UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSRS CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-6660 Name of Fund: MuniYield Quality Fund, Inc. Fund Address: P.O. Box 9011 Princeton, NJ 08543-9011 Name and address of agent for service: Terry K. Glenn, President, MuniYield Quality Fund, Inc., 800 Scudders Mill Road, Plainsboro, NJ, 08536. Mailing address: P.O. Box 9011, Princeton, NJ, 08543-9011 Registrant's telephone number, including area code: (609) 282-2800 Date of fiscal year end: 10/31/04 Date of reporting period: 11/01/03 - 04/30/04 Item 1 - Report to Stockholders [LOGO] Merrill Lynch Investment Managers www.mlim.ml.com MuniYield Quality Fund, Inc. Semi-Annual Report April 30, 2004 [LOGO] Merrill Lynch Investment Managers 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, net of dividends to Preferred Stock, 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. As of April 30, 2004, the percentage of the Fund's total net assets invested in inverse floaters was 11.51%. 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. 2 MUNIYIELD QUALITY FUND, INC. APRIL 30, 2004 A Letter From the President Dear Shareholder For the six-month and 12-month periods ended April 30, 2004, the Lehman Brothers Municipal Bond Index posted returns of +1.19% and +2.68%, respectively. Its taxable counterpart, the Lehman Brothers Aggregate Bond Index, had returns of +1.25% and +1.82% for the same periods. Amid considerable month-to-month volatility, tax-exempt bond yields rose over the past year, although not to the same extent as 10-year U.S. Treasury yields. In all, tax-exempt securities continued to be an attractive fixed income investment alternative. As of April month-end, the Federal Reserve Board maintained its accommodative policy stance, although a better-than-expected employment report for the month of March prompted speculation that an interest rate increase could come sooner than many had expected. On April 2, 2004, the good news on the employment front -- previously the one dim spot in an otherwise bright economic picture -- helped prompt the yield on the 10-year Treasury bond to spike nearly 25 basis points (.25%) from 3.91% to 4.15%. Market watchers continue to monitor the economic data and Federal Reserve Board language for indications of interest rate direction. If economic growth maintains its recent pace and employment figures continue to improve, many believe it is just a matter of time before interest rates move upward. Equity markets, in the meantime, gleaned support from the improving economic environment and provided attractive returns. For the six-month and 12-month periods ended April 30, 2004, the Standard & Poor's 500 Index returned +6.27% and +22.88%, respectively. Significant fiscal and monetary stimulus in 2003, including low interest rates and tax cuts, has opened the door to consumer spending, capital spending, increases in exports and long-awaited job growth. As expected, these developments have led the way to improvements in corporate earnings -- a positive for stock markets. The events and efforts of the past year leave us with a much stronger economy today. Of course, markets will always fluctuate, and there are many uncertainties -- not the least of which are geopolitical in nature -- which can translate into negative market movements. Keeping this in mind, we encourage you to revisit your portfolio and your asset allocation strategy to ensure you are well positioned to take advantage of the opportunities that lie ahead. Importantly, your financial advisor can help you develop a strategy most suitable for your circumstances through all types of market and economic cycles. We thank you for trusting Merrill Lynch Investment Managers with your investment assets, and we look forward to serving you in the months and years ahead. Sincerely, /s/ Terry K. Glenn Terry K. Glenn President and Director MUNIYIELD QUALITY FUND, INC. APRIL 30, 2004 3 [LOGO] Merrill Lynch Investment Managers A Discussion With Your Fund's Portfolio Manager We remained focused on enhancing yield and preserving net asset value in a volatile interest rate environment, and the Fund was able to outperform its comparable Lipper category average. Describe the recent market environment relative to municipal bonds. For much of the six-month period, a positive economic backdrop helped bond prices to move higher as yields, which typically move opposite of prices, declined. In early April, however, a surprisingly strong monthly employment report triggered fears that the long-accommodative Federal Reserve Board might raise interest rates sooner than many had expected. As a result, bond yields rose (prices fell) sharply for the remainder of the period. At the end of April, long-term U.S. Treasury bond yields had climbed to 5.13%, representing an increase of approximately 15 basis points (.15%) over the past six months. Ten-year U.S. Treasury note yields stood at 4.30% as of period-end, an increase of more than 20 basis points. Tax-exempt bond yields generally mimicked the movement of their taxable counterparts, although volatility in the municipal market was more subdued. Long-term revenue bond yields, as measured by the Bond Buyer Revenue Bond Index, rose just four basis points over the past six months. For the same period, yields on AAA-rated issues maturing in 30 years increased approximately 10 basis points to 4.93% while yields on 10-year, AAA-rated issues increased more than 16 basis points to nearly 4%, according to Municipal Market Data. The more marked increase in 10-year bond yields may be attributed to the fact that recent issuance has been heavily concentrated in the 10-year - 20-year range. The resulting supply imbalance prompted higher intermediate bond yields (and lower prices). Longer-maturity and lower-rated issues continued to benefit from more favorable supply/demand factors and, therefore, have seen less price depreciation. For the six-month period as a whole, municipal bond supply declined approximately 5% compared to the same period a year ago. While investor enthusiasm for stocks has taken some attention away from fixed income markets, overall demand for tax-exempt municipal bonds has remained positive. Recent Federal Reserve Board statistics showed that U.S. household holdings of municipal securities increased by more than $25 billion during the fourth quarter of 2003 to approximately $680 billion. In addition, data from the Investment Company Institute indicates that, in just the first three months of 2004, tax-exempt bond funds have seen net new cash flows of almost $640 million. How did the Fund perform in light of the existing market conditions? For the six-month period ended April 30, 2004, the Common Stock of MuniYield Quality Fund, Inc. had net annualized yields of 6.46% and 7.30%, based on a period-end per share net asset value of $15.08 and a per share market price of $13.35, respectively, and $.486 per share income dividends. Over the same period, the total investment return on the Fund's Common Stock was +1.50%, based on a change in per share net asset value from $15.36 to $15.08, and assuming reinvestment of $.486 per share ordinary income dividends. For the six-month period ended April 30, 2004, the Fund's Auction Market Preferred Stock (AMPS) had an average yield of .86% for Series A, .90% for Series B, .97% for Series C and .93% for Series D. The Fund's return, based on net asset value, exceeded that of its comparable Lipper category of Insured Municipal Debt Funds (Leveraged), which had an average return of +1.01% for the six-month period. (Funds in this Lipper category invest primarily in municipal debt issues insured as to timely payment. These funds can be leveraged via use of debt, preferred equity and/or reverse repurchase agreements.) The Fund's outperformance is primarily attributed to the prerefunding of several holdings. When municipal bonds are prerefunded, they are essentially refinanced ahead of their maturity date. The proceeds from the refinancing are typically used to purchase government-backed debt. This is then pledged to pay off the original debt at an earlier call date. In short, when the bond holdings are prerefunded, their prices generally increase sharply, particularly when the yield curve is relatively steep. In addition, the Fund maintained its dividend during the period at $.081 a share, generating an above-average tax-exempt yield for the Fund's shareholders. 4 MUNIYIELD QUALITY FUND, INC. APRIL 30, 2004 For a description of the Fund's total investment return based on a change in the per share market value of the Fund's Common Stock (as measured by the trading price of the Fund's shares on the New York Stock Exchange), and assuming reinvestment of dividends, please refer to the Financial Highlights section included in this report. As a closed-end fund, the Fund's shares may trade in the secondary market at a premium or discount to the Fund's net asset value. As a result, total investment returns based on changes in the market value of the Fund's Common Stock can vary significantly from total investment return based on changes in the Fund's net asset value. What changes were made to the portfolio during the period? We continued to pursue three general themes in managing the Fund. First, when making new purchases, we tended to target longer-dated bonds, generally in the 25-year range. The municipal yield curve flattened out past this range; therefore, there was no significant yield to be gained by extending out any further. Second, we found it advantageous to purchase California municipal bonds. Given recent heavy supply of California issues, we have been able to make purchases at attractive spreads relative to national municipal bonds and historic norms for the state. We believe these holdings should benefit Fund performance as California's finances start to improve and state bonds begin trading at more typical levels. Finally, when available, we continued to favor premium-coupon bonds when making new purchases. We generally maintained the Fund's fully invested position throughout the period, seeking to enhance shareholder income. With short-term interest rates at historic lows, the cost of holding cash reserves would have been relatively high in terms of its effect on performance. Given the historically low short-term interest rates, the Fund's borrowing costs remained at attractive levels of around 1%. These levels, in combination with a positively sloped yield curve, provided a generous income benefit to the Common Stock shareholder from the leveraging of Preferred Stock. We believe the Fund's borrowing costs should remain at relatively low levels for the foreseeable future. While the timing is questionable, the Federal Reserve Board's next move likely will be to raise short-term interest rates. The increase, however, is expected to be gradual and should not have a material impact on the positive advantage leverage has had on the Fund's Common Stock yield. However, should the spread between short-term and long-term interest rates narrow, the benefits of leveraging will decline and, as a result, reduce the yield on the Fund's Common Stock. At the end of the period, the Fund's leverage amount, due to AMPS, was 30.35% of total assets. (For a more complete explanation of the benefits and risks of leveraging, see page 2 of this report to shareholders.) How would you characterize the Fund's position at the close of the period? The portfolio essentially remained fully invested in high-quality municipal bonds at the end of the period, which we believe should continue to provide a material benefit to the Common Stock shareholder as short-term interest rates remain near their historic lows. We maintained our defensive market stance at the close of the period in recognition of improving economic conditions. We believe this positioning prepares the Fund for relative outperformance once interest rates inevitably begin to rise. Finally, we remained overweight in premium-coupon bonds and continued to favor maturities in the 25-year range. Michael A. Kalinoski Vice President and Portfolio Manager May 12, 2004 MUNIYIELD QUALITY FUND, INC. APRIL 30, 2004 5 [LOGO] Merrill Lynch Investment Managers Proxy Results During the six-month period ended April 30, 2004, MuniYield Quality Fund, Inc.'s Common Stock shareholders voted on the following proposal. The proposal was approved at a shareholders' meeting on April 27, 2004. A description of the proposal and number of shares voted are as follows: -------------------------------------------------------------------------------------------------------------- Shares Voted Shares Withheld For From Voting -------------------------------------------------------------------------------------------------------------- 1. To elect the Fund's Directors: James H. Bodurtha 28,835,951 572,544 Joe Grills 28,833,526 574,969 Roberta Cooper Ramo 28,829,520 578,975 Robert S. Salomon, Jr. 28,833,868 574,627 Stephen B. Swensrud 28,817,683 590,812 -------------------------------------------------------------------------------------------------------------- During the six-month period ended April 30, 2004, MuniYield Quality Fund, Inc.'s Preferred Stock shareholders (Series A - D) voted on the following proposal. The proposal was approved at a shareholders' meeting on April 27, 2004. A description of the proposal and number of shares voted are as follows: -------------------------------------------------------------------------------------------------------------- Shares Voted Shares Withheld For From Voting -------------------------------------------------------------------------------------------------------------- 1. To elect the Fund's Board of Directors: James H. Bodurtha, Joe Grills, Herbert I. London, Andre F. Perold, Roberta Cooper Ramo, Robert S. Salomon, Jr. and Stephen B. Swensrud 7,024 6 -------------------------------------------------------------------------------------------------------------- Quality Profile The quality ratings of securities in the Fund as of April 30, 2004 were as follows: -------------------------------------------------------------------------------- Percent of Total S&P Rating/Moody's Rating Investments -------------------------------------------------------------------------------- AAA/Aaa ........................................................... 83.3% AA/Aa ............................................................. 5.8 A/A ............................................................... 2.7 BBB/Baa ........................................................... 7.6 NR (Not Rated) .................................................... 0.6 -------------------------------------------------------------------------------- 6 MUNIYIELD QUALITY FUND, INC. APRIL 30, 2004 Schedule of Investments (in Thousands) S&P Moody's Face State Ratings Ratings Amount Municipal Bonds Value =================================================================================================================================== Alaska--0.5% AAA Aaa $ 2,100 Alaska State International Airports Revenue Bonds, Series B, 5.75% due 10/01/2019 (a) $ 2,313 =================================================================================================================================== Arizona--1.1% AAA NR* 2,345 Maricopa County, Arizona, Public Finance Corporation, Lease Revenue Bonds, RIB, Series 511X, 9.63% due 7/01/2014 (a)(i) 2,796 AAA Aaa 2,000 Mesa, Arizona, IDA, Revenue Bonds (Discovery Health Systems), Series A, 5.875% due 1/01/2014 (g) 2,220 =================================================================================================================================== California--18.1% AAA Aaa 4,150 Alameda Corridor Transportation Authority, California, Revenue Refunding Bonds, Subordinated Lien, Series A, 5.525%** due 10/01/2025 (a) 2,602 California State Department of Water Resources, Power Supply Revenue Bonds, Series A: BBB+ A3 1,400 5.375% due 5/01/2021 1,442 AAA Aaa 1,000 5.375% due 5/01/2022 (g) 1,053 BBB Baa1 4,000 California State, GO, 5.25% due 4/01/2032 3,952 California State, GO, Refunding: AAA Aaa 2,000 5.25% due 2/01/2022 (k) 2,077 BBB Baa1 5,700 5.25% due 2/01/2028 5,626 BBB Baa1 3,000 5.25% due 2/01/2029 2,955 AAA Aaa 6,000 5.25% due 2/01/2030 (b) 6,091 AAA Aaa 7,700 5.25% due 2/01/2030 (g) 7,817 AAA NR* 2,850 California State, GO, Refunding, ROCS, Series II-RR-272, 9.33% due 2/01/2033 (i)(j) 2,885 BBB- Baa2 1,500 California State Public Works Board, Lease Revenue Bonds (Department of Mental Health--Coalinga State Hospital), Series A, 5.125% due 6/01/2029 1,438 California State, Various Purpose, GO: BBB Baa1 2,500 5.25% due 11/01/2029 2,462 BBB Baa1 3,200 5.50% due 11/01/2033 3,269 Golden State Tobacco Securitization Corporation of California, Tobacco Settlement Revenue Bonds: BBB Baa3 3,600 Series 2003-A-1, 6.75% due 6/01/2039 3,372 BBB- Baa2 4,050 Series B, 5.60% due 6/01/2028 4,050 AAA Aaa 3,000 Series B, 5.50% due 6/01/2033 (b) 3,095 AAA Aaa 1,870 Series B, 5.625% due 6/01/2033 (b) 1,953 AAA Aaa 4,500 Series B, 5% due 6/01/2038 (a) 4,343 AAA Aaa 14,160 Series B, 5.625% due 6/01/2038 (k) 14,736 AAA Aaa 1,600 Series B, 5.50% due 6/01/2043 (b) 1,647 San Diego, California, Unified School District, Election 1998, GO, Series D (d): AAA Aaa 3,945 5.25% due 7/01/2022 4,139 AAA Aaa 2,175 5.25% due 7/01/2024 2,262 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 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 ROCS Reset Option Certificates S/F Single-Family MUNIYIELD QUALITY FUND, INC. APRIL 30, 2004 7 [LOGO] Merrill Lynch Investment Managers Schedule of Investments (continued) (in Thousands) S&P Moody's Face State Ratings Ratings Amount Municipal Bonds Value =================================================================================================================================== Colorado--9.7% Colorado Health Facilities Authority Revenue Bonds, Series A: AA Aa2 $ 1,650 (Catholic Health Initiatives), 5.50% due 3/01/2032 $ 1,690 AA NR* 1,600 (Covenant Retirement Communities Inc.), 5.50% due 12/01/2027 (j) 1,649 AA NR* 1,000 (Covenant Retirement Communities Inc.), 5.50% due 12/01/2033 (j) 1,026 Colorado Housing and Finance Authority, Revenue Refunding Bonds, AMT: AAA Aaa 2,085 (S/F Program), Series B-2, 6.80% due 2/01/2031 (g) 2,237 AAA Aaa 960 (S/F Program), Series C-2, 8.40% due 10/01/2021 (e)(g) 985 AAA Aaa 1,410 Series C-2, 7.05% due 4/01/2031 (e)(g) 1,440 AAA Aaa 2,285 Series C-2, 7.25% due 10/01/2031 (a) 2,328 AAA Aaa 640 Series E-2, 7% due 2/01/2030 (g) 649 AAA Aaa 4,000 Denver, Colorado, City and County Airport Revenue Bonds, AMT, Series D, 7.75% due 11/15/2013 (g) 4,870 Denver, Colorado, City and County, COP, Series B (a)(h): AAA Aaa 8,000 5.50% due 12/01/2010 9,061 AAA Aaa 6,405 5.75% due 12/01/2010 7,348 AAA Aaa 16,000 Northwest Parkway, Colorado, Public Highway Authority, Capital Appreciation Revenue Bonds, Senior Convertible, Series C, 5.332%** due 6/15/2025 (f) 11,427 =================================================================================================================================== District of AAA Aaa 2,500 District of Columbia Revenue Refunding Bonds (Catholic Columbia--0.6% University of America Project), 5.625% due 10/01/2029 (a) 2,620 =================================================================================================================================== Florida--0.7% 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 (j) 2,337 AAA Aaa 1,000 South Miami, Florida, Health Facilities Authority, Hospital Revenue Bonds (Baptist Health System Obligation Group), 5.25% due 11/15/2033 (a) 1,016 =================================================================================================================================== Georgia--1.2% A A3 4,785 Monroe County, Georgia, Development Authority, PCR, Refunding (Oglethorpe Power Corporation--Scherer), Series A, 6.80% due 1/01/2011 5,559 =================================================================================================================================== Hawaii--0.5% AAA Aaa 2,000 Hawaii State, GO, Series CX, 5.50% due 2/01/2021 (f) 2,138 =================================================================================================================================== Illinois--18.1% Chicago, Illinois, Board of Education, GO (a): AAA Aaa 1,750 (Chicago School Reform Project), Series A, 5.25% due 12/01/2030 1,768 NR* Aaa 5,000 RIB, Series 467, 10.13% due 12/01/2027 (i) 6,159 Chicago, Illinois, Capital Appreciation, GO, Project and Refunding, Series A (g): AAA Aaa 1,000 5.422%** due 1/01/2027 717 AAA Aaa 1,000 5.435%** due 1/01/2028 716 AAA Aaa 1,000 5.448%** due 1/01/2029 714 AAA Aaa 1,000 5.46%** due 1/01/2030 725 Chicago, Illinois, GO (Lakefront Millennium Parking Facilities) (g): AAA Aaa 5,000 5.125% due 1/01/2028 5,033 AAA Aaa 2,500 5.444%** due 1/01/2029 2,345 Chicago, Illinois, O'Hare International Airport Revenue Bonds, 3rd Lien, AMT, Series B-2: AAA Aaa 3,400 5.75% due 1/01/2023 (f) 3,628 AAA Aaa 4,000 5.75% due 1/01/2024 (f) 4,265 AAA Aaa 3,300 6% due 1/01/2029 (b) 3,558 Chicago, Illinois, O'Hare International Airport Revenue Refunding Bonds, AMT: AAA Aaa 2,665 3rd Lien, Series A-2, 5.75% due 1/01/2021 (f) 2,865 AAA NR* 6,835 DRIVERS, Series 250, 10.084% due 1/01/2021 (g)(i) 7,728 AAA Aaa 6,200 Cook County, Illinois, Capital Improvement, GO, Series C, 5.50% due 11/15/2026 (a) 6,510 AAA Aaa 2,130 Illinois Development Finance Authority Revenue Bonds (Presbyterian Home Lake Project), Series B, 6.25% due 9/01/2017 (f) 2,333 AAA Aaa 3,000 Illinois Sports Facilities Authority Revenue Bonds, 5.414%** due 6/15/2030 (a) 2,208 AAA Aaa 10,000 Illinois State, GO, First Series, 5.50% due 8/01/2018 (f) 10,813 NR* A1 3,750 Illinois Student Assistance Commission, Student Loan Revenue Refunding Bonds, AMT, Sub-Series CC, 6.875% due 3/01/2015 3,756 NR* Aaa 5,295 Kane and De Kalb Counties, Illinois, Community Unity School District Number 302, GO, 5.80% due 2/01/2022 (d) 5,861 Metropolitan Pier and Exposition Authority, Illinois, Dedicated State Tax Revenue Refunding Bonds (McCormick Place Expansion Project): AAA Aaa 7,000 5.50% due 12/15/2024 (d) 7,345 AAA Aaa 3,500 Series B, 5.75% due 6/15/2023 (g) 3,822 8 MUNIYIELD QUALITY FUND, INC. APRIL 30, 2004 Schedule of Investments (continued) (in Thousands) S&P Moody's Face State Ratings Ratings Amount Municipal Bonds Value =================================================================================================================================== Indiana--4.0% De Kalb County, Indiana, Redevelopment Authority Revenue Bonds (Mini-Mill), Series A (l): AAA Aaa $ 3,000 6.50% due 1/15/2014 $ 3,161 AAA Aaa 3,220 6.625% due 1/15/2017 3,388 AAA Aaa 2,500 Indiana Bond Bank Revenue Bonds, Guarantee State Revolver, 6.875% due 2/01/2012 (a) 2,654 BBB Baa2 8,800 Indianapolis, Indiana, Airport Authority, Special Facilities Revenue Bonds (Federal Express Corporation Project), AMT, 7.10% due 1/15/2017 9,057 =================================================================================================================================== Kentucky--2.2% 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 (g)(h) 6,883 NR* Baa2 3,250 Perry County, Kentucky, Solid Waste Disposal Revenue Bonds (TJ International Project), AMT, 7% due 6/01/2024 3,324 =================================================================================================================================== Louisiana--4.1% AAA Aaa 8,500 Louisiana Local Government, Environmental Facilities, Community Development Authority Revenue Bonds (Capital Projects and Equipment Acquisition), Series A, 6.30% due 7/01/2030 (a) 9,830 AAA Aaa 6,800 New Orleans, Louisiana, Ernest N. Morial Exhibit Hall Authority, Special Tax, Sub-Series A, 5.25% due 7/15/2028 (a) 6,937 AAA Aaa 1,900 Terrebonne Parish, Louisiana, Hospital Service District Number 1, Hospital Revenue Bonds (Terrebonne General Medical Center Project), 5.50% due 4/01/2033 (a) 1,986 =================================================================================================================================== Massachusetts--4.6% Massachusetts Bay, Massachusetts, Transportation Authority, General Transportation System Revenue Refunding Bonds, Series A (g): AAA Aaa 3,730 7% due 3/01/2011 4,487 AAA Aaa 3,550 7% due 3/01/2014 4,350 AAA Aaa 7,005 Massachusetts State, HFA, Rental Housing Mortgage Revenue Bonds, AMT, Series C, 5.60% due 1/01/2045 (f) 7,146 Massachusetts State, HFA, S/F Housing Revenue Bonds (g): AAA Aaa 1,310 6.35% due 6/01/2017 1,347 AAA Aaa 1,205 Series 37, 6.35% due 6/01/2017 1,239 AAA Aaa 2,625 Massachusetts State Port Authority, Special Facilities Revenue Bonds (Delta Air Lines Inc. Project), AMT, Series A, 5.50% due 1/01/2019 (a) 2,719 =================================================================================================================================== Michigan--5.6% Detroit, Michigan, City School District, GO, Series A (f): AAA Aaa 4,000 5.50% due 5/01/2019 4,324 AAA Aaa 3,625 5.50% due 5/01/2020 3,898 AAA Aaa 3,040 Michigan Higher Education Student Loan Authority, Student Loan Revenue Refunding Bonds, AMT, Series XVII-G, 5.20% due 9/01/2020 (a) 3,101 Michigan State Strategic Fund, Limited Obligation Revenue Refunding Bonds (Detroit Edison Company Project), AMT (b): AAA Aaa 3,100 5.45% due 9/01/2029 3,178 AAA Aaa 1,700 Series A, 5.50% due 6/01/2030 1,751 AAA Aaa 3,300 Series C, 5.65% due 9/01/2029 3,413 AAA Aaa 5,800 Series C, 5.45% due 12/15/2032 5,916 =================================================================================================================================== Nebraska--0.5% A+ NR* 2,300 Washington County, Nebraska, Wastewater Facilities Revenue Bonds (Cargill Inc. Project), AMT, 5.90% due 11/01/2027 2,407 =================================================================================================================================== Nevada--3.5% AA NR* 4,100 Carson City, Nevada, Hospital Revenue Bonds (Carson--Tahoe Hospital Project), Series A, 5.50% due 9/01/2033 (j) 4,202 Director of the State of Nevada, Department of Business and Industry Revenue Bonds (Las Vegas Monorail Company Project), First Tier (a): AAA Aaa 1,000 5.625% due 1/01/2032 1,050 AAA Aaa 4,400 5.375% due 1/01/2040 4,488 AAA Aaa 5,710 Washoe County, Nevada, School District, GO, 5.875% due 12/01/2009 (f)(h) 6,516 =================================================================================================================================== New Hampshire--3.5% AAA Aaa 10,000 New Hampshire Health and Education Facilities Authority Revenue Bonds (Dartmouth--Hitchcock Obligation Group), 5.50% due 8/01/2027 (f) 10,528 AAA Aaa 5,000 New Hampshire State Business Finance Authority, PCR, Refunding (Public Service Company), AMT, Series D, 6% due 5/01/2021 (g) 5,460 =================================================================================================================================== New Jersey--1.2% BBB Baa3 5,700 Tobacco Settlement Financing Corporation of New Jersey Revenue Bonds, 6.75% due 6/01/2039 5,339 MUNIYIELD QUALITY FUND, INC. APRIL 30, 2004 9 [LOGO] Merrill Lynch Investment Managers Schedule of Investments (continued) (in Thousands) S&P Moody's Face State Ratings Ratings Amount Municipal Bonds Value =================================================================================================================================== New York--10.4% AAA Aaa $ 700 Erie County, New York, IDA, School Facility Revenue Bonds (City of Buffalo Project), 5.75% due 5/01/2023 (f) $ 759 AAA Aaa 8,085 New York City, New York, City Municipal Water Finance Authority, Water and Sewer System Revenue Bonds, RITR, Series FR-6, 10.025% due 6/15/2026 (g)(i) 9,327 New York City, New York, GO: AAA NR* 3,500 DRIVERS, Series 194, 10.157% due 2/01/2015 (f)(i) 3,987 NR* Aaa 6,920 RIB, Series 394, 10.352% due 8/01/2016 (g)(i) 8,668 AAA Aaa 9,325 Refunding, Series G, 5.75% due 2/01/2017 (f) 9,968 AAA Aaa 5,000 Series B, 5.875% due 8/15/2013 (b) 5,455 AAA A2 4,660 Series F, 5.75% due 2/01/2019 (b) 4,982 AAA Aaa 4,570 Tobacco Settlement Financing Corporation of New York, Revenue Bonds, Series A-1, 5.25% due 6/01/2022 (a) 4,727 =================================================================================================================================== Ohio--0.5% AA NR* 2,000 Jackson, Ohio, Hospital Facilities Revenue Bonds (Consolidated Health System--Jackson Hospital),6.125% due 10/01/2020 (j) 2,196 =================================================================================================================================== 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 1,416 AAA Aaa 1,000 Series B, 6% due 6/01/2019 1,089 AAA Aaa 1,000 Series B, 6.125% due 6/01/2026 1,071 =================================================================================================================================== Oregon--2.0% NR* Aaa 7,500 Portland, Oregon, Sewer System Revenue Bonds, RIB, Series 386, 10.08% due 8/01/2020 (d)(i) 9,100 =================================================================================================================================== Pennsylvania--4.6% AAA Aaa 2,000 Allegheny County, Pennsylvania, Port Authority, Special Transportation Revenue Bonds, 6% due 3/01/2009 (g)(h) 2,289 AAA Aaa 800 Allegheny County, Pennsylvania, Sanitation Authority, Sewer Revenue Bonds, 5.50% due 12/01/2030 (g) 836 AAA Aaa 6,250 Philadelphia, Pennsylvania, Authority for Industrial Development, Lease Revenue Bonds, Series B, 5.50% due 10/01/2021 (f) 6,688 Philadelphia, Pennsylvania, School District, GO, Series B (d): AAA Aaa 1,500 5.625% due 8/01/2020 1,615 AAA Aaa 3,670 5.625% due 8/01/2021 3,946 AAA Aaa 2,000 5.625% due 8/01/2022 2,142 AAA Aaa 3,000 Washington County, Pennsylvania, Capital Funding Authority Revenue Bonds (Capital Projects and Equipment Program), 6.15% due 12/01/2029 (a) 3,428 =================================================================================================================================== Rhode Island--0.6% AAA Aaa 2,500 Providence, Rhode Island, GO, Series A, 5.70% due 7/15/2019 (f) 2,731 =================================================================================================================================== South Carolina--3.6% AAA Aaa 3,300 Florence County, South Carolina, Hospital Revenue Refunding Bonds (McLeod Regional Medical Center Project), Series A, 5.25% due 11/01/2034 (f) 3,351 AA Ba1 3,450 South Carolina Educational Facilities Authority for Private Nonprofit Institutions Revenue Bonds (The Benedict College), 5.625% due 7/01/2031 (j) 3,603 AAA NR* 3,045 South Carolina State Public Service Authority, Revenue Refunding Bonds, DRIVERS, Series 277, 10.112% due 1/01/2022 (g)(i) 3,454 NR* A1 3,800 Spartanburg County, South Carolina, Solid Waste Disposal Facilities Revenue Bonds (BMW Project), AMT, 7.55% due 11/01/2024 4,070 BBB Baa3 2,400 Tobacco Settlement Revenue Management Authority of South Carolina, Tobacco Settlement Revenue Bonds, Series B, 6.375% due 5/15/2030 2,166 =================================================================================================================================== Tennessee--6.3% AAA Aaa 17,000 Chattanooga, Tennessee, IDB, Lease Rent Revenue Bonds (Southside Redevelopment Corporation), 5.875% due 10/01/2024 (a) 18,590 AAA Aaa 5,000 Memphis--Shelby County, Tennessee, Airport Authority, Airport Revenue Bonds, AMT, Series D, 6.25% due 3/01/2018 (a) 5,545 Tennessee HDA, Homeownership Revenue Bonds, AMT, Series 2-C (a): AAA Aaa 2,075 6.10% due 7/01/2013 2,206 AA Aa2 2,390 6.20% due 7/01/2015 2,557 10 MUNIYIELD QUALITY FUND, INC. APRIL 30, 2004 Schedule of Investments (continued) (in Thousands) S&P Moody's Face State Ratings Ratings Amount Municipal Bonds Value =================================================================================================================================== Texas--15.5% Austin, Texas, Convention Center Revenue Bonds (Convention Enterprises Inc.), Trust Certificates, Second Tier, Series B: A- Aa3 $ 4,000 6% due 1/01/2023 $ 4,151 A- Aa3 1,400 5.75% due 1/01/2032 1,428 NR* Aaa 1,000 Bell County, Texas, Health Facilities Development Revenue Bonds (Lutheran General Health Care System), 6.50% due 7/01/2019 (c) 1,200 AAA Aaa 5,000 Dallas-Fort Worth, Texas, International Airport Revenue Bonds, AMT, Series A, 5.375% due 11/01/2022 (f) 5,152 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 2,005 AAA Aaa 2,145 5.875% due 11/01/2018 2,332 AAA Aaa 2,385 5.875% due 11/01/2019 2,592 NR* Aaa 5,235 Denton, Texas, Utility System Revenue Bonds, RIB, Series 369, 10.58% due 12/01/2017 (f)(i) 6,658 Gregg County, Texas, Health Facilities Development Corporation, Hospital Revenue Bonds (Good Shepherd Medical Center Project) (j): AA Baa2 6,000 6.875% due 10/01/2020 6,956 AA Baa2 2,600 6.375% due 10/01/2025 2,867 AAA Aaa 4,000 Harris County, Houston, Texas, Sports Authority Revenue Refunding Bonds, Senior Lien, Series G, 5.75% due 11/15/2020 (g) 4,311 AAA Aaa 2,700 Houston, Texas, Airport System Revenue Refunding Bonds, Sub-Lien, Series B, 5.50% due 7/01/2030 (f) 2,795 AA Baa2 2,800 Sam Rayburn, Texas, Municipal Power Agency Revenue Refunding Bonds, 5.75% due 10/01/2021 (j) 2,968 AAA Aaa 3,200 San Benito, Texas, Consolidated Independent School District, GO, 5.75% due 2/15/2016 (g) 3,538 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) 7,658 Travis County, Texas, Health Facilities Development Corporation, Revenue Refunding Bonds (Ascension Health Credit), Series A (h): AAA Aaa 8,100 5.875% due 11/15/2009 (a) 9,289 AAA Aaa 4,600 6.25% due 11/15/2009 (g) 5,362 =================================================================================================================================== Utah--3.8% AAA Aaa 15,000 Salt Lake City, Utah, Hospital Revenue Refunding Bonds (IHC Hospitals Inc.), 6.30% due 2/15/2015 (g) 17,415 =================================================================================================================================== Virginia--2.2% AAA Aaa 6,000 Fairfax County, Virginia, EDA, Resource Recovery Revenue Refunding Bonds, AMT, Series A, 6.05% due 2/01/2009 (a) 6,671 AAA Aaa 3,100 Halifax County, Virginia, IDA, Exempt Facility Revenue Refunding Bonds (Old Dominion Electric Cooperative Project), AMT, 5.625% due 6/01/2028 (a) 3,263 =================================================================================================================================== Washington--9.0% AAA NR* 10,000 Energy Northwest, Washington, Electric Revenue Bonds, DRIVERS, Series 242, 10.117% due 7/01/2017 (g)(i) 11,961 AAA Aaa 2,835 King County, Washington, Sewer Revenue Refunding Bonds, Series B, 5.50% due 1/01/2027 (f) 2,970 Washington State, GO (f): AAA Aaa 7,500 Series A and AT-6, 6.25% due 2/01/2011 8,667 AAA Aaa 9,000 Series S-4, 5.75% due 1/01/2013 10,025 Washington State, Various Purpose, GO (f): AAA Aaa 3,595 Series A, 5.625% due 7/01/2021 3,886 AAA Aaa 3,750 Series C, 5.25% due 1/01/2026 3,813 =================================================================================================================================== Wisconsin--0.7% BBB Baa3 2,600 Badger, Wisconsin, Tobacco Asset Securitization Corporation, Asset-Backed Revenue Bonds, 6.375% due 6/01/2032 2,334 NR* Aaa 1,000 Milwaukee County, Wisconsin, Airport Revenue Bonds, AMT, Series A, 5.75% due 12/01/2025 (d) 1,040 =================================================================================================================================== Puerto Rico--0.7% AAA Aaa 2,435 Puerto Rico Electric Power Authority, Power Revenue Bonds, Trust Receipts, Class R, Series 16 HH, 10.07% due 7/01/2013 (f)(i) 3,144 --------------------------------------------------------------------------------------------------------- Total Municipal Bonds (Cost--$610,723)--140.4% 644,336 ========================================================================================================= MUNIYIELD QUALITY FUND, INC. APRIL 30, 2004 11 [LOGO] Merrill Lynch Investment Managers Schedule of Investments (concluded) (in Thousands) Shares Held Short-Term Securities Value ========================================================================================================= 3,770 Merrill Lynch Institutional Tax-Exempt Fund (m) $ 3,770 --------------------------------------------------------------------------------------------------------- Total Short-Term Securities (Cost--$3,770)--0.8% 3,770 ========================================================================================================= Total Investments (Cost--$614,493)--141.2% 648,106 Other Assets Less Liabilities--2.4% 10,810 Preferred Stock, at Redemption Value--(43.6%) (200,010) -------- Net Assets Applicable to Common Stock--100.0% $458,906 ======== (a) AMBAC Insured. (b) XL Capital Insured. (c) Escrowed to maturity. (d) FGIC Insured. (e) FHA Insured. (f) FSA Insured. (g) MBIA Insured. (h) Prerefunded. (i) 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 April 30, 2004. (j) Radian Insured. (k) CIFG Insured. (l) Connie Lee Insured. (m) 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 Dividend Affiliate Activity Income -------------------------------------------------------------------------- Merrill Lynch Institutional Tax-Exempt Fund (6,700) $42 -------------------------------------------------------------------------- * Not Rated. ** Represents a zero coupon or step bond; the interest rate shown reflects the effective yield at the time of purchase by the Fund. Forward interest rate swaps entered into as of April 30, 2004 were as follows: (in Thousands) -------------------------------------------------------------------------- Notional Unrealized Amount Appreciation -------------------------------------------------------------------------- Receive a variable rate equal to 7-Day Bond Market Association Municipal Swap Index Rate and pay a fixed rate equal to 4.175% Broker, J.P. Morgan Chase Bank Expires June 2024 $52,000 $ 1,265 Receive a variable rate equal to 7-Day Bond Market Association Municipal Swap Index Rate and pay a fixed rate equal to 4.0025% Broker, Morgan Stanley Capital Services, Inc. Expires June 2024 $14,000 705 -------------------------------------------------------------------------- Total $ 1,970 ======= See Notes to Financial Statements. 12 MUNIYIELD QUALITY FUND, INC. APRIL 30, 2004 Statement of Net Assets As of April 30, 2004 ===================================================================================================================== Assets --------------------------------------------------------------------------------------------------------------------- Investments in unaffiliated securities, at value (identified cost--$610,722,748) .......................... $ 644,335,323 Investments in affiliated securities, at value (identified cost--$3,770,314) ............................ 3,770,314 Unrealized appreciation on forward interest rate swaps .... 1,969,898 Cash ...................................................... 96,803 Receivables: Interest ............................................... $ 11,928,347 Securities sold ........................................ 102,681 Dividends from affiliates .............................. 92 12,031,120 ------------- Prepaid expenses .......................................... 29,861 ------------- Total assets .............................................. 662,233,319 ------------- ===================================================================================================================== Liabilities --------------------------------------------------------------------------------------------------------------------- Payables: Securities purchased ................................... 2,641,309 Investment adviser ..................................... 318,020 Dividends to Common Stock shareholders ................. 305,104 Other affiliates ....................................... 4,647 3,269,080 ------------- Accrued expenses .......................................... 48,505 ------------- Total liabilities ......................................... 3,317,585 ------------- ===================================================================================================================== 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) .............................................. 200,009,580 ------------- ===================================================================================================================== Net Assets Applicable to Common Stock --------------------------------------------------------------------------------------------------------------------- Net assets applicable to Common Stock ..................... $ 458,906,154 ============= ===================================================================================================================== Analysis of Net Assets Applicable to Common Stock --------------------------------------------------------------------------------------------------------------------- Common Stock, par value $.10 per share (30,425,258 shares issued and outstanding) .................................. $ 3,042,526 Paid-in capital in excess of par .......................... 423,867,385 Undistributed investment income--net ...................... $ 7,303,599 Accumulated realized capital losses on investments--net ... (10,889,829) Unrealized appreciation on investments--net ............... 35,582,473 ------------- Total accumulated earnings--net ........................... 31,996,243 ------------- Total--Equivalent to $15.08 net asset value per share of Common Stock (market price--$13.35) ...................... $ 458,906,154 ============= * Auction Market Preferred Stock. See Notes to Financial Statements. MUNIYIELD QUALITY FUND, INC. APRIL 30, 2004 13 [LOGO] Merrill Lynch Investment Managers Statement of Operations For the Six Months Ended April 30, 2004 ===================================================================================================================== Investment Income --------------------------------------------------------------------------------------------------------------------- Interest .................................................. $ 17,850,214 Dividends from affiliates ................................. 41,989 ------------- Total income .............................................. 17,892,203 ------------- ===================================================================================================================== Expenses --------------------------------------------------------------------------------------------------------------------- Investment advisory fees .................................. $ 1,682,546 Commission fees ........................................... 252,823 Accounting services ....................................... 106,363 Transfer agent fees ....................................... 46,290 Professional fees ......................................... 33,119 Printing and shareholder reports .......................... 26,613 Custodian fees ............................................ 17,649 Directors' fees and expenses .............................. 13,448 Listing fees .............................................. 12,007 Pricing fees .............................................. 10,838 Other ..................................................... 27,706 ------------- Total expenses before reimbursement ....................... 2,229,402 Reimbursement of expenses ................................. (9,902) ------------- Total expenses after reimbursement ........................ 2,219,500 ------------- Investment income--net .................................... 15,672,703 ------------- ===================================================================================================================== Realized & Unrealized Loss on Investments--Net --------------------------------------------------------------------------------------------------------------------- Realized loss on investments--net ......................... (263,480) Change in unrealized appreciation on investments--net ..... (8,172,547) ------------- Total realized and unrealized loss on investments--net .... (8,436,027) ------------- ===================================================================================================================== Dividends to Preferred Stock Shareholders --------------------------------------------------------------------------------------------------------------------- Investment income--net .................................... (914,200) ------------- Net Increase in Net Assets Resulting from Operations ...... $ 6,322,476 ============= See Notes to Financial Statements. 14 MUNIYIELD QUALITY FUND, INC. APRIL 30, 2004 Statements of Changes in Net Assets For the Six For the Months Ended Year Ended April 30, October 31, Increase (Decrease) in Net Assets: 2004 2003 ===================================================================================================================== Operations --------------------------------------------------------------------------------------------------------------------- Investment income--net .................................... $ 15,672,703 $ 32,439,196 Realized gain (loss) on investments--net .................. (263,480) 1,847,031 Change in unrealized appreciation on investments--net ..... (8,172,547) 2,257,186 Dividends to Preferred Stock shareholders ................. (914,200) (1,983,700) ------------------------------- Net increase in net assets resulting from operations ...... 6,322,476 34,559,713 ------------------------------- ===================================================================================================================== Dividends to Common Stock Shareholders --------------------------------------------------------------------------------------------------------------------- Investment income--net .................................... (14,786,675) (29,345,161) ------------------------------- Net decrease in net assets resulting from dividends to Common Stock shareholders ................................ (14,786,675) (29,345,161) ------------------------------- ===================================================================================================================== Net Assets Applicable to Common Stock --------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets applicable to Common Stock ............................................. (8,464,199) 5,214,552 Beginning of period ....................................... 467,370,353 462,155,801 ------------------------------- End of period* ............................................ $ 458,906,154 $ 467,370,353 =============================== * Undistributed investment income--net ................. $ 7,303,599 $ 7,331,771 =============================== See Notes to Financial Statements. MUNIYIELD QUALITY FUND, INC. APRIL 30, 2004 15 [LOGO] Merrill Lynch Investment Managers Financial Highlights The following per share data and ratios have been derived For the Six For the Year Ended from information provided in the financial statements. Months Ended October 31, April 30, ------------------------------------------------ Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001+ 2000+ ================================================================================================================================== Per Share Operating Performance ---------------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period ..... $ 15.36 $ 15.19 $ 15.27 $ 14.18 $ 13.54 -------------------------------------------------------------- Investment income--net ................... .52++ 1.07++ 1.06 1.06 1.07 Realized and unrealized gain (loss) on investments--net ........................ (.28) .13 (.13) 1.08 .66 Dividends and distributions to Preferred Stock shareholders: Investment income--net ................ (.03) (.07) (.09) (.21) (.27) Realized gain on investments--net ..... -- -- --@ -- -- -------------------------------------------------------------- Total from investment operations ......... .21 1.13 .84 1.93 1.46 -------------------------------------------------------------- Less dividends and distributions to Common Stock shareholders: Investment income--net ................ (.49) (.96) (.91) (.84) (.82) Realized gain on investments--net ..... -- -- (.01) -- -- -------------------------------------------------------------- Total dividends and distributions to Common Stock shareholders ............... (.49) (.96) (.92) (.84) (.82) -------------------------------------------------------------- Net asset value, end of period ........... $ 15.08 $ 15.36 $ 15.19 $ 15.27 $ 14.18 ============================================================== Market price per share, end of period .... $ 13.35 $ 14.35 $ 13.74 $ 14.24 $12.0625 ============================================================== ================================================================================================================================== Total Investment Return** ---------------------------------------------------------------------------------------------------------------------------------- Based on market price per share .......... (3.82%)@@ 11.68% 2.94% 25.47% 7.03% ============================================================== Based on net asset value per share ....... 1.50%@@ 8.13% 6.12% 14.46% 12.09% ============================================================== ================================================================================================================================== Ratios Based on Average Net Assets of Common Stock ---------------------------------------------------------------------------------------------------------------------------------- Total expenses, net of reimbursement*** .. .94%* .94% .96% .98% .99% ============================================================== Total expenses*** ........................ .94%* .95% .96% .98% .99% ============================================================== Total investment income--net*** .......... 6.60%* 6.89% 7.03% 7.18% 7.74% ============================================================== Amount of dividends to Preferred Stock shareholders ............................ .38%* .42% .61% 1.45% 1.94% ============================================================== Investment income--net, to Common Stock shareholders ............................ 6.22%* 6.47% 6.42% 5.73% 5.81% ============================================================== ================================================================================================================================== Ratios Based on Average Net Assets of Common & Preferred Stock*** ---------------------------------------------------------------------------------------------------------------------------------- Total expenses, net of reimbursement ..... .66%* .66% .67% .68% .67% ============================================================== Total expenses ........................... .66%* .66% .67% .68% .67% ============================================================== Total investment income--net ............. 4.65%* 4.83% 4.89% 4.97% 5.23% ============================================================== ================================================================================================================================== Ratios Based on Average Net Assets of Preferred Stock ---------------------------------------------------------------------------------------------------------------------------------- Dividends to Preferred Stock shareholders .92%* .99% 1.40% 3.27% 4.03% ============================================================== 16 MUNIYIELD QUALITY FUND, INC. APRIL 30, 2004 Financial Highlights (concluded) For the Six For the Year Ended Months Ended October 31, The following per share data and ratios have been derived April 30, -------------------------------------------------- from information provided in the financial statements. 2004 2003 2002 2001+ 2000+ ================================================================================================================================== Supplemental Data ---------------------------------------------------------------------------------------------------------------------------------- Net assets applicable to Common Stock, end of period (in thousands) ........ $458,906 $467,370 $462,156 $464,522 $431,471 ================================================================ Preferred Stock outstanding, end of period (in thousands) ............... $200,000 $200,000 $200,000 $200,000 $200,000 ================================================================ Portfolio turnover ................... 9.57% 33.92% 46.29% 89.58% 51.19% ================================================================ ================================================================================================================================== Leverage ---------------------------------------------------------------------------------------------------------------------------------- Asset coverage per $1,000 ............ $ 3,295 $ 3,337 $ 3,311 $ 3,323 $ 3,157 ================================================================ ================================================================================================================================== Dividends Per Share on Preferred Stock Outstanding ---------------------------------------------------------------------------------------------------------------------------------- Series A--Investment income--net ..... $ 107 $ 273 $ 370 $ 852 $ 1,024 ================================================================ Series B--Investment income--net ..... $ 113 $ 238 $ 337 $ 792 $ 1,015 ================================================================ Series C--Investment income--net ..... $ 120 $ 253 $ 349 $ 832 $ 999 ================================================================ Series D--Investment income--net ..... $ 116 $ 228 $ 339 $ 791 $ 1,002 ================================================================ * Annualized. ** 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. ++ Based on average shares outstanding. @ Amount is less than $(.01) per share. @@ Aggregate total investment return. See Notes to Financial Statements. MUNIYIELD QUALITY FUND, INC. APRIL 30, 2004 17 [LOGO] Merrill Lynch Investment Managers Notes to Financial Statements 1. Significant Accounting Policies: MuniYield Quality Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended, 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. Actual results may differ from these estimates. These unaudited financial statements reflect all adjustments, which are, in the opinion of management, necessary to a fair statement of the results for the interim period presented. All such adjustments are of a normal, recurring nature. 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 last available bid price in the over-the-counter market or on the basis of yield equivalents as obtained by the Fund's pricing service from one or more dealers that make markets in the 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). Swap agreements are valued by quoted fair values received daily by the Fund from the counterparty. Short-term investments with a remaining maturity 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 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 both to increase the return of the Fund and to hedge, or protect, its exposure to interest rate movements and movements in the securities markets. 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. 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 may 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). 18 MUNIYIELD QUALITY FUND, INC. APRIL 30, 2004 Notes to Financial Statements (continued) Written and purchased options are non-income producing investments. o Forward interest rate swaps -- The Fund may enter into forward interest rate swaps. In a forward interest rate swap, the Fund and the counterparty agree to make periodic net payments on a specified notional contract amount, commencing on a specified future effective date, unless terminated earlier. When the agreement is closed, the Fund records a realized gain or loss in an amount equal to the value of the agreement. (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. The Fund amortizes all premiums and discounts on debt securities. (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. 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 six months ended April 30, 2004, FAM reimbursed the Fund in the amount of $9,902. For the six months ended April 30, 2004, the Fund reimbursed FAM $6,879 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 six months ended April 30, 2004 were $66,471,232 and $62,890,278, respectively. Net realized gains (losses) for the six months ended April 30, 2004 and net unrealized appreciation as of April 30, 2004 were as follows: -------------------------------------------------------------------------------- Realized Unrealized Gains (Losses) Appreciation -------------------------------------------------------------------------------- Long-term investments ..................... $ 4,021,393 $33,612,575 Forward interest rate swaps ............... (4,284,873) 1,969,898 ------------------------------- Total ..................................... $ (263,480) $35,582,473 =============================== MUNIYIELD QUALITY FUND, INC. APRIL 30, 2004 19 [LOGO] Merrill Lynch Investment Managers Notes to Financial Statements (concluded) As of April 30, 2004, net unrealized appreciation for Federal income tax purposes aggregated $33,663,906, of which $35,863,584 related to appreciated securities and $2,199,678 related to depreciated securities. The aggregate cost of investments at April 30, 2004 for Federal income tax purposes was $614,441,731. 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. Preferred Stock Auction Market Preferred Stock 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 April 30, 2004 were as follows: Series A, 1.02%; Series B, 1.00%; Series C, .85%; and Series D, .97%. 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 six months ended April 30, 2004, Merrill Lynch, Pierce, Fenner & Smith Incorporated, an affiliate of FAM, earned $118,175 as commissions. 5. Capital Loss Carryforward: On October 31, 2003, the Fund had a net capital loss carryforward of $4,372,432, of which $1,093,528 expires in 2008 and $3,278,904 expires in 2010. This amount will be available to offset like amounts of any future taxable gains. 6. Subsequent Event: The Fund paid a tax-exempt income dividend to holders of Common Stock in the amount of $.081000 per share on May 27, 2004 to shareholders of record on May 14, 2004. 20 MUNIYIELD QUALITY FUND, INC. APRIL 30, 2004 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 stable level of dividend distributions, 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. MUNIYIELD QUALITY FUND, INC. APRIL 30, 2004 21 [LOGO] Merrill Lynch Investment Managers Officers and Directors Terry K. Glenn, President and Director James H. Bodurtha, Director Joe Grills, Director Herbert I. London, Director Andre F. Perold, Director Roberta Cooper Ramo, Director Robert S. Salomon, Jr., Director Stephen B. Swensrud, Director Kenneth A. Jacob, Senior Vice President John M. Loffredo, Senior Vice President Michael A. Kalinoski, Vice President Donald C. Burke, Vice President and Treasurer Phillip S. Gillespie, Secretary Custodian State Street Bank and Trust Company P.O. Box 351 Boston, MA 02101 Transfer Agents Common Stock: EquiServe P.O. Box 43010 Providence, RI 02940-3010 Preferred Stock: The Bank of New York 101 Barclay Street -- 7 West New York, NY 10286 NYSE Symbol MQY 22 MUNIYIELD QUALITY FUND, INC. APRIL 30, 2004 Electronic Delivery The Fund offers electronic delivery of communications to its shareholders. In order to receive this service, you must register your account and provide us with e-mail information. To sign up for this service, simply access this website http://www.icsdelivery.com/live and follow the instructions. When you visit this site, you will obtain a personal identification number (PIN). You will need this PIN should you wish to update your e-mail address, choose to discontinue this service and/or make any other changes to the service. This service is not available for certain retirement accounts at this time. MUNIYIELD QUALITY FUND, INC. APRIL 30, 2004 23 [LOGO] Merrill Lynch Investment Managers www.mlim.ml.com 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. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available (1) without charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2) on www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's website at http://www.sec.gov. MuniYield Quality Fund, Inc. Box 9011 Princeton, NJ 08543-9011 #16352 -- 4/04 Item 2 - Code of Ethics - Not Applicable to this semi-annual report Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-annual report Item 4 - Principal Accountant Fees and Services - Not Applicable to this semi-annual report Item 5 - Audit Committee of Listed Registrants - Not Applicable to this semi-annual report Item 6 - Schedule of Investments - Not Applicable Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies - Not Applicable to this semi-annual report Item 8 - Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers - Not Applicable Item 9 - Submission of Matters to a Vote of Security Holders - Not Applicable Item 10 - Controls and Procedures 10(a) - The registrant's certifying officers have reasonably designed such disclosure controls and procedures to ensure material information relating to the registrant is made known to us by others particularly during the period in which this report is being prepared. The registrant's certifying officers have determined that the registrant's disclosure controls and procedures are effective based on our evaluation of these controls and procedures as of a date within 90 days prior to the filing date of this report. 10(b) - There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR 270.30a-3(d)) that occurred during the last fiscal half-year of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 11 - Exhibits attached hereto 11(a)(1) - Code of Ethics - Not Applicable to this semi-annual report 11(a)(2) - Certifications - Attached hereto 11(a)(3) - Not Applicable 11(b) - Certifications - Attached hereto Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MuniYield Quality Fund, Inc. By: /s/ Terry K. Glenn -------------------------------- Terry K. Glenn, President of MuniYield Quality Fund, Inc. Date: June 18, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Terry K. Glenn -------------------------------- Terry K. Glenn, President of MuniYield Quality Fund, Inc. Date: June 18, 2004 By: /s/ Donald C. Burke -------------------------------- Donald C. Burke, Chief Financial Officer of MuniYield Quality Fund, Inc. Date: June 18, 2004