-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C2gvubgCAPwufCPCMd5REKaYU52SnMYPDqqOJBHQuAGw8mGxnC4JxsM8NvQP+6T0 8rzYS30vacQZjjbbw/2C4g== 0001193805-02-000122.txt : 20021223 0001193805-02-000122.hdr.sgml : 20021223 20021223151254 ACCESSION NUMBER: 0001193805-02-000122 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20021031 FILED AS OF DATE: 20021223 EFFECTIVENESS DATE: 20021223 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MUNIYIELD QUALITY FUND INC CENTRAL INDEX KEY: 0000890196 IRS NUMBER: 223170744 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-06660 FILM NUMBER: 02866801 BUSINESS ADDRESS: STREET 1: 800 SCUDDER MILL ROAD CITY: PLAINSBORO STATE: NJ ZIP: 08536 BUSINESS PHONE: 6092822800 MAIL ADDRESS: STREET 1: P O BOX 9011 CITY: PRINCETON STATE: NJ ZIP: 08543-9011 N-30D 1 e200063_n-30d.txt ANNUAL REPORT [LOGO] Merrill Lynch Investment Managers Annual Report October 31, 2002 MuniYield Quality Fund, Inc. www.mlim.ml.com MUNIYIELD QUALITY FUND, INC. The Benefits and Risks of Leveraging MuniYield Quality Fund, Inc. utilizes leveraging to seek to enhance the yield and net asset value of its Common Stock. However, these objectives cannot be achieved in all interest rate environments. To leverage, the Fund issues Preferred Stock, which pays dividends at prevailing short-term interest rates, and invests the proceeds in long-term municipal bonds. The interest earned on these investments is paid to Common Stock shareholders in the form of dividends, and the value of these portfolio holdings is reflected in the per share net asset value of the Fund's Common Stock. However, in order to benefit Common Stock shareholders, the yield curve must be positively sloped; that is, short-term interest rates must be lower than long-term interest rates. At the same time, a period of generally declining interest rates will benefit Common Stock shareholders. If either of these conditions change, then the risks of leveraging will begin to outweigh the benefits. To illustrate these concepts, assume a fund's Common Stock capitalization of $100 million and the issuance of Preferred Stock for an additional $50 million, creating a total value of $150 million available for investment in long-term municipal bonds. If prevailing short-term interest rates are approximately 3% and long-term interest rates are approximately 6%, the yield curve has a strongly positive slope. The fund pays dividends on the $50 million of Preferred Stock based on the lower short-term interest rates. At the same time, the fund's total portfolio of $150 million earns the income based on long-term interest rates. Of course, increases in short-term interest rates would reduce (and even eliminate) the dividends on the Common Stock. In this case, the dividends paid to Preferred Stock shareholders are significantly lower than the income earned on the fund's long-term investments, and therefore the Common Stock shareholders are the beneficiaries of the incremental yield. However, if short-term interest rates rise, narrowing the differential between short-term and long-term interest rates, the incremental yield pickup on the Common Stock will be reduced or eliminated completely. At the same time, the market value of the fund's Common Stock (that is, its price as listed on the New York Stock Exchange) may, as a result, decline. Furthermore, if long-term interest rates rise, the Common Stock's net asset value will reflect the full decline in the price of the portfolio's investments, since the value of the fund's Preferred Stock does not fluctuate. In addition to the decline in net asset value, the market value of the fund's Common Stock may also decline. As a part of its investment strategy, the Fund may invest in certain securities whose potential income return is inversely related to changes in a floating interest rate ("inverse floaters"). In general, income on inverse floaters will decrease when short-term interest rates increase and increase when short-term interest rates decrease. Investments in inverse floaters may be characterized as derivative securities and may subject the Fund to the risks of reduced or eliminated interest payments and losses of invested principal. In addition, inverse floaters have the effect of providing investment leverage and, as a result, the market value of such securities will generally be more volatile than that of fixed-rate, tax-exempt securities. To the extent the Fund invests in inverse floaters, the market value of the Fund's portfolio and the net asset value of the Fund's shares may also be more volatile than if the Fund did not invest in these securities. Swap Agreements The Fund may also invest in swap agreements, which are over-the-counter contracts in which one party agrees to make periodic payments based on the change in market value of a specified bond, basket of bonds, or index in return for periodic payments based on a fixed or variable interest rate or the change in market value of a different bond, basket of bonds or index. Swap agreements may be used to obtain exposure to a bond or market without owning or taking physical custody of securities. MuniYield Quality Fund, Inc., October 31, 2002 DEAR SHAREHOLDER For the year ended October 31, 2002, the Common Stock of MuniYield Quality Fund, Inc. earned $.916 per share income dividends, which included earned and unpaid dividends of $.079. This represents a net annualized yield of 6.01%, based on a year-end net asset value of $15.19 per share. During the same period, the total investment return of the Fund's Common Stock was +6.12%, based on a change in per share net asset value from $15.27 to $15.19, and assuming reinvestment of $.913 per share income dividends. For the six-month period ended October 31, 2002, the total investment return on the Fund's Common Stock was +5.63%, based on a change in per share net asset value from $14.85 to $15.19, and assuming reinvestment of $.459 per share income dividends. For the six-month period ended October 31, 2002, the Fund's Auction Market Preferred Stock had an average yield of 1.26% for Series A, 1.32% for Series B, 1.47% for Series C and 1.38% for Series D. The Municipal Market Environment During the six-month period ended October 31, 2002, the direction of long-term fixed income interest rates was driven as much by volatile U.S. equity markets and continued worldwide political tensions as by economic fundamentals. After rising steadily early in 2002, bond yields reversed course to move sharply lower throughout most of the period. Positive economic fundamentals repeatedly were overwhelmed by falling equity valuations and declines in investor confidence. U.S. gross domestic product (GDP) activity for the first quarter of 2002 measured at 5%, considerably above the level of economic growth seen at the end of 2001. During May and June, a number of economic indicators, such as housing activity, consumer spending and weekly unemployment claims, all pointed to at least a modest economic recovery by the end of 2002. However, steady dramatic declines in U.S. equity markets led the majority of investors to conclude that the Federal Reserve Board was unlikely to increase short-term interest rates for the remainder of the year. U.S. Treasury issue prices were also boosted by erupting Middle East and India/Pakistan conflicts that led many international investors to seek the safe-haven status of U.S. Treasury securities. By the end of June 2002, long-term U.S. Treasury bond yields had declined to 5.50%, a decline of almost 35 basis points (.35%) from their recent highs in mid-March. In late July, second quarter U.S. GDP growth was initially estimated at 1.1%. While subject to revision, this estimate suggested that continued declines in U.S. equity prices were negatively affecting not only consumer but business confidence as well and undermining much of the economic growth witnessed earlier this year. Some analysts extrapolated that recent weakness would continue, if not accelerate. This brought about forecasts that the Federal Reserve Board would soon be obliged to lower short-term interest rates both to offset equity market declines and boost consumer and business spending. The possibility of lower short-term interest rates helped push longer-term bond yields lower still during July and August. The dramatic decline in U.S. equity prices in late August and September triggered a significant fixed income rally as investors again sought the safe-haven status of U.S. Treasury securities. By the end of September, U.S. Treasury bond yields fell to 4.66%. Bolstered by an unexpected decline in the national unemployment rate to 5.6% in early October, U.S. equity markets staged a strong rally throughout much of the month. The Standard & Poor's 500 Index rose more than 8% for the month, triggered by stronger-than-expected earnings reports from a large number of companies, such as General Electric Company, International Business Machines Corporation and Microsoft Corporation. Bond prices continued to trade in an inverse relationship to equity prices. Consequently, as stocks rallied, bond yields rose in October, despite generally weak economic releases. During October, the U.S. housing sector remained quite robust, but retail sales and industrial production slowed. By October 31, 2002, long-term U.S. Treasury bond yields rose to almost 5%, a monthly increase of more than 30 basis points. During the past six months, the yield on 30-year U.S. Treasury bonds declined over 60 basis points. For the six-month period ended October 31, 2002, municipal bond prices also generally increased. Similar to their taxable counterparts, municipal bond yields rose in early 2002, largely on the expectation of short-term interest rate increases by the Federal Reserve Board. By late March, long-term municipal revenue bond yields, as measured by the Bond Buyer Revenue Bond Index, rose to 5.67%, their highest level in more than a year. During recent months, tax-exempt bond yields have generally declined largely in response to the positive fixed income environment engendered by falling equity valuations. The municipal bond market's price advances in tax-exempt issues, however, have not been able to keep pace with U.S. Treasury issues as municipal bonds cannot offer foreign investors the safe-haven status U.S. Treasury issues enjoy in periods of economic and financial instability. The municipal bond market's recent price advances have also been supported by the continued improvement in the tax-exempt market's technical position. Despite sizeable advances in the rate of new municipal bond issuance, investor demand has increased, allowing tax-exempt bond prices to rise. By the end of October 2002, long-term municipal revenue bond yields stood at 5.20%, a decline of more than 30 basis points during the past six months. Investor demand has remained very positive throughout the period. The Investment Company Institute reported that thus far in 2002, municipal bond fund net cash flows remained very strong at over $17.5 billion, up nearly 80% compared to the same period in 2001. Additionally, investors received from June to August 2002 approximately $75 billion from bond maturities, proceeds from early redemptions and coupon income. Given the current weakness in U.S. equity markets, much of these monies were likely reinvested in tax-exempt products. Perhaps more importantly, short-term municipal rates have continued to move lower in response to Federal Reserve Board actions. In reaction to Federal Reserve Board interest rate reductions, short-term municipal rates have declined to the 1% - 1.50% range. As interest rates have declined, investors have extended maturities to take advantage of the steep municipal bond yield curve. The significant income sacrifice incurred by remaining in cash reserves has resulted in ongoing strong demand for municipal securities, especially in the 5-year - 15-year maturity range. Recent performance by the tax-exempt market has been even more impressive considering the increase in new bond issuance seen thus far in 2002. Nationwide, municipalities have used present low interest rate levels both to refinance older debt and fund new capital projects. Over the past six months, more than $200 billion in new long-term municipal bonds was issued, an increase of nearly 40% compared to the same period in 2001. Nearly $100 billion in long-term tax-exempt securities was underwritten during the October quarter of 2002, an increase of over 40% compared to the October quarter of 2001 level. In the coming months, interest rates are likely to remain volatile, with an expected upward bias. However, until equity market conditions stabilize, interest rates should remain near their current historically low levels. While recent stock market declines appear to have negatively affected economic growth in recent months, business activity is likely to accelerate going forward. While governmental stimulus in response to the September 11, 2001 attacks has been significant, the recent 50 basis point decrease in interest rates by the Federal Reserve Board should provide additional incentive to the sluggish U.S. economy. The ongoing U.S. military response to worldwide terrorism has reduced a once-sizeable Federal surplus to a material deficit. Further military action in early 2003 would likely result in higher Federal spending, deficits and increased Treasury financing. Increased Federal borrowings can be expected to put upward pressure on interest rates going forward. Equity market declines helped push interest rates to lower levels than economic fundamentals alone would support. When U.S. equity markets stabilize and economic activity resumes, associated interest rate increases should not be extreme. Inflationary pressures have remained subdued, meaning that significant interest rate increases are unlikely. As equity valuations are likely to only gradually recover, U.S. economic recovery is also likely to be a moderate process. This suggests that the pace of any interest rate increases will be gradual. As the municipal bond market's strong technical position can be expected to remain supportive in the coming months, future tax-exempt rate increases should be more restrained than their taxable counterparts. 2 & 3 MuniYield Quality Fund, Inc., October 31, 2002 Portfolio Strategy We maintained our fully invested market position and relatively strong credit profile throughout the six-month period ended October 31, 2002. The Fund also remained somewhat defensively structured being primarily invested in premium coupon issues and intermediate maturities. New purchases were focused on premium coupon bonds in the 20-year - 25-year maturity area. We focused on these maturities because they offered approximately 95% of maximum yield available in the entire municipal yield curve with less interest rate volatility than that associated with longer maturity bonds. Because of the exceptional steepness of the municipal bond curve, purchases of shorter maturity bonds required a significant yield sacrifice. We adopted this strategy in recognition of relatively low municipal yields within the background of a cautious economic environment. Despite significant monetary and fiscal stimulus, the U.S. economy is still facing considerable uncertainty. Additionally, international economic weakness has contributed to the headwind facing the U.S. economy. Consequently, we expect to retain our market position, as we have maintained our fully invested status throughout the period in an effort to enhance shareholder income. At October 31, 2002, 97.4% of the Fund's assets were invested in securities rated A or better by at least one of the major bond rating agencies including more than 80% that were invested in securities insured by AAA-rated municipal bond issuers. Looking ahead, we expect to remain essentially fully invested and to retain our relatively high credit quality profile. We will continue to seek opportunities in the market provided by new municipal issuance to purchase premium coupon issues primarily in the 20-year to 25-year maturity range. During the six-month period ended October 31, 2002, the Fund's borrowing costs remained at very low levels, approximately 1.5%. These attractive borrowing levels, in combination with a steep tax-exempt yield curve, have generated a substantial income benefit to the Fund's Common Stock shareholder from the leveraging of the Preferred Stock. Further material declines in short-term interest rates would require significant easing of monetary policy by the Federal Reserve Board. While such action is not expected, an increase in short-term interest rates by the Federal Reserve Board is even less anticipated. We expect our short-term borrowing costs to remain at attractive levels for the foreseeable future. However, should the spread between short-term and long-term interest rates narrow, the benefits of leverage will decline and the yield to the Fund's Common Stock Shareholders will be reduced. (For a more complete explanation of the benefits and risks of leveraging, see page 1 of this report to shareholders.) In Conclusion We appreciate your ongoing interest in MuniYield Quality Fund, Inc., and we look forward to serving your investment needs in the months and years to come. Sincerely, /s/ Terry K. Glenn Terry K. Glenn President and Director /s/ Kenneth A. Jacob Kenneth A. Jacob Senior Vice President /s/ John M. Loffredo John M. Loffredo Senior Vice President /s/ Michael Kalinoski Michael Kalinoski Vice President and Portfolio Manager November 27, 2002 IMPORTANT TAX INFORMATION (unaudited) All of the net investment income distributions paid by MuniYield Quality Fund, Inc. during its taxable year ended October 31, 2002 qualify as tax-exempt interest dividends for Federal income tax purposes. Additionally, the following table summarizes the taxable distributions paid by the Fund during the year: - ------------------------------------------------------------------------------- Payable Ordinary Date Income - ------------------------------------------------------------------------------- Common Stock Shareholders 12/28/2001 $0.005193 - ------------------------------------------------------------------------------- Preferred Stock Shareholders: Series A 12/04/2001 $5.22 --------------------------------------------- Series B 12/11/2001 $4.85 --------------------------------------------- Series C 12/14/2001 $5.09 --------------------------------------------- Series D 12/07/2001 $4.85 - ------------------------------------------------------------------------------- Please retain this information for your records. MANAGED DIVIDEND POLICY The Fund's dividend policy is to distribute all or a portion of its net investment income to its shareholders on a monthly basis. In order to provide shareholders with a more consistent yield to the current trading price of shares of Common Stock of the Fund, the Fund may at times pay out less than the entire amount of net investment income earned in any particular month and may at times in any month pay out such accumulated but undistributed income in addition to net investment income earned in that month. As a result, the dividends paid by the Fund for any particular month may be more or less than the amount of net investment income earned by the Fund during such month. The Fund's current accumulated but undistributed net investment income, if any, is disclosed in the Statement of Net Assets, which comprises part of the financial information included in this report. 4 & 5 MuniYield Quality Fund, Inc., October 31, 2002 SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face STATE Ratings+ Ratings+ Amount Issue Value ==================================================================================================================================== Alaska--0.5% AAA Aaa $ 2,100 Alaska State International Airports Revenue Bonds, Series B, 5.75% due 10/01/2019 (a) $ 2,308 ==================================================================================================================================== Arizona--2.1% AAA NR* 2,345 Maricopa County, Arizona, Public Finance Corporation, Lease Revenue Bonds, RIB, Series 511X, 8.84% due 7/01/2014 (a)(j) 2,866 ----------------------------------------------------------------------------------------------------------- AAA Aaa 2,000 Mesa, Arizona, IDA, Revenue Bonds (Discovery Health Systems), Series A, 5.875% due 1/01/2014 (h) 2,247 ----------------------------------------------------------------------------------------------------------- AA+ NR* 3,250 Phoenix, Arizona, GO, Refunding, DRIVERS, Series 173, 12.80% due 7/01/2008 (j) 4,729 ==================================================================================================================================== California--0.5% AAA Aaa 2,175 San Diego, California, Unified School District, Election 1998, GO, Series D, 5.25% due 7/01/2024 (d) 2,264 ==================================================================================================================================== Colorado--18.1% Colorado Health Facilities Authority Revenue Bonds, Series A: AA Aa2 2,475 (Catholic Health Initiatives), 5.50% due 3/01/2032 2,480 AA NR* 1,600 (Covenant Retirement Communities), 5.50% due 12/01/2027 (l) 1,617 ----------------------------------------------------------------------------------------------------------- Colorado Housing and Finance Authority Revenue Bonds (S/F Program) (h): AAA NR* 1,640 AMT, Series B-2, 6.80% due 4/01/2030 1,744 AAA NR* 4,505 Series B-3, 6.55% due 10/01/2016 4,790 AAA NR* 3,130 Series B-3, 6.50% due 10/01/2029 3,326 ----------------------------------------------------------------------------------------------------------- Colorado Housing and Finance Authority, Revenue Refunding Bonds: AAA Aaa 10,400 AMT, Series A-2, 6.60% due 5/01/2028 (a) 11,425 AAA NR* 3,075 AMT, Series C-2, 7.05% due 4/01/2031 (e)(h) 3,284 AAA Aaa 6,410 AMT, Series C-2, 7.25% due 10/01/2031 (a) 7,171 AAA Aaa 2,000 AMT, Series E-2, 7% due 2/01/2030 (h) 2,254 AAA Aaa 3,000 (S/F Program), AMT, Series B-2, 6.80% due 2/01/2031 (h) 3,388 AAA NR* 1,965 (S/F Program), AMT, Series C-2, 8.40% due 10/01/2021 (e)(h) 2,109 AAA NR* 1,815 Series C-3, 7.15% due 10/01/2030 (e)(h) 1,946 ----------------------------------------------------------------------------------------------------------- AAA Aaa 8,500 Denver, Colorado, City and County Airport Revenue Bonds, AMT, Series D, 7.75% due 11/15/2013 (h) 10,697 ----------------------------------------------------------------------------------------------------------- Denver, Colorado, City and County, COP, Series B (a): AAA Aaa 6,405 5.75% due 12/01/2018 7,074 AAA Aaa 14,590 5.50% due 12/01/2025 15,323 ----------------------------------------------------------------------------------------------------------- Longmont, Colorado, Sales and Use Tax Revenue Bonds (d): AAA NR* 2,280 5.70% due 11/15/2018 2,490 AAA NR* 2,200 5.75% due 11/15/2019 2,395 ==================================================================================================================================== District of Columbia-- AAA Aaa 6,000 District of Columbia, GO, Refunding, DRIVERS, Series 152, 8.82% 2.1% due 6/01/2013 (f)(j) 7,224 ----------------------------------------------------------------------------------------------------------- AAA Aaa 2,500 District of Columbia, Revenue Refunding Bonds (Catholic University of America Project), 5.625% due 10/01/2029 (a) 2,626 ==================================================================================================================================== Florida--0.5% AA NR* 2,240 Beacon Tradeport Community Development District, Florida, Special Assessment Revenue Refunding Bonds (Commercial Project), Series A, 5.625% due 5/01/2032 (l) 2,341 ==================================================================================================================================== Georgia--1.7% AAA Aaa 2,000 Atlanta, Georgia, Airport Revenue Refunding Bonds, Series A, 5.60% due 1/01/2030 (d) 2,105 ----------------------------------------------------------------------------------------------------------- A A3 4,785 Monroe County, Georgia, Development Authority, PCR, Refunding (Oglethorpe Power Corporation--Scherer), Series A, 6.80% due 1/01/2011 5,645 ==================================================================================================================================== Hawaii--0.5% AAA Aaa 2,000 Hawaii State, GO, Series CX, 5.50% due 2/01/2021 (f) 2,119 ==================================================================================================================================== Illinois--14.2% NR* Aaa 5,000 Chicago, Illinois, Board of Education, GO, RIB, Series 467, 9.34% due 12/01/2027 (a)(j) 5,740 ----------------------------------------------------------------------------------------------------------- AAA Aaa 5,000 Chicago, Illinois, GO (Lakefront Millennium Parking Facilities), 5.125% due 1/01/2028 (h) 5,030 ----------------------------------------------------------------------------------------------------------- AAA NR* 6,835 Chicago, Illinois, O'Hare International Airport, Revenue Refunding Bonds, DRIVERS, AMT, Series 250, 9.28% due 1/01/2021 (h)(j) 7,694 ----------------------------------------------------------------------------------------------------------- Chicago, Illinois, S/F Mortgage Revenue Bonds, AMT (g): AAA Aaa 625 Series B, 4% due 10/01/2033 662 AAA Aaa 1,865 Series C, 7% due 3/01/2032 (h) 2,034 ----------------------------------------------------------------------------------------------------------- AAA Aaa 6,200 Cook County, Illinois, Capital Improvement, GO, Series C, 5.50% due 11/15/2026 (a) 6,522 ----------------------------------------------------------------------------------------------------------- AAA Aaa 2,130 Illinois Development Finance Authority Revenue Bonds (Presbyterian Home Lake Project), Series B, 6.25% due 9/01/2017 (f) 2,371 ----------------------------------------------------------------------------------------------------------- Illinois State, GO, First Series: AAA Aaa 1,000 5.50% due 2/01/2018 (d) 1,082 AAA NR* 10,000 5.50% due 8/01/2018 (f) 10,708 AAA Aaa 3,000 5.625% due 6/01/2025 (h) 3,156 ----------------------------------------------------------------------------------------------------------- NR* A1 3,750 Illinois Student Assistance Commission, Student Loan Revenue Refunding Bonds, AMT, Sub-Series CC, 6.875% due 3/01/2015 3,830 ----------------------------------------------------------------------------------------------------------- NR* Aaa 5,295 Kane and De Kalb Counties, Illinois, Community Unity School District Number 302, GO, 5.80% due 2/01/2022 (d) 5,839 ----------------------------------------------------------------------------------------------------------- Metropolitan Pier and Exposition Authority, Illinois, Dedicated State Tax Revenue Refunding Bonds: AAA Aaa 7,000 (McCormick Place Expansion Project), 5.50% due 12/15/2024 (d) 7,321 AAA Aaa 3,500 (McCormick Place Expansion), Series B, 5.75% due 6/15/2023 (h) 3,818 ==================================================================================================================================== Indiana--6.3% De Kalb County, Indiana, Redevelopment Authority Revenue Bonds (Mini-Mill), Series A (a): AAA NR* 3,000 6.50% due 1/15/2014 3,322 AAA NR* 3,220 6.625% due 1/15/2017 3,564 ----------------------------------------------------------------------------------------------------------- AAA NR* 2,500 Indiana Bond Bank Revenue Bonds, Guarantee State Revolver, 6.875% due 2/01/2012 (a) 2,790 ----------------------------------------------------------------------------------------------------------- AAA Aaa 2,000 Indiana State Office Building Commission Revenue Bonds (Correction Facilities Program), Series A, 5.50% due 7/01/2020 (a) 2,098 ----------------------------------------------------------------------------------------------------------- BBB Baa2 8,800 Indianapolis, Indiana, Airport Authority, Special Facilities Revenue Bonds (Federal Express Corporation Project), AMT, 7.10% due 1/15/2017 9,376 ----------------------------------------------------------------------------------------------------------- AA NR* 7,500 Indianapolis, Indiana, Local Public Improvement Bond Bank, Revenue Refunding Bonds, Series D, 6.75% due 2/01/2020 7,736 ====================================================================================================================================
Portfolio Abbreviations To simplify the listings of MuniYield Quality Fund, Inc.'s portfolio holdings in the Schedule of Investments, we have abbreviated the names of many of the securities according to the list below and at right. AMT Alternative Minimum Tax (subject to) COP Certificates of Participation DRIVERS Derivative Inverse Tax-Exempt Receipts EDA Economic Development Authority GO General Obligation Bonds HDA Housing Development Authority HFA Housing Finance Agency IDA Industrial Development Authority IDB Industrial Development Board PCR Pollution Control Revenue Bonds RIB Residual Interest Bonds RITR Residual Interest Trust Receipts S/F Single-Family MuniYield Quality Fund, Inc., October 31, 2002 SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face STATE Ratings+ Ratings+ Amount Issue Value ==================================================================================================================================== Kansas--1.4% Kansas City, Kansas, Utility System Revenue Refunding Bonds (d): AAA NR* $ 1,140 6.375% due 9/01/2004 (i) $ 1,257 AAA Aaa 2,360 6.375% due 9/01/2023 2,578 ----------------------------------------------------------------------------------------------------------- NR* Aaa 2,550 Kansas State Development Finance Authority Revenue Bonds (Public Water Supply Revolving Loan), Series 2, 5.75% due 4/01/2016 (a) 2,843 ==================================================================================================================================== Kentucky--3.4% AAA Aaa 2,715 Kentucky Housing Corporation, Housing Revenue Bonds, AMT, Series B, 6.625% due 7/01/2026 (e)(h) 2,836 ----------------------------------------------------------------------------------------------------------- AAA Aaa 6,570 Lexington--Fayette Urban County Government, Kentucky, Governmental Program Revenue Bonds (University of Kentucky Alumni Association Inc. Project), 6.75% due 11/01/2004 (h)(i) 7,343 ----------------------------------------------------------------------------------------------------------- BBB Baa2 5,250 Perry County, Kentucky, Solid Waste Disposal Revenue Bonds (TJ International Project), AMT, 7% due 6/01/2024 5,477 ==================================================================================================================================== Louisiana--2.3% AAA Aaa 9,000 Louisiana Local Government, Environmental Facilities, Community Development Authority Revenue Bonds (Capital Projects and Equipment Acquisition), Series A, 6.30% due 7/01/2030 (a) 10,645 ==================================================================================================================================== Massachusetts--3.9% Massachusetts Bay, Massachusetts, Transportation Authority, General Transportation System Revenue Refunding Bonds, Series A (h): AAA Aaa 3,730 7% due 3/01/2011 4,618 AAA Aaa 3,550 7% due 3/01/2014 4,490 ----------------------------------------------------------------------------------------------------------- AAA Aaa 1,000 Massachusetts State, GO, Refunding, Consolidated Loan, Series D, 5.375% due 8/01/2022 (h) 1,046 ----------------------------------------------------------------------------------------------------------- Massachusetts State, HFA, S/F Housing Revenue Bonds (h): AAA Aaa 2,330 6.35% due 6/01/2017 2,456 AAA Aaa 1,975 Series 37, 6.35% due 6/01/2017 2,082 ----------------------------------------------------------------------------------------------------------- NR* Aa3 2,500 Massachusetts State, Revenue Bonds, RIB, Series 420, 9.32% due 12/15/2014 (j) 3,142 ==================================================================================================================================== Michigan--3.6% Detroit, Michigan, City School District, GO, Series A (f): AAA Aaa 4,000 5.50% due 5/01/2019 4,294 AAA Aaa 3,625 5.50% due 5/01/2020 3,859 ----------------------------------------------------------------------------------------------------------- AAA NR* 3,040 Michigan Higher Education Student Loan Authority, Student Loan Revenue Refunding Bonds, AMT, Series XVII-G, 5.20% due 9/01/2020 (a) 3,073 ----------------------------------------------------------------------------------------------------------- AA Aa2 2,000 Michigan State Hospital Finance Authority, Revenue Refunding Bonds (Ascension Health Credit), Series A, 6.125% due 11/15/2026 2,108 ----------------------------------------------------------------------------------------------------------- A- A3 3,300 Michigan State Strategic Fund, Limited Obligation Revenue Refunding Bonds (Detroit Edison Company Pollution Control), AMT, Series C, 5.65% due 9/01/2029 3,354 ==================================================================================================================================== Minnesota--0.3% AAA Aaa 1,500 Minneapolis and Saint Paul, Minnesota, Metropolitan Airports Commission, Airport Revenue Bonds, AMT, Series B, 5.625% due 1/01/2018 (d) 1,581 ==================================================================================================================================== Mississippi--0.7% AAA Aaa 2,915 Mississippi Home Corporation, S/F Revenue Refunding Bonds, AMT, Series I, 7.375% due 6/01/2028 (g)(h) 3,214 ==================================================================================================================================== Missouri--1.4% Missouri State Housing Development Commission, S/F Mortgage Revenue Bonds (h): AAA Aaa 1,585 (Homeowner Loan), AMT, Series B-1, 7.45% due 9/01/2031 1,734 AAA Aaa 1,235 Series C-1, 6.55% due 9/01/2028 1,334 ----------------------------------------------------------------------------------------------------------- AAA Aaa 3,140 Saint Joseph, Missouri, School District, GO (Missouri Direct Deposit Program), 5.75% due 3/01/2017 (f) 3,465 ==================================================================================================================================== Nevada--2.1% AAA Aaa 3,000 Clark County, Nevada, Passenger Facility Charge Revenue Bonds (Las Vegas/MaCarran International Airport), AMT, Series A, 5.50% due 7/01/2025 (h) 3,064 ----------------------------------------------------------------------------------------------------------- AAA Aaa 5,710 Washoe County, Nevada, School District, GO, 5.875% due 12/01/2009 (f)(i) 6,651 ==================================================================================================================================== New Hampshire-- AAA Aaa 10,000 New Hampshire Health and Education Facilities Authority Revenue Bonds 3.5% (Dartmouth--Hitchcock Obligation Group), 5.50% due 8/01/2027 (f) 10,513 ----------------------------------------------------------------------------------------------------------- AAA Aaa 5,000 New Hampshire State Business Finance Authority, PCR, Refunding (Public Service Company), AMT, Series D, 6% due 5/01/2021 (h) 5,453 ==================================================================================================================================== New Jersey--2.1% AAA Aaa 6,740 New Jersey State Transportation Trust Fund Authority, Transportation System Revenue Refunding Bonds, Series B, 6% due 12/15/2017 (h) 7,734 ----------------------------------------------------------------------------------------------------------- A A1 2,000 Tobacco Settlement Financing Corporation, New Jersey, Asset Backed Revenue Refunding Bonds, 6.125% due 6/01/2042 1,918 ==================================================================================================================================== New Mexico--0.8% AAA Aaa 3,500 University of New Mexico, University Revenue Bonds, Sub-Lien, Series A, 5.75% due 6/01/2020 (h) 3,856 ==================================================================================================================================== New York--12.5% AAA Aaa 8,085 New York City, New York, City Municipal Water Finance Authority, Water and Sewer System Revenue Bonds, RITR, Series FR-6, 9.945% due 6/15/2026 (h)(j) 9,512 ----------------------------------------------------------------------------------------------------------- New York City, New York, GO: AAA A2 3,500 DRIVERS, Series 194, 9.34% due 2/01/2015 (f)(j) 4,161 A Aaa 6,920 RIB, Series 394, 9.873% due 8/01/2016 (h)(j) 8,815 AAA Aaa 5,000 Series B, 5.875% due 8/15/2013 5,595 AAA Aaa 9,055 Series F, 5.75% due 2/01/2019 (b) 9,791 AAA Aaa 1,495 Series I, 6.25% due 4/15/2017 1,701 ----------------------------------------------------------------------------------------------------------- New York City, New York, GO, Refunding: AAA A2 5,000 Series E, 6.50% due 2/15/2006 (b) 5,609 AAA Aaa 9,325 Series G, 5.75% due 2/01/2017 (f) 10,143 AAA Aaa 2,315 Series J, 6% due 8/01/2017 (b) 2,560 ==================================================================================================================================== North Carolina-- Iredell County, North Carolina, Public Facilities, Corporate Installment 0.8% Payment Revenue Bonds (School Projects) (a): NR* Aaa 2,180 6% due 6/01/2014 2,504 NR* Aaa 1,000 6% due 6/01/2017 1,137 ==================================================================================================================================== Ohio--0.5% AA NR* 2,000 Jackson, Ohio, Hospital Facilities Revenue Bonds (Consolidated Health System--Jackson Hospital), 6.125% due 10/01/2020 2,182 ==================================================================================================================================== Oklahoma--0.8% Tulsa, Oklahoma, Airports Improvement Trust, General Revenue Bonds (Tulsa International Airport), AMT (d): AAA Aaa 1,250 Series A, 6% due 6/01/2020 1,427 AAA Aaa 1,000 Series B, 6% due 6/01/2019 1,079 AAA Aaa 1,000 Series B, 6.125% due 6/01/2026 1,083 ==================================================================================================================================== Oregon--2.1% NR* Aaa 7,500 Portland, Oregon, Sewer System Revenue Bonds, RIB, Series 386, 9.27% due 8/01/2020 (d)(j) 9,642 ====================================================================================================================================
8 & 9 MuniYield Quality Fund, Inc., October 31, 2002 SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face STATE Ratings+ Ratings+ Amount Issue Value ==================================================================================================================================== Pennsylvania--4.4% AAA Aaa $ 2,000 Allegheny County, Pennsylvania, Port Authority, Special Transportation Revenue Bonds, 6% due 3/01/2009 (h)(i) $ 2,333 ----------------------------------------------------------------------------------------------------------- AAA Aaa 6,250 Philadelphia, Pennsylvania, Authority for Industrial Development, Lease Revenue Bonds, Series B, 5.50% due 10/01/2021 (f) 6,617 ----------------------------------------------------------------------------------------------------------- Philadelphia, Pennsylvania, School District, GO, Series B (d): AAA Aaa 1,500 5.625% due 8/01/2020 1,618 AAA Aaa 3,670 5.625% due 8/01/2021 3,927 AAA Aaa 2,000 5.625% due 8/01/2022 2,127 ----------------------------------------------------------------------------------------------------------- AAA Aaa 3,000 Washington County, Pennsylvania, Capital Funding Authority Revenue Bonds (Capital Projects and Equipment Program), 6.15% due 12/01/2029 (a) 3,464 ==================================================================================================================================== Rhode Island--0.6% AAA Aaa 2,500 Providence, Rhode Island, GO, Series A, 5.70% due 7/15/2019 (f) 2,729 ==================================================================================================================================== South Carolina--5.4% AAA NR* 10,000 Fairfield County, South Carolina, PCR (South Carolina Electric and Gas), 6.20% due 9/01/2014 (h) 10,338 ----------------------------------------------------------------------------------------------------------- AAA Aaa 2,200 Richland County, South Carolina, School District Number 001, GO, 5.75% due 3/01/2015 (f) 2,444 ----------------------------------------------------------------------------------------------------------- AA NR* 4,500 South Carolina Educational Facilities Authority for Private Nonprofit Institutions Revenue Bonds (The Benedict College), 5.625% due 7/01/2031 (l) 4,685 ----------------------------------------------------------------------------------------------------------- AAA NR* 3,045 South Carolina State Public Service Authority, Revenue Refunding Bonds, DRIVERS, Series 277, 9.32% due 1/01/2022 (h)(j) 3,542 ----------------------------------------------------------------------------------------------------------- NR* A1 3,800 Spartanburg County, South Carolina, Solid Waste Disposal Facilities Revenue Bonds (BMW Project), AMT, 7.55% due 11/01/2024 4,146 ==================================================================================================================================== Tennessee--6.2% AAA Aaa 17,000 Chattanooga, Tennessee, IDB, Lease Rent Revenue Bonds (Southside Redevelopment Corporation), 5.875% due 10/01/2024 (a) 18,436 ----------------------------------------------------------------------------------------------------------- AAA Aaa 5,000 Memphis--Shelby County, Tennessee, Airport Authority, Airport Revenue Bonds, AMT, Series D, 6.25% due 3/01/2018 (a) 5,524 ----------------------------------------------------------------------------------------------------------- Tennessee HDA, Homeownership Revenue Bonds, AMT, Series 2-C (a): AAA Aaa 2,075 6.10% due 7/01/2013 2,223 AAA Aa2 2,390 6.20% due 7/01/2015 2,572 ==================================================================================================================================== Texas--17.6% Austin, Texas, Convention Center Revenue Bonds (Convention Enterprises Inc.), Trust Certificates, Second Tier, Series B: A+ Aa3 5,000 6% due 1/01/2023 5,256 A+ Aa3 2,400 5.75% due 1/01/2032 2,461 ----------------------------------------------------------------------------------------------------------- NR* Aaa 1,000 Bell County, Texas, Health Facilities Development Revenue Bonds (Lutheran General Health Care System), 6.50% due 7/01/2019 (c) 1,231 ----------------------------------------------------------------------------------------------------------- Dallas-Fort Worth, Texas, International Airport Revenue Refunding and Improvement Bonds, AMT, Series A (d): AAA Aaa 1,835 5.875% due 11/01/2017 1,998 AAA Aaa 2,145 5.875% due 11/01/2018 2,323 AAA Aaa 2,385 5.875% due 11/01/2019 2,574 ----------------------------------------------------------------------------------------------------------- NR* Aaa 5,235 Denton, Texas, Utility System Revenue Bonds, RIB, Series 369, 9.79% due 12/01/2017 (f)(j) 6,684 ----------------------------------------------------------------------------------------------------------- Gregg County, Texas, Health Facilities Development Corporation, Hospital Revenue Bonds (Good Shepherd Medical Center Project): AA Baa2 6,000 6.875% due 10/01/2020 6,913 AA Baa2 2,600 6.375% due 10/01/2025 2,869 ----------------------------------------------------------------------------------------------------------- Harris County, Houston, Texas, Sports Authority, Revenue Refunding Bonds, Senior Lien, Series G (h): AAA Aaa 2,670 5.75% due 11/15/2019 2,934 AAA Aaa 4,000 5.75% due 11/15/2020 4,374 ----------------------------------------------------------------------------------------------------------- Houston, Texas, Airport System Revenue Refunding Bonds, Sub-Lien: AAA Aaa 1,500 AMT, Series A, 5.50% due 7/01/2023 1,544 AAA Aaa 1,200 Series B, 5.50% due 7/01/2030 (f) 1,246 ----------------------------------------------------------------------------------------------------------- AAA Aaa 15,000 Houston, Texas, Water and Sewer System, Revenue Refunding Bonds, Junior Lien, Series A, 5.32%** due 12/01/2021 (f) 5,467 ----------------------------------------------------------------------------------------------------------- AA NR* 2,800 Sam Rayburn, Texas, Municipal Power Agency, Revenue Refunding Bonds, 5.75% due 10/01/2021 2,949 ----------------------------------------------------------------------------------------------------------- San Antonio, Texas, Airport System Improvement Revenue Bonds, AMT (d): AAA Aaa 2,010 5.75% due 7/01/2016 2,184 AAA Aaa 3,000 5.75% due 7/01/2017 3,235 ----------------------------------------------------------------------------------------------------------- AAA Aaa 3,200 San Benito, Texas, Consolidated Independent School District, GO, 5.75% due 2/15/2016 (h) 3,546 ----------------------------------------------------------------------------------------------------------- AAA Aaa 7,200 Texas State Turnpike Authority, Central Texas Turnpike System Revenue Bonds, First Tier, Series A, 5.75% due 8/15/2038 (a) 7,775 ----------------------------------------------------------------------------------------------------------- Travis County, Texas, Health Facilities Development Corporation, Revenue Refunding Bonds (Ascension Health Credit), Series A: AAA Aaa 4,600 6.25% due 11/15/2014 (h) 5,326 AAA Aaa 8,000 5.875% due 11/15/2024 (a) 8,561 ==================================================================================================================================== Utah--4.2% AAA Aaa 15,000 Salt Lake City, Utah, Hospital Revenue Refunding Bonds (IHC Hospitals Inc.), 6.30% due 2/15/2015 (h)(k) 17,951 ----------------------------------------------------------------------------------------------------------- NR* Aaa 1,500 Utah Water Finance Agency Revenue Bonds (Pooled Loan Financing Program), Series A, 5.70% due 10/01/2020 (a) 1,618 ==================================================================================================================================== Virginia--1.5% AAA Aaa 6,000 Fairfax County, Virginia, EDA, Resource Recovery Revenue Refunding Bonds, AMT, Series A, 6.05% due 2/01/2009 (a) 6,784 ==================================================================================================================================== Washington--11.2% AAA NR* 10,000 Energy Northwest, Washington, Electric Revenue Bonds, DRIVERS, Series 242, 9.31% due 7/01/2017 (h)(j) 12,139 ----------------------------------------------------------------------------------------------------------- Energy Northwest, Washington, Electric Revenue Refunding Bonds (Columbia Generating): AAA Aaa 2,550 Series A, 5.75% due 7/01/2018 (h) 2,808 AAA Aaa 2,675 Series B, 6% due 7/01/2018 (a) 3,011 ----------------------------------------------------------------------------------------------------------- AAA Aaa 2,835 King County, Washington, Sewer Revenue Refunding Bonds, Series B, 5.50% due 1/01/2027 2,957 ----------------------------------------------------------------------------------------------------------- AAA NR* 5,000 Tacoma, Washington, Electric System Revenue Refunding Bonds, RIB, Series 512X, 9.32% due 1/01/2017 (f)(j) 5,955 ----------------------------------------------------------------------------------------------------------- Washington State, GO (f): AAA Aaa 7,500 Series A and AT-6, 6.25% due 2/01/2011 8,860 AAA Aaa 9,000 Series S-4, 5.75% due 1/01/2013 10,097 ----------------------------------------------------------------------------------------------------------- Washington State, Various Purpose, GO (f): AAA NR* 3,595 Series A, 5.625% due 7/01/2021 3,812 AAA Aaa 2,000 Series C, 5.25% due 01/01/2026 2,047 ====================================================================================================================================
10 & 11 MuniYield Quality Fund, Inc., October 31, 2002 SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face STATE Ratings+ Ratings+ Amount Issue Value ==================================================================================================================================== Wisconsin--0.2% NR* Aaa $ 1,000 Milwaukee County, Wisconsin, Airport Revenue Bonds, AMT, Series A, 5.75% due 12/01/2025 (d) $ 1,053 ==================================================================================================================================== Puerto Rico--0.7% AAA Aaa 2,435 Puerto Rico Electric Power Authority, Power Revenue Bonds, Trust Receipts, Class R, Series 16 HH, 9.308% due 7/01/2013 (f)(j) 3,225 ==================================================================================================================================== Total Municipal Bonds (Cost--$607,162)--140.7% 650,131 ==================================================================================================================================== Shares Held Common Stock ==================================================================================================================================== 1,790 Merrill Lynch Institutional Tax-Exempt Fund++ 1,790 ==================================================================================================================================== Total Common Stock (Cost--$1,790)--0.4% 1,790 ==================================================================================================================================== Total Investments (Cost--$608,952)--141.1% 651,921 Variation Margin on Financial Futures Contracts***--(0.1%) (236) Other Assets Less Liabilities--2.3% 10,485 Preferred Stock, at Redemption Value--(43.3%) (200,014) -------- Net Assets Applicable to Common Stock--100.0% $462,156 ======== ====================================================================================================================================
(a) AMBAC Insured. (b) XL Capital Insured. (c) Escrowed to maturity. (d) FGIC Insured. (e) FHA Insured. (f) FSA Insured. (g) FNMA/GNMA Collateralized. (h) MBIA Insured. (i) Prerefunded. (j) The interest rate is subject to change periodically and inversely based upon prevailing market rates. The interest rate shown is the rate in effect at October 31, 2002. (k) All or a portion of security held as collateral in connection with open financial futures contracts. (l) Radian Insured. * Not Rated. ** Represents a zero coupon bond; the interest rate shown reflects the effective yield at the time of purchase by the Fund. *** Financial futures contracts sold as of October 31, 2002 were as follows: (in Thousands) -------------------------------------------------------------------------- Number of Expiration Contracts Issue Date Value -------------------------------------------------------------------------- 520 U.S. Treasury Bonds December 2002 $59,654 -------------------------------------------------------------------------- Total Financial Futures Contracts Sold (Total Contract Price--$58,183) $59,654 ======= -------------------------------------------------------------------------- + Ratings of issues shown are unaudited. ++ Investments in companies considered to be an affiliate of the Fund (such companies are defined as "Affiliated Companies" in section 2(a)(3) of the Investment Company Act of 1940) are as follows: (in Thousands) -------------------------------------------------------------------------- Net Share Net Dividend Affiliate Activity Cost Income -------------------------------------------------------------------------- Merrill Lynch Institutional Tax-Exempt Fund 1,790 $1,790 $20 -------------------------------------------------------------------------- See Notes to Financial Statements. Quality Profile (unaudited) The quality ratings of securities in the Fund as of October 31, 2002 were as follows: - -------------------------------------------------------------------------------- Percent of Total S&P Rating/Moody's Rating Investments - -------------------------------------------------------------------------------- AAA/Aaa ........................................................ 86.6% AA/Aa .......................................................... 7.9 A/A ............................................................ 2.9 BBB/Baa ........................................................ 2.3 NR (Not Rated) ................................................. 0.3 - -------------------------------------------------------------------------------- STATEMENT OF NET ASSETS As of October 31, 2002 ==================================================================================================================================== Assets: Investments, at value (identified cost--$608,952,210) ......................... $651,920,669 Cash .......................................................................... 134,359 Receivables: Interest .................................................................... $ 12,032,707 Securities sold ............................................................. 2,994,357 15,027,064 -------------- Prepaid expenses .............................................................. 36,196 ------------ Total assets .................................................................. 667,118,288 ------------ ==================================================================================================================================== Liabilities: Payables: Securities purchased ........................................................ 4,011,911 Dividends to Common Stock shareholders ...................................... 353,736 Investment adviser .......................................................... 292,226 Variation margin ............................................................ 235,625 4,893,498 -------------- Accrued expenses .............................................................. 54,609 ------------ Total liabilities ............................................................. 4,948,107 ------------ ==================================================================================================================================== Preferred Stock: Preferred Stock, at redemption value, par value $.05 per share (2,000 Series A shares, 2,000 Series B shares, 2,000 Series C shares and 2,000 Series D shares of AMPS* issued and outstanding at $25,000 per share liquidation preference) .. 200,014,380 ------------ ==================================================================================================================================== Net Assets Applicable Net assets applicable to Common Stock ......................................... $462,155,801 To Common Stock: ============ ==================================================================================================================================== Analysis of Net Common Stock, par value $.10 per share (30,425,258 shares issued and Assets Applicable outstanding) .................................................................. $ 3,042,526 To Common Stock: Paid-in capital in excess of par .............................................. 423,867,385 Undistributed investment income--net .......................................... $ 6,221,436 Accumulated realized capital losses on investments--net ....................... (12,473,380) Unrealized appreciation on investments--net ................................... 41,497,834 -------------- Total accumulated earnings--net ............................................... 35,245,890 ------------ Total--Equivalent to $15.19 net asset value per share of Common Stock (market price--$13.74) ........................................................ $462,155,801 ============ ====================================================================================================================================
* Auction Market Preferred Stock. See Notes to Financial Statements. 12 & 13 MuniYield Quality Fund, Inc., October 31, 2002 STATEMENT OF OPERATIONS For the Year Ended October 31, 2002 =================================================================================================================================== Investment Interest ................................................................. $ 36,550,384 Income: Dividends ................................................................ 20,101 ------------ Total income ............................................................. 36,570,485 ------------ =================================================================================================================================== Expenses: Investment advisory fees ................................................. $ 3,286,243 Commission fees .......................................................... 506,440 Accounting services ...................................................... 216,312 Transfer agent fees ...................................................... 93,566 Professional fees ........................................................ 87,755 Directors' fees and expenses ............................................. 37,527 Printing and shareholder reports ......................................... 37,163 Custodian fees ........................................................... 32,566 Listing fees ............................................................. 28,293 Pricing fees ............................................................. 24,646 Other .................................................................... 47,953 ----------- Total expenses before reimbursement ...................................... 4,398,464 Reimbursement of expenses ................................................ (3,065) ----------- Total expenses after reimbursement ....................................... 4,395,399 ------------ Investment income--net ................................................... 32,175,086 ------------ =================================================================================================================================== Realized & Unrealized Realized loss on investments--net ........................................ (2,864,003) Loss on Change in unrealized appreciation/depreciation on investments--net ....... (910,451) Investments--Net: ------------ Total realized and unrealized loss on investments--net ................... (3,774,454) ------------ =================================================================================================================================== Dividends & Investment income--net ................................................... (2,790,340) Distributions to Realized gain on investments--net ........................................ (40,020) Preferred Stock ------------ Shareholders: Total dividends and distributions to Preferred Stock shareholders ........ (2,830,360) ------------ Net Increase in Net Assets Resulting from Operations ..................... $ 25,570,272 ============ ===================================================================================================================================
See Notes to Financial Statements. STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended October 31, ------------------------------ Increase (Decrease) in Net Assets: 2002 2001+ =================================================================================================================================== Operations: Investment income--net ................................................. $ 32,175,086 $ 32,327,769 Realized gain (loss) on investments--net ............................... (2,864,003) 8,352,760 Change in unrealized appreciation/depreciation on investments--net ..... (910,451) 24,382,848 Dividends and distributions to Preferred Stock shareholders ............ (2,830,360) (6,534,340) ------------- ------------- Net increase in net assets resulting from operations ................... 25,570,272 58,529,037 ------------- ------------- =================================================================================================================================== Dividends & Investment income--net ................................................. (27,778,261) (25,478,111) Distributions to Realized gain on investments--net ...................................... (157,998) -- Common Stock ------------- ------------- Shareholders: Net decrease in net assets resulting from dividends and distributions to Common Stock shareholders .............................................. (27,936,259) (25,478,111) ------------- ------------- =================================================================================================================================== Net Assets Applicable Total increase (decrease) in net assets applicable to Common Stock ..... (2,365,987) 33,050,926 To Common Stock: Beginning of year ...................................................... 464,521,788 431,470,862 ------------- ------------- End of year* ........................................................... $ 462,155,801 $ 464,521,788 ============= ============= =================================================================================================================================== *Undistributed investment income--net .................................. $ 6,221,436 $ 4,382,001 ============= ============= ===================================================================================================================================
+ Certain prior year amounts have been reclassified to conform to current year presentation. See Notes to Financial Statements. 14 & 15 MuniYield Quality Fund, Inc., October 31, 2002 FINANCIAL HIGHLIGHTS
The following per share data and ratios have been derived from information provided in the financial statements. For the Year Ended October 31, -------------------------------------------------------- Increase (Decrease) in Net Asset Value: 2002 2001 2000 1999 1998 =================================================================================================================================== Per Share Net asset value, beginning of year ................. $ 15.27 $ 14.18 $ 13.54 $ 15.58 $ 15.17 Operating --------- --------- --------- --------- --------- Performance:+ Investment income--net ............................. 1.06 1.06 1.07 1.07 1.12 Realized and unrealized gain (loss) on investments--net ................................... (.13) 1.08 .66 (2.04) .40 Dividends and distributions to Preferred Stock shareholders: Investment income--net ........................... (.09) (.21) (.27) (.21) (.23) Realized gain on investments--net ................ --++ -- -- -- -- --------- --------- --------- --------- --------- Total from investment operations ................... .84 1.93 1.46 (1.18) 1.29 --------- --------- --------- --------- --------- Less dividends and distributions to Common Stock shareholders: Investment income--net ........................... (.91) (.84) (.82) (.86) (.88) Realized gain on investments--net ................ (.01) -- -- -- -- --------- --------- --------- --------- --------- Total dividends and distributions to Common Stock shareholders ....................................... (.92) (.84) (.82) (.86) (.88) --------- --------- --------- --------- --------- Net asset value, end of year ....................... $ 15.19 $ 15.27 $ 14.18 $ 13.54 $ 15.58 ========= ========= ========= ========= ========= Market price per share, end of year ................ $ 13.74 $ 14.24 $ 12.0625 $ 12.0625 $ 15.5625 ========= ========= ========= ========= ========= =================================================================================================================================== Total Investment Based on market price per share .................... 2.94% 25.47% 7.03% (17.61%) 14.33% Return:* ========= ========= ========= ========= ========= Based on net asset value per share ................. 6.12% 14.46% 12.09% (7.62%) 8.93% ========= ========= ========= ========= ========= =================================================================================================================================== Ratios Based on Total expenses** ................................... .96% .98% .99% .95% .91% Average Net Assets ========= ========= ========= ========= ========= Of Common Stock: Total investment income--net** ..................... 7.03% 7.18% 7.74% 7.17% 7.30% ========= ========= ========= ========= ========= Amount of dividends to Preferred Stock shareholders .61% 1.45% 1.94% 1.41% 1.50% ========= ========= ========= ========= ========= Investment income--net, to Common Stock shareholders 6.42% 5.73% 5.81% 5.76% 5.80% ========= ========= ========= ========= ========= =================================================================================================================================== Ratios Based on Total expenses ..................................... .67% .68% .67% .66% .64% Average Net Assets ========= ========= ========= ========= ========= Of Common & Total investment income--net ....................... 4.89% 4.97% 5.23% 4.99% 5.12% Preferred Stock:** ========= ========= ========= ========= ========= =================================================================================================================================== Ratios Based on Dividends to Preferred Stock shareholders .......... 1.40% 3.27% 4.03% 3.21% 3.51% Average Net Assets ========= ========= ========= ========= ========= of Preferred Stock: =================================================================================================================================== Supplemental Net assets applicable to Common Stock, end of year Data: (in thousands) ..................................... $ 462,156 $ 464,522 $ 431,471 $ 411,883 $ 473,898 ========= ========= ========= ========= ========= Preferred Stock outstanding, end of year (in thousands) ..................................... $ 200,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000 ========= ========= ========= ========= ========= Portfolio turnover ................................. 46.29% 89.58% 51.19% 91.78% 42.95% ========= ========= ========= ========= ========= =================================================================================================================================== Leverage: Asset coverage per $1,000 .......................... $ 3,311 $ 3,323 $ 3,157 $ 3,059 $ 3,369 ========= ========= ========= ========= ========= =================================================================================================================================== Dividends Per Share Series A--Investment income--net ................... $ 370 $ 852 $ 1,024 $ 824 $ 961 On Preferred Stock ========= ========= ========= ========= ========= Outstanding: Series B--Investment income--net ................... $ 337 $ 792 $ 1,015 $ 779 $ 879 ========= ========= ========= ========= ========= Series C--Investment income--net ................... $ 349 $ 832 $ 999 $ 809 $ 815 ========= ========= ========= ========= ========= Series D--Investment income--net ................... $ 339 $ 791 $ 1,002 $ 787 $ 856 ========= ========= ========= ========= ========= ===================================================================================================================================
* Total investment returns based on market value, which can be significantly greater or lesser than the net asset value, may result in substantially different returns. Total investment returns exclude the effects of sales charges. ** Do not reflect the effect of dividends to Preferred Stock shareholders. + Certain prior year amounts have been reclassified to conform to current year presentation. ++ Amount is less than $.01 per share. See Notes to Financial Statements. 16 & 17 MuniYield Quality Fund, Inc., October 31, 2002 NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: MuniYield Quality Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940 as a non-diversified, closed-end management investment company. 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 Fund determines and makes available for publication the net asset value of its Common Stock on a weekly basis. The Fund's Common Stock is listed on the New York Stock Exchange under the symbol MQY. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of investments -- Municipal bonds are traded primarily in the over-the-counter markets and are valued at the most recent bid price or yield equivalent as obtained by the Fund's pricing service from dealers that make markets in such securities. Financial futures contracts and options thereon, which are traded on exchanges, are valued at their closing prices as of the close of such exchanges. Options written or purchased are valued at the last sale price in the case of exchange-traded options. In the case of options traded in the over-the-counter market, valuation is the last asked price (options written) or the last bid price (options purchased). Securities with remaining maturities of sixty days or less are valued at amortized cost, which approximates market value. Securities and assets for which market quotations are not readily available are valued at their fair value as determined in good faith by or under the direction of the Board of Directors of the Fund, including valuations furnished by a pricing service retained by the Fund, which may utilize a matrix system for valuations. The procedures of the pricing service and its valuations are reviewed by the officers of the Fund under the general supervision of the Board of Directors. (b) Derivative financial instruments -- The Fund may engage in various portfolio investment strategies to increase or decrease the level of risk to which the Fund is exposed more quickly and efficiently than transactions in other types of instruments. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. o Financial futures contracts -- The Fund may purchase or sell financial futures contracts and options on such futures contracts for the purpose of hedging the market risk on existing securities or the intended purchase of securities. 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 Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund 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 Fund is authorized to write covered call options and purchase put options. When the Fund writes an option, an amount equal to the premium received by the Fund 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 Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received). Written and purchased options are non-income producing investments. (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 its shareholders. Therefore, no Federal income tax provision is required. (d) Security transactions and investment income -- Security transactions are recorded on the dates the transactions are entered into (the trade dates). Realized gains and losses on security transactions are determined on the identified cost basis. Dividend income is recorded on the ex-dividend dates. Interest income is recognized on the accrual basis. As required, effective November 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing all premiums and discounts on debt securities. The cumulative effect of this accounting change had no impact on total net assets of the Fund, but resulted in a $45,653 increase in cost of securities (which, in turn, results in a corresponding $45,653 decrease in net unrealized appreciation and a corresponding $45,653 increase in undistributed net investment income), based on securities held by the Fund as of October 31, 2001. The effect of this change for the year ended October 31, 2002 was to increase net investment income by $12,411, decrease net unrealized appreciation by $27,826 and increase net realized capital losses by $30,238. The statement of changes in net assets and financial highlights for prior periods have not been restated to reflect this change in presentation. (e) Dividends and distributions -- Dividends from net investment income are declared and paid monthly. Distributions of capital gains are recorded on the ex-dividend dates. (f) Change in financial statement classification for Auction Market Preferred Stock ("AMPS") -- In accordance with the provisions of the Financial Accounting Standards Board's Emerging Issues Task Force D-98 ("EITF D-98"), "Classification and Measurement of Redeemable Securities," effective for the current period, the Fund has reclassified its AMPS outside of permanent equity in the Net Assets section of the Statement of Net Assets. In addition, dividends to Preferred Stock shareholders are now classified as a component of the "Net Increase in Net Assets Resulting from Operations" on the Statements of Operations and Changes in Net Assets and as a component of the "Total from investment operations" in the Financial Highlights. Prior year amounts presented have been reclassified to conform to this period's presentation. The application of EITF D-98 related entirely to presentation and had no impact on net asset value or the allocation of net investment income or net realized capital gains or losses to Common Stock shareholders. (g) Reclassification -- Accounting principles generally accepted in the United States of America require that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. Accordingly, the current year's permanent book/tax difference of $187,297 has been reclassified between accumulated net realized capital losses and undistributed net investment income. This reclassification has no effect on net assets or net asset value per share. 2. Investment Advisory Agreement and Transactions with Affiliates: The Fund 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 Fund's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays a monthly fee at an annual rate of .50% of the Fund's average weekly net assets, including proceeds from the issuance of Preferred Stock. For the year ended October 31, 2002, FAM reimbursed the Fund in the amount of $3,065. For the year ended October 31, 2002, the Fund reimbursed FAM $23,178 for certain accounting services. Certain officers and/or directors of the Fund are officers and/or directors of FAM, PSI, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the year ended October 31, 2002 were $296,686,973 and $299,928,527, respectively. 18 & 19 MuniYield Quality Fund, Inc., October 31, 2002 NOTES TO FINANCIAL STATEMENTS (concluded) Net realized gains (losses) for the year ended October 31, 2002 and net unrealized gains (losses) as of October 31, 2002 were as follows: - -------------------------------------------------------------------------------- Realized Unrealized Gains (Losses) Gains (Losses) - -------------------------------------------------------------------------------- Long-term investments ................ $ 3,867,048 $ 42,968,459 Financial futures contracts .......... (6,731,051) (1,470,625) ------------ ------------ Total ................................ $ (2,864,003) $ 41,497,834 ============ ============ - -------------------------------------------------------------------------------- As of October 31, 2002, net unrealized appreciation for Federal income tax purposes aggregated $42,996,256, of which $43,894,587 related to appreciated securities and $898,331 related to depreciated securities. The aggregate cost of investments at October 31, 2002 for Federal income tax purposes was $608,924,413. 4. Stock Transactions: The Fund is authorized to issue 200,000,000 shares of stock, including Preferred Stock, par value $.10 per share, all of which were initially classified as Common Stock. The Board of Directors is authorized, however, to reclassify any unissued shares of stock without approval of the holders of Common Stock. Common Stock Shares issued and outstanding during the years ended October 31, 2002 and October 31, 2001 remained constant. Preferred Stock AMPS are redeemable shares of Preferred Stock of the Fund, with a par value of $.05 per share and a liquidation preference of $25,000 per share plus accrued and unpaid dividends, that entitle their holders to receive cash dividends at an annual rate that may vary for the successive dividend periods. The yields in effect at October 31, 2002 were as follows: Series A, 1.349%; Series B, 1.45%; Series C, 1.40%; and Series D, 1.50%. Shares issued and outstanding during the years ended October 31, 2002 and October 31, 2001 remained constant. The Fund pays commissions to certain broker-dealers at the end of each auction at an annual rate ranging from .25% to .375%, calculated on the proceeds of each auction. For the year ended October 31, 2002, Merrill Lynch, Pierce, Fenner & Smith Incorporated, an affiliate of FAM, earned $246,754 as commissions. 5. Distributions to Shareholders: On November 7, 2002, a tax-exempt income dividend of $.078500 was declared. The dividend was paid on November 27, 2002, to shareholders of record on November 14, 2002. The tax character of distributions paid during the fiscal years ended October 31, 2002 and October 31, 2001 was as follows: - ----------------------------------------------------------------------------- 10/31/2002 10/31/2001 - ----------------------------------------------------------------------------- Distributions paid from: Tax-exempt income .................... $30,568,601 $32,012,451 Ordinary income ...................... 198,018 -- ----------- Total distributions .................... $30,766,619 $32,012,451 =========== =========== - ----------------------------------------------------------------------------- As of October 31, 2002, the components of accumulated earnings on a tax basis were as follows: - ----------------------------------------------------------------------------- Undistributed tax-exempt income--net .................... $ 6,193,612 Undistributed long-term capital gains--net .............. -- ------------ Total undistributed earnings--net ....................... 6,193,612 Capital loss carryforward ............................... (7,974,254)* Unrealized gains--net ................................... 37,026,532** ------------ Total accumulated earnings--net ......................... $ 35,245,890 ============ - ----------------------------------------------------------------------------- * On October 31, 2002, the Fund had a net capital loss carryforward of $7,974,254, of which $4,695,349 expires in 2008 and $3,278,905 expires in 2010. 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, the realization for tax purposes of unrealized losses on certain futures contracts and the difference between book and tax amortization methods for premiums and discounts on fixed income securities. INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders, MuniYield Quality Fund, Inc.: We have audited the accompanying statement of net assets, including the schedule of investments, of MuniYield Quality Fund, Inc. as of October 31, 2002, the related statements of operations for the year then ended and changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years presented. These financial statements and the financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at October 31, 2002 by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of MuniYield Quality Fund, Inc. as of October 31, 2002, the results of its operations, the changes in its net assets, and the financial highlights for the respective stated periods in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Princeton, New Jersey December 6, 2002 20 & 21 MuniYield Quality Fund, Inc., October 31, 2002 OFFICERS AND DIRECTORS
Number of Portfolios in Other Position(s) Length Fund Complex Directorships Held of Time Overseen by Held by Name Address & Age with Fund Served Principal Occupation(s) During Past 5 Years Director Director - ------------------------------------------------------------------------------------------------------------------------------------ Interested Director - ------------------------------------------------------------------------------------------------------------------------------------ Terry K. P.O. Box 9011 President 1999 to Chairman, Americas Region since 2001, and 117 Funds None Glenn* Princeton, NJ 08543-9011 and present Executive Vice President since 1983 of Fund 162 Portfolios Age: 62 Director and Asset Management, L.P. ("FAM") and Merrill 1992 to Lynch Investment Managers, L.P. ("MLIM"); present President of Merrill Lynch Mutual Funds since 1999; President of FAM Distributors, Inc. ("FAMD") since 1986 and Director thereof since 1991; Executive Vice President and Director of Princeton Services, Inc. ("Princeton Services") since 1993; President of Princeton Administrators, L.P. since 1988; Director of Financial Data Services, Inc. since 1985. ------------------------------------------------------------------------------------------------------------------------ * Mr. Glenn is a director, trustee or member of an advisory board of certain other investment companies for which FAM or MLIM acts as investment adviser. Mr. Glenn is an "interested person," as described in the Investment Company Act, of the Fund based on his positions as Chairman (Americas Region) and Executive Vice President of FAM and MLIM; President of FAMD; Executive Vice President of Princeton Services; and President of Princeton Administrators, L.P. The Director's term is unlimited. Directors 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. - ------------------------------------------------------------------------------------------------------------------------------------ Number of Portfolios in Other Position(s) Length Fund Complex Directorships Held of Time Overseen by Held by Name Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years Director Director - ------------------------------------------------------------------------------------------------------------------------------------ Independent Directors - ------------------------------------------------------------------------------------------------------------------------------------ James H. P.O. Box 9011 Director 1995 to Director and Executive Vice President, The 42 Funds None Bodurtha Princeton, NJ 08543-9011 present China Business Group, Inc. since 1996. 61 Portfolios Age: 58 - ------------------------------------------------------------------------------------------------------------------------------------ Joe Grills P.O. Box 9011 Director 2002 to Member of Committee on Investment of Employee 42 Funds Kimco Princeton, NJ 08543-9011 present Benefit Assets of the Association for 61 Portfolios Realty Age: 67 Financial Professionals since 1986. - ------------------------------------------------------------------------------------------------------------------------------------ Herbert I. P.O. Box 9011 Director 1992 to John M. Olin Professor of Humanities, 42 Funds None London Princeton, NJ 08543-9011 present New York University since 1993. 61 Portfolios Age: 63 - ------------------------------------------------------------------------------------------------------------------------------------ Andre F. P.O. Box 9011 Director 1992 to George Gund Professor of Finance and Banking, 42 Funds None Perold Princeton, NJ 08543-9011 present Harvard School of Business since 2000; 61 Portfolios Age: 50 Finance Area Chair since 1996. - ------------------------------------------------------------------------------------------------------------------------------------ Roberta P.O. Box 9011 Director 1999 to Shareholder, Modrall, Sperling, Roehl, 42 Funds Cooper's, Cooper Ramo Princeton, NJ 08543-9011 present Harris & Sisk, P.A. since 1993. 61 Portfolios Inc.; ECMC, Age: 60 Inc. - ------------------------------------------------------------------------------------------------------------------------------------ Robert S. P.O. Box 9011 Director 2002 to Principal of STI Management since 1994; 42 Funds None Salomon, Jr. Princeton, NJ 08543-9011 present Director of Rye Country Day School 61 Portfolios Age: 66 since 2001. - ------------------------------------------------------------------------------------------------------------------------------------ Melvin R. P.O. Box 9011 Director 2002 to Director, Silbanc Properties, Ltd.(real 42 Funds None Seiden Princeton, NJ 08543-9011 present estate, investment and consulting) 61 Portfolios Age: 72 since 1987. - ------------------------------------------------------------------------------------------------------------------------------------ Stephen B. P.O. Box 9011 Director 2002 to Chairman, Fernwood Advisors since 1996. 42 Funds Interna- Swensrud Princeton, NJ 08543-9011 present 61 Portfolios tional Age: 69 Mobile Communi- cations, Inc. ------------------------------------------------------------------------------------------------------------------------ * The Director's term is unlimited. Directors serve until their resignation, removal or death, or until December 31 of the year in which they turn 72. - ------------------------------------------------------------------------------------------------------------------------------------ Position(s) Length Held of Time Name Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years - ------------------------------------------------------------------------------------------------------------------------------------ Fund Officers - ------------------------------------------------------------------------------------------------------------------------------------ Donald C. P.O. Box 9011 Vice 1993 to First Vice President of FAM and MLIM since 1997 and Treasurer thereof Burke Princeton, NJ 08543-9011 President present since 1999; Senior Vice President and Treasurer of Princeton Services Age: 42 and and since 1999; Vice President of FAMD since 1999; Vice President of FAM and Treasurer 1999 to MLIM from 1990 to 1997; Director of MLIM Taxation since 1990. present - ------------------------------------------------------------------------------------------------------------------------------------ Kenneth A. P.O. Box 9011 Senior 2002 to Managing Director of FAM and MLIM since 1997. Jacob Princeton, NJ 08543-9011 Vice present Age: 51 President - ------------------------------------------------------------------------------------------------------------------------------------ John M. P.O. Box 9011 Senior 2002 to Managing Director of FAM and MLIM since 2000 and First Vice President Loffredo Princeton, NJ 08543-9011 Vice present from 1997 to 2000. Age: 38 President - ------------------------------------------------------------------------------------------------------------------------------------ Michael P.O. Box 9011 Vice 2000 to Vice President of MLIM since 1999. Kalinoski Princeton, NJ 08543-9011 President present Age: 32 - ------------------------------------------------------------------------------------------------------------------------------------ Alice A. P.O. Box 9011 Secretary 1999 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM Pellegrino Princeton, NJ 08543-9011 present from 1999 to 2002; Attorney associated with MLIM since 1997; Associate Age: 42 with Kirkpatrick & Lockhart LLP from 1992 to 1997. ------------------------------------------------------------------------------------------------------------------------ * Officers of the Fund serve at the pleasure of the Board of Directors. - ------------------------------------------------------------------------------------------------------------------------------------
Custodian State Street Bank and Trust Company One Heritage Drive North Quincy, MA 02171 Transfer Agents Common Stock: EquiServe Trust Company, I.A. P.O. Box 43011 Providence, RI 02940-3011 Preferred Stock: The Bank of New York 100 Church Street New York, NY 10286 NYSE Symbol MQY 22 & 23 [LOGO] Merrill Lynch Investment Managers [GRAPHICS OMITTED] MuniYield Quality Fund, Inc. seeks to provide shareholders with as high a level of current income exempt from Federal income taxes as is consistent with its investment policies and prudent investment management by investing primarily in a portfolio of long-term, high-grade municipal obligations the interest on which is exempt from Federal income taxes in the opinion of bond counsel to the issuer. This report, including the financial information herein, is transmitted to shareholders of MuniYield Quality Fund, Inc. for their information. It is not a prospectus. Past performance results shown in this report should not be considered a representation of future performance. The Fund has leveraged its Common Stock and intends to remain leveraged by issuing Preferred Stock to provide the Common Stock shareholders with a potentially higher rate of return. Leverage creates risks for Common Stock shareholders, including the likelihood of greater volatility of net asset value and market price of shares of the Common Stock, and the risk that fluctuations in the short-term dividend rates of the Preferred Stock may affect the yield to Common Stock shareholders. Statements and other information herein are as dated and are subject to change. MuniYield Quality Fund, Inc. Box 9011 Princeton, NJ 08543-9011 [RECYCLED LOGO] Printed on post-consumer recycled paper #16352--10/02 -----END PRIVACY-ENHANCED MESSAGE-----