1,206,393
Republic of Italy:
AA NR* 900,000 5.25% due 4/05/2006 957,281
AA NR* 1,050,000 4.375% due 10/25/2006 1,099,886
United Mexican States:
BBB- Baa2 2,320,000 9.875% due 2/01/2010 2,929,000
BBB- Baa2 900,000 6.375% due 1/16/2013 933,750
------------
19,043,400
================================================================================================================================
Industrial--Consumer BBB Baa2 60,000 Albertson's Inc., 7.50% due 2/15/2011 68,781
Goods--1.4% Anheuser-Busch Companies, Inc.:
A+ A1 160,000 5.95% due 1/15/2033 164,259
A+ A1 390,000 6% due 11/01/2041 397,630
A A2 500,000 Brown-Forman Corporation, 3% due 3/15/2008 489,361
A A3 600,000 Campbell Soup Company, 4.875% due 10/01/2013 600,636
BBB- Baa3 600,000 Cia Brasileira de Bebida, 8.75% due 9/15/2013 (a) 636,000
A A2 960,000 Coca-Cola Enterprises, 6.75% due 9/15/2028 1,070,665
Conagra Foods Inc.:
BBB+ Baa1 200,000 7% due 10/01/2028 219,811
BBB+ Baa1 370,000 8.25% due 9/15/2030 464,299
A A2 140,000 Diageo Capital PLC, 3.50% due 11/19/2007 141,207
BBB- Baa3 500,000 The Dial Corporation, 6.50% due 9/15/2008 559,301
A A2 500,000 Fortune Brands, Inc., 2.875% due 12/01/2006 503,096
BBB+ Baa2 355,000 General Mills Inc., 6% due 2/15/2012 379,626
BBB Baa2 575,000 International Paper Company, 8.125% due 7/08/2005 626,376
BBB Baa2 432,000 Kellogg Company, 6% due 4/01/2006 462,905
AA- Aa2 294,000 Kimberly-Clark Corporation, 7.10% due 8/01/2007 335,533
BBB+ A3 225,000 Kraft Foods Inc., 4.625% due 11/01/2006 234,794
Kroger Company:
BBB Baa3 160,000 7.625% due 9/15/2006 178,308
BBB Baa3 85,000 7.70% due 6/01/2029 99,250
BBB Baa3 250,000 7.50% due 4/01/2031 288,068
20 MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003
Schedule of Investments (continued)
Master Aggregate Bond Index Series (in U.S. dollars)
S&P Moody's Face
Industry+ Ratings@ Ratings@ Amount Corporate Bonds & Notes Value
================================================================================================================================
Industrial--Consumer BBB+ Baa1 $ 500,000 Miller Brewing Company, 5.50% due 8/15/2013 (a) $ 510,822
Goods (concluded) A- A3 500,000 Nabisco, Inc., 6.375% due 2/01/2005 521,828
BBB Ba1 300,000 Packaging Corp. of America, 5.75% due 8/01/2013 303,062
A A3 155,000 Pepsi Bottling Group, Inc., 7% due 3/01/2029 177,635
A+ A1 92,000 Pepsi Bottling Holdings Inc., 5.625% due 2/17/2009 (a) 99,899
BBB Baa2 300,000 Safeway Inc., 6.15% due 3/01/2006 320,997
BBB Baa2 290,000 Sappi Papier Holdings AG, 6.75% due 6/15/2012 (a) 317,010
A+ A3 520,000 Sara Lee Corporation, 6.25% due 9/15/2011 577,413
Sealed Air Corporation:
BBB Baa3 400,000 5.375% due 4/15/2008 422,356
BBB Baa3 135,000 6.95% due 5/15/2009 (a) 151,722
BBB- Baa2 700,000 Staples, Inc., 7.125% due 8/15/2007 770,162
BBB Baa3 390,000 SuperValu Inc., 7.50% due 5/15/2012 443,022
------------
12,535,834
================================================================================================================================
Industrial--Energy-- Anadarko Finance Company:
1.4% BBB+ Baa1 390,000 6.75% due 5/01/2011 442,116
BBB+ Baa1 265,000 7.50% due 5/01/2031 310,442
Apache Corporation:
A- A3 565,000 6.25% due 4/15/2012 628,101
A- A3 190,000 7.625% due 7/01/2019 232,416
AA+ Aa1 390,000 Atlantic Richfield, 5.90% due 4/15/2009 431,356
A- A3 150,000 Atmos Energy Corporation, 5.125% due 1/15/2013 152,294
BBB+ Baa1 330,000 Chevron Phillips Chemical Company, 5.375% due 6/15/2007 351,341
ChevronTexaco Capital Company:
AA Aa2 230,000 3.50% due 9/17/2007 234,249
AA Aa2 165,000 3.375% due 2/15/2008 165,783
A A2 325,000 Colonial Pipeline, 7.63% due 4/15/2032 (a) 397,703
ConocoPhillips Holding Company:
A- A3 570,000 6.35% due 4/15/2009 639,446
A- A3 1,720,000 4.75% due 10/15/2012 1,727,238
A- A3 505,000 6.95% due 4/15/2029 572,690
BBB+ A3 75,000 Consolidated Natural Gas, 6.25% due 11/01/2011 82,848
Duke Energy Corporation:
A- A3 400,000 3.75% due 3/05/2008 403,129
BBB+ Baa1 550,000 6.25% due 1/15/2012 594,867
BBB- Baa2 350,000 Enterprise Products Operating LP, 6.875% due 3/01/2033 349,738
BBB+ Baa1 945,000 Kinder Morgan Energy Partners, LP, 6.75% due 3/15/2011 1,060,757
BBB Baa2 475,000 Kinder Morgan, Inc., 6.50% due 9/01/2012 524,162
NR* A1 350,000 Motiva Enterprises LLC, 5.20% due 9/15/2012 (a) 356,310
A- Baa1 100,000 Murphy Oil Corporation, 6.375% due 5/01/2012 109,899
A- A3 225,000 Nabors Industries Inc., 5.375% due 8/15/2012 233,060
BBB Baa3 480,000 NiSource Finance Corporation, 7.625% due 11/15/2005 524,399
BBB- Baa3 450,000 Ocean Energy Inc., 7.25% due 10/01/2011 517,896
A- A3 400,000 Phillips Petroleum, 8.50% due 5/25/2005 436,048
AA Aa3 250,000 Texaco Capital Inc., 8.625% due 6/30/2010 314,418
BBB Baa3 300,000 Valero Energy Corporation, 6.875% due 4/15/2012 331,980
------------
12,124,686
================================================================================================================================
Industrial-- A- Baa1 340,000 Alcan Inc., 6.45% due 3/15/2011 379,660
Manufacturing--3.6% A- A2 150,000 Alcoa Inc., 6% due 1/15/2012 163,014
A+ A1 600,000 American Honda Finance, 1.42% due 10/03/2005 (a)(c) 602,473
A A3 320,000 Baxter International Inc., 4.625% due 3/15/2015 305,559
A A3 225,000 Boeing Capital Corporation, 7.10% due 9/27/2005 243,335
A A2 265,000 Caterpillar Financial Services Corporation, 4.875%
due 6/15/2007 281,409
Centex Corporation:
BBB Baa2 390,000 7.875% due 2/01/2011 458,548
BBB Baa2 100,000 7.50% due 1/15/2012 115,358
A- A3 450,000 Cooper Industries Inc., 5.50% due 11/01/2009 483,927
MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003 21
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued)
Master Aggregate Bond Index Series (in U.S. dollars)
S&P Moody's Face
Industry+ Ratings@ Ratings@ Amount Corporate Bonds & Notes Value
================================================================================================================================
Industrial-- DaimlerChrysler NA Holdings:
Manufacturing BBB A3 $1,530,000 6.40% due 5/15/2006 $ 1,639,253
(concluded) BBB A3 280,000 7.30% due 1/15/2012 311,765
BBB A3 600,000 8.50% due 1/18/2031 716,870
A- A3 720,000 Deere & Co., 7.85% due 5/15/2010 869,998
BBB- Baa2 555,000 Delphi Auto Systems Corporation, 6.55% due 6/15/2006 595,537
BBB- Baa3 270,000 Domtar Inc., 7.875% due 10/15/2011 318,408
A A2 335,000 Emerson Electric Company, 7.875% due 6/01/2005 362,871
BBB- Baa1 2,005,000 Ford Motor Company, 7.45% due 7/16/2031 2,026,095
Ford Motor Credit Company:
BBB- A3 1,410,000 6.875% due 2/01/2006 1,504,904
BBB- A3 200,000 7.25% due 10/25/2011 216,913
AAA Aaa 2,410,000 General Electric Capital Corporation, 6.75% due 3/15/2032 2,668,162
AAA Aaa 325,000 General Electric Company, 5% due 2/01/2013 328,684
General Motors Acceptance Corporation:
BBB A3 749,000 6.85% due 6/17/2004 766,644
BBB A3 772,000 7.75% due 1/19/2010 875,107
BBB A3 140,000 6.875% due 9/15/2011 150,798
BBB A3 1,075,000 7% due 2/01/2012 1,155,781
BBB A3 1,853,000 8% due 11/01/2031 2,080,858
BBB+ Baa1 555,000 Hanson Australia Funding, 5.25% due 3/15/2013 552,438
A A1 150,000 Harley-Davidson Funding Corp., 3.625% due 12/15/2008 (a) 149,622
BBB- Baa2 1,000,000 Hertz Corp., 7% due 1/15/2028 939,400
A A2 515,000 Honeywell International, 6.125% due 11/01/2011 566,298
IBM Corporation:
A+ A1 395,000 6.45% due 8/01/2007 439,885
A+ A1 200,000 4.75% due 11/29/2012 200,423
A A2 400,000 Johnson Controls, Inc., 4.875% due 9/15/2013 403,513
A- A3 121,437 Kern River Funding Corporation, 4.893% due 4/30/2018 (a) 120,852
BBB- Baa3 200,000 Lennar Corporation, 5.95% due 3/01/2013 209,271
Lockheed Martin Corporation:
BBB Baa2 135,000 7.75% due 5/01/2026 162,197
BBB Baa2 450,000 8.50% due 12/01/2029 589,668
BBB- Baa3 250,000 MDC Holdings Inc., 5.50% due 5/15/2013 250,525
BBB Baa2 325,000 Martin Marietta Corp., 7.375% due 4/15/2013 375,306
Masco Corporation:
BBB+ Baa1 365,000 6% due 5/03/2004 370,050
BBB+ Baa1 45,000 6.50% due 8/15/2032 47,230
Newell Rubbermaid Inc.:
BBB+ Baa2 250,000 4.625% due 12/15/2009 251,441
BBB+ Baa2 300,000 4% due 5/01/2010 290,267
AA Aa3 385,000 Pitney Bowes Inc., 4.75% due 5/15/2018 367,226
Pulte Homes Inc.:
BBB- Baa3 110,000 7.875% due 8/01/2011 129,649
BBB- Baa3 105,000 6.25% due 2/15/2013 111,465
Raytheon Company:
BBB- Baa3 160,000 8.20% due 3/01/2006 179,446
BBB- Baa3 35,000 6.15% due 11/01/2008 38,085
BBB- Baa3 1,300,000 8.30% due 3/01/2010 1,559,880
BBB- Baa3 350,000 6.75% due 3/15/2018 378,004
A A2 500,000 Rockwell Collins, Inc., 4.75% due 12/01/2013 497,623
A- A3 400,000 Science Applications International, 5.50% due 7/01/2033 365,816
A A2 225,000 The Stanley Works, 4.90% due 11/01/2012 227,718
A- A3 870,000 Textron Financial Corporation, 2.75% due 6/01/2006 868,203
NR* Ba1 400,000 Timken Company, 6.75% due 8/21/2006 409,060
BBB- Baa3 325,000 Toll Brothers, Inc., 6.875% due 11/15/2012 358,371
BBB Baa2 830,000 Weyerhaeuser Company, 5.95% due 11/01/2008 892,154
------------
31,923,017
22 MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003
Schedule of Investments (continued)
Master Aggregate Bond Index Series (in U.S. dollars)
S&P Moody's Face
Industry+ Ratings@ Ratings@ Amount Corporate Bonds & Notes Value
================================================================================================================================
Industrial--Other-- AA A1 $ 441,000 Abbott Laboratories, 5.625% due 7/01/2006 $ 475,679
2.2% A+ A1 285,000 Archer-Daniels-Midland, 5.935% due 10/01/2032 286,342
BBB Baa2 200,000 BRE Properties, 5.95% due 3/15/2007 214,419
BBB+ Baa2 1,205,000 Burlington Northern Santa Fe Corporation, 6.75% due 7/15/2011 1,365,992
BBB Baa2 490,000 CSX Corporation, 6.75% due 3/15/2011 551,612
BBB Baa2 650,000 Centerpoint Properties, 4.75% due 8/01/2010 652,722
Continental Airlines, Inc.:
AAA Aaa 1,140,000 6.563% due 2/15/2012 1,212,284
BBB Ba3 250,000 7.875% due 7/02/2018 251,467
A- A3 480,000 Dow Chemical, 5.75% due 11/15/2009 513,912
AA Aa3 680,000 Eli Lilly & Company, 7.125% due 6/01/2025 803,838
A A2 540,000 General Dynamics Corporation, 3% due 5/15/2008 527,237
BBB Baa2 400,000 HRPT Properties Trust, 5.75% due 2/15/2014 401,085
BBB Baa2 500,000 Harris Corporation, 6.35% due 2/01/2028 533,971
BBB+ Baa2 350,000 Health Care Properties Investors Inc., 6.45% due 6/25/2012 379,552
BBB Baa3 700,000 ICI North America, 8.875% due 11/15/2006 806,088
A- Baa2 550,000 Inversiones CMPC SA, 4.875% due 6/18/2013 (a) 528,830
AAA Aaa 2,500,000 J. Paul Getty Trust, 5.875% due 10/01/2033 2,474,595
NR* A3 2,034,000 Morgan Stanley (TRACER), 5.838% due 3/01/2007 (a)(c)(d) 2,186,733
BBB Baa2 235,000 New Plan Excel Realty Trust, 5.875% due 6/15/2007 254,956
Norfolk Southern Corporation:
BBB Baa1 675,000 6.75% due 2/15/2011 768,706
BBB Baa1 220,000 7.25% due 2/15/2031 249,131
BBB Baa3 237,000 Northrop Grumman Corporation, 7.125% due 2/15/2011 274,111
AAA Aaa 420,000 Pfizer Inc., 5.625% due 2/01/2006 449,481
BBB+ Baa2 170,000 Placer Dome Inc., 6.375% due 3/01/2033 172,084
Praxair, Inc.:
A- A3 235,000 6.50% due 3/01/2008 261,120
A- A3 135,000 6.375% due 4/01/2012 150,210
A- A3 70,000 3.95% due 6/01/2013 65,588
BBB- Baa3 715,000 Rock-Tenn Company, 5.625% due 3/15/2013 719,266
A Baa1 400,000 Southwest Airlines Co., 8% due 3/01/2005 424,511
NR* Baa2 1,080,000 Union Pacific Corp., 5.75% due 10/15/2007 1,165,497
A A2 455,000 United Technology Corporation, 6.35% due 3/01/2011 508,327
------------
19,629,346
================================================================================================================================
Industrial-- AOL Time Warner Inc.:
Services--3.2% BBB+ Baa1 1,880,000 6.875% due 5/01/2012 2,115,573
BBB+ Baa1 400,000 7.70% due 5/01/2032 466,842
BBB- Baa3 600,000 Aramark Services Inc., 6.375% due 2/15/2008 640,114
BBB+ Baa2 350,000 Berkley (WR) Corporation, 5.125% due 9/30/2010 353,739
Carnival Corporation:
A- A3 380,000 3.75% due 11/15/2007 (a) 380,679
A- A3 225,000 6.15% due 4/15/2008 245,018
BBB+ Baa2 600,000 Celulosa Arauco y Constitucion SA, 5.125% due 7/09/2013 586,979
BBB Baa1 815,000 Cendant Corporation, 6.875% due 8/15/2006 894,171
Citizens Communications Company:
BBB Baa2 1,210,000 8.50% due 5/15/2006 1,321,152
BBB Baa2 275,000 7.625% due 8/15/2008 301,112
BBB- Baa3 450,000 Clear Channel Communications, Inc., 7.25% due 10/15/2027 508,180
BBB Baa3 450,000 Comcast Cable Communications, 8.875% due 5/01/2017 578,921
Comcast Corporation:
BBB Baa3 550,000 5.85% due 1/15/2010 587,243
BBB Baa3 685,000 7.05% due 3/15/2033 745,152
BBB Baa2 350,000 Cox Communications Inc., 7.125% due 10/01/2012 403,695
Dayton Hudson Corp.:
A+ A2 888,000 10% due 1/01/2011 1,171,611
A+ A2 100,000 6.75% due 1/01/2028 109,201
MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003 23
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued)
Master Aggregate Bond Index Series (in U.S. dollars)
S&P Moody's Face
Industry+ Ratings@ Ratings@ Amount Corporate Bonds & Notes Value
================================================================================================================================
Industrial--Services Federated Department Stores:
(concluded) BBB+ Baa1 $ 25,000 6.625% due 9/01/2008 $ 27,681
BBB+ Baa1 135,000 6.30% due 4/01/2009 148,106
BBB+ Baa1 270,000 6.625% due 4/01/2011 303,175
A+ A1 435,000 First Data Corporation, 6.375% due 12/15/2007 481,683
BBB+ Baa2 470,000 Fiserv, Inc., 4% due 4/15/2008 467,786
A A2 375,000 Gannett Company Inc., 5.50% due 4/01/2007 406,464
A- A3 610,000 Hewlett-Packard Company, 3.625% due 3/15/2008 611,036
A- A3 235,000 Kohl's Corporation, 6.30% due 3/01/2011 263,702
Liberty Media Corporation:
BBB- Baa3 810,000 7.875% due 7/15/2009 938,287
BBB- Baa3 655,000 5.70% due 5/15/2013 662,379
BBB+ Baa1 450,000 Limited Brands Inc., 6.125% due 12/01/2012 482,318
Lowe's Companies Inc.:
A A2 250,000 6.875% due 2/15/2028 281,821
A A2 65,000 6.50% due 3/15/2029 70,326
BBB Ba1 360,000 Manor Care, Inc., 6.25% due 5/01/2013 379,350
News America Incorporated:
BBB- Baa3 550,000 7.25% due 5/18/2018 624,478
BBB- Baa3 340,000 7.28% due 6/30/2028 379,012
BBB Baa3 300,000 Norske Skog Industrier ASA, 6.125% due 10/15/2015 (a) 303,783
BBB+ Baa3 300,000 RLI Corp., 5.95% due 1/15/2014 298,725
A- A3 1,700,000 Reed Elsevier Capital, 6.125% due 8/01/2006 1,852,160
BBB Baa3 200,000 Tele-Communications Inc., 9.80% due 2/01/2012 260,889
The Thomson Corporation:
A- A3 345,000 5.75% due 2/01/2008 374,072
A- A3 325,000 4.25% due 8/15/2009 328,123
Time Warner Inc.:
BBB+ Baa1 1,020,000 7.75% due 6/15/2005 1,100,622
BBB+ Baa1 352,000 6.875% due 6/15/2018 387,091
BBB- Baa3 715,000 USA Interactive, 7% due 1/15/2013 788,343
AAA Aaa 570,000 United Parcel Service, 8.375% due 4/01/2020 735,005
BBB- Baa3 500,000 Univision Communication Inc., 7.85% due 7/15/2011 594,420
A- A3 510,000 Viacom Inc., 7.75% due 6/01/2005 551,447
AA Aa2 510,000 Wal-Mart Stores, Inc., 6.875% due 8/10/2009 587,545
Waste Management Inc.:
BBB Baa3 375,000 6.50% due 5/15/2004 381,309
BBB Baa3 1,250,000 7.375% due 8/01/2010 1,444,413
A Baa1 600,000 Wyeth, 5.50% due 2/01/2014 606,849
------------
28,531,782
================================================================================================================================
Utilities-- A A2 315,000 ALLTEL Corporation, 7% due 7/01/2012 357,667
Communications-- BBB Baa2 450,000 AT&T Corporation, 8.05% due 11/15/2011 517,941
1.9% BBB Baa2 825,000 AT&T Wireless Services Inc., 8.75% due 3/01/2031 1,017,909
A+ A1 900,000 Ameritech Capital Funding, 6.45% due 1/15/2018 973,318
A+ A1 514,000 BellSouth Corporation, 6% due 10/15/2011 557,299
A- Baa1 970,000 British Telecom PLC, 8.375% due 12/15/2010 1,180,370
BBB+ Baa2 400,000 CenturyTel Inc., 7.875% due 8/15/2012 473,770
Deutsche Telekom International Finance:
BBB+ Baa3 1,565,000 8.25% due 6/15/2005 1,697,642
BBB+ Baa3 510,000 8.50% due 6/15/2010 616,649
BBB+ Baa3 450,000 8.75% due 6/15/2030 574,843
France Telecom:
BBB Baa3 700,000 9.25% due 3/01/2011 840,757
BBB Baa3 650,000 10% due 3/01/2031 863,639
GTE Corporation:
A+ A3 1,100,000 6.84% due 4/15/2018 1,202,831
A+ A3 255,000 6.94% due 4/15/2028 267,547
BBB+ Baa3 200,000 Intelsat, Ltd., 6.50% due 11/01/2013 (a) 208,679
24 MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003
Schedule of Investments (continued)
Master Aggregate Bond Index Series (in U.S. dollars)
S&P Moody's Face
Industry+ Ratings@ Ratings@ Amount Corporate Bonds & Notes Value
================================================================================================================================
Utilities-- BBB+ Baa1 $ 790,000 Koninklijke (KPN) NV, 8% due 10/01/2010 $ 945,051
Communications Sprint Capital Corporation:
(concluded) BBB- Baa3 1,091,000 8.375% due 3/15/2012 1,274,070
BBB- Baa3 600,000 6.90% due 5/01/2019 612,923
BBB+ Baa2 750,000 Telecom Italia Capital SA, 5.25% due 11/15/2013 (a) 751,493
Verizon Global Funding Corporation:
A+ A2 700,000 6.75% due 12/01/2005 759,549
A+ A2 765,000 7.375% due 9/01/2012 886,450
A+ A2 85,000 Verizon New York Inc., 6.875% due 4/01/2012 94,053
A+ A3 80,000 Verizon Wireless Capital LLC, 5.375% due 12/15/2006 85,368
------------
16,759,818
================================================================================================================================
Utilities--Gas & BBB+ Baa1 200,000 AGL Capital Corporation, 4.45% due 4/15/2013 189,947
Electric--1.4% A- Baa2 270,000 AmerenEnergy Generating, 7.95% due 6/01/2032 325,254
A A2 300,000 Australian Gas Light Company, 5.30% due 9/25/2015 (a) 303,555
BBB+ A2 605,000 Baltimore Gas & Electric, 5.20% due 6/15/2033 549,705
BBB Baa1 115,000 Cincinnati Gas & Electric Company, 5.70% due 9/15/2012 120,989
BBB+ Baa1 500,000 Commonwealth Edison Company, 6.95% due 7/15/2018 565,621
BBB Baa2 135,000 Conectiv Inc., 5.30% due 6/01/2005 140,282
A A1 550,000 Consolidated Edison Company of New York, 5.10% due 6/15/2033 497,361
BBB- Baa3 495,000 Consumers Energy, 4.25% due 4/15/2008 (a) 499,944
Dominion Resources Inc.:
BBB+ Baa1 541,000 8.125% due 6/15/2010 648,957
BBB+ Baa1 360,000 6.30% due 3/15/2033 364,691
BBB+ Baa2 725,000 Entergy Mississippi Inc., 5.15% due 2/01/2013 709,476
BBB+ Baa2 120,000 Exelon Corporation, 6.75% due 5/01/2011 134,030
A- A2 170,000 FPL Group Capital Inc., 7.625% due 9/15/2006 190,855
BB+ Baa2 920,000 FirstEnergy Corp., 6.45% due 11/15/2011 953,532
A Aa3 170,000 Florida Power and Light, 6.875% due 12/01/2005 184,946
A A2 160,000 Georgia Power Company, 5.125% due 11/15/2012 163,229
BBB- Baa3 510,000 MidAmerican Energy Holdings, 5.875% due 10/01/2012 534,750
BBB Baa2 200,000 New York State Electric & Gas, 5.75% due 5/01/2023 190,286
BBB A3 200,000 Ohio Power Company, 6.60% due 2/15/2033 214,633
BBB Baa1 530,000 Oncor Electric Delivery, 6.375% due 5/01/2012 582,463
BBB Baa2 200,000 Pepco Holdings Inc., 4% due 5/15/2010 194,325
BBB- Baa2 635,000 Progress Energy Inc., 7.10% due 3/01/2011 715,406
BBB- Baa3 350,000 Public Service Company of New Mexico, 4.40% due 9/15/2008 354,423
A- A3 745,000 Public Service Electric & Gas, 5.125% due 9/01/2012 761,222
A- A1 170,000 South Carolina Electric & Gas Company, 6.70% due 2/01/2011 192,464
A+ A1 385,000 Southern California Gas Company, 4.80% due 10/01/2012 387,357
BBB+ Baa1 590,000 Southern Power Company, 6.25% due 7/15/2012 637,501
BBB Baa2 150,000 TGT Pipeline, LLC, 5.20% due 6/01/2018 140,450
BBB+ Baa1 300,000 Texas Gas Transmission Corporation, 4.60% due 6/01/2015 282,676
A- A1 277,000 Union Electric Company, 5.25% due 9/01/2012 285,526
A- A1 280,000 Wisconsin Electric Power, 5.625% due 5/15/2033 271,909
------------
12,287,765
================================================================================================================================
MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003 25
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued)
Master Aggregate Bond Index Series (in U.S. dollars)
S&P Moody's Face
Industry+ Ratings@ Ratings@ Amount Corporate Bonds & Notes Value
================================================================================================================================
Yankee--Corporate-- BHP Finance USA Limited:
2.2% A+ A2 $ 105,000 4.80% due 4/15/2013 $ 105,268
A+ A2 365,000 6.42% due 3/01/2026 390,047
A- A1 200,000 BSCH Issuances Ltd., 7.625% due 9/14/2010 237,085
A- Baa3 730,000 Brascan Corporation, 5.75% due 3/01/2010 772,811
BBB+ Baa1 730,000 Burlington Resources Finance, 6.50% due 12/01/2011 815,276
BBB+ Baa1 500,000 Canadian National Railways, 6.375% due 10/15/2011 551,818
A A2 535,000 Corporacion Andina de Fomento, 6.875% due 3/15/2012 593,616
A- A2 120,000 Corporacion Nacional del Cobre (Codelco), 6.375%
due 11/30/2012 (a) 129,821
A- Baa1 250,000 EnCana Corp., 4.75% due 10/15/2013 246,468
A+ A1 1,160,000 Hydro-Quebec, 8.875% due 3/01/2026 1,615,870
BBB- Baa3 300,000 Inco Limited, 7.75% due 5/15/2012 349,968
Inter-American Development Bank:
AAA Aaa 975,000 5.75% due 2/26/2008 1,070,613
AAA NR* 1,000,000 6.80% due 10/15/2025 1,159,338
International Bank for Reconstruction and Development:
AAA Aaa 2,090,000 4.75% due 4/30/2004 2,114,574
AAA Aaa 250,000 3.50% due 10/22/2004 254,366
AAA Aaa 530,000 KFW International Finance, 4.75% due 1/24/2007 568,554
A- A3 610,000 Korea Development Bank, 4.25% due 11/13/2007 621,042
AA- A1 570,000 National Australia Bank Ltd., 8.60% due 5/19/2010 705,869
BBB Baa2 500,000 Nexen Inc., 5.05% due 11/20/2013 492,984
BBB- Baa3 1,165,000 Noranda Inc., 7% due 7/15/2005 1,231,242
A A2 950,000 Norsk Hydro A/S, 6.36% due 1/15/2009 1,055,013
Pemex Project Funding Master Trust:
BBB- Baa1 1,205,000 9.125% due 10/13/2010 1,430,938
BBB- Baa1 400,000 7.375% due 12/15/2014 427,000
BBB- Baa1 40,000 8.625% due 2/01/2022 44,300
BBB+ Baa2 345,000 Potash Corporation of Saskatchewan, 7.75% due 5/31/2011 405,087
A+ A1 565,000 Unilever Capital Corporation, 7.125% due 11/01/2010 656,870
Vodafone Group PLC:
A A2 530,000 7.75% due 2/15/2010 628,153
A A2 185,000 7.875% due 2/15/2030 227,263
A+ A1 350,000 Westpac Banking Corporation, 4.625% due 6/01/2018 326,058
------------
19,227,312
----------------------------------------------------------------------------------------------------------
Total Corporate Bonds & Notes (Cost--$224,726,827)--26.6% 234,850,063
==========================================================================================================
State Municipal Bonds
================================================================================================================================
Texas--0.1% A A1 250,000 Harris County, Texas, Industrial Development Corporation,
Solid Waste Disposal Revenue Bonds (Deer Park Refining LP),
5.683% due 3/01/2023 254,208
AA Aa3 500,000 Illinois State, GO, 5.10% due 6/01/2033 459,735
----------------------------------------------------------------------------------------------------------
Total Municipal Bonds (Cost--$696,181)--0.1% 713,943
==========================================================================================================
26 MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003
Schedule of Investments (concluded)
Master Aggregate Bond Index Series (in U.S. dollars)
Face
Amount Short-Term Investments Value
===============================================================================================================================
Commercial $40,000,000 CBA (Delaware) Finance, 1.08% due 1/14/2004 $ 39,985,600
Paper***
=========================================================================================================
Repurchase 40,200,000 Morgan Stanley & Co., Inc., purchased on 12/31/2003 to
Agreements yield 0.92% to 1/02/2004, repurchase price $40,202,055,
collaterized by Federal Home Loan Mortgage Corporation,
5% due 12/01/2018 40,200,000
=========================================================================================================
Shares
Held
=========================================================================================================
126,137,000 Merrill Lynch Premier Institutional Fund (e)(f) 126,137,000
---------------------------------------------------------------------------------------------------------
Total Short-Term Investments (Cost--$206,322,600)--23.3% 206,322,600
===============================================================================================================================
Total Investments (Cost--$1,046,945,205)--121.0% 1,068,562,794
Liabilities in Excess of Other Assets--(21.0%) (185,535,909)
--------------
Net Assets++--100.0% $ 883,026,885
==============
@ Ratings of issues shown are unaudited.
+ For Series compliance purposes, "Industry" means any one or more of the
industry sub-classifications used by one or more widely recognized market
indexes or ratings group indexes, and/or as defined by Series management.
This definition may not apply for purposes of this report, which may
combine such industry sub-classifications for reporting ease. These
industry classifications are unaudited.
++ Swap contracts entered into as of December 31, 2003 were as follows:
--------------------------------------------------------------------------
Notional Unrealized
Amount Appreciation
--------------------------------------------------------------------------
Receive a variable return equal to
Lehman Brothers CMBS Investment
Grade Index Total Return and pay
floating rate based on 1-month USD
LIBOR, minus .55%
Broker, Morgan Stanley Capital
Services Inc.
Expires March 2004 $22,000,000 --
--------------------------------------------------------------------------
* Not Rated.
** Mortgage-Backed Securities 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.
*** Commercial Paper is traded on a discount basis; the interest rate shown
reflects the discount rate paid at the time of purchase by the Series.
(a) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(b) The security is a perpetual bond and has no definite maturity date.
(c) Floating rate note.
(d) Tradable Custodial Receipts (TRACERS).
(e) Investments in companies considered to be an affiliate of the Series (such
companies are defined as "Affiliated Companies" in Section 2(a)(3) of the
Investment Company Act of 1940) are as follows:
--------------------------------------------------------------------------
Interest/
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series, LLC $ (303,426) $ 10,133
Money Market Series
Merrill Lynch Premier
Institutional Fund 125,867,842 $ 68,214
--------------------------------------------------------------------------
(f) Security was purchased with the cash proceeds from securities loans.
(g) Includes a "to-be-announced" (TBA) transaction. The Series has committed
to selling securities for which all specific information is not available
at this time.
See Notes to Financial Statements.
MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003 27
[LOGO] Merrill Lynch Investment Managers
Statement of Assets and Liabilities Master Aggregate Bond Index Series
As of December 31, 2003
=========================================================================================================
Assets
- ---------------------------------------------------------------------------------------------------------
Investments, at value (including securities loaned of
$122,218,764) (identified cost--$1,046,945,205) ... $1,068,562,794
Cash ................................................ 53,842
Receivables:
Interest ......................................... $ 8,867,285
Securities sold .................................. 2,237,387
Contributions .................................... 974,169
Swaps ............................................ 246,889
Paydowns ......................................... 4,800 12,330,530
-----------
Prepaid expenses and other assets ................... 42,939
--------------
Total assets ........................................ 1,080,990,105
--------------
=========================================================================================================
Liabilities
- ---------------------------------------------------------------------------------------------------------
Collateral on securities loaned, at value ........... 126,137,000
Payables:
Securities purchased ............................. 70,475,145
Withdrawals ...................................... 491,955
Other affiliates ................................. 8,775
Investment adviser ............................... 1,832 70,977,707
-----------
Accrued expenses and other liabilities .............. 848,513
--------------
Total liabilities ................................... 197,963,220
--------------
=========================================================================================================
Net Assets
- ---------------------------------------------------------------------------------------------------------
Net assets .......................................... $ 883,026,885
--------------
=========================================================================================================
Net Assets Consist of
- ---------------------------------------------------------------------------------------------------------
Investors' capital .................................. $ 861,409,296
Unrealized appreciation on investments--net ......... 21,617,589
--------------
Net Assets .......................................... $ 883,026,885
==============
See Notes to Financial Statements.
28 MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003
Statement of Operations Master Aggregate Bond Index Series
For the Year Ended December 31, 2003
======================================================================================================
Investment Income
- ------------------------------------------------------------------------------------------------------
Interest ............................................. $ 34,422,899
Securities lending--net .............................. 78,347
------------
Total income ......................................... 34,501,246
------------
======================================================================================================
Expenses
- ------------------------------------------------------------------------------------------------------
Professional fees .................................... $ 156,905
Accounting services .................................. 143,424
Custodian fees ....................................... 90,906
Investment advisory fees ............................. 80,613
Pricing fees ......................................... 13,531
Trustees' fees and expenses .......................... 9,967
Printing and shareholder reports ..................... 9,028
Other ................................................ 17,547
---------
Total expenses ....................................... 521,921
------------
Investment income--net ............................... 33,979,325
------------
======================================================================================================
Realized & Unrealized Gain (Loss) on Investments--Net
- ------------------------------------------------------------------------------------------------------
Realized gain from investments--net .................. 2,279,499
Change in unrealized appreciation on investments--net (5,378,419)
------------
Total realized and unrealized loss on investments--net (3,098,920)
------------
Net Increase in Net Assets Resulting from Operations . $ 30,880,405
============
See Notes to Financial Statements.
MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003 29
[LOGO] Merrill Lynch Investment Managers
Statements of Changes in Net Assets Master Aggregate Bond Index Series
For the Year Ended
December 31,
-------------------------------
Increase (Decrease) in Net Assets: 2003 2002
==================================================================================================================
Operations
- ------------------------------------------------------------------------------------------------------------------
Investment income--net ..................................... $ 33,979,325 $ 28,432,807
Realized gain on investments--net .......................... 2,279,499 3,541,654
Change in unrealized appreciation on investments--net ...... (5,378,419) 20,353,079
-------------------------------
Net increase in net assets resulting from operations ....... 30,880,405 52,327,540
-------------------------------
==================================================================================================================
Capital Transactions
- ------------------------------------------------------------------------------------------------------------------
Proceeds from contributions ................................ 357,719,192 414,370,731
Fair value of withdrawals .................................. (222,140,755) (216,281,419)
-------------------------------
Net increase in net assets derived from capital transactions 135,578,437 198,089,312
-------------------------------
==================================================================================================================
Net Assets
- ------------------------------------------------------------------------------------------------------------------
Total increase in net assets ............................... 166,458,842 250,416,852
Beginning of year .......................................... 716,568,043 466,151,191
-------------------------------
End of year ................................................ $ 883,026,885 $ 716,568,043
===============================
See Notes to Financial Statements
30 MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003
Financial Highlights Master Aggregate Bond Index Series
For the Year Ended December 31,
The following ratios have been derived ------------------------------------------------------------------
from information provided in the financial statements. 2003 2002 2001 2000 1999
================================================================================================================================
Total Investment Return*
- --------------------------------------------------------------------------------------------------------------------------------
Total investment return ................ 3.92% 10.13% 8.07% -- --
==================================================================
================================================================================================================================
Ratios to Average Net Assets
- --------------------------------------------------------------------------------------------------------------------------------
Expenses ............................... .06% .08% .13% .14% .10%
==================================================================
Investment income--net ................. 4.22% 5.37% 5.93% 6.62% 6.30%
==================================================================
================================================================================================================================
Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 883,027 $ 716,568 $ 466,151 $ 308,345 $ 406,148
==================================================================
Portfolio turnover ..................... 136.76% 112.18% 144.23% 43.24% 61.82%
==================================================================
* Total return is required to be disclosed for fiscal years beginning after
December 15, 2000.
See Notes to Financial Statements.
MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003 31
[LOGO] Merrill Lynch Investment Managers
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, as amended, and is organized as a Delaware statutory 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 -- Equity securities that are held by the Series
that are traded on stock exchanges or the Nasdaq National Market are valued at
the last sale price or official close price on the exchange, as of the close of
business on the day the securities are being valued or, lacking any sales, at
the last available bid price for long positions, and at the last available ask
price for short positions. In cases where equity securities are traded on more
than one exchange, the securities are valued on the exchange designated as the
primary market by or under the authority of the Board of Trustees of the Trust.
Long positions traded in the over-the-counter ("OTC") market, Nasdaq Small Cap
or Bulletin Board are valued at the last available bid price or yield equivalent
obtained from one or more dealers or pricing services approved by the Board of
Trustees of the Trust. Short positions traded in the OTC market are valued at
the last available ask price. Portfolio securities that are traded both in the
OTC market and on a stock exchange are valued according to the broadest and most
representative market.
Options written are valued at the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last ask price.
Options purchased are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Swap agreements are valued daily based upon quotations from
market makers. Financial futures contracts and options thereon, which are traded
on exchanges, are valued at their last sale price as of the close of such
exchanges. Obligations with remaining maturities of 60 days or less are valued
at amortized cost unless the Investment Adviser believes that this method no
longer produces fair valuations.
Repurchase agreements are valued at cost plus accrued interest. The Series
employs pricing services to provide certain securities prices for the Series.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Trustees of the Trust, including valuations furnished by the
pricing services retained by the Series, which may use a matrix system for
valuations. The procedures of a pricing service and its valuations are reviewed
by the officers of the Series under the general supervision of the Trust's Board
of Trustees. Such valuations and procedures will be reviewed periodically by the
Board of Trustees of the Trust.
Generally, trading in foreign securities, as well as U.S. government securities
and money market instruments, is substantially completed each day at various
times prior to the close of business on the New York Stock Exchange ("NYSE").
The values of such securities used in computing the net assets of the Series are
determined as of such times. Foreign currency exchange rates also are generally
determined prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE that may not be reflected in the computation of the Series' net assets. If
events (for example, a company announcement, market volatility or a natural
disaster) occur during such periods that are expected to materially affect the
value of such securities, those securities may be valued at their fair value as
determined in good faith by the Trust's Board of Trustees or by the Investment
Adviser using a pricing service and/or procedures approved by the Trust's Board
of Trustees.
(b) Repurchase agreements -- The Series invests in U.S. government 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.
32 MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003
Notes to Financial Statements (continued) Master Aggregate Bond Index Series
(c) Derivative financial instruments -- The Series may engage in various
portfolio investment techniques to provide liquidity or as a proxy for a direct
investment in securities underlying the Series' index. Losses may arise due to
changes in the value of the contract or if the counterparty does not perform
under the contract.
o Financial futures contracts -- The Series may purchase or sell financial
futures contracts and options on such futures contracts. Futures contracts
are contracts for delayed delivery of securities at a specific future date
and at a specific price or yield. 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 may 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.
o Swaps -- The Series may enter into swap agreements, which are
over-the-counter contracts in which the Series and a counterparty agree to
make periodic net payments on a specified notional amount. The net
payments can be made for a set period of time or may be triggered by a
pre-determined credit event. The net periodic payments may be based on a
fixed or variable interest rate; the change in market value of a specified
security, basket of securities, or index; or the return generated by a
security.
(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. Therefore, no Federal income tax
provision is required. It is intended that the Series' assets will be managed so
an investor in the Series 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. The
Series amortizes all premiums and discounts on debt securities.
(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.
MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003 33
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (continued) Master Aggregate Bond Index Series
(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. The
market value of the loaned securities is determined at the close of business of
the Series and any additional required collateral is delivered to the Series on
the next business day. 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.
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. As of December 31, 2003, the Series lent securities with a value of
$8,714,195 to MLPF&S or its affiliates. Pursuant to that order, the Trust also
has retained Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an affiliate
of FAM, as the securities lending agent for a fee based on a share of the
returns on investment of cash collateral. MLIM, LLC 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 MLIM, LLC or in
registered money market funds advised by FAM or its affiliates. For the year
ended December 31, 2003, MLIM, LLC received $34,553 in securities lending agent
fees.
Merrill Lynch Trust Company, an indirect, wholly-owned subsidiary of ML & Co.,
is the Series' custodian.
For the year ended December 31, 2003, the Series reimbursed FAM $17,135 for
certain accounting services.
Certain officers and/or trustees of the Series are officers and/or directors of
FAM, PSI, and/or ML & Co.
34 MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003
Notes to Financial Statements (concluded) Master Aggregate Bond Index Series
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended December 31, 2003 were $1,227,220,099 and $1,064,425,864,
respectively.
Net realized gains for the year ended December 31, 2003 and net unrealized gains
as of December 31, 2003 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains Gains
- --------------------------------------------------------------------------------
Long-term investments .................... $ 1,834,546 $21,617,589
Financial futures contracts .............. 2,275 --
Swaps .................................... 442,678 --
------------------------------
Total .................................... $ 2,279,499 $21,617,589
==============================
As of December 31, 2003, net unrealized appreciation for Federal income tax
purposes aggregated $20,957,645, of which $22,736,016 related to appreciated
securities and $1,778,371 related to depreciated securities. At December 31,
2003, the aggregate cost of investments for Federal income tax purposes was
$1,047,605,149.
4. Short-Term Borrowings:
The Series, along with certain other funds managed by FAM and its affiliates, is
a party to a $500,000,000 credit agreement with Bank One, N.A. and certain other
lenders. 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. On November 28, 2003, the credit
agreement was renewed for one year under the same terms. The Series did not
borrow under the credit agreement during the year ended December 31, 2003.
MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003 35
[LOGO] Merrill Lynch Investment Managers
Independent Auditors' Report Master Aggregate Bond Index Series
To the Investors and Board of Trustees of
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
portfolios constituting the Quantitative Master Series Trust (the "Trust"), as
of December 31, 2003, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Trust's management. Our responsibility is to express
an opinion on these financial statements and 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 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 as of December 31, 2003, 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, the financial statements and financial highlights referred to
above 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, 2003, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and its financial highlights for each of the five years in the period then
ended, in conformity with accounting principles generally accepted in the United
States of America.
Deloitte & Touche LLP
Princeton, New Jersey
February 13, 2004
36 MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003
Officers and Directors/Trustees (unaudited)
Number of
Portfolios in Other Public
Fund Complex Directorships
Position(s) Length Overseen by Held by
Held with of Time Director/ Director/
Name Address & Age Fund/Trust Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Interested Director/Trustee
- ------------------------------------------------------------------------------------------------------------------------------------
Terry K. P.O. Box 9011 President 1999 to President and Chairman of the Merrill Lynch 123 Funds None
Glenn* Princeton, NJ and present Investment Managers, L.P. ("MLIM")/Fund Asset 160 Portfolios
08543-9011 Director/ and Management, L.P. ("FAM")--Advised Funds since
Age: 63 Trustee 1997 to 1999; Chairman (Americas Region) of MLIM from 2000
present to 2002; Executive Vice President of FAM and MLIM
(which terms as used herein include their corporate
predecessors) from 1983 to 2002; President of
FAM Distributors, Inc. ("FAMD") from 1986 to 2002
and Director thereof from 1991 to 2002; Executive
Vice President and Director of Princeton Services,
Inc. ("Princeton Services") from 1993 to 2002; of
Princeton Administrators, L.P. from 1989 to 2002;
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 acts as investment adviser. Mr. Glenn is an "interested person" as described in the Investment Company Act, of
the Fund based on his former positions with FAM, MLIM, FAMD, Princeton Services and 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.
====================================================================================================================================
Independent Directors/Trustees*
- ------------------------------------------------------------------------------------------------------------------------------------
Donald W. P.O. Box 9095 Director/ 2002 to Manager of The Burton Partnership, Limited 23 Funds ITC Delta-
Burton Princeton, NJ Trustee present Partnership since 1979; Managing General Partner 36 Portfolios Com, Inc.,
08543-9095 of the South Atlantic Venture Funds, Limited ITC Financial
Age: 59 Partnerships and Chairman of South Atlantic Services,
Private Equity Fund IV, Limited Partnership since Knology,
1983; Member of the Investment Advisory Council Inc., Pri-
of the Florida State Board of Administration Care, Inc.,
since 2001. Symbion, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
M. Colyer P.O. Box 9095 Director/ 2000 to James R. Williston Professor of Investment 24 Funds Cambridge
Crum Princeton, NJ Trustee present Management Emeritus, Harvard Business 37 Portfolios Bancorp
08543-9095 School since 1996; Chairman and Director of
Age: 71 Phaeton International, Ltd. from 1985 to present;
Director of Cambridge Bancorp since 1969.
- ------------------------------------------------------------------------------------------------------------------------------------
Laurie P.O. Box 9095 Director/ 2000 to Professor of Finance and Economics, Graduate 23 Funds None
Simon Princeton, NJ Trustee present School of Business, Columbia University since 36 Portfolios
Hodrick 08543-9095 1998; Associate Professor of Finance and
Age: 41 Economics, Graduate School of Business,
Columbia University from 1996 to 1998.
- ------------------------------------------------------------------------------------------------------------------------------------
David H. P.O. Box 9095 Director/ 2003 to Consultant with Putnam Investments since 1993 23 Funds None
Walsh Princeton, NJ Trustee present and employed in various capacities therewith from 36 Portfolios
08543-9095 1971 to 1992; Director of the National Audubon
Age: 62 Society since 2000; Director of the American
Museum of Fly Fishing since 1998.
------------------------------------------------------------------------------------------------------------------------
MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003 37
[LOGO] Merrill Lynch Investment Managers
Officers and Directors/Trustees (unaudited)(concluded)
Number of
Portfolios in Other Public
Fund Complex Directorships
Position(s) Length Overseen by Held by
Held with of Time Director/ Director/
Name Address & Age Fund/Trust Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Interested Directors/Trustees* (concluded)
- ------------------------------------------------------------------------------------------------------------------------------------
Fred G. P.O. Box 9095 Director/ 2000 to Managing Director of FGW Associates since 1997; 23 Funds Watson
Weiss Princeton, NJ Trustee present Vice President, Planning, Investment and Devel- 36 Portfolios Pharma-
08543-9095 opment of Warner Lambert Co. from 1979 to 1997; ceuticals,
Age: 62 Director of BTG International, PLC since 2001; Inc.
Director of KIMC Investment, Inc. since 2003;
Director of Osmotica Holdings Corp. AVV since 2003.
------------------------------------------------------------------------------------------------------------------------
* 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 since 1999;
Burke Princeton, NJ President present Senior Vice President and Treasurer of Princeton Services since 1999; Vice
08543-9011 and and President of FAMD since 1999; Director of MLIM Taxation since 1990.
Age: 43 Treasurer 1999 to
present
- ------------------------------------------------------------------------------------------------------------------------------------
Robert C. P.O. Box 9011 Senior Vice 1999 to President of MLIM and member of the Executive Management Committee of ML & Co.,
Doll, Jr. Princeton, NJ President present Inc. since 2001; Global Chief Investment Officer and Senior Portfolio Manager of
08543-9011 MLIM since 1999; Chief Investment Officer of Equities at Oppenheimer Funds, Inc.
Age: 49 from 1990 to 1999 and Chief Investment Officer thereof from 1998 to 1999; Executive
Vice President of Oppenheimer Funds, Inc. 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 from
Hewson Princeton, NJ President present 1994 to 2000.
08543-9011
Age: 52
- ------------------------------------------------------------------------------------------------------------------------------------
Frank P.O. Box 9011 Vice 2002 to Managing Director of MLIM and head of the Global Fixed Income Structured Asset Team
Viola Princeton, NJ President present since 2002; Director (Global Fixed Income) of MLIM from 2000 to 2001 and Vice
08543-9011 President from 1997 to 2000.
Age: 39
- ------------------------------------------------------------------------------------------------------------------------------------
Brian D. P.O. Box 9011 Secretary 2003 to Vice President (Legal Advisory) of MLIM since 2002; Attorney with Reed Smith from
Stewart Princeton, NJ present 2001 to 2002; Attorney with Saul Ewing from 1999 to 2001.
08543-9011
Age: 34
------------------------------------------------------------------------------------------------------------------------
* Officers of the Fund serve at the pleasure of the Board of Directors/Trustees.
- ------------------------------------------------------------------------------------------------------------------------------------
Further information about the Fund's Officers and Directors is available in the Fund's Statement of Additional
Information, which can be obtained without charge by calling 1-800-MER-FUND.
- ------------------------------------------------------------------------------------------------------------------------------------
Custodian
Merrill Lynch Trust Company, FSB
1300 Merrill Lynch Drive
3rd Floor -- MSC 0303
Pennington, NJ 08534
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
38 MERRILL LYNCH AGGREGATE BOND INDEX FUND DECEMBER 31, 2003
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
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.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2)
on www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
website at http://www.sec.gov.
Merrill Lynch Index Funds, Inc.
Box 9011
Princeton, NJ
08543-9011
#Index 1 -- 12/03
Item 2 - Code of Ethics - The registrant has adopted 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
and principal accounting officer, or persons performing similar
functions. A copy of the code of ethics is available without charge
upon request by calling toll-free 1-800-MER-FUND (1-800-637-3863).
Item 3 - Audit Committee Financial Expert - The registrant's board of directors
has determined that (i) the registrant has the following audit
committee financial experts serving on its audit committee and (ii)
each audit committee financial expert is independent: (1) Donald W.
Burton, (2) M. Colyer Crum, (3) Laurie Simon Hodrick, (4) David H.
Walsh and (5) Fred G. Weiss.
The registrant's board of directors has determined that Laurie Simon
Hodrick and M. Colyer Crum qualify as financial experts pursuant to
Item 3(c)(4) of Form N-CSR.
Ms. Hodrick has a thorough understanding of generally accepted
accounting principals, financial statements, and internal controls and
procedures for financial reporting. Ms. Hodrick earned a Ph.D. in
economics and has taught courses in finance for over 15 years. Her
M.B.A.-level course centers around the evaluation and analysis of
firms' corporate financial statements. She has also taught in financial
analysts' training programs. Ms. Hodrick has also worked with several
prominent corporations in connection with the analysis of financial
forecasts and projections and analysis of the financial statements of
those companies, serving on the Financial Advisory Council of one of
these major corporations. She has also served as the Treasurer and
Finance Chair of a 501(c)(3) organization. Ms. Hodrick has published a
number of articles in leading economic and financial journals and is
the associate editor of two leading finance journals.
M. Colyer Crum also possesses a thorough understanding of generally
accepted accounting principals, financial statements, and internal
controls and procedures for financial reporting through a combination
of education and experience. Professor Crum was a professor of
investment management at the Harvard Business School for 25 years. The
courses taught by Professor Crum place a heavy emphasis on the analysis
of underlying company financial statements with respect to stock
selection and the analysis of credit risk in making loans. Professor
Crum has also served on a number of boards of directors and has served
on the audit committees, and in some cases chaired the audit committee,
for several major corporations and financial institutions. For two such
organizations, Professor Crum has performed extensive investment
analysis of financial statements in connection with investment
management decisions. From these experiences, he has gained significant
experience with the establishment of reserves and accounting policies,
differences between U.S. GAAP and Canadian GAAP and executive
compensation issues.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - 2003 -- $46,000 2002 -- $50,900
(b) Audit-Related Fees - 2003 -- $12,000 2002 -- $22,500
The nature of the services includes assurance
and related services reasonably related to the
performance of the audit of financial
statements not included in Audit Fees above.
(c) Tax Fees - 2003 -- $24,200 2002 -- $26,900
The nature of the services includes tax compliance, tax
advice and tax planning.
(d) All Other Fees - 2003 -- $0 2002 -- $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of
services. Audit, audit-related and tax compliance services
provided to the registrant on an annual basis require specific
pre-approval by the Committee. The Committee also must approve
other non-audit services provided to the registrant and those
non-audit services provided to the registrant's affiliated
service providers that relate directly to the operations and the
financial reporting of the registrant. Certain of these
non-audit services that the Committee believes are a) consistent
with the SEC's auditor independence rules and b) routine and
recurring services that will not impair the independence of the
independent accountants may be approved by the Committee without
consideration on a specific case-by-case basis ("general
pre-approval"). However, such services will only be deemed
pre-approved provided that any individual project does not
exceed $5,000 attributable to the registrant or $50,000 for the
project as a whole. Any proposed services exceeding the
pre-approved cost levels will require specific pre-approval by
the Committee, as will any other services not subject to general
pre-approval (e.g., unanticipated but permissible services). The
Committee is informed of each service approved subject to
general pre-approval at the next regularly scheduled in-person
board meeting.
(e)(2) 0%
(f) N/A
(g) 2003 -- $18,690,437 2002 -- $17,012,158
(h) The registrant's audit committee has considered that the provision
of non-audit services that were rendered to the registrant's
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.
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Reserved
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable
Item 8 - Reserved
Item 9 - Controls and Procedures
9(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to the
filing date of this report.
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 attached hereto
10(a) - Not Applicable
10(b) - 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 and Master Aggregate Bond Index
Series
By: /s/ Terry K. Glenn
----------------------------------
Terry K. Glenn,
President of
Merrill Lynch Aggregate Bond Index Fund and Master Aggregate Bond
Index Series
Date: February 23, 2004
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 and Master Aggregate Bond
Index Series
Date: February 23, 2004
By: /s/ Donald C. Burke
----------------------------------
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch Aggregate Bond Index Fund and Master Aggregate Bond
Index Series
Date: February 23, 2004