[LOGO] Merrill Lynch Investment Managers
Annual Report
October 31, 2002
MuniYield
Quality
Fund II, Inc.
www.mlim.ml.com
MUNIYIELD QUALITY FUND II, INC.
The Benefits and
Risks of Leveraging
MuniYield Quality Fund II, Inc. utilizes leveraging to seek to enhance the yield
and net asset value of its Common Stock. However, these objectives cannot be
achieved in all interest rate environments. To leverage, the Fund issues
Preferred Stock, which pays dividends at prevailing short-term interest rates,
and invests the proceeds in long-term municipal bonds. The interest earned on
these investments is paid to Common Stock shareholders in the form of dividends,
and the value of these portfolio holdings is reflected in the per share net
asset value of the Fund's Common Stock. However, in order to benefit Common
Stock shareholders, the yield curve must be positively sloped; that is,
short-term interest rates must be lower than long-term interest rates. At the
same time, a period of generally declining interest rates will benefit Common
Stock shareholders. If either of these conditions change, then the risks of
leveraging will begin to outweigh the benefits.
To illustrate these concepts, assume a fund's Common Stock capitalization of
$100 million and the issuance of Preferred Stock for an additional $50 million,
creating a total value of $150 million available for investment in long-term
municipal bonds. If prevailing short-term interest rates are approximately 3%
and long-term interest rates are approximately 6%, the yield curve has a
strongly positive slope. The fund pays dividends on the $50 million of Preferred
Stock based on the lower short-term interest rates. At the same time, the fund's
total portfolio of $150 million earns the income based on long-term interest
rates. Of course, increases in short-term interest rates would reduce (and even
eliminate) the dividends on the Common Stock.
In this case, the dividends paid to Preferred Stock shareholders are
significantly lower than the income earned on the fund's long-term investments,
and therefore the Common Stock shareholders are the beneficiaries of the
incremental yield. However, if short-term interest rates rise, narrowing the
differential between short-term and long-term interest rates, the incremental
yield pickup on the Common Stock will be reduced or eliminated completely. At
the same time, the market value of the fund's Common Stock (that is, its price
as listed on the New York Stock Exchange) may, as a result, decline.
Furthermore, if long-term interest rates rise, the Common Stock's net asset
value will reflect the full decline in the price of the portfolio's investments,
since the value of the fund's Preferred Stock does not fluctuate. In addition to
the decline in net asset value, the market value of the fund's Common Stock may
also decline.
As a part of its investment strategy, the Fund may invest in certain securities
whose potential income return is inversely related to changes in a floating
interest rate ("inverse floaters"). In general, income on inverse floaters will
decrease when short-term interest rates increase and increase when short-term
interest rates decrease. Investments in inverse floaters may be characterized as
derivative securities and may subject the Fund to the risks of reduced or
eliminated interest payments and losses of invested principal. In addition,
inverse floaters have the effect of providing investment leverage and, as a
result, the market value of such securities will generally be more volatile than
that of fixed-rate, tax-exempt securities. To the extent the Fund invests in
inverse floaters, the market value of the Fund's portfolio and the net asset
value of the Fund's shares may also be more volatile than if the Fund did not
invest in these securities.
Swap
Agreements
The Fund may also invest in swap agreements, which are over-the-counter
contracts in which one party agrees to make periodic payments based on the
change in market value of a specified bond, basket of bonds, or index in return
for periodic payments based on a fixed or variable interest rate or the change
in market value of a different bond, basket of bonds or index. Swap agreements
may be used to obtain exposure to a bond or market without owning or taking
physical custody of securities.
MuniYield Quality Fund II, Inc., October 31, 2002
DEAR SHAREHOLDER
For the year ended October 31, 2002, the Common Stock of MuniYield Quality Fund
II, Inc. earned $.787 per share income dividends, which included earned and
unpaid dividends of $.067. This represents a net annualized yield of 5.90%,
based on a month-end net asset value of $13.27 per share. During the same
period, the total investment return of the Fund's Common Stock was +7.27%, based
on a change in per share net asset value from $13.21 to $13.27, and assuming
reinvestment of $.783 per share income dividends.
For the six-month period ended October 31, 2002, the total investment return on
the Fund's Common Stock was +7.01%, based on a change in per share net asset
value from $12.81 to $13.27, and assuming reinvestment of $.392 per share income
dividends.
For the six-month period ended October 31, 2002, the Fund's Auction Market
Preferred Stock had an average yield of 1.44% for Series A, 1.45% for Series B
and 1.39% for Series C.
The Municipal Market Environment
During the six-month period ended October 31, 2002, the direction of long-term
fixed income interest rates was driven as much by volatile U.S. equity markets
and continued worldwide political tensions as by economic fundamentals. After
rising steadily early in 2002, bond yields reversed course to move sharply lower
throughout most of the period. Positive economic fundamentals repeatedly were
overwhelmed by falling equity valuations and declines in investor confidence.
U.S. gross domestic product (GDP) activity for the first quarter of 2002
measured at 5%, considerably above the level of economic growth seen at the end
of 2001. During May and June, a number of economic indicators, such as housing
activity, consumer spending and weekly unemployment claims, all pointed to at
least a modest economic recovery by the end of 2002. However, steady dramatic
declines in U.S. equity markets led the majority of investors to conclude that
the Federal Reserve Board was unlikely to increase short-term interest rates for
the remainder of the year. U.S. Treasury issue prices were also boosted by
erupting Middle East and India/Pakistan conflicts that led many international
investors to seek the safe-haven status of U.S. Treasury securities. By the end
of June 2002, long-term U.S. Treasury bond yields had declined to 5.50%, a
decline of almost 35 basis points (.35%) from their recent highs in mid-March.
In late July, second quarter U.S. GDP growth was initially estimated at 1.1%.
While subject to revision, this estimate suggested that continued declines in
U.S. equity prices were negatively affecting not only consumer but business
confidence as well and undermining much of the economic growth witnessed earlier
this year. Some analysts extrapolated that recent weakness would continue, if
not accelerate. This brought about forecasts that the Federal Reserve Board
would soon be obliged to lower short-term interest rates both to offset equity
market declines and boost consumer and business spending. The possibility of
lower short-term interest rates helped push longer-term bond yields lower still
during July and August. The dramatic decline in U.S. equity prices in late
August and September triggered a significant fixed income rally as investors
again sought the safe-haven status of U.S. Treasury securities. By the end of
September, U.S. Treasury bond yields fell to 4.66%.
Bolstered by an unexpected decline in the national unemployment rate to 5.6% in
early October, U.S. equity markets staged a strong rally throughout much of the
month. The Standard & Poor's 500 Index rose more than 8% for the month,
triggered by stronger-than-expected earnings reports from a large number of
companies, such as General Electric Company, International Business Machines
Corporation and Microsoft Corporation. Bond prices continued to trade in an
inverse relationship to equity prices. Consequently, as stocks rallied, bond
yields rose in October, despite generally weak economic releases. During
October, the U.S. housing sector remained quite robust, but retail sales and
industrial production slowed. By October 31, 2002, long-term U.S. Treasury bond
yields rose to almost 5%, a monthly increase of more than 30 basis points.
During the past six months, the yield on 30-year U.S. Treasury bonds declined
over 60 basis points.
For the six-month period ended October 31, 2002, municipal bond prices also
generally increased. Similar to their taxable counterparts, municipal bond
yields rose in early 2002, largely on the expectation of short-term interest
rate increases by the Federal Reserve Board. By late March, long-term municipal
revenue bond yields, as measured by the Bond Buyer Revenue Bond Index, rose to
5.67%, their highest level in more than a year. During recent months, tax-exempt
bond yields have generally declined largely in response to the positive fixed
income environment engendered by falling equity valuations. The municipal bond
market's price advances in tax-exempt issues, however, have not been able to
keep pace with U.S. Treasury issues as municipal bonds cannot offer foreign
investors the safe-haven status U.S. Treasury issues enjoy in periods of
economic and financial instability. The municipal bond market's recent price
advances have also been supported by the continued improvement in the tax-exempt
market's technical position. Despite sizeable advances in the rate of new
municipal bond issuance, investor demand has increased, allowing tax-exempt bond
prices to rise. By the end of October 2002, long-term municipal revenue bond
yields stood at 5.20%, a decline of more than 30 basis points during the past
six months.
Investor demand has remained very positive throughout the period. The Investment
Company Institute reported that thus far in 2002, municipal bond fund net cash
flows remained very strong at over $17.5 billion, up nearly 80% compared to the
same period in 2001. Additionally, investors received from June to August 2002
approximately $75 billion from bond maturities, proceeds from early redemptions
and coupon income. Given the current weakness in U.S. equity markets, much of
these monies were likely reinvested in tax-exempt products. Perhaps more
importantly, short-term municipal rates have continued to move lower in response
to Federal Reserve Board actions. In reaction to Federal Reserve Board interest
rate reductions, short-term municipal rates have declined to the 1% - 1.50%
range. As interest rates have declined, investors have extended maturities to
take advantage of the steep municipal bond yield curve. The significant income
sacrifice incurred by remaining in cash reserves has resulted in ongoing strong
demand for municipal securities, especially in the 5-year - 15-year maturity
range.
Recent performance by the tax-exempt market has been even more impressive
considering the increase in new bond issuance seen thus far in 2002. Nationwide,
municipalities have used present low interest rate levels both to refinance
older debt and fund new capital projects. Over the past six months, more than
$200 billion in new long-term municipal bonds was issued, an increase of nearly
40% compared to the same period in 2001. Nearly $100 billion in long-term
tax-exempt securities was underwritten during the October quarter of 2002, an
increase of over 40% compared to the October quarter of 2001 level.
In the coming months, interest rates are likely to remain volatile, with an
expected upward bias. However, until equity market conditions stabilize,
interest rates should remain near their current historically low levels. While
recent stock market declines appear to have negatively affected economic growth
in recent months, business activity is likely to accelerate going forward. While
governmental stimulus in response to the September 11, 2001 attacks has been
significant, the recent 50 basis point decrease in interest rates by the Federal
Reserve Board should provide additional incentive to the sluggish U.S. economy.
The ongoing U.S. military response to worldwide terrorism has reduced a
once-sizeable Federal surplus to a material deficit. Further military action in
early 2003 would likely result in higher Federal spending, deficits and
increased Treasury financing. Increased Federal borrowings can be expected to
put upward pressure on interest rates going forward.
Equity market declines helped push interest rates to lower levels than economic
fundamentals alone would support. When U.S. equity markets stabilize and
economic activity resumes, associated interest rate increases should not be
extreme. Inflationary pressures have remained subdued, meaning that significant
interest rate increases are unlikely. As equity valuations are likely to only
gradually recover, U.S. economic recovery is also likely to be a moderate
process. This suggests that the pace of any interest rate increases will be
gradual. As the municipal bond market's strong technical position can be
expected to remain supportive in the coming months, future tax-exempt rate
increases should be more restrained than their taxable counterparts.
2 & 3
MuniYield Quality Fund II, Inc., October 31, 2002
Portfolio Strategy
We maintained our fully invested market position and relatively strong credit
profile throughout the six-month period ended October 31, 2002. The Fund also
remained somewhat defensively structured as it was primarily invested in premium
coupon issues and intermediate maturities. New purchases were focused on premium
coupon bonds in the 20-year - 25-year maturity area. We focused on these
maturities because they offered approximately 95% of maximum yield available in
the entire municipal yield curve with less interest rate volatility than that
associated with longer maturity bonds. Because of the exceptional steepness of
the municipal bond curve, purchases of shorter maturity bonds required a
significant yield sacrifice. We adopted this strategy in recognition of
relatively low municipal yields within the background of a cautious economic
environment. Despite significant monetary and fiscal stimulus, the U.S. economy
is still facing considerable uncertainty. Additionally, international economic
weakness has contributed to the headwind facing the U.S. economy. We maintained
our fully invested status throughout the period in an effort to enhance
shareholder income. At October 31, 2002, 94.5% of the Fund's assets were
invested in securities rated A or better by at least one of the major bond
rating agencies and more than 80% of the Fund's assets were invested in
securities insured by AAA-rated municipal bond issuers. Looking ahead, we expect
to remain essentially fully invested and to retain our relatively high credit
quality profile. We will continue to seek opportunities in the market provided
by new municipal issuance to purchase premium coupon issues primarily in the
20-year - 25-year maturity range.
During the six-month period ended October 31, 2002, the Fund's borrowing costs
remained at very low levels, approximately 1.5%. These attractive borrowing
levels in combination with a steep tax-exempt yield curve have generated a
substantial income benefit to the Fund's Common Stock shareholder from the
leveraging of the Preferred Stock. Further material declines in short-term
interest rates would require significant easing of monetary policy by the
Federal Reserve Board. While such action is not expected, an increase in
short-term interest rates by the Federal Reserve Board is even less anticipated.
We anticipate our short-term borrowing costs to remain at attractive levels for
the foreseeable future. However, should the spread between short-term and
long-term interest rates narrow, the benefits of leverage will decline and the
yield to the Fund's Common Stock Shareholders will be reduced. (For a more
complete explanation of the benefits and risks of leveraging, see page 1 of this
report to shareholders.)
In Conclusion
We appreciate your ongoing interest in MuniYield Quality Fund II, Inc., and we
look forward to serving your investment needs in the months and years to come.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Kenneth A. Jacob
Kenneth A. Jacob
Senior Vice President
/s/ John M. Loffredo
John M. Loffredo
Senior Vice President
/s/ Michael Kalinoski
Michael Kalinoski
Vice President and Portfolio Manager
November 21, 2002
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face
STATE Ratings++ Ratings++ Amount Issue Value
====================================================================================================================================
Alabama--1.0% AAA NR* $ 2,645 Birmingham, Alabama, Capital Improvement Warrants, GO, Series A,
5.55% due 8/01/2021 (e) $ 2,809
====================================================================================================================================
Alaska--0.5% AAA Aaa 1,400 Alaska State International Airports Revenue Bonds, Series B,
5.75% due 10/01/2019 (a) 1,539
====================================================================================================================================
California--2.9% AAA NR* 2,500 California Health Facilities Finance Authority Revenue Bonds (Kaiser
Permanente), RIB, Series 26, 8.80% due 6/01/2022 (c)(h) 2,714
------------------------------------------------------------------------------------------------------------
AA Aa3 3,650 Sacramento County, California, Sanitation District Financing
Authority, Revenue Refunding Bonds, Trust Receipts, Class R,
Series A, 9.889% due 12/01/2019 (h) 4,445
------------------------------------------------------------------------------------------------------------
AAA Aaa 1,450 San Diego, California, Unified School District, Election 1998, GO,
Series D, 5.25% due 7/01/2024 (b) 1,509
====================================================================================================================================
Colorado--13.1% AAA NR* 11,020 Colorado Department of Transportation Revenue Bonds, DRIVERS,
Series 249, 9.82% due 6/15/2014 (a)(h) 14,794
------------------------------------------------------------------------------------------------------------
Colorado Health Facilities Authority Revenue Bonds, Series A:
AA Aa2 1,725 (Catholic Health Initiatives), 5.50% due 3/01/2032 1,729
AA NR* 1,200 (Covenant Retirement Communities), 5.50% due 12/01/2027 (m) 1,212
------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Colorado Housing and Finance Authority, Revenue Refunding Bonds, AMT,
Series E-2, 7% due 2/01/2030 (e) 3,382
------------------------------------------------------------------------------------------------------------
Colorado Housing and Finance Authority, Revenue Refunding Bonds
(S/F Program):
AAA NR* 1,585 AMT, Series A-2, 6.45% due 4/01/2030 (e) 1,730
AAA Aaa 3,000 AMT, Series A-2, 6.50% due 8/01/2031 (e) 3,281
AAA Aaa 3,470 AMT, Series B-2, 6.80% due 2/01/2031 (e) 3,919
AAA Aaa 1,045 AMT, Series C-1, 7.65% due 12/01/2025 (e)(j) 1,075
AAA Aaa 5,320 Series B-3, 6.70% due 8/01/2017 (c) 5,931
------------------------------------------------------------------------------------------------------------
AAA Aaa 1,735 Northwest Parkway, Colorado, Public Highway Revenue Bonds, Series A,
5.50% due 6/15/2021 (a) 1,853
====================================================================================================================================
Connecticut--7.9% AAA Aaa 5,550 Connecticut State, GO, Series A, 6% due 4/15/2010 (c)(g) 6,520
------------------------------------------------------------------------------------------------------------
Connecticut State Regional Learning Educational Service Center Revenue
Bonds (Office/Education Center Facility):
NR* NR* 645 7.50% due 2/01/2005 653
NR* NR* 1,100 7.75% due 2/01/2015 1,144
------------------------------------------------------------------------------------------------------------
Portfolio
Abbreviations
To simplify the listings of MuniYield Quality Fund II, Inc.'s portfolio holdings
in the Schedule of Investments, we have abbreviated the names of many of the
securities according to the list below and at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
DRIVERS Derivative Inverse Tax-Exempt Receipts
GO General Obligation Bonds
HDA Housing Development Authority
IDB Industrial Development Board
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
S/F Single-Family
4 & 5
MuniYield Quality Fund II, Inc., October 31, 2002
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face
STATE Ratings++ Ratings++ Amount Issue Value
====================================================================================================================================
Connecticut AAA NR* $ 9,325 Connecticut State Resource Recovery Authority, Revenue Refunding
(concluded) Bonds, DRIVERS, Series 187, 8.89% due 11/15/2011 (e)(h) $ 11,538
------------------------------------------------------------------------------------------------------------
NR* Aaa 2,750 Connecticut State Special Tax Obligation Revenue Bonds, RIB,
Series 372, 9.923% due 12/01/2017 (b)(h) 3,516
====================================================================================================================================
Georgia--4.7% Atlanta, Georgia, Airport Revenue Refunding Bonds, Series A (b):
AAA Aaa 7,850 5.875% due 1/01/2017 8,663
AAA Aaa 1,500 5.60% due 1/01/2030 1,579
------------------------------------------------------------------------------------------------------------
AAA Aaa 3,400 Georgia Municipal Electric Authority, Power Revenue Refunding Bonds,
Series Z, 5.50% due 1/01/2020 (e) 3,821
====================================================================================================================================
Illinois--14.0% AAA Aaa 3,500 Chicago, Illinois, Gas Supply Revenue Refunding Bonds (People's Gas,
Light & Coke), Series A, 6.10% due 6/01/2025 (a) 3,846
------------------------------------------------------------------------------------------------------------
AAA Aaa 2,830 Chicago, Illinois, Park District, GO, Refunding, Series C, 5.50%
due 1/01/2021 (b) 2,985
------------------------------------------------------------------------------------------------------------
AAA Aaa 450 Chicago, Illinois, S/F Mortgage Revenue Bonds, AMT, Series B, 4%
due 10/01/2033 (k) 476
------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Cook County, Illinois, Capital Improvement, GO, Series C, 5.50%
due 11/15/2026 (a) 3,156
------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 Illinois Regional Transportation Authority Revenue Bonds, 6.50%
due 7/01/2026 (e)(i) 12,339
------------------------------------------------------------------------------------------------------------
Illinois State, GO, First Series:
AAA Aaa 1,000 5.50% due 2/01/2018 (b) 1,082
AAA Aaa 7,000 5.625% due 6/01/2025 (e) 7,363
------------------------------------------------------------------------------------------------------------
NR* Aaa 6,000 Illinois Student Assistance Commission, Student Loan Revenue
Refunding Bonds, AMT, Senior Series BB, 6.75% due 3/01/2015 6,128
------------------------------------------------------------------------------------------------------------
AAA NR* 3,625 Metropolitan Pier and Exposition Authority, Illinois, Dedicated State
Tax Revenue Refunding Bonds, DRIVERS, Series 269, 9.32%
due 6/15/2023 (b)(h) 4,284
====================================================================================================================================
Indiana--2.1% AAA NR* 2,675 Indiana Bond Bank Revenue Bonds, Guarantee State Revolver, 6.75%
due 2/01/2017 (a) 2,988
------------------------------------------------------------------------------------------------------------
AA NR* 3,100 Indianapolis, Indiana, Local Public Improvement Bond Bank Revenue
Refunding Bonds, Series D, 6.75% due 2/01/2020 3,198
====================================================================================================================================
Kansas--5.1% AAA NR* 5,790 Sedgwick and Shawnee Counties, Kansas, S/F Mortgage-Backed Revenue
Bonds, AMT, Series A-2, 7.60% due 12/01/2031 (d)(e) 6,629
------------------------------------------------------------------------------------------------------------
AAA Aaa 2,855 Sedgwick and Shawnee Counties, Kansas, S/F Mortgage-Backed Revenue
Refunding Bonds, AMT, Series A-2, 6.45% due 12/01/2033 (d)(e) 3,107
------------------------------------------------------------------------------------------------------------
AAA Aaa 4,680 Sedgwick and Shawnee Counties, Kansas, S/F Revenue Bonds, AMT,
Series A-1, 6.875% due 12/01/2026 (d)(e) 5,291
====================================================================================================================================
Kentucky--1.1% BBB Baa2 3,000 Perry County, Kentucky, Solid Waste Disposal Revenue Bonds
(TJ International Project), AMT, 7% due 6/01/2024 3,130
====================================================================================================================================
Louisiana--3.4% AAA Aaa 5,000 Jefferson Parish, Louisiana, Home Mortgage Authority, S/F Mortgage
Revenue Bonds, AMT, Series B-1, 6.65% due 12/01/2033 (e)(k) 5,490
------------------------------------------------------------------------------------------------------------
AAA Aaa 3,900 Louisiana Local Government, Environmental Facilities, Community
Development Authority Revenue Bonds (Capital Projects and Equipment
Acquisition), Series A, 6.30% due 7/01/2030 (a) 4,613
====================================================================================================================================
Massachusetts--2.2% AAA Aaa 725 Massachusetts State, GO, Refunding, Consolidated Loan, Series D,
5.375% due 8/01/2022 (e) 758
------------------------------------------------------------------------------------------------------------
Massachusetts State Health and Educational Facilities Authority,
Revenue Refunding Bonds (New England Memorial Hospital), Series B (f):
NR* Ca 2,001 6% due 7/01/2008 160
NR* Ca 3,478 6.125% due 7/01/2013 278
------------------------------------------------------------------------------------------------------------
NR* Aa3 4,200 Massachusetts State Revenue Bonds, RIB, Series 420, 9.32% due
12/15/2014 (h) 5,279
====================================================================================================================================
Michigan--2.7% AAA Aaa 1,855 Brown City, Michigan, Community School District, Building and Site,
GO, 5.50% due 5/01/2019 (b) 1,991
------------------------------------------------------------------------------------------------------------
AAA Aaa 1,800 Byron Center, Michigan, Public Schools, GO, 5.50% due 5/01/2018 (b) 1,946
------------------------------------------------------------------------------------------------------------
AAA NR* 1,300 Michigan Higher Education Student Loan Authority, Student Loan Revenue
Refunding Bonds, AMT, Series XVII-G, 5.20% due 9/01/2020 (a) 1,314
------------------------------------------------------------------------------------------------------------
AAA Aaa 2,685 Michigan State, HDA, Revenue Refunding Bonds, Series C, 5.90% due
12/01/2015 (c)(j) 2,834
====================================================================================================================================
Missouri--2.1% Saint Louis County, Missouri, Pattonville R-3 School District, GO
(Missouri Direct Deposit Program) (b):
AAA Aaa 2,000 5.75% due 3/01/2015 2,230
AAA Aaa 2,000 5.75% due 3/01/2016 2,230
AAA Aaa 1,500 6% due 3/01/2019 1,680
====================================================================================================================================
Nevada--1.7% AAA Aaa 4,500 Las Vegas New Convention and Visitors Authority Revenue Bonds, 6%
due 7/01/2013 (a) 5,139
====================================================================================================================================
New Hampshire-- AAA Aaa 2,350 New Hampshire State Business Finance Authority, PCR, Refunding (Public
0.8% Service Company of New Hampshire Project), Series C, 5.45%
due 5/01/2021 (e) 2,475
====================================================================================================================================
New Jersey--4.4% AAA Aaa 5,000 Cape May County, New Jersey, Industrial Pollution Control Financing
Authority, Revenue Refunding Bonds (Atlantic City Electric Company
Project), Series B, 7% due 11/01/2029 (e) 5,559
------------------------------------------------------------------------------------------------------------
AAA Aaa 1,540 New Jersey State Transportation Trust Fund Authority, Transportation
System Revenue Refunding Bonds, Series B, 6% due 12/15/2018 (e) 1,759
------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Salem County, New Jersey, Industrial Pollution Control Financing
Authority, Revenue Refunding Bonds (Public Service Electric & Gas),
RIB, Series 380, 10.37% due 6/01/2031 (e)(h) 5,820
====================================================================================================================================
New Mexico--5.8% AAA Aaa 2,300 New Mexico Mortgage Finance Authority, S/F Premium Revenue Bonds,
AMT, Series E-2, 6.25% due 7/01/2029 (e)(k) 2,537
------------------------------------------------------------------------------------------------------------
New Mexico State Highway Commission, Tax Revenue Bonds, Senior
Sub-Lien, Series A (c):
AAA Aaa 7,295 6% due 6/15/2014 8,353
AAA Aaa 5,495 6% due 6/15/2015 6,273
====================================================================================================================================
New York--13.6% AAA Aaa 9,280 Nassau Health Care Corporation, New York, Health System Revenue Bonds,
5.75% due 8/01/2022 (c) 10,120
------------------------------------------------------------------------------------------------------------
AA+ Aa2 2,500 New York City, New York, City Transitional Finance Authority, Revenue
Refunding Bonds, Future Tax Secured, Series C, 5.50% due 11/01/2024 2,657
------------------------------------------------------------------------------------------------------------
New York City, New York, GO:
AAA Aaa 4,000 Series D, 5.875% due 6/01/2021 (e) 4,418
AAA Aaa 1,000 Series E, 5.75% due 5/15/2018 (l) 1,092
AAA Aaa 2,000 Series I, 6.25% due 4/15/2017 (l) 2,275
------------------------------------------------------------------------------------------------------------
AAA Aaa 8,000 New York State Dormitory Authority, Revenue Refunding Bonds (State
University Educational Facilities), 5.75% due 5/15/2010 (g) 9,291
------------------------------------------------------------------------------------------------------------
AAA Aaa 9,825 New York State Mortgage Agency Revenue Bonds, AMT, 24th Series,
5.875% due 10/01/2015 (e) 10,508
====================================================================================================================================
6 & 7
MuniYield Quality Fund II, Inc., October 31, 2002
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face
STATE Ratings++ Ratings++ Amount Issue Value
====================================================================================================================================
North Carolina-- BBB Baa2 $10,500 Martin County, North Carolina, Industrial Facilities and Pollution
4.1% Control Financing Authority Revenue Bonds (Solid Waste
Disposal--Weyerhaeuser Company), AMT, 6.80% due 5/01/2024 $ 10,944
------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Randolph County, North Carolina, COP, 5.50% due 6/01/2014 (c) 1,100
====================================================================================================================================
Ohio--2.5% Plain, Ohio, Local School District, GO, Refunding (b):
NR* Aaa 5,120 6% due 6/1/2011 (g) 6,037
NR* Aaa 1,170 6% due 12/01/2020 1,301
====================================================================================================================================
Pennsylvania--4.9% NR* Aaa 3,335 Delaware River Port Authority of Pennsylvania and New Jersey Revenue
Bonds, RIB, Series 396, 9.873% due 1/01/2019 (c)(h) 4,129
------------------------------------------------------------------------------------------------------------
AAA Aaa 3,230 Philadelphia, Pennsylvania, Authority for Industrial Development,
Lease Revenue Bonds, Series B, 5.50% due 10/01/2020 (c) 3,449
------------------------------------------------------------------------------------------------------------
AAA Aaa 4,500 Philadelphia, Pennsylvania, School District, GO, Series B, 5.625%
due 8/01/2022 (b) 4,786
------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Washington County, Pennsylvania, Capital Funding Authority Revenue
Bonds (Capital Projects and Equipment Program), 6.15% due 12/01/2029 (a) 2,310
====================================================================================================================================
Rhode Island--1.4% AAA Aaa 4,010 Rhode Island State Health and Educational Building Corporation, Higher
Education Facilities Revenue Bonds (University of Rhode Island),
Series A, 5.70% due 9/15/2024 (e) 4,253
====================================================================================================================================
South Carolina-- A- A2 5,765 Berkeley County, South Carolina, Pollution Control Facilities Revenue
4.8% Refunding Bonds (South Carolina Electric and Gas Company), 6.50%
due 10/01/2014 5,957
------------------------------------------------------------------------------------------------------------
AAA NR* 2,950 Fairfield County, South Carolina, PCR (South Carolina Electric and
Gas), 6.20% due 9/01/2014 (e) 3,050
------------------------------------------------------------------------------------------------------------
AAA NR* 2,250 South Carolina State Public Service Authority, Revenue Refunding Bonds,
DRIVERS, Series 277, 9.32% due 1/01/2022 (e)(h) 2,617
------------------------------------------------------------------------------------------------------------
NR* A1 2,500 Spartanburg County, South Carolina, Solid Waste Disposal Facilities
Revenue Bonds (BMW Project), AMT, 7.55% due 11/01/2024 2,728
====================================================================================================================================
South Dakota--0.7% AAA Aaa 2,015 South Dakota State Health and Educational Facilities Authority Revenue
Bonds (Rapid City Regional Hospital), 5.625% due 9/01/2019 (e) 2,145
====================================================================================================================================
Tennessee--2.7% AAA Aaa 7,365 Chattanooga, Tennessee, IDB, Lease Rent Revenue Bonds (Southside
Redevelopment Corporation), 5.875% due 10/01/2024 (a) 7,987
====================================================================================================================================
Texas--11.6% A+ Aa3 4,000 Austin, Texas, Convention Center Revenue Bonds (Convention
Enterprises Inc.), Trust Certificates, Second Tier, Series B, 5.75%
due 1/01/2032 4,102
------------------------------------------------------------------------------------------------------------
AAA Aaa 1,630 Brownsville, Texas, GO (Combined Tax and Revenue Certificates of
Obligation), Series A, 6.50% due 2/15/2017 (b) 1,918
------------------------------------------------------------------------------------------------------------
AAA Aaa 2,730 Corpus Christi, Texas, Utility System Revenue Refunding Bonds,
Series A, 6% due 7/15/2016 (c) 3,091
------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Dallas-Fort Worth, Texas, International Airport Joint Revenue Refunding
and Improvement Bonds, AMT, Series A, 5.50% due 11/01/2031 (b) 3,090
------------------------------------------------------------------------------------------------------------
Dickinson, Texas, Independent School District, GO, Refunding (e):
AAA Aaa 1,180 6% due 2/15/2017 1,329
AAA Aaa 1,250 6% due 2/15/2018 1,400
------------------------------------------------------------------------------------------------------------
AA Baa2 4,000 Gregg County, Texas, Health Facilities Development Corporation,
Hospital Revenue Bonds (Good Shepherd Medical Center Project), 6.875%
due 10/01/2020 (m) 4,609
------------------------------------------------------------------------------------------------------------
Houston, Texas, Airport System Revenue Refunding Bonds, Sub-Lien (c):
AAA Aaa 1,065 AMT, Series A, 5.625% due 7/01/2020 1,115
AAA Aaa 2,000 AMT, Series A, 5.625% due 7/01/2021 2,093
AAA Aaa 1,000 AMT, Series A, 5.50% due 7/01/2023 1,029
AAA Aaa 900 Series B, 5.50% due 7/01/2030 935
------------------------------------------------------------------------------------------------------------
BBB+ Baa1 3,500 Lower Colorado River Authority, Texas, PCR (Samsung Austin
Semiconductor), AMT, 6.375% due 4/01/2027 3,578
------------------------------------------------------------------------------------------------------------
AAA Aaa 4,800 Texas State Turnpike Authority, Central Texas Turnpike System Revenue
Bonds, First Tier, Series A, 5.75% due 8/15/2038 (a) 5,184
------------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 University of Houston, Texas, University Revenue Bonds, 5.50%
due 2/15/2030 (e) 1,040
====================================================================================================================================
Virginia--1.5% BBB- NR* 26,500 Pocahontas Parkway Association, Virginia, Toll Road Revenue Bonds,
Senior-Series B, 5.875%** due 8/15/2024 4,321
====================================================================================================================================
Washington--14.7% Energy Northwest, Washington, Electric Revenue Refunding Bonds
(Columbia Generating):
AAA Aaa 2,550 Series A, 5.75% due 7/01/2018 (e) 2,808
AAA Aaa 3,750 Series B, 6% due 7/01/2018 (a) 4,221
------------------------------------------------------------------------------------------------------------
King County, Washington, Issaquah School District Number 411, GO (c):
AAA Aa2 1,500 6.25% due 12/01/2014 1,746
AAA Aa2 1,900 6.25% due 12/01/2015 2,192
AAA Aa2 2,000 6.25% due 12/01/2016 2,300
------------------------------------------------------------------------------------------------------------
AAA Aaa 2,150 King County, Washington, Sewer Revenue Refunding Bonds, Series B,
5.50% due 1/01/2027 (e) 2,243
------------------------------------------------------------------------------------------------------------
Port Seattle, Washington, Revenue Bonds, AMT, Series B (e):
AAA Aaa 7,470 6% due 2/01/2016 8,185
AAA Aaa 1,000 5.625% due 2/01/2024 1,039
------------------------------------------------------------------------------------------------------------
AAA Aaa 6,150 Seattle, Washington, Municipal Light and Power Revenue Bonds, 6%
due 10/01/2019 (e) 7,005
------------------------------------------------------------------------------------------------------------
NR* Aaa 5,000 Snohomish County, Washington, Arlington School District Number 016,
GO, 6.50% due 12/01/2015 (b) 5,913
------------------------------------------------------------------------------------------------------------
Washington State, Various Purpose, GO (c):
AAA NR* 4,250 Series A, 5.625% due 7/01/2021 4,506
AAA Aaa 1,400 Series C, 5.25% due 1/01/2026 1,432
====================================================================================================================================
West Virginia--0.4% AAA Aaa 1,000 West Virginia State, GO, Series D, 6.50% due 11/01/2026 (b) 1,170
====================================================================================================================================
Wisconsin--3.7% Wisconsin State, GO:
AAA Aaa 2,000 Series C, 5.55% due 5/01/2021 (e) 2,109
AAA Aaa 3,000 Series F, 5.50% due 5/01/2019 (c) 3,235
------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Wisconsin State Transportation Revenue Bonds, Series A, 5.50%
due 7/01/2015 (b) 5,484
====================================================================================================================================
8 & 9
MuniYield Quality Fund II, Inc., October 31, 2002
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face
STATE Ratings++ Ratings++ Amount Issue Value
===================================================================================================================================
Puerto Rico--5.7% AAA Aaa $ 5,000 Puerto Rico Commonwealth, Highway and Transportation Authority,
Transportation Revenue Bonds, Series B, 6% due 7/01/2026 (e) $ 5,445
-----------------------------------------------------------------------------------------------------------
AAA Aaa 2,375 Puerto Rico Commonwealth, Highway and Transportation Authority,
Transportation Revenue Refunding Bonds, Series E, 5.50% due
7/01/2022 (c) 2,630
-----------------------------------------------------------------------------------------------------------
NR* Aaa 3,250 Puerto Rico Electric Power Authority, Power Revenue Refunding Bonds,
RIB, Series 449X, 8.87% due 7/01/2016 (a)(h) 3,771
-----------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 Puerto Rico Municipal Finance Agency, GO, Series A, 5.50%
due 8/01/2023 (c) 2,673
-----------------------------------------------------------------------------------------------------------
AAA NR* 2,200 Puerto Rico Public Buildings Authority, Revenue Refunding Bonds,
Series L, 5.50% due 7/01/2021 (l) 2,434
===================================================================================================================================
Total Municipal Bonds (Cost--$420,760)--147.8% 438,605
===================================================================================================================================
Shares
Held Common Stock
===================================================================================================================================
3,257 Merrill Lynch Institutional Tax-Exempt Fund+ 3,257
===================================================================================================================================
Total Common Stock (Cost--$3,257)--1.1% 3,257
===================================================================================================================================
Total Investments (Cost--$424,017)--148.9% 441,862
Variation Margin on Financial Futures Contracts***--(0.1%) (159)
Other Assets Less Liabilities--1.8% 5,259
Preferred Stock, at Redemption Value--(50.6%) (150,115)
---------
Net Assets Applicable to Common Stock--100.0% $ 296,847
=========
===================================================================================================================================
(a) AMBAC Insured.
(b) FGIC Insured.
(c) FSA Insured.
(d) GNMA Collateralized.
(e) MBIA Insured.
(f) Non-income producing security.
(g) Prerefunded.
(h) The interest rate is subject to change periodically and inversely based
upon prevailing market rates. The interest rate shown is the rate in
effect at October 31, 2002.
(i) All or a portion of security held as collateral in connection with open
financial futures contracts.
(j) FHA Insured.
(k) FNMA/GNMA Collateralized.
(l) XLCA Insured.
(m) Radian Insured.
* Not Rated.
** Represents a zero coupon bond; the interest rate shown reflects the
effective yield at the time of purchase by the Fund.
*** Financial futures contracts sold as of October 31, 2002 were as follows:
(in Thousands)
--------------------------------------------------------------------------
Number of Expiration
Contracts Issue Date Value
--------------------------------------------------------------------------
350 U.S. Treasury Bonds December 2002 $40,152
--------------------------------------------------------------------------
Total Financial Futures Contracts Sold
(Total Contract Price--$39,162) $40,152
=======
--------------------------------------------------------------------------
+ Investments in companies considered to be an affiliate of the Fund (such
companies are defined as "Affiliated Companies" in section 2(a)(3) of the
Investment Company Act of 1940) are as follows:
(in Thousands)
--------------------------------------------------------------------------
Net Share Net Dividend
Affiliate Activity Cost Income
--------------------------------------------------------------------------
Merrill Lynch Institutional
Tax-Exempt Fund 3,257 $3,257 $21
--------------------------------------------------------------------------
++ Ratings of issues shown are unaudited.
See Notes to Financial Statements.
Quality Profile
(unaudited)
The quality ratings of securities in the Fund as of October 31, 2002 were as
follows:
--------------------------------------------------------------------------------
Percent
of Total
S&P Rating/Moody's Rating Investments
--------------------------------------------------------------------------------
AAA/Aaa ........................................................... 86.3%
AA/Aa ............................................................. 6.2
A/A ............................................................... 2.0
BBB/Baa ........................................................... 5.0
CC/Ca ............................................................. 0.1
NR (Not Rated) .................................................... 0.4
--------------------------------------------------------------------------------
10 & 11
MuniYield Quality Fund II, Inc., October 31, 2002
STATEMENT OF NET ASSETS
As of October 31, 2002
===================================================================================================================================
Assets: Investments, at value (identified cost--$424,016,768) .................... $ 441,861,870
Cash ..................................................................... 93,469
Receivables:
Interest ............................................................... $ 8,417,209
Securities sold ........................................................ 57,469 8,474,678
-----------
Prepaid expenses ......................................................... 22,421
-------------
Total assets ............................................................. 450,452,438
-------------
===================================================================================================================================
Liabilities: Payables:
Securities purchased ................................................... 2,880,059
Dividends to Common Stock shareholders ................................. 208,627
Investment adviser ..................................................... 196,609
Variation margin ....................................................... 158,594 3,443,889
-----------
Accrued expenses ......................................................... 46,497
-------------
Total liabilities ........................................................ 3,490,386
-------------
===================================================================================================================================
Preferred Stock: Preferred Stock, at redemption value, par value $.05 per share
(2,000 Series A shares, 2,000 Series B shares and 2,000 Series C
shares of AMPS* issued and outstanding at $25,000 per share
liquidation preference) .................................................. 150,115,180
-------------
===================================================================================================================================
Net Assets Net assets applicable to Common Stock .................................... $ 296,846,872
Applicable to =============
Common Stock:
===================================================================================================================================
Analysis of Net Common Stock, par value $.10 per share (22,366,930 shares issued
Assets Applicable to and outstanding) ......................................................... $ 2,236,693
Common Stock: Paid-in capital in excess of par ......................................... 311,763,292
Undistributed investment income--net ..................................... $ 3,411,881
Accumulated realized capital losses on investments--net .................. (37,420,252)
Unrealized appreciation on investments--net .............................. 16,855,258
-----------
Total accumulated losses--net ............................................ (17,153,113)
-------------
Total--Equivalent to $13.27 net asset value per share of Common
Stock (market price--$11.75) ............................................. $ 296,846,872
=============
===================================================================================================================================
* Auction Market Preferred Stock.
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
For the Year Ended October 31, 2002
===================================================================================================================================
Investment Interest ................................................................. $ 24,147,573
Income: Dividends ................................................................ 20,509
------------
Total income ............................................................. 24,168,082
------------
===================================================================================================================================
Expenses: Investment advisory fees ................................................. $ 2,202,564
Commission fees .......................................................... 381,960
Accounting services ...................................................... 158,039
Professional fees ........................................................ 104,284
Transfer agent fees ...................................................... 69,114
Printing and shareholder reports ......................................... 35,424
Listing fees ............................................................. 28,293
Custodian fees ........................................................... 25,663
Directors' fees and expenses ............................................. 24,895
Pricing fees ............................................................. 18,544
Other .................................................................... 38,455
-----------
Total expenses before reimbursement ...................................... 3,087,235
Reimbursement of expenses ................................................ (3,111)
-----------
Total expenses after reimbursement ....................................... 3,084,124
------------
Investment income--net ................................................... 21,083,958
------------
===================================================================================================================================
Realized & Realized loss on investments--net ........................................ (727,453)
Unrealized Gain (Loss) Change in unrealized appreciation/depreciation on investments--net ....... 802,420
On Investments--Net: ------------
Total realized and unrealized gain on investments--net ................... 74,967
------------
===================================================================================================================================
Dividends to Preferred Investment income--net ................................................... (2,259,120)
Stock Shareholders: ------------
Net Increase in Net Assets Resulting from Operations ..................... $ 18,899,805
============
===================================================================================================================================
See Notes to Financial Statements.
12 & 13
MuniYield Quality Fund II, Inc., October 31, 2002
STATEMENTS OF CHANGES IN NET ASSETS
For the Year
Ended October 31,
------------------------------
Increase (Decrease) in Net Assets: 2002 2001+
===================================================================================================================================
Operations: Investment income--net .................................................. $ 21,083,958 $ 21,051,913
Realized gain (loss) on investments--net ................................ (727,453) 5,664,177
Change in unrealized appreciation/depreciation on investments--net ...... 802,420 13,042,044
Dividends to Preferred Stock shareholders ............................... (2,259,120) (4,971,540)
------------- -------------
Net increase in net assets resulting from operations .................... 18,899,805 34,786,594
------------- -------------
===================================================================================================================================
Dividends to Investment income--net .................................................. (17,510,018) (16,558,730)
Common Stock ------------- -------------
Shareholders: Net decrease in net assets resulting from dividends to Common
Stock shareholders ...................................................... (17,510,018) (16,558,730)
------------- -------------
===================================================================================================================================
Net Assets Applicable Total increase in net assets applicable to Common Stock ................. 1,389,787 18,227,864
To Common Stock: Beginning of year ....................................................... 295,457,085 277,229,221
------------- -------------
End of year* ............................................................ $ 296,846,872 $ 295,457,085
============= =============
===================================================================================================================================
*Undistributed investment income--net .................................... $ 3,411,881 $ 2,000,367
============= =============
===================================================================================================================================
+ Certain prior year amounts have been reclassified to conform to current
year presentation.
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
The following per share data and ratios have
been derived from information provided in the
financial statements. For the Year Ended October 31,
---------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2002 2001 2000 1999 1998
===================================================================================================================================
Per Share Net asset value, beginning of year ............... $ 13.21 $ 12.39 $ 12.31 $ 15.52 $ 15.46
Operating --------- --------- --------- --------- ---------
Performance:+ Investment income--net ........................... .94 .94 .99 1.04 1.10
Realized and unrealized gain (loss) on
investments--net ................................. --++ .84 .17 (2.65) .46
Dividends and distributions to Preferred
Stock shareholders:
Investment income--net ......................... (.10) (.22) (.27) (.19) (.17)
Realized gain on investments--net .............. -- -- -- -- (.12)
In excess of realized gain on
investments--net ............................... -- -- -- (.06) --
--------- --------- --------- --------- ---------
Total from investment operations ................. .84 1.56 .89 (1.86) 1.27
--------- --------- --------- --------- ---------
Less dividends and distributions to Common
Stock shareholders:
Investment income--net ......................... (.78) (.74) (.81) (.86) (.87)
Realized gain on investments--net .............. -- -- -- -- (.34)
In excess of realized gain on
investments--net ............................... -- -- -- (.49) --
--------- --------- --------- --------- ---------
Total dividends and distributions to Common
Stock shareholders ............................... (.78) (.74) (.81) (1.35) (1.21)
--------- --------- --------- --------- ---------
Net asset value, end of year ..................... $ 13.27 $ 13.21 $ 12.39 $ 12.31 $ 15.52
========= ========= ========= ========= =========
Market price per share, end of year .............. $ 11.75 $ 12.07 $ 11.50 $ 11.50 $ 15.1875
========= ========= ========= ========= =========
===================================================================================================================================
Total Investment Based on market price per share .................. 3.95% 11.70% 7.35% (16.70%) 14.51%
Return:* ========= ========= ========= ========= =========
Based on net asset value per share ............... 7.27% 13.47% 8.04% (12.74%) 8.80%
========= ========= ========= ========= =========
===================================================================================================================================
Ratios Based on Total expenses** ................................. 1.06% 1.07% 1.08% .99% .95%
Average Net Assets ========= ========= ========= ========= =========
Of Common Stock: Total investment income--net** ................... 7.26% 7.36% 8.04% 7.31% 7.21%
========= ========= ========= ========= =========
Amount of dividends to Preferred Stock
shareholders ..................................... .78% 1.74% 2.21% 1.30% 1.12%
========= ========= ========= ========= =========
Investment income--net, to Common Stock
shareholders ..................................... 6.48% 5.62% 5.83% 6.01% 6.09%
========= ========= ========= ========= =========
===================================================================================================================================
Ratios Based on Total expenses ................................... .70% .70% .70% .67% .66%
Average Net Assets ========= ========= ========= ========= =========
Of Common & Total investment income--net ..................... 4.79% 4.83% 5.19% 4.97% 4.98%
Preferred Stock:** ========= ========= ========= ========= =========
===================================================================================================================================
Ratios Based on Dividends to Preferred Stock shareholders ........ 1.51% 3.31% 4.02% 2.75% 2.53%
Average Net Assets ========= ========= ========= ========= =========
Of Preferred Stock:
===================================================================================================================================
Supplemental Net assets applicable to Common Stock, end
Data: of year (in thousands) ........................... $ 296,847 $ 295,457 $ 277,229 $ 275,281 $ 342,496
========= ========= ========= ========= =========
Preferred Stock outstanding, end of year
(in thousands) ................................... $ 150,000 $ 150,000 $ 150,000 $ 150,000 $ 150,000
========= ========= ========= ========= =========
Portfolio turnover ............................... 42.89% 98.99% 142.46% 164.45% 154.08%
========= ========= ========= ========= =========
===================================================================================================================================
Leverage: Asset coverage per $1,000 ........................ $ 2,979 $ 2,970 $ 2,848 $ 2,835 $ 3,283
========= ========= ========= ========= =========
===================================================================================================================================
Dividends Per Share Series A--Investment income--net ................. $ 390 $ 855 $ 1,017 $ 706 $ 629
On Preferred Stock ========= ========= ========= ========= =========
Outstanding: Series B--Investment income--net ................. $ 388 $ 853 $ 1,024 $ 702 $ 634
========= ========= ========= ========= =========
Series C--Investment income--net ................. $ 351 $ 777 $ 986 $ 650 $ 634
========= ========= ========= ========= =========
===================================================================================================================================
* Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
charges.
** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Certain prior year amounts have been reclassified to conform to current
year presentation.
++ Amount is less than $.01 per share.
See Notes to Financial Statements.
14 & 15
MuniYield Quality Fund II, Inc., October 31, 2002
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniYield Quality Fund II, Inc. (the "Fund") is registered under the Investment
Company Act of 1940 as a non-diversified, closed-end management investment
company. The Fund's financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America, which
may require the use of management accruals and estimates. The Fund determines
and makes available for publication the net asset value of its Common Stock on a
weekly basis. The Fund's Common Stock is listed on the New York Stock Exchange
under the symbol MQT. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments -- Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or yield
equivalent as obtained by the Fund's pricing service from dealers that make
markets in such securities. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their closing prices as of the
close of such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of options traded
in the over-the-counter market, valuation is the last asked price (options
written) or the last bid price (options purchased). Securities with remaining
maturities of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market quotations are
not readily available are valued at their fair value as determined in good faith
by or under the direction of the Board of Directors of the Fund, including
valuations furnished by a pricing service retained by the Fund, which may
utilize a matrix system for valuations. The procedures of the pricing service
and its valuations are reviewed by the officers of the Fund under the general
supervision of the Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. Losses may arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.
o Financial futures contracts -- The Fund may purchase or sell financial futures
contracts and options on such futures contracts for the purpose of hedging the
market risk on existing securities or the intended purchase of securities.
Futures contracts are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a contract, the
Fund deposits and maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
o Options -- The Fund is authorized to write covered call options and purchase
put options. When the Fund writes an option, an amount equal to the premium
received by the Fund is reflected as an asset and an equivalent liability. The
amount of the liability is subsequently marked to market to reflect the current
market value of the option written. When a security is purchased or sold through
an exercise of an option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from (or added to)
the proceeds of the security sold. When an option expires (or the Fund enters
into a closing transaction), the Fund realizes a gain or loss on the option to
the extent of the premiums received or paid (or gain or loss to the extent the
cost of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis. As required, effective
November 1, 2001, the Fund has adopted the provisions of the AICPA Audit and
Accounting Guide for Investment Companies and began amortizing all premiums and
discounts on debt securities. The cumulative effect of this accounting change
had no impact on total net assets of the Fund, but resulted in a $2,317 increase
in cost of securities (which, in turn, results in a corresponding $2,317
decrease in net unrealized appreciation and a corresponding $2,317 increase in
undistributed net investment income), based on securities held by the Fund as of
October 31, 2001.
The effect of this change for the year ended October 31, 2002 was to increase
net investment income by $305 and increase net realized capital losses by
$2,622. The statement of changes in net assets and financial highlights for
prior periods have not been restated to reflect this change in presentation.
(e) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
(f) Change in financial statement classification for Auction Market Preferred
Stock ("AMPS") -- In accordance with the provisions of the Financial Accounting
Standards Board's Emerging Issues Task Force D-98 ("EITF D-98"), "Classification
and Measurement of Redeemable Securities," effective for the current period, the
Fund has reclassified its AMPS outside of permanent equity in the Net Assets
section of the Statement of Net Assets. In addition, dividends to Preferred
Stock shareholders are now classified as a component of the "Net Increase in Net
Assets Resulting from Operations" on the Statements of Operations and Changes in
Net Assets and as a component of the "Total from investment operations" in the
Financial Highlights. Prior year amounts presented have been reclassified to
conform to this period's presentation. The application of EITF D-98 related
entirely to presentation and had no impact on net asset value or the allocation
of net investment income or net realized capital gains or losses to Common Stock
shareholders.
(g) Reclassification -- Accounting principles generally accepted in the United
States of America require that certain components of net assets be adjusted to
reflect permanent differences between financial and tax reporting. Accordingly,
the current year's permanent book/tax differences of $130 have been reclassified
between paid-in capital in excess of par and accumulated net realized capital
losses and $94,377 has been reclassified between accumulated net realized
capital losses and undistributed net investment income. These reclassifications
have no effect on net assets or net asset value per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of .50% of the Fund's average weekly net assets, including
proceeds from the issuance of Preferred Stock. For the year ended October 31,
2002, FAM reimbursed the Fund in the amount of $3,111.
For the year ended October 31, 2002, the Fund reimbursed FAM $18,351 for certain
accounting services.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, and/or ML & Co.
16 & 17
MuniYield Quality Fund II, Inc., October 31, 2002
NOTES TO FINANCIAL STATEMENTS (concluded)
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended October 31, 2002 were $184,754,337 and $186,891,038, respectively.
Net realized gains (losses) for the year ended October 31, 2002 and net
unrealized gains (losses) as of October 31, 2002 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
--------------------------------------------------------------------------------
Long-term investments ................ $ 3,827,626 $ 17,845,102
Financial futures contracts .......... (4,555,079) (989,844)
------------ ------------
Total ................................ $ (727,453) $ 16,855,258
============ ============
--------------------------------------------------------------------------------
As of October 31, 2002, net unrealized appreciation for Federal income tax
purposes aggregated $17,845,102, of which $26,575,792 related to appreciated
securities and $8,730,690 related to depreciated securities. The aggregate cost
of investments at October 31, 2002 for Federal income tax purposes was
$424,016,768.
4. Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of stock, including Preferred
Stock, par value $.10 per share, all of which were initially classified as
Common Stock. The Board of Directors is authorized, however, to reclassify any
unissued shares of stock without approval of the holders of Common Stock.
Common Stock
Shares issued and outstanding during the years ended October 31, 2002 and
October 31, 2001 remained constant.
Preferred Stock
AMPS are redeemable shares of Preferred Stock of the Fund, with a par value of
$.05 per share and a liquidation preference of $25,000 per share plus accrued
and unpaid dividends, that entitle their holders to receive cash dividends at an
annual rate that may vary for the successive dividend periods. The yields in
effect at October 31, 2002 were as follows: Series A, 1.32%; Series B, 1.32%;
and Series C, 1.45%.
Shares issued and outstanding during the years ended October 31, 2002 and
October 31, 2001 remained constant.
The Fund pays commissions to certain broker-dealers at the end of each auction
at an annual rate ranging from .25% to .375%, calculated on the proceeds of each
auction. For the year ended October 31, 2002, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, an affiliate of FAM, earned $178,506 as commissions.
5. Distributions to Shareholders:
On November 7, 2002, a tax-exempt income dividend of $.067000 was declared. The
dividend was paid on November 27, 2002, to shareholders of record on November
14, 2002.
The tax character of distributions paid during the fiscal years ended October
31, 2002 and October 31, 2001 was as follows:
------------------------------------------------------------------------------
10/31/2002 10/31/2001
------------------------------------------------------------------------------
Distributions paid from:
Tax-exempt income .................... $19,769,138 $21,530,270
----------- -----------
Total distributions .................... $19,769,138 $21,530,270
=========== ===========
------------------------------------------------------------------------------
As of October 31, 2002, the components of accumulated losses on a tax basis were
as follows:
--------------------------------------------------------------------------------
Undistributed tax-exempt income--net ...................... $ 3,411,881
Undistributed long-term capital gains--net ................ --
------------
Total undistributed earnings--net ......................... 3,411,881
Capital loss carryforward ................................. (35,865,542)*
Unrealized gains--net ..................................... 15,300,548**
------------
Total accumulated losses--net ............................. $(17,153,113)
============
--------------------------------------------------------------------------------
* On October 31, 2002, the Fund had a net capital loss carryforward of
$35,865,542, of which $8,688,802 expires in 2007, $26,079,903 expires in
2008 and $1,096,837 expires in 2010. This amount will be available to
offset like amounts of any future taxable gains.
** The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the tax deferral of losses on straddles and the
realization for tax purposes of unrealized losses on certain futures
contracts.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
MuniYield Quality Fund II, Inc.:
We have audited the accompanying statement of net assets, including the schedule
of investments, of MuniYield Quality Fund II, Inc. as of October 31, 2002, the
related statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years presented. These financial statements
and the financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned at October 31, 2002 by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MuniYield Quality
Fund II, Inc. as of October 31, 2002, the results of its operations, the changes
in its net assets, and the financial highlights for the respective stated
periods in conformity with accounting principles generally accepted in the
United States of America.
Deloitte & Touche LLP
Princeton, New Jersey
December 6, 2002
18 & 19
MuniYield Quality Fund II, Inc., October 31, 2002
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid by MuniYield Quality Fund
II, Inc. during its taxable year ended October 31, 2002 qualify as tax-exempt
interest dividends for Federal income tax purposes.
Please retain this information for your records.
MANAGED DIVIDEND POLICY
The Fund's dividend policy is to distribute all or a portion of its net
investment income to its shareholders on a monthly basis. In order to provide
shareholders with a more consistent yield to the current trading price of shares
of Common Stock of the Fund, the Fund may at times pay out less than the entire
amount of net investment income earned in any particular month and may at times
in any month pay out such accumulated but undistributed income in addition to
net investment income earned in that month. As a result, the dividends paid by
the Fund for any particular month may be more or less than the amount of net
investment income earned by the Fund during such month. The Fund's current
accumulated but undistributed net investment income, if any, is disclosed in the
Statement of Assets, Liabilities and Capital, which comprises part of the
Financial Information included in this report.
20 & 21
MuniYield Quality Fund II, Inc., October 31, 2002
OFFICERS AND DIRECTORS
Number of
Portfolios in Other
Position(s) Length Fund Complex Directorships
Held of Time Overseen by Held by
Name Address & Age with Fund Served Principal Occupation(s) During Past 5 Years Director Director
------------------------------------------------------------------------------------------------------------------------------------
Interested Director
------------------------------------------------------------------------------------------------------------------------------------
Terry K. P.O. Box 9011 President 1999 to Chairman, Americas Region since 2001 and 117 Funds None
Glenn* Princeton, NJ 08543-9011 and present Executive Vice President since 1983 of Fund 162 Portfolios
Age: 62 Director and Asset Management, L.P. ("FAM") and Merrill
1992 to Lynch Investment Managers, L.P. ("MLIM");
present President of Merrill Lynch Mutual Funds since
1999; President of FAM Distributors, Inc.
("FAMD") since 1986 and Director thereof
since 1991; Executive Vice President and
Director of Princeton Services, Inc.
("Princeton Services") since 1993; President
of Princeton Administrators, L.P. since 1988;
Director of Financial Data Services, Inc.
since 1985.
------------------------------------------------------------------------------------------------------------------------
* Mr. Glenn is a director, trustee or member of an advisory board of certain other investment companies for which FAM or
MLIM acts as investment adviser. Mr. Glenn is an "interested person," as described in the Investment Company Act, of
the Fund based on his positions as Chairman (Americas Region) and Executive Vice President of FAM and MLIM; President
of FAMD; Executive Vice President of Princeton Services; and President of Princeton Administrators, L.P. The
Director's term is unlimited. Directors serve until their resignation, removal or death, or until December 31 of the
year in which they turn 72. As Fund President, Mr. Glenn serves at the pleasure of the Board of Directors.
------------------------------------------------------------------------------------------------------------------------------------
Number of
Portfolios in Other
Position(s) Length Fund Complex Directorships
Held of Time Overseen by Held by
Name Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years Director Director
------------------------------------------------------------------------------------------------------------------------------------
Independent Directors
------------------------------------------------------------------------------------------------------------------------------------
James H. P.O. Box 9011 Director 1995 to Director and Executive Vice President, The 42 Funds None
Bodurtha Princeton, NJ 08543-9011 present China Business Group, Inc. since 1996; 61 Portfolios
Age: 58 Chairman, Berkshire Holding Corporation
since 1980.
------------------------------------------------------------------------------------------------------------------------------------
Joe Grills P.O. Box 9011 Director 2002 to Member of Committee on Investment of Employee 42 Funds Kimco
Princeton, NJ 08543-9011 present Benefit Assets of the Association for 61 Portfolios Realty
Age: 67 Financial Professionals since 1986.
------------------------------------------------------------------------------------------------------------------------------------
Herbert I. P.O. Box 9011 Director 1992 to John M. Olin Professor of Humanities, New 42 Funds None
London Princeton, NJ 08543-9011 present York University since 1993. 61 Portfolios
Age: 63
------------------------------------------------------------------------------------------------------------------------------------
Andre F. P.O. Box 9011 Director 1992 to George Gund Professor of Finance and Banking, 42 Funds None
Perold Princeton, NJ 08543-9011 present Harvard School of Business since 2000; 61 Portfolios
Age: 50 Finance Area Chair since 1996.
------------------------------------------------------------------------------------------------------------------------------------
Roberta P.O. Box 9011 Director 1999 to Shareholder, Modrall, Sperling, Roehl, 42 Funds Cooper's,
Cooper Ramo Princeton, NJ 08543-9011 present Harris & Sisk, P.A. since 1993. 61 Portfolios Inc.; ECMC,
Age: 60 Inc.
------------------------------------------------------------------------------------------------------------------------------------
Robert S. P.O. Box 9011 Director 2002 to Principal of STI Management since 1994; 42 Funds None
Salomon, Jr. Princeton, NJ 08543-9011 present Director, Rye Country Day School since 2001. 61 Portfolios
Age: 66
------------------------------------------------------------------------------------------------------------------------------------
Melvin R. P.O. Box 9011 Director 2002 to Director, Silbanc Properties, Ltd.(real 42 Funds None
Seiden Princeton, NJ 08543-9011 present estate, investment and consulting) 61 Portfolios
Age: 72 since 1987.
------------------------------------------------------------------------------------------------------------------------------------
Stephen P.O. Box 9011 Director 2002 to Chairman, Fernwood Advisors since 1996. 42 Funds Interna-
B. Swensrud Princeton, NJ 08543-9011 present 61 Portfolios tional
Age: 69 Mobile
Communi-
cations,
Inc.
------------------------------------------------------------------------------------------------------------------------
* The Director's term is unlimited. Directors serve until their resignation, removal or death, or until December 31 of
the year in which they turn 72.
------------------------------------------------------------------------------------------------------------------------------------
Position(s) Length
Held of Time
Name Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years
------------------------------------------------------------------------------------------------------------------------------------
Fund Officers
------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 1993 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof
Burke Princeton, NJ 08543-9011 President present since 1999; Senior Vice President and Treasurer of Princeton Services
Age: 42 and and since 1999; Vice President of FAMD since 1999; Vice President of MLIM
Treasurer 1999 to and FAM from 1990 to 1997; Director of MLIM Taxation since 1990.
present
------------------------------------------------------------------------------------------------------------------------------------
Kenneth A. P.O. Box 9011 Senior 2002 to Managing Director of FAM and MLIM since 1997.
Jacob Princeton, NJ 08543-9011 Vice present
Age: 51 President
------------------------------------------------------------------------------------------------------------------------------------
John M. P.O. Box 9011 Senior 2002 to Managing Director of FAM and MLIM since 2000 and First Vice President
Loffredo Princeton, NJ 08543-9011 Vice present from 1997 to 2000.
Age: 38 President
------------------------------------------------------------------------------------------------------------------------------------
Michael P.O. Box 9011 Vice 2000 to Vice President of MLIM since 1999.
Kalinoski Princeton, NJ 08543-9011 President present
Age: 32
------------------------------------------------------------------------------------------------------------------------------------
Alice A. P.O. Box 9011 Secretary 1999 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM
Pellegrino Princeton, NJ 08543-9011 present from 1999 to 2002; Attorney associated with MLIM since 1997; Associate
Age: 42 with Kirkpatrick & Lockhart LLP from 1992 to 1997.
------------------------------------------------------------------------------------------------------------------------
* Officers of the Fund serve at the pleasure of the Board of Directors.
------------------------------------------------------------------------------------------------------------------------------------
Custodian
The Bank of New York
100 Church Street
New York, NY 10286
Transfer Agents
Common Stock:
The Bank of New York
101 Barclay Street
New York, NY 10286
Preferred Stock:
The Bank of New York
100 Church Street
New York, NY 10286
NYSE Symbol
MQT
22 & 23
[LOGO] Merrill Lynch Investment Managers
[GRAPHICS OMITTED]
MuniYield Quality Fund II, 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. The Fund invests primarily in insured municipal bonds.
This report, including the financial information herein, is transmitted to
shareholders of MuniYield Quality Fund II, Inc. for their information. It is not
a prospectus. Past performance results shown in this report should not be
considered a representation of future performance. The Fund has leveraged its
Common Stock and intends to remain leveraged by issuing Preferred Stock to
provide the Common Stock shareholders with a potentially higher rate of return.
Leverage creates risks for Common Stock shareholders, including the likelihood
of greater volatility of net asset value and market price of shares of the
Common Stock, and the risk that fluctuations in the short-term dividend rates of
the Preferred Stock may affect the yield to Common Stock shareholders.
Statements and other information herein are as dated and are subject to change.
MuniYield Quality Fund II, Inc.
Box 9011
Princeton, NJ
08543-9011
[RECYCLED LOGO] Printed on post-consumer recycled paper #16433--10/02