[LOGO] Merrill Lynch Investment Managers
Annual Report
October 31, 2001
MuniYield
Quality
Fund II, Inc.
www.mlim.ml.com
MUNIYIELD QUALITY FUND II, INC.
A Special Message to Shareholders
THE U.S. ECONOMY & THE AFTERMATH OF SEPTEMBER 11th
A Perspective from Bob Doll, President & Chief Investment Officer
Of Merrill Lynch Investment Managers, L.P.
For Americans, the world was changed forever on September 11th. In looking for
some perspective, I have been reassured by my belief that the pride of America
is its people and its economy. In the wake of this attack, there has been no
question about the mettle of Americans--across the country, they have risen to
the occasion again and again by helping the victims and raising the flag. But
there are many important questions about the American economy, the engine of our
way of life, that have yet to be answered, indeed, that may take months to
answer.
During the coming days, weeks and months, navigating a course through the
financial markets will be challenging. The resolve of Americans and the U.S.
Government will be tested. But history tells us that Americans and America are
resilient. And we know that the market will eventually rally. As President Bush
told the nation in his speech on September 20th, "Terrorists attacked a symbol
of prosperity. They did not touch its source. America is successful because of
the hard work and creativity and enterprise of our people. They were the true
strengths of our economy before September 11th and they are our strengths
today."
For the rest of this year at least, the main event will be a market of
tug-of-war as consumer demand shock vies with proactive monetary and fiscal
policies from the Fed and government, which may pump as much as $100 billion
into the economy. Where we go and when we get there will depend on the
government's ability to reinvigorate consumer and business confidence.
Eventually, the market will get back to focusing on the basics--economic and
earnings fundamentals.
There is no doubt that these are extraordinarily trying times. But we have been
through trying times before, and the economy has always emerged stronger than
ever. We have no reason to believe this time will be any different.
MuniYield Quality Fund II, Inc., October 31, 2001
DEAR SHAREHOLDER
The Board of Directors of MuniYield Quality Fund II, Inc. recently approved a
change to the Fund's investment strategy. Effective immediately, at least 80% of
the Fund's assets must be invested in insured municipal bonds under normal
circumstances. In addition, the Fund may not invest in below investment-grade
securities.
For the year ended October 31, 2001, the Common Stock of MuniYield Quality Fund
II, Inc. earned $0.737 per share income dividends, which included earned and
unpaid dividends of $0.063. This represents a net annualized yield of 5.58%,
based on a month-end net asset value of $13.21 per share. During the same
period, the total investment return on the Fund's Common Stock was +13.47%,
based on a change in per share net asset value from $12.39 to $13.21, and
assuming reinvestment of $0.740 per share income dividends.
For the six-month period ended October 31, 2001, the total investment return on
the Fund's Common Stock was +9.60%, based on a change in per share net asset
value from $12.43 to $13.21, and assuming reinvestment of $0.368 per share
income dividends.
For the six-month period ended October 31, 2001, the Fund's Auction Market
Preferred Stock had an average yield of 2.51% for Series A, 2.52% for Series B
and 2.49% for Series C.
The Municipal Market Environment
Throughout most of the six-month period ended October 31, 2001, long-term
interest rates generally declined. Continued weak economic activity and
declining equity markets led the Federal Reserve Board to lower short-term
interest rates 100 basis points (1.00%) from May to August. These actions were
taken largely to boost both economic activity and consumer confidence. By early
September there were a number of, albeit few, indications pointing toward the
beginning of a US economic recovery. However, immediately following the tragedy
of the World Trade Center and Pentagon attacks, all such indications effectively
vanished. After anemic economic growth of just 0.3% during the second quarter of
2001 and -0.4% for the third quarter of 2001, US gross domestic product is
widely expected to be negative for the remainder of the year and perhaps into
early 2002. The Federal Reserve Board quickly lowered short-term interest rates
an additional 50 basis points immediately following the attacks, just prior to
the reopening of the stock exchanges. This marked the eighth time this year the
Federal Reserve Board had eased monetary conditions. Despite the events of
September 11, the Federal Reserve Board noted that the nation's long-term
economic prospects remained favorable.
Initially, long-term interest rates rose during the days following the September
11 attacks. The quick response by both Federal and state governments to
stabilize, aid and restore US business activities promptly improved fixed-income
investors' confidence. Investor attention again focused on weak US economic
fundamentals and, on a financial environment further impaired by the economic
losses resulting from the attacks. In addition to the immediate loss of four
days of equity trading and air transportation, including air cargo transfers, US
consumer confidence was expected to be severely shaken, resulting in weaker
consumer spending and, eventually, diminished business manufacturing. By
September 30, 2001, US Treasury bond yields declined to 5.42%, their approximate
level before the September attacks.
In early October, the Federal Reserve Board lowered short-term interest rates an
additional 50 basis points to a target of 2.50%, the lowest rate in nearly 40
years. US economic reports continued to be very weak, pushing US equity prices
lower in early October and bond prices higher. US military reprisals in
Afghanistan also helped to support higher bond prices as investors sought the
safe haven of US Treasury obligations. At October 31, 2001, the US Treasury
announced that it would no longer issue 30-year maturity bonds, triggering an
explosive fixed-income rally as investors scrambled to purchase soon-to-be
unavailable issues. By the end of October, long-term US Treasury bond yields
fell to 4.87%, declining more than 90 basis points during the last six months
and more than 50 basis points in October 2001.
The municipal bond market displayed a very similar pattern during the October
period. Long-term tax-exempt bond yields had generally declined through early
September as strong investor demand easily outweighed sizable increases in new
bond issuance. The disruption in the financial markets following the September
11 attacks also served to push tax-exempt bond yields higher. The municipal bond
market was able to reorganize operations quickly, and tax-exempt bond yields
were able to decline in conjunction with US Treasury bond yields for the
remainder of the period. While municipal bond yields were unable to match the
dramatic declines witnessed in the US Treasury market, tax-exempt bond prices
rose strongly during late October. For the six months ended October 31, 2001, as
measured by the Bond Buyer Revenue Bond Index, long-term municipal bond yields
stood at 5.23%, a decline of 40 basis points and approximately 20 basis points
during October.
Increased investor demand was the driving force for much of the municipal bond
market's performance during the period. Investors received more than $60 billion
in coupon income payments and monies from maturities and early redemptions this
past June and July 2001. Also, a number of mutual fund families raised more than
$2.5 billion in new closed-end tax-exempt bond funds during the summer. Perhaps
most importantly, short-term municipal rates continued to move lower in response
to Federal Reserve Board actions. Seasonal tax pressures in March and April 2001
kept short-term municipal rates artificially high, although not as high as in
recent years. As these pressures abated, short-term municipal rates declined to
approximately 2%. As interest rates declined, investors extended maturities to
take advantage of the steep municipal bond yield curve. All of these factors
contributed to a very positive technical environment for municipal bonds in
recent months. Much of this positive environment can be expected to continue in
the coming months.
Recent investor demand has been strong enough to easily outweigh the continued
dramatic increase in new tax-exempt bond issuance. Historically low municipal
bond yields continued to allow municipalities to refund outstanding,
high-couponed debt. For the six months ended October 31, 2001, more than $145
billion in long-term tax-exempt bonds was issued, an increase of nearly 40%
compared to the same period a year ago. During the October 31, 2001 quarter,
tax-exempt bond issuance remained sizable with almost $70 billion in long-term
municipal bonds underwritten, an increase of more than 30% compared to the
October 31, 2000 quarter. Municipalities issued nearly $30 billion in tax-exempt
bonds during October 2001, an increase of more than 45% compared to October 2000
issuance.
Interest rates are likely to remain near current levels, or perhaps move
slightly lower, as we expect US economic conditions to remain very weak.
However, in the coming months, business activity is likely to accelerate,
perhaps significantly. Immediately after the September 11 attacks, the Federal
Government announced a $45 billion aid package for New York City, Washington, DC
and the airline industry, with additional fiscal aid packages expected. The
military response to these attacks will continue to require sizable increases in
Defense Department spending. Eventually, this governmental spending should
result in increased US economic activity, particularly in the construction and
defense industries. This governmental stimulus, in conjunction with the actions
already taken by the Federal Reserve Board, can be expected to generate
significant increases in US gross domestic product growth some time in 2002.
As inflationary pressures are expected to remain well-contained going forward,
increased economic activity need not result in significant increases in
long-term bond yields. Also, throughout much of 2001, the municipal bond market
exhibited far less volatility than its taxable counterparts. Since the strong
technical position that supported the tax-exempt bond market's performance this
year can be expected to continue going forward, any potential increases in
municipal bond yields also can be expected to be minimal.
Portfolio Strategy
We entered the period with the Fund fully invested in municipal bonds with a
relatively high-credit profile. We structured the Fund's position toward the
defensive side, with investments largely in premium coupon issues and
intermediate maturities. We adopted
2 & 3
MuniYield Quality Fund II, Inc., October 31, 2001
this structure in response to the aggressive fiscal and monetary stimulus
intended to generate increased economic growth. During the period, despite
additional significant monetary stimulus, the US economy failed to exhibit
favorable momentum. Consequently, we adopted a more positive outlook toward the
municipal bond market. We maintained the Fund's fully invested status throughout
the period in an effort to enhance shareholder income and upgraded its already
strong credit profile. At October 31, 2001, 94.9% 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 insurers.
The 400 basis point decline in short-term interest rates engineered by the
Federal Reserve Board in 2001 resulted in a material decrease in the Fund's
borrowing cost into the 2% range. This decline, in combination with a steep
tax-exempt yield curve, generated a substantial income benefit to the Fund's
Common Stock shareholders from the leveraging of the Preferred Stock. Additional
limited declines in short-term interest rates are expected this year, which
should lead to lower borrowing costs for the Fund and additional income for the
Fund's Common Stock shareholders from the leveraging of the Preferred Stock.
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 complete explanation of the benefits
and risks of leveraging, see page 5 of this report to shareholders.)
Looking ahead, we expect to remain essentially fully invested and retain or
improve the current credit quality profile. We will continue to seek
opportunities for the Fund in the market provided by new municipal issuance to
structure the portfolio more favorably. We also expect to pursue opportunities
to adopt a more aggressive stance given the favorable backdrop of low inflation
and declining economic growth.
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/ Vincent R. Giordano
Vincent R. Giordano
Senior Vice President
/s/ Michael Kalinoski
Michael Kalinoski
Vice President and Portfolio Manager
November 30, 2001
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.
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.
4 & 5
MuniYield Quality Fund II, Inc., October 31, 2001
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
====================================================================================================================================
Arizona--1.2% AAA Aaa $ 2,000 Maricopa County, Arizona, Stadium District Revenue Bonds, 5.75% due
7/01/2016 (e) $ 2,135
-----------------------------------------------------------------------------------------------------------
AAA Aaa 2,750 Mesa, Arizona, GO, 6.50% due 7/01/2011 (b) 3,348
====================================================================================================================================
California--4.4% AAA Aaa 7,500 Alameda Corridor, California, Transportation Authority Revenue Bonds,
Series 1999-A, 5.402%** due 10/01/2030 (e) 1,616
-----------------------------------------------------------------------------------------------------------
AAA NR* 2,500 California Health Facilities Finance Authority Revenue Bonds (Kaiser
Permanente), RIB, Series 26, 8.77% due 6/01/2022 (c)(h) 2,783
-----------------------------------------------------------------------------------------------------------
A1+ NR* 800 California Pollution Control Financing Authority, PCR, Refunding
(Pacific Gas and Electric), VRDN, AMT, Series B, 2.35% due 11/01/2026
(i) 800
-----------------------------------------------------------------------------------------------------------
NR* Aaa 2,000 California State, GO, Refunding, RIB, Series 470X, 9.69% due 2/01/2010
(e)(h) 2,633
-----------------------------------------------------------------------------------------------------------
AAA NR* 6,250 Los Angeles, California, Water and Power Revenue Refunding Bonds,
DRIVERS, Series 185, 8.391% due 7/01/2013 (e)(h) 7,534
-----------------------------------------------------------------------------------------------------------
AA Aa3 3,650 Sacramento County, California, Sanitation District Financing
Authority, Revenue Refunding Bonds, Trust Receipts, Class R, Series A,
9.789% due 12/01/2019 (h) 4,358
====================================================================================================================================
Colorado--10.6% AAA Aaa 16,250 Colorado Department of Transit, TRAN, 6% due 6/15/2015 (a) 18,479
-----------------------------------------------------------------------------------------------------------
Colorado Housing and Finance Authority, Revenue Refunding Bonds:
AAA Aaa 3,000 AMT, Series E-2, 7% due 2/01/2030 (e) 3,436
AAA NR* 1,940 (S/F Program), AMT, Series A-2, 6.45% due 4/01/2030 (e) 2,172
AAA Aaa 3,000 (S/F Program), AMT, Series A-2, 6.50% due 8/01/2031 (e) 3,389
AAA NR* 3,470 (S/F Program), AMT, Series B-2, 5.20% due 2/01/2031 (e) 3,904
AAA Aaa 1,720 (S/F Program), AMT, Series C-1, 7.65% due 12/01/2025 (e)(j) 1,842
AAA NR* 5,320 (S/F Program), Series B-3, 5.20% due 8/01/2017 (c) 5,946
-----------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Jefferson County, Colorado, School District Number R-001, GO, Series
A, 5.50% due 12/15/2014 (b) 2,163
-----------------------------------------------------------------------------------------------------------
AAA Aaa 4,845 Pueblo County, Colorado, Pueblo Rural School District Number 070, GO,
6% due 12/01/2009 (b)(g) 5,625
====================================================================================================================================
Connecticut--6.3% AAA NR* 5,550 Connecticut State, GO, Series A, 6% due 4/15/2016 (c) 6,324
-----------------------------------------------------------------------------------------------------------
AAA Aaa 1,400 Connecticut State Health and Educational Facilities Authority, Revenue
Refunding Bonds (Yale University), RIB, 9.515% due 6/10/2030 (h) 1,489
-----------------------------------------------------------------------------------------------------------
Connecticut State Regional Learning Educational Service Center Revenue
Bonds (Office/Education Center Facility):
NR* NR* 860 7.50% due 2/01/2005 881
NR* NR* 1,100 7.75% due 2/01/2015 1,164
-----------------------------------------------------------------------------------------------------------
AAA NR* 9,325 Connecticut State Resource Recovery Authority, Revenue Refunding
Bonds, DRIVERS, Series 187, 8.79% due 11/15/2011 (e)(h) 10,958
-----------------------------------------------------------------------------------------------------------
NR* Aaa 2,750 Connecticut State Special Tax Obligation Revenue Bonds, RIB, Series
372, 9.74% due 12/01/2017 (b)(h) 3,416
-----------------------------------------------------------------------------------------------------------
AAA NR* 3,000 Connecticut State Special Tax Obligation Revenue Refunding Bonds,
DRIVERS, Series 168, 9.809% due 10/01/2009 (e)(h) 3,926
====================================================================================================================================
Georgia--2.7% AAA Aaa 7,850 Atlanta, Georgia, Airport Revenue Refunding Bonds, Series A, 5.875%
due 1/01/2017 (b) 8,601
-----------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Georgia Municipal Electric Authority, Power Revenue Refunding Bonds,
Series Z, 5.50% due 1/01/2020 (e) 3,301
====================================================================================================================================
Illinois--6.6% 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) 3,805
-----------------------------------------------------------------------------------------------------------
NR* Aaa 2,500 Cook County, Illinois, Community Consolidated School District Number
146, Tinley Park, GO, 9% due 12/01/2016 (b) 3,669
-----------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 Illinois Regional Transportation Authority Revenue Bonds, 6.50% due
7/01/2026 (e) 12,408
-----------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Illinois State, GO, First Series, 6% due 1/01/2013 (b) 3,403
-----------------------------------------------------------------------------------------------------------
NR* Aaa 6,000 Illinois Student Assistance Commission, Student Loan Revenue Refunding
Bonds, AMT, Senior Series BB, 6.75% due 3/01/2015 6,152
====================================================================================================================================
Indiana--1.4% AAA NR* 2,675 Indiana Bond Bank Revenue Bonds, Guarantee State Revolver, 6.75% due
2/01/2017 (a) 3,008
-----------------------------------------------------------------------------------------------------------
AA NR* 3,100 Indianapolis, Indiana, Local Public Improvement Bond Bank Revenue
Refunding Bonds, Series D, 6.75% due 2/01/2020 3,313
====================================================================================================================================
Kansas--3.7% AAA NR* 6,650 Sedgwick and Shawnee Counties, Kansas, S/F Mortgage-Backed Revenue
Bonds, AMT, Series A-2, 7.60% due 12/01/2031 (d)(e) 7,679
-----------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Sedgwick and Shawnee Counties, Kansas, S/F Mortgage-Backed Revenue
Refunding Bonds, AMT, Series B-2, 5.125% due 12/01/2033 (e)(k) 3,298
-----------------------------------------------------------------------------------------------------------
AAA Aaa 4,955 Sedgwick and Shawnee Counties, Kansas, S/F Revenue Bonds, AMT, Series
A-1, 6.875% due 12/01/2026 (d)(e) 5,671
====================================================================================================================================
Kentucky--0.7% A- A3 3,000 Perry County, Kentucky, Solid Waste Disposal Revenue Bonds (TJ
International Project), AMT, 7% due 6/01/2024 3,187
====================================================================================================================================
Louisiana--2.3% AAA Aaa 5,000 Jefferson Parish, Louisiana, Home Mortgage Authority, S/F Mortgage
Revenue Bonds, AMT, Series B-1, 5.25% due 12/01/2033 (e)(k) 5,532
-----------------------------------------------------------------------------------------------------------
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) 4,708
====================================================================================================================================
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
TRAN Tax Revenue Anticipation Notes
VRDN Variable Rate Demand Notes
6 & 7
MuniYield Quality Fund II, Inc., October 31, 2001
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
====================================================================================================================================
Massachusetts--3.6% BBB+ Baa2 $ 2,000 Massachusetts Municipal Wholesale Electric Company, Power Supply
System Revenue Refunding Bonds, Series A, 6.75% due 7/01/2011 $ 2,092
-----------------------------------------------------------------------------------------------------------
AAA NR* 4,305 Massachusetts State, Consolidated Loan, GO, Series A, 6% due
2/01/2010 (c)(g) 4,962
-----------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 Massachusetts State Health and Educational Facilities Authority
Revenue Bonds (Daughters), Series D, 6.10% due 7/01/2006 (a)(g) 2,734
-----------------------------------------------------------------------------------------------------------
Massachusetts State Health and Educational Facilities Authority,
Revenue Refunding Bonds (New England Memorial Hospital), Series B (f):
NR* Ca 2,242 6% due 7/01/2008 314
NR* Ca 3,898 6.125% due 7/01/2013 546
-----------------------------------------------------------------------------------------------------------
NR* Aa3 4,200 Massachusetts State Revenue Bonds, RIB, Series 420, 9.14% due
12/15/2014 (h) 5,191
====================================================================================================================================
Michigan--1.1% AAA Aaa 1,800 Michigan Municipal Bond Authority Revenue Bonds (Pooled Project),
Series B, 5.625% due 10/01/2019 (e) 1,923
-----------------------------------------------------------------------------------------------------------
AAA NR* 2,685 Michigan State, HDA, Revenue Refunding Bonds, Series C, 5.90% due
12/01/2015 (c)(j) 2,853
====================================================================================================================================
Minnesota--1.5% AAA Aaa 2,500 Minneapolis and Saint Paul, Minnesota, Metropolitan Airports
Commission, Airport Revenue Bonds, AMT, Series B, 5.50% due
1/01/2008 (a) 2,692
-----------------------------------------------------------------------------------------------------------
AAA NR* 3,650 Minneapolis, Minnesota, Special School District Number 001, GO, 5.40%
due 2/01/2015 (e) 3,864
====================================================================================================================================
Missouri--1.4% 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 2,221
AAA Aaa 2,000 5.75% due 3/01/2016 2,208
AAA Aaa 1,500 6% due 3/01/2019 1,667
====================================================================================================================================
Nevada--1.1% AAA Aaa 4,500 Las Vegas New Convention and Visitors Authority Revenue Bonds, 6% due
7/01/2013 (a) 5,106
====================================================================================================================================
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) 5,672
-----------------------------------------------------------------------------------------------------------
AAA NR* 7,040 New Jersey State Transportation Trust Fund Authority, Transportation
System Revenue Bonds, Series A, 5.50% due 6/15/2012 (c) 7,940
-----------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Salem County, New Jersey, Industrial Pollution Control Financing
Authority, Revenue Refunding Bonds (Public Service Electric & Gas),
RIB, Series 380, 10.24% due 6/01/2031 (e)(h) 5,916
====================================================================================================================================
New Mexico--3.8% AAA NR* 2,345 New Mexico Mortgage Finance Authority, S/F Premium Revenue Bonds, AMT,
Series E-2, 6.25% due 7/01/2029 (e)(k) 2,582
-----------------------------------------------------------------------------------------------------------
New Mexico State Highway Commission, Tax Revenue Bonds, Senior
Sub-Lien, Series A (c):
AAA NR* 7,295 6% due 6/15/2014 8,333
AAA NR* 5,495 6% due 6/15/2015 6,225
====================================================================================================================================
New York--12.8% AAA Aaa 9,280 Nassau Health Care Corporation, New York, Health System Revenue Bonds,
5.75% due 8/01/2022 (c) 9,967
-----------------------------------------------------------------------------------------------------------
AAA NR* 2,000 New York City, New York, GO, Series I, 6.25% due 4/15/2017 2,197
-----------------------------------------------------------------------------------------------------------
New York State Dormitory Authority Revenue Bonds, Series C (e):
AAA Aaa 1,490 7.375% due 5/15/2009 (g) 1,900
AAA Aaa 5,510 7.375% due 5/15/2010 6,642
-----------------------------------------------------------------------------------------------------------
AAA Aaa 9,000 New York State Dormitory Authority, Revenue Refunding Bonds (State
University Educational Facilities), 5.75% due 5/15/2024 (b) 9,716
-----------------------------------------------------------------------------------------------------------
AAA Aaa 9,825 New York State Mortgage Agency Revenue Bonds, AMT, 24th Series, 5.875%
due 10/01/2015 (e) 10,548
-----------------------------------------------------------------------------------------------------------
AAA Aaa 14,505 New York State Thruway Authority, Service Contract Revenue Bonds
(Local Highway and Bridge), 5.625% due 4/01/2013 (e) 16,044
====================================================================================================================================
North Carolina--3.1% A- A3 12,000 Martin County, North Carolina, Industrial Facilities and Pollution
Control Financing Authority Revenue Bonds (Solid Waste Disposal--
Weyerhaeuser Company), AMT, 6.80% due 5/01/2024 12,592
-----------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Randolph County, North Carolina, COP, 5.50% due 6/01/2014 (c) 1,085
====================================================================================================================================
Ohio--1.6% NR* Aaa 6,290 Plain, Ohio, Local School District, GO, Refunding, 6% due
12/01/2020 (b) 6,987
====================================================================================================================================
Pennsylvania--1.1% NR* Aaa 3,335 Delaware River Port Authority of Pennsylvania and New Jersey Revenue
Bonds, RIB, Series 396, 9.72% due 1/01/2019 (c)(h) 4,089
-----------------------------------------------------------------------------------------------------------
NR* NR* 1,000 Pennsylvania Economic Development Financing Authority, Exempt
Facilities Revenue Bonds (National Gypsum Company), AMT, Series A,
6.25% due 11/01/2027 734
====================================================================================================================================
Rhode Island--1.0% 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) 4,255
====================================================================================================================================
South Carolina--2.7% A- A2 5,765 Berkeley County, South Carolina, Pollution Control Facilities Revenue
Refunding Bonds (South Carolina Electric and Gas Company), 6.50% due
10/01/2014 6,115
-----------------------------------------------------------------------------------------------------------
AAA NR* 2,950 Fairfield County, South Carolina, PCR (South Carolina Electric and Gas
Company), 6.20% due 9/01/2014 (e) 3,126
-----------------------------------------------------------------------------------------------------------
NR* A1 2,500 Spartanburg County, South Carolina, Solid Waste Disposal Facilities
Revenue Bonds (BMW Project), AMT, 7.55% due 11/01/2024 2,720
====================================================================================================================================
Tennessee--1.8% AAA Aaa 7,365 Chattanooga, Tennessee, IDB, Lease Rent Revenue Bonds (Southside
Redevelopment Corporation), 5.875% due 10/01/2024 (a) 7,995
====================================================================================================================================
Texas--6.2% AA Aa3 4,000 Austin, Texas, Convention Center Revenue Bonds (Convention Enterprises
Inc.), Trust Certificates, Second Tier, Series B, 5.75% due 1/01/2032 4,095
-----------------------------------------------------------------------------------------------------------
AAA Aaa 1,630 Brownsville, Texas, GO (Combined Tax and Revenue Certificates of
Obligation), Series A, 6.50% due 2/15/2017 (b) 1,870
-----------------------------------------------------------------------------------------------------------
AAA Aaa 2,730 Corpus Christi, Texas, Utility System Revenue Refunding Bonds, Series
A, 6% due 7/15/2016 (c) 3,047
-----------------------------------------------------------------------------------------------------------
Dickinson, Texas, Independent School District, GO, Refunding:
AAA Aaa 1,180 6% due 2/15/2017 1,300
AAA Aaa 1,250 6% due 2/15/2018 (e) 1,371
-----------------------------------------------------------------------------------------------------------
AA NR* 4,000 Gregg County, Texas, Health Facilities Development Corporation,
Hospital Revenue Bonds (Good Shepherd Medical Center Project), 6.875%
due 10/01/2020 4,529
-----------------------------------------------------------------------------------------------------------
8 & 9
MuniYield Quality Fund II, Inc., October 31, 2001
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
====================================================================================================================================
Texas AAA Aaa $ 3,675 Houston, Texas, Hotel Occupancy Tax and Special Revenue Bonds
(concluded) (Convention and Entertainment), Series B, 5.75% due 9/01/2012 (a) $ 4,136
-----------------------------------------------------------------------------------------------------------
BBB Baa2 3,500 Lower Colorado River Authority, Texas, PCR (Samsung Austin
Semiconductor), AMT, 6.375% due 4/01/2027 3,536
-----------------------------------------------------------------------------------------------------------
NR* Aaa 3,000 Lower Colorado River Authority, Texas, Revenue Refunding Bonds,
DRIVERS, Series 166, 9.553% due 5/15/2009 (c)(h) 3,838
====================================================================================================================================
Virginia--1.1% BBB- Baa3 26,500 Pocahontas Parkway Association, Virginia, Toll Road Revenue Bonds,
Senior-Series B, 5.875%** due 8/15/2024 5,059
====================================================================================================================================
Washington--6.0% King County, Washington, Issaquah School District Number 411, GO (c):
AAA Aa2 1,500 6.25% due 12/01/2014 1,731
AAA Aa2 1,900 6.25% due 12/01/2015 2,180
AAA Aa2 2,000 6.25% due 12/01/2016 2,277
-----------------------------------------------------------------------------------------------------------
AAA Aaa 7,470 Port Seattle, Washington, Revenue Bonds, AMT, Series B, 6% due
2/01/2016 (e) 8,120
-----------------------------------------------------------------------------------------------------------
AAA Aaa 6,150 Seattle, Washington, Municipal Light and Power Revenue Bonds, 6% due
10/01/2019 (e) 6,754
-----------------------------------------------------------------------------------------------------------
NR* Aaa 5,000 Snohomish County, Washington, Arlington School District Number 016,
GO, 6.50% due 12/01/2015 (b) 5,881
====================================================================================================================================
Wisconsin--1.2% AAA Aaa 5,000 Wisconsin State Transportation Revenue Bonds, Series A, 5.50% due
7/01/2015 (b) 5,381
====================================================================================================================================
Puerto Rico--2.9% AAA Aaa 5,000 Puerto Rico Commonwealth Highway and Transportation Authority,
Transportation Revenue Bonds, Series B, 6% due 7/01/2026 (e) 5,363
-----------------------------------------------------------------------------------------------------------
AAA Aaa 1,000 Puerto Rico Electric Power Authority, Power Revenue Bonds, Series HH,
5.75% due 7/01/2014 (c) 1,136
-----------------------------------------------------------------------------------------------------------
NR* Aaa 3,250 Puerto Rico Electric Power Authority, Power Revenue Refunding Bonds,
RIB, Series 449X, 8.92% due 7/01/2016 (a)(h) 3,733
-----------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 Puerto Rico Municipal Finance Agency, GO, Series A, 5.50% due
8/01/2023 (c) 2,646
====================================================================================================================================
Total Investments (Cost--$421,737)--98.3% 437,792
Other Assets Less Liabilities--1.7% 7,665
--------
Net Assets--100.0% $445,457
========
====================================================================================================================================
(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, 2001.
(i) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at October 31,
2001.
(j) FHA Insured.
(k) FNMA/GNMA Collateralized.
* Not Rated.
** Represents a zero coupon bond; the interest rate shown reflects the
effective yield at the time of purchase by the Fund.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
Quality Profile (unaudited)
The quality ratings of securities in the Fund as of October 31, 2001 were as
follows:
--------------------------------------------------------------------------------
Percent of
S&P Rating/Moody's Rating Net Assets
--------------------------------------------------------------------------------
AAA/Aaa .................................................. 84.6%
AA/Aa .................................................... 4.8
A/A ...................................................... 5.5
BBB/Baa .................................................. 2.4
CC/Ca .................................................... 0.2
NR (Not Rated) ........................................... 0.6
Other* ................................................... 0.2
--------------------------------------------------------------------------------
* Temporary investments in short-term municipal securities.
10 & 11
MuniYield Quality Fund II, Inc., October 31, 2001
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
As of October 31, 2001
========================================================================================================================
Assets: Investments, at value (identified cost--$421,736,797) ............... $437,791,952
Cash ................................................................ 30,122
Receivables:
Interest .......................................................... $ 7,604,660
Securities sold ................................................... 460,481 8,065,141
-----------
Prepaid expenses and other assets ................................... 51,473
------------
Total assets ........................................................ 445,938,688
------------
========================================================================================================================
Liabilities: Payables:
Dividends to shareholders ......................................... 225,370
Investment adviser ................................................ 188,351 413,721
-----------
Accrued expenses .................................................... 67,882
------------
Total liabilities ................................................... 481,603
------------
========================================================================================================================
Net Assets: Net assets .......................................................... $445,457,085
============
========================================================================================================================
Capital: Capital Stock (200,000,000 shares authorized):
Preferred Stock, par value $.05 per share (6,000 shares of AMPS*
issued and outstanding at $25,000 per share liquidation preference) $150,000,000
Common Stock, par value $.10 per share (22,366,930 shares issued
and outstanding) .................................................. $ 2,236,693
Paid-in capital in excess of par .................................... 311,763,422
Undistributed investment income-- net ............................... 2,000,367
Accumulated realized capital losses on investments-- net ............ (30,183,530)
Accumulated distributions in excess of realized capital gains on
investments--net .................................................... (6,415,022)
Unrealized appreciation on investments--net ......................... 16,055,155
-----------
Total--Equivalent to $13.21 net asset value per share of Common
Stock (market price--$12.07) ........................................ 295,457,085
------------
Total capital ....................................................... $445,457,085
============
========================================================================================================================
* Auction Market Preferred Stock.
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
For the Year Ended October 31, 2001
========================================================================================================================
Investment Interest and amortization of premium and discount earned ............ $ 24,104,115
Income:
========================================================================================================================
Expenses: Investment advisory fees ............................................ $ 2,180,317
Commission fees ..................................................... 379,480
Accounting services ................................................. 134,680
Professional fees ................................................... 103,649
Transfer agent fees ................................................. 78,536
Printing and shareholder reports .................................... 38,706
Listing fees ........................................................ 31,500
Directors' fees and expenses ........................................ 28,666
Custodian fees ...................................................... 26,523
Pricing fees ........................................................ 17,149
Other ............................................................... 32,996
-----------
Total expenses ...................................................... 3,052,202
------------
Investment income--net .............................................. 21,051,913
------------
========================================================================================================================
Realized & Realized gain on investments--net ................................... 5,664,177
Unrealized Gain on Change in unrealized appreciation on investments--net ............... 13,042,044
Investments--Net: ------------
Net Increase in Net Assets Resulting from Operations ................ $ 39,758,134
============
========================================================================================================================
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended
October 31,
--------------------------
Increase (Decrease) in Net Assets: 2001 2000
========================================================================================================================
Operations: Investment income--net .............................................. $ 21,051,913 $ 22,029,545
Realized gain (loss) on investments--net ............................ 5,664,177 (25,891,907)
Change in unrealized appreciation/depreciation on
investments--net .................................................... 13,042,044 29,880,898
------------ ------------
Net increase in net assets resulting from operations ................ 39,758,134 26,018,536
------------ ------------
========================================================================================================================
Dividends to Investment income--net:
Shareholders: Common Stock ...................................................... (16,558,730) (18,016,562)
Preferred Stock ................................................... (4,971,540) (6,054,040)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders ........................................................ (21,530,270) (24,070,602)
------------ ------------
========================================================================================================================
Net Assets: Total increase in net assets ........................................ 18,227,864 1,947,934
Beginning of year ................................................... 427,229,221 425,281,287
------------ ------------
End of year* ........................................................ $445,457,085 $427,229,221
============ ============
========================================================================================================================
*Undistributed investment income--net ............................... $ 2,000,367 $ 2,478,854
============ ============
========================================================================================================================
See Notes to Financial Statements.
12 & 13
MuniYield Quality Fund II, Inc., October 31, 2001
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: 2001 2000 1999 1998 1997
=================================================================================================================================
Per Share Net asset value, beginning of year ........ $ 12.39 $ 12.31 $ 15.52 $ 15.46 $ 14.86
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .................... .94 .99 1.04 1.10 1.15
Realized and unrealized gain (loss) on
investments--net ......................... .84 .17 (2.65) .46 .64
-------- -------- -------- -------- --------
Total from investment operations .......... 1.78 1.16 (1.61) 1.56 1.79
-------- -------- -------- -------- --------
Less dividends and distributions to Common
Stock shareholders:
Investment income--net .................. (.74) (.81) (.86) (.87) (.91)
Realized gain on investments--net ....... -- -- -- (.34) (.03)
In excess of realized gain on
investments--net ....................... -- -- (.49) -- --
-------- -------- -------- -------- --------
Total dividends and distributions to Common
Stock shareholders ....................... (.74) (.81) (1.35) (1.21) (.94)
-------- -------- -------- -------- --------
Effect of Preferred Stock:
Dividends and distributions to Preferred
Stock shareholders:
Investment income--net ................ (.22) (.27) (.19) (.17) (.24)
Realized gain on investments--net ..... -- -- -- (.12) (.01)
In excess of realized gain on
investments--net ..................... -- -- (.06) -- --
-------- -------- -------- -------- --------
Total effect of Preferred Stock ........... (.22) (.27) (.25) (.29) (.25)
-------- -------- -------- -------- --------
Net asset value, end of year .............. $ 13.21 $ 12.39 $ 12.31 $ 15.52 $ 15.46
======== ======== ======== ======== ========
Market price per share, end of year ....... $ 12.07 $ 11.50 $ 11.50 $15.1875 $ 14.375
======== ======== ======== ======== ========
=================================================================================================================================
Total Investment Based on market price per share ........... 11.70% 7.35% (16.70%) 14.51% 13.86%
Return:* ======== ======== ======== ======== ========
Based on net asset value per share ........ 13.47% 8.04% (12.74%) 8.80% 11.24%
======== ======== ======== ======== ========
=================================================================================================================================
Ratios Based on Total expenses** .......................... 1.07% 1.08% .99% .95% .95%
Average Net Assets ======== ======== ======== ======== ========
Of Common Stock: Total investment income--net** ............ 7.36% 8.04% 7.31% 7.21% 7.50%
======== ======== ======== ======== ========
Amount of dividends to Preferred Stock
shareholders .............................. 1.74% 2.21% 1.30% 1.12% 1.55%
======== ======== ======== ======== ========
Investment income--net, to Common Stock
shareholders .............................. 5.62% 5.83% 6.01% 6.09% 5.95%
======== ======== ======== ======== ========
=================================================================================================================================
Ratios Based on Total expenses ............................ .70% .70% .67% .66% .66%
Total Average Net ======== ======== ======== ======== ========
Assets:**+ Total investment income--net .............. 4.83% 5.19% 4.97% 4.98% 5.22%
======== ======== ======== ======== ========
=================================================================================================================================
Ratios Based on Dividends to Preferred Stock shareholders . 3.31% 4.02% 2.75% 2.53% 3.48%
Average Net Assets ======== ======== ======== ======== ========
Of Preferred Stock:
=================================================================================================================================
Supplemental Net assets, net of Preferred Stock, end of
Data: year (in thousands) ....................... $295,457 $277,229 $275,281 $342,496 $341,230
======== ======== ======== ======== ========
Preferred Stock outstanding, end of year
(in thousands) ............................ $150,000 $150,000 $150,000 $150,000 $150,000
======== ======== ======== ======== ========
Portfolio turnover ........................ 98.99% 142.46% 164.45% 154.08% 201.87%
======== ======== ======== ======== ========
=================================================================================================================================
Leverage: Asset coverage per $1,000 ................. $ 2,970 $ 2,848 $ 2,835 $ 3,283 $ 3,275
======== ======== ======== ======== ========
=================================================================================================================================
Dividends Per Share Series A--Investment income--net .......... $ 855 $ 1,017 $ 706 $ 629 $ 869
On Preferred Stock ======== ======== ======== ======== ========
Outstanding: Series B--Investment income--net .......... $ 853 $ 1,024 $ 702 $ 634 $ 868
======== ======== ======== ======== ========
Series C--Investment income--net .......... $ 777 $ 986 $ 650 $ 634 $ 872
======== ======== ======== ======== ========
=================================================================================================================================
* 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.
+ Includes Common and Preferred Stock average net assets.
See Notes to Financial Statements.
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,
14 & 15
MuniYield Quality Fund II, Inc., October 31, 2001
NOTES TO FINANCIAL STATEMENTS (concluded)
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. Interest income is recognized on the accrual basis. The
Fund will adopt the provisions to amortize all premiums and discounts on debt
securities effective November 1, 2001, as now required under the new AICPA Audit
and Accounting Guide for Investment Companies. The cumulative effect of this
accounting change will have no impact on the total net assets of the Fund, but
will result in a $2,317 increase to the cost of securities and a corresponding
$2,317 decrease to net unrealized appreciation, based on debt securities held as
of October 31, 2001.
(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. Distributions in excess of realized capital gains are due
primarily to differing tax treatments for futures transactions.
(f) 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 undistributed net investment income and paid-in capital in excess of
par. 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.
Prior to January 1, 2001, FAM provided accounting services to the Fund at its
cost and the Fund reimbursed FAM for these services. FAM continues to provide
certain accounting services to the Fund. The Fund reimburses FAM for such
services. For the year ended October 31, 2001, the Fund reimbursed FAM an
aggregate of $17,503 for the above-described services. The Fund entered into an
agreement with State Street Bank and Trust Company ("State Street"), effective
January 1, 2001, pursuant to which State Street provides certain accounting
services to the Fund. The Fund pays a fee for these services.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended October 31, 2001 were $420,122,943 and $422,110,943, respectively.
Net realized gains (losses) for the year ended October 31, 2001 and net
unrealized gains as of October 31, 2001 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains
--------------------------------------------------------------------------------
Long-term investments ................... $ 6,153,822 $16,055,155
Financial futures contracts ............. (489,645) --
----------- -----------
Total ................................... $ 5,664,177 $16,055,155
=========== ===========
--------------------------------------------------------------------------------
As of October 31, 2001, net unrealized appreciation for Federal income tax
purposes aggregated $16,054,617, of which $23,537,490 related to appreciated
securities and $7,482,873 related to depreciated securities. The aggregate cost
of investments at October 31, 2001 for Federal income tax purposes was
$421,737,335.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital 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 capital stock without approval of the holders
of Common Stock.
Common Stock
Shares issued and outstanding during the years ended October 31, 2001 and
October 31, 2000 remained constant.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred Stock of the
Fund, with a par value of $.05 per share and a liquidation preference of $25,000
per share, 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, 2001 were as follows: Series A, 1.95%; Series B, 1.94%; and Series
C, 1.85%.
Shares issued and outstanding during the years ended October 31, 2001 and
October 31, 2000 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, 2001, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, an affiliate of FAM, earned $168,778 as commissions.
5. Capital Loss Carryforward:
At October 31, 2001, the Fund had a net capital loss carryforward of
approximately $34,769,000, of which $8,689,000 expires in 2007 and $26,080,000
expires in 2008. This amount will be available to offset like amounts of any
future taxable gains.
6. Subsequent Event:
On November 8, 2001, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.063284 per share,
payable on November 29, 2001 to shareholders of record as of November 20, 2001.
16 & 17
MuniYield Quality Fund II, Inc., October 31, 2001
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
MuniYield Quality Fund II, Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of MuniYield Quality Fund II, Inc. as of
October 31, 2001, 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, 2001 by correspondence with the custodian. 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, 2001, 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
New York, New York
December 5, 2001
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, 2001 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.
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
James H. Bodurtha, Director
Herbert I. London, Director
Joseph L. May, Director
Andre F. Perold, Director
Roberta Cooper Ramo, Director
Vincent R. Giordano, Senior Vice President
Kenneth A. Jacob, Vice President
Michael A. Kalinoski, Vice President
Donald C. Burke, Vice President and Treasurer
Alice A. Pellegrino, Secretary
Custodian
The Bank of New York
90 Washington 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
18 & 19
[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.
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
[RECYCLE LOGO] Printed on post-consumer recycled paper #16433--10/01