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
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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