UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-6728
Name of Fund: MuniYield Quality Fund II, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Terry K. Glenn, President, MuniYield
Quality Fund II, Inc., 800 Scudders Mill Road, Plainsboro, NJ, 08536.
Mailing address: P.O. Box 9011, Princeton, NJ, 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 10/31/04
Date of reporting period: 11/01/03 - 04/30/04
Item 1 - Report to Stockholders
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
MuniYield Quality
Fund II, Inc.
Semi-Annual Report
April 30, 2004
[LOGO] Merrill Lynch Investment Managers
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, net of dividends to Preferred Stock, is paid to Common Stock
shareholders in the form of dividends, and the value of these portfolio holdings
is reflected in the per share net asset value of the Fund's Common Stock.
However, in order to benefit Common Stock shareholders, the yield curve must be
positively sloped; that is, short-term interest rates must be lower than
long-term interest rates. At the same time, a period of generally declining
interest rates will benefit Common Stock shareholders. If either of these
conditions change, then the risks of leveraging will begin to outweigh the
benefits.
To illustrate these concepts, assume a fund's Common Stock capitalization of
$100 million and the issuance of Preferred Stock for an additional $50 million,
creating a total value of $150 million available for investment in long-term
municipal bonds. If prevailing short-term interest rates are approximately 3%
and long-term interest rates are approximately 6%, the yield curve has a
strongly positive slope. The fund pays dividends on the $50 million of Preferred
Stock based on the lower short-term interest rates. At the same time, the fund's
total portfolio of $150 million earns the income based on long-term interest
rates. Of course, increases in short-term interest rates would reduce (and even
eliminate) the dividends on the Common Stock.
In this case, the dividends paid to Preferred Stock shareholders are
significantly lower than the income earned on the fund's long-term investments,
and therefore the Common Stock shareholders are the beneficiaries of the
incremental yield. However, if short-term interest rates rise, narrowing the
differential between short-term and long-term interest rates, the incremental
yield pickup on the Common Stock will be reduced or eliminated completely. At
the same time, the market value of the fund's Common Stock (that is, its price
as listed on the New York Stock Exchange) may, as a result, decline.
Furthermore, if long-term interest rates rise, the Common Stock's net asset
value will reflect the full decline in the price of the portfolio's investments,
since the value of the fund's Preferred Stock does not fluctuate. In addition to
the decline in net asset value, the market value of the fund's Common Stock may
also decline.
As a part of its investment strategy, the Fund may invest in certain securities
whose potential income return is inversely related to changes in a floating
interest rate ("inverse floaters"). In general, income on inverse floaters will
decrease when short-term interest rates increase and increase when short-term
interest rates decrease. Investments in inverse floaters may be characterized as
derivative securities and may subject the Fund to the risks of reduced or
eliminated interest payments and losses of invested principal. In addition,
inverse floaters have the effect of providing investment leverage and, as a
result, the market value of such securities will generally be more volatile than
that of fixed-rate, tax-exempt securities. To the extent the Fund invests in
inverse floaters, the market value of the Fund's portfolio and the net asset
value of the Fund's shares may also be more volatile than if the Fund did not
invest in these securities. As of April 30, 2004, the percentage of the Fund's
total net assets invested in inverse floaters was 12.97%.
Swap Agreements
The Fund may also invest in swap agreements, which are over-the-counter
contracts in which one party agrees to make periodic payments based on the
change in market value of a specified bond, basket of bonds, or index in return
for periodic payments based on a fixed or variable interest rate or the change
in market value of a different bond, basket of bonds or index. Swap agreements
may be used to obtain exposure to a bond or market without owning or taking
physical custody of securities.
2 MUNIYIELD QUALITY FUND II, INC. APRIL 30, 2004
A Letter From the President
Dear Shareholder
For the six-month and 12-month periods ended April 30, 2004, the Lehman Brothers
Municipal Bond Index posted returns of +1.19% and +2.68%, respectively. Its
taxable counterpart, the Lehman Brothers Aggregate Bond Index, had returns of
+1.25% and +1.82% for the same periods. Amid considerable month-to-month
volatility, tax-exempt bond yields rose over the past year, although not to the
same extent as 10-year U.S. Treasury yields. In all, tax-exempt securities
continued to be an attractive fixed income investment alternative.
As of April month-end, the Federal Reserve Board maintained its accommodative
policy stance, although a better-than-expected employment report for the month
of March prompted speculation that an interest rate increase could come sooner
than many had expected. On April 2, 2004, the good news on the employment front
-- previously the one dim spot in an otherwise bright economic picture -- helped
prompt the yield on the 10-year Treasury bond to spike nearly 25 basis points
(.25%), from 3.91% to 4.15%. Market watchers continue to monitor the economic
data and Federal Reserve Board language for indications of interest rate
direction. If economic growth maintains its recent pace and employment figures
continue to improve, many believe it is just a matter of time before interest
rates move upward.
Equity markets, in the meantime, gleaned support from the improving economic
environment and provided attractive returns. For the six-month and 12-month
periods ended April 30, 2004, the Standard & Poor's 500 Index returned +6.27%
and +22.88%, respectively. Significant fiscal and monetary stimulus in 2003,
including low interest rates and tax cuts, has opened the door to consumer
spending, capital spending, increases in exports and long-awaited job growth. As
expected, these developments have led the way to improvements in corporate
earnings -- a positive for stock markets.
The events and efforts of the past year leave us with a much stronger economy
today. Of course, markets will always fluctuate, and there are many
uncertainties -- not the least of which are geopolitical in nature -- which can
translate into negative market movements. Keeping this in mind, we encourage you
to revisit your portfolio and your asset allocation strategy to ensure you are
well positioned to take advantage of the opportunities that lie ahead.
Importantly, your financial advisor can help you develop a strategy most
suitable for your circumstances through all types of market and economic cycles.
We thank you for trusting Merrill Lynch Investment Managers with your investment
assets, and we look forward to serving you in the months and years ahead.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
MUNIYIELD QUALITY FUND II, INC. APRIL 30, 2004 3
[LOGO] Merrill Lynch Investment Managers
A Discussion With Your Fund's Portfolio Manager
We remained focused on enhancing yield and preserving net asset value in a
volatile interest rate environment, and the Fund was able to outperform its
comparable Lipper category average.
Describe the recent market environment relative to municipal bonds.
For much of the six-month period, a positive economic backdrop helped bond
prices to move higher as yields, which typically move opposite of prices,
declined. In early April, however, a surprisingly strong monthly employment
report triggered fears that the long-accommodative Federal Reserve Board might
raise interest rates sooner than many had expected. As a result, bond yields
rose (prices fell) sharply for the remainder of the period. At the end of April,
long-term U.S. Treasury bond yields had climbed to 5.13%, representing an
increase of approximately 15 basis points (.15%) over the past six months.
Ten-year U.S. Treasury note yields stood at 4.30% as of period-end, an increase
of more than 20 basis points.
Tax-exempt bond yields generally mimicked the movement of their taxable
counterparts, although volatility in the municipal market was more subdued.
Long-term revenue bond yields, as measured by the Bond Buyer Revenue Bond Index,
rose just four basis points over the past six months. For the same period,
yields on AAA-rated issues maturing in 30 years rose approximately 10 basis
points to 4.93% while yields on 10-year, AAA-rated issues increased more than 16
basis points to nearly 4%, according to Municipal Market Data. The more marked
increase in 10-year bond yields may be attributed to the fact that recent
issuance has been heavily concentrated in the 10-year - 20-year range. The
resulting supply imbalance prompted higher intermediate bond yields (and lower
prices). Longer-maturity and lower-rated issues continued to benefit from more
favorable supply/demand factors and, therefore, have seen less price
depreciation. For the six-month period as a whole, municipal bond supply
declined approximately 5% compared to the same period a year ago.
While investor enthusiasm for stocks has taken some attention away from fixed
income markets, overall demand for tax-exempt municipal bonds has remained
positive. Recent Federal Reserve Board statistics showed that U.S. household
holdings of municipal securities increased by more than $25 billion during the
fourth quarter of 2003 to approximately $680 billion. In addition, data from the
Investment Company Institute indicates that, in just the first three months of
2004, tax-exempt bond funds have seen net new cash flows of almost $640 million.
How did the Fund perform in light of the existing market conditions?
For the six-month period ended April 30, 2004, the Common Stock of MuniYield
Quality Fund II, Inc. had net annualized yields of 6.45% and 7.24%, based on a
period-end per share net asset value of $13.24 and a per share market price of
$11.80, respectively, and $.426 per share income dividends. Over the same
period, the total investment return on the Fund's Common Stock was +1.85%, based
on a change in per share net asset value from $13.44 to $13.24, and assuming
reinvestment of $.423 per share ordinary income dividends.
For the six-month period ended April 30, 2004, the Fund's Auction Market
Preferred Stock (AMPS) had an average yield of .87% for Series A, .89% for
Series B and .92% for Series C.
The Fund's return, based on net asset value, exceeded that of its comparable
Lipper category of Insured Municipal Debt Funds (Leveraged), which had a return
of +1.01% for the six-month period. (Funds in this Lipper category invest
primarily in municipal debt issues insured as to timely payment. These funds can
be leveraged via use of debt, preferred equity and/or reverse repurchase
agreements.) The Fund's outperformance is primarily attributed to the
prerefunding of several holdings and to the favorable performance of several
uninsured credits. When municipal bonds are prerefunded, they are essentially
refinanced ahead of their maturity date. The proceeds from the refinancing are
typically used to purchase government-backed debt. This is then pledged to pay
off the original debt at an earlier call date. In short, when the bond holdings
are prerefunded, their prices generally increase sharply, particularly when the
yield curve is relatively steep. In addition, the Fund generated an
above-average tax-exempt yield for shareholders.
For a description of the Fund's total investment return based on a change in the
per share market value of the Fund's Common Stock (as measured by the trading
price of the Fund's shares on the New York Stock Exchange), and assuming
reinvestment of dividends, please refer to the Financial
4 MUNIYIELD QUALITY FUND II, INC. APRIL 30, 2004
Highlights section included in this report. As a closed-end fund, the Fund's
shares may trade in the secondary market at a premium or discount to the Fund's
net asset value. As a result, total investment returns based on changes in the
market value of the Fund's Common Stock can vary significantly from total
investment return based on changes in the Fund's net asset value.
What changes were made to the portfolio during the period?
We continued to pursue three general themes in managing the Fund. First, when
making new purchases, we tended to target longer-dated bonds, generally in the
25-year range. The municipal yield curve flattened out past this range;
therefore, there was no significant yield to be gained by extending out any
further. Second, we found it advantageous to purchase California municipal
bonds. Given the recent heavy supply of California issues, we have been able to
make purchases at attractive spreads relative to national municipal bonds and
historic norms for the state. We believe these holdings should benefit Fund
performance as California's finances start to improve and state bonds begin
trading at more typical levels. Finally, when available, we continued to favor
premium-coupon bonds when making new purchases.
We generally maintained the Fund's fully invested position throughout the
period, seeking to enhance shareholder income. With short-term interest rates at
historic lows, the cost of holding cash reserves would have been relatively high
in terms of its effect on performance.
Given the historically low short-term interest rates, the Fund's borrowing costs
remained at attractive levels of around 1%. These levels, in combination with a
positively sloped yield curve, provided a generous income benefit to the Common
Stock shareholder from the leveraging of Preferred Stock. We believe the Fund's
borrowing costs should remain at relatively low levels for the foreseeable
future. While the timing is questionable, the Federal Reserve Board's next move
likely will be to raise short-term interest rates. The increase, however, is
expected to be gradual and should not have a material impact on the positive
advantage leverage has had on the Fund's Common Stock yield. However, should the
spread between short-term and long-term interest rates narrow, the benefits of
leveraging will decline and, as a result, reduce the yield on the Fund's Common
Stock. At the end of the period, the Fund's leverage amount, due to AMPS, was
33.63% of total assets. (For a more complete explanation of the benefits and
risks of leveraging, see page 2 of this report to shareholders.)
How would you characterize the Fund's position at the close of the period?
The portfolio essentially remained fully invested in high-quality municipal
bonds at the end of the period, which we believe should continue to provide a
material benefit to the Fund's Common Stock shareholder as short-term interest
rates remain near their historic lows. We maintained our defensive market stance
at the close of the period in recognition of improving economic conditions.
Finally, we remained overweight in premium-coupon bonds and continued to favor
maturities in the 25-year range.
Michael A. Kalinoski
Vice President and Portfolio Manager
May 12, 2004
MUNIYIELD QUALITY FUND II, INC. APRIL 30, 2004 5
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (in Thousands)
S&P Moody's Face
State Ratings Ratings Amount Municipal Bonds Value
===================================================================================================================================
Alabama--1.0% AAA NR* $ 2,645 Birmingham, Alabama, Capital Improvement Warrants,
GO, Series A, 5.55% due 8/01/2021 (e) $ 2,859
===================================================================================================================================
Alaska--0.5% AAA Aaa 1,400 Alaska State International Airports Revenue Bonds,
Series B, 5.75% due 10/01/2019 (a) 1,542
===================================================================================================================================
Arizona--1.0% AAA Aaa 2,700 Northern Arizona University System Revenue Bonds,
5.50% due 6/01/2034 (b) 2,862
===================================================================================================================================
California--19.7% AAA Aaa 2,850 Alameda Corridor Transportation Authority,
California, Revenue Refunding Bonds, Subordinated
Lien, Series A, 5.525%** due 10/01/2025 (a) 1,787
AAA NR* 2,500 California Health Facilities Financing Authority
Revenue Bonds (Kaiser Permanente), RIB, Series 26,
9.59% due 6/01/2022 (c)(h) 2,771
AAA Aaa 2,490 California State Department of Water Resources, Power
Supply Revenue Bonds, Series A, 5.375%
due 5/01/2022 (e) 2,622
California State, GO, Refunding:
AAA Aaa 1,500 5.25% due 2/01/2022 (m) 1,558
BBB Baa1 2,800 5.25% due 2/01/2028 2,764
AAA Aaa 5,300 5.25% due 2/01/2030 (e) 5,380
AAA Aaa 1,780 5.25% due 2/01/2030 (i) 1,807
AAA NR* 1,950 ROLS, Series II-R-272, 9.33% due 2/01/2033 (h)(l) 1,974
BBB- Baa2 1,000 California State Public Works Board, Lease Revenue
Bonds (Department of Mental Health--Coalinga State
Hospital), Series A, 5.125% due 6/01/2029 958
California State, Various Purpose, GO:
BBB Baa1 2,750 5.25% due 11/01/2029 2,708
BBB Baa1 6,500 5.50% due 11/01/2033 6,640
Golden State Tobacco Securitization Corporation of
California, Tobacco Settlement Revenue Bonds:
NR* Baa3 1,000 Series A-2, 7.90% due 6/01/2042 1,063
BBB Baa3 4,000 Series A-3, 7.875% due 6/01/2042 4,246
BBB- Baa2 2,750 Series B, 5.60% due 6/01/2028 2,750
AAA Aaa 2,050 Series B, 5.50% due 6/01/2033 (i) 2,115
AAA Aaa 1,300 Series B, 5.625% due 6/01/2033 (i) 1,358
AAA NR* 7,075 Series B, 5.625% due 6/01/2038 (m) 7,363
AA NR* 1,500 Series B, 5.50% due 6/01/2043 (l) 1,515
AAA Aaa 1,100 Series B, 5.50% due 6/01/2043 (i) 1,132
AA Aa3 3,650 Sacramento County, California, Sanitation District,
Financing Authority, Revenue Refunding Bonds, Trust
Receipts, Class R, Series A, 10.56% due 12/01/2019 (h) 4,163
AAA Aaa 1,450 San Diego, California, Unified School District,
Election 1998, GO, Series D, 5.25% due 7/01/2024 (b) 1,508
===================================================================================================================================
Colorado--11.8% AAA NR* 11,020 Colorado Department of Transportation Revenue Bonds,
DRIVERS, Series 249, 10.616% due 6/15/2014 (a)(h) 14,384
Colorado Health Facilities Authority Revenue Bonds,
Series A:
AA Aa2 1,150 (Catholic Health Initiatives), 5.50% due 3/01/2032 1,178
AA NR* 1,200 (Covenant Retirement Communities Inc.), 5.50%
due 12/01/2027 (l) 1,236
AA NR* 675 (Covenant Retirement Communities Inc.), 5.50%
due 12/01/2033 (l) 693
Colorado Housing and Finance Authority, Revenue
Refunding Bonds, AMT (e):
AAA NR* 725 (S/F Program), Series A-2, 6.45% due 4/01/2030 749
AAA Aaa 2,420 (S/F Program), Series B-2, 6.80% due 2/01/2031 2,596
AAA Aaa 295 (S/F Program), Series C-1, 7.65% due 12/01/2025 (j) 299
AAA Aaa 965 Series E-2, 7% due 2/01/2030 978
AAA Aaa 15,300 Northwest Parkway, Colorado, Public Highway Authority,
Capital Appreciation Revenue Bonds, Senior Convertible,
Series C, 5.387%** due 6/15/2025 (c) 10,927
AAA Aaa 1,735 Northwest Parkway, Colorado, Public Highway Authority
Revenue Bonds, Series A, 5.50% due 6/15/2021 (a) 1,844
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 at right.
AMT Alternative Minimum Tax (subject to)
DRIVERS Derivative Inverse Tax-Exempt Receipts
GO General Obligation Bonds
HDA Housing Development Authority
IDA Industrial Development Authority
IDB Industrial Development Board
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
ROLS Reset Option Longs
S/F Single-Family
6 MUNIYIELD QUALITY FUND II, INC. APRIL 30, 2004
Schedule of Investments (continued) (in Thousands)
S&P Moody's Face
State Ratings Ratings Amount Municipal Bonds Value
===================================================================================================================================
Connecticut--4.1% NR* NR* $ 1,100 Connecticut State Regional Learning Educational
Service Center Revenue Bonds (Office/Education
Center Facility), 7.75% due 2/01/2006 (g) $ 1,226
AAA NR* 9,325 Connecticut State Resource Recovery Authority,
Revenue Refunding Bonds, DRIVERS, Series 187, 9.366%
due 11/15/2011 (e)(h) 11,057
===================================================================================================================================
Florida--0.3% AAA Aaa 750 South Miami, Florida, Health Facilities Authority,
Hospital Revenue Bonds (Baptist Health System
Obligation Group), 5.25% due 11/15/2033 (a) 762
===================================================================================================================================
Georgia--2.9% AAA Aaa 7,850 Atlanta, Georgia, Airport Revenue Refunding Bonds,
Series A, 5.875% due 1/01/2017 (b) 8,683
===================================================================================================================================
Illinois--16.4% AAA Aaa 3,250 Chicago, Illinois, Board of Education, GO (Chicago
School Reform Project), Series A, 5.25%
due 12/01/2030 (a) 3,283
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) 3,710
Chicago, Illinois, O'Hare International Airport
Revenue Bonds, 3rd Lien, AMT, Series B-2:
AAA Aaa 5,200 5.75% due 1/01/2023 (c) 5,549
AAA Aaa 2,200 6% due 1/01/2029 (i) 2,372
AAA Aaa 2,830 Chicago, Illinois, Park District, GO, Refunding,
Series C, 5.50% due 1/01/2021 (b) 3,012
AAA Aaa 3,000 Cook County, Illinois, Capital Improvement, GO,
Series C, 5.50% due 11/15/2026 (a) 3,150
AAA Aaa 10,000 Illinois Regional Transportation Authority Revenue
Bonds, 6.50% due 7/01/2026 (e) 12,071
AAA Aaa 15,100 Illinois Sports Facilities Authority Revenue Bonds,
5.368%** due 6/15/2030 (a) 11,113
AAA NR* 3,625 Metropolitan Pier and Exposition Authority, Illinois,
Dedicated State Tax Revenue Refunding Bonds, DRIVERS,
Series 269, 10.117% due 6/15/2023 (e)(h) 4,291
===================================================================================================================================
Indiana--1.0% AAA NR* 2,675 Indiana Bond Bank Revenue Bonds, Guarantee State
Revolver, 6.75% due 2/01/2017 (a) 2,837
===================================================================================================================================
Kansas--2.7% AAA NR* 2,505 Sedgwick and Shawnee Counties, Kansas, S/F
Mortgage-Backed Revenue Bonds, AMT, Series A-2, 7.60%
due 12/01/2031 (d)(e) 2,673
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)(k) 3,053
AAA Aaa 2,280 Sedgwick and Shawnee Counties, Kansas, S/F Revenue
Bonds (Mortgage-Backed Securities Program), AMT,
Series A-1, 6.875% due 12/01/2026 (d)(e) 2,380
===================================================================================================================================
Kentucky--0.7% BBB Baa2 2,000 Perry County, Kentucky, Solid Waste Disposal Revenue
Bonds (TJ International Project), AMT, 7% due 6/01/2024 2,046
===================================================================================================================================
Louisiana--4.8% AAA Aaa 3,270 Jefferson Parish, Louisiana, Home Mortgage Authority,
S/F Mortgage Revenue Bonds, AMT, Series B-1, 6.65%
due 12/01/2033 (e)(k) 3,485
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) 4,510
AAA Aaa 4,650 New Orleans, Louisiana, Ernest N. Morial Exhibit Hall
Authority, Special Tax, Sub-Series A, 5.25%
due 7/15/2028 (a) 4,744
AAA Aaa 1,300 Terrebonne Parish, Louisiana, Hospital Service
District Number 1, Hospital Revenue Bonds (Terrebonne
General Medical Center Project), 5.50%
due 4/01/2033 (a) 1,359
===================================================================================================================================
Massachusetts--1.9% Massachusetts State Health and Educational Facilities
Authority, Revenue Refunding Bonds (New England
Memorial Hospital), Series B (f):
NR* Ca 1,908 6% due 7/01/2008 267
NR* Ca 3,317 6.125% due 7/01/2013 464
Massachusetts State Port Authority, Special Facilities
Revenue Bonds (Delta Air Lines Inc. Project), AMT,
Series A (a):
AAA Aaa 2,900 5.50% due 1/01/2016 3,031
AAA Aaa 1,775 5.50% due 1/01/2019 1,839
MUNIYIELD QUALITY FUND II, INC. APRIL 30, 2004 7
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued) (in Thousands)
S&P Moody's Face
State Ratings Ratings Amount Municipal Bonds Value
===================================================================================================================================
Michigan--3.9% 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) $ 1,326
AAA Aaa 2,685 Michigan State, HDA, Revenue Refunding Bonds,
Series C, 5.90% due 12/01/2015 (c)(j) 2,811
Michigan State Strategic Fund, Limited Obligation
Revenue Refunding Bonds (Detroit Edison Company
Project) (i):
AAA Aaa 2,250 5.45% due 9/01/2029 2,307
AAA Aaa 1,000 AMT, Series A, 5.50% due 6/01/2030 1,030
AAA Aaa 3,900 AMT, Series C, 5.45% due 12/15/2032 3,978
===================================================================================================================================
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 2,221
AAA Aaa 2,000 5.75% due 3/01/2016 2,222
AAA Aaa 1,500 6% due 3/01/2019 1,697
===================================================================================================================================
Nevada--2.2% AA NR* 2,800 Carson City, Nevada, Hospital Revenue Bonds
(Carson-Tahoe Hospital Project), Series A, 5.50%
due 9/01/2033 (l) 2,870
Director of the State of Nevada, Department of
Business and Industry Revenue Bonds (Las Vegas
Monorail Company Project), First Tier (a):
AAA Aaa 250 5.625% due 1/01/2032 262
AAA Aaa 3,300 5.375% due 1/01/2040 3,366
===================================================================================================================================
New Jersey--4.7% 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) 5,223
AAA Aaa 5,000 Salem County, New Jersey, Industrial Pollution Control
Financing Authority, Revenue Refunding Bonds (Public
Service Electric & Gas), RIB, Series 380, 11.13%
due 6/01/2031 (e)(h) 5,235
BBB Baa3 3,800 Tobacco Settlement Financing Corporation of New Jersey
Revenue Bonds, 6.75% due 6/01/2039 3,559
===================================================================================================================================
New Mexico--4.5% New Mexico State Highway Commission, Tax Revenue
Bonds, Senior Sub-Lien, Series A (c):
AAA Aaa 6,295 6% due 6/15/2014 7,144
AAA Aaa 5,495 6% due 6/15/2015 6,216
===================================================================================================================================
New York--11.1% AAA Aaa 500 Erie County, New York, IDA, School Facility Revenue
Bonds (City of Buffalo Project), 5.75% due 5/01/2023 (c) 542
AAA Aaa 9,280 Nassau Health Care Corporation, New York, Health
System Revenue Bonds, 5.75% due 8/01/2022 (c) 10,071
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 2,643
New York City, New York, GO:
AAA Aaa 4,000 Series D, 5.875% due 6/01/2021 (e) 4,448
AAA Aaa 1,000 Series E, 5.75% due 5/15/2018 (i) 1,099
AAA Aaa 5,000 New York State Dormitory Authority, Revenue Refunding
Bonds (State University Educational Facilities), 5.75%
due 5/15/2010 (b)(g) 5,721
AAA Aaa 1,000 New York State Mortgage Agency Revenue Bonds, AMT,
24th Series, 5.875% due 10/01/2015 (e) 1,036
AAA NR* 7,115 Tobacco Settlement Financing Corporation of New York,
Revenue Bonds, Series A-1, 5.25% due 6/01/2022 (a) 7,359
===================================================================================================================================
North Carolina--1.7% BBB Baa2 5,000 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 5,122
===================================================================================================================================
Ohio--2.4% Plain, Ohio, Local School District, GO, Refunding (b):
NR* Aaa 5,120 6% due 6/01/2011 (g) 5,916
NR* Aaa 1,170 6% due 12/01/2020 1,323
8 MUNIYIELD QUALITY FUND II, INC. APRIL 30, 2004
Schedule of Investments (continued) (in Thousands)
S&P Moody's Face
State Ratings Ratings Amount Municipal Bonds Value
===================================================================================================================================
Pennsylvania--5.2% AAA Aaa $ 600 Allegheny County, Pennsylvania, Sanitation Authority,
Sewer Revenue Bonds, 5.50% due 12/01/2030 (e) $ 627
NR* Aaa 3,335 Delaware River Port Authority of Pennsylvania and
New Jersey Revenue Bonds, RIB, Series 396, 10.603%
due 1/01/2019 (c)(h) 4,160
AAA Aaa 3,230 Philadelphia, Pennsylvania, Authority for Industrial
Development, Lease Revenue Bonds, Series B, 5.50%
due 10/01/2020 (c) 3,463
AAA Aaa 4,500 Philadelphia, Pennsylvania, School District, GO,
Series B, 5.625% due 8/01/2022 (b) 4,820
AAA Aaa 2,000 Washington County, Pennsylvania, Capital Funding
Authority Revenue Bonds (Capital Projects and
Equipment Program), 6.15% due 12/01/2029 (a) 2,285
===================================================================================================================================
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) 4,308
===================================================================================================================================
South Carolina--2.5% AAA Aaa 2,200 Florence County, South Carolina, Hospital Revenue
Refunding Bonds (McLeod Regional Medical Center
Project), Series A, 5.25% due 11/01/2034 (c) 2,234
AAA NR* 2,250 South Carolina State Public Service Authority,
Revenue Refunding Bonds, DRIVERS, Series 277, 10.112%
due 1/01/2022 (e)(h) 2,552
NR* A1 2,500 Spartanburg County, South Carolina, Solid Waste
Disposal Facilities Revenue Bonds (BMW Project), AMT,
7.55% due 11/01/2024 2,678
===================================================================================================================================
Tennessee--2.7% AAA Aaa 7,365 Chattanooga, Tennessee, IDB, Lease Rent Revenue Bonds
(Southside Redevelopment Corporation), 5.875%
due 10/01/2024 (a) 8,054
===================================================================================================================================
Texas--12.2% BBB- Aa3 4,000 Austin, Texas, Convention Center Revenue Bonds
(Convention Enterprises Inc.), Trust Certificates,
Second Tier, Series B, 5.75% due 1/01/2032 4,079
AAA Aaa 2,730 Corpus Christi, Texas, Utility System Revenue
Refunding Bonds, Series A, 6% due 7/15/2016 (c) 3,087
Dallas-Fort Worth, Texas, International Airport
Revenue Bonds, AMT:
AAA NR* 3,250 DRIVERS, Series 202, 10.586% due 11/01/2028 (b)(h) 3,630
AAA Aaa 6,000 Series A, 5.375% due 11/01/2022 (c) 6,182
Dickinson, Texas, Independent School District, GO,
Refunding (e):
AAA Aaa 1,180 6% due 2/15/2017 1,326
AAA Aaa 1,250 6% due 2/15/2018 1,405
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 (l) 4,638
AAA Aaa 1,900 Houston, Texas, Airport System Revenue Refunding Bonds,
Sub-Lien, Series B, 5.50% due 7/01/2030 (c) 1,967
A- A3 3,500 Lower Colorado River Authority, Texas, PCR (Samsung
Austin Semiconductor), AMT, 6.375% due 4/01/2027 3,749
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) 5,105
AAA Aaa 1,000 University of Houston, Texas, University Revenue
Bonds, 5.50% due 2/15/2030 (e) 1,038
===================================================================================================================================
Virginia--2.6% AAA Aaa 2,100 Halifax County, Virginia, IDA, Exempt Facility Revenue
Refunding Bonds (Old Dominion Electric Cooperative
Project), AMT, 5.625% due 6/01/2028 (a) 2,211
BB NR* 26,500 Pocahontas Parkway Association, Virginia, Toll Road
Revenue Bonds, Senior Series B, 5.875%** due 8/15/2024 5,566
===================================================================================================================================
Washington--11.4% AAA Aaa 2,150 King County, Washington, Sewer Revenue Refunding Bonds,
Series B, 5.50% due 1/01/2027 (c) 2,252
AAA Aaa 7,470 Port Seattle, Washington, Revenue Bonds, AMT,
Series B, 6% due 2/01/2016 (e) 8,224
AAA Aaa 6,150 Seattle, Washington, Municipal Light and Power
Revenue Bonds, 6% due 10/01/2019 (e) 6,954
NR* Aaa 4,500 Snohomish County, Washington, Arlington School
District Number 016, GO, 6.50% due 12/01/2015 (b) 5,269
Washington State, Various Purpose, GO (c):
AAA Aaa 4,250 Series A, 5.625% due 7/01/2021 4,594
AAA Aaa 6,250 Series C, 5.25% due 1/01/2026 6,355
MUNIYIELD QUALITY FUND II, INC. APRIL 30, 2004 9
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (concluded) (in Thousands)
S&P Moody's Face
State Ratings Ratings Amount Municipal Bonds Value
===================================================================================================================================
Wisconsin--3.7% Wisconsin State, GO:
AAA Aaa $ 2,000 Series C, 5.55% due 5/01/2021 (e) $ 2,160
AAA Aaa 3,000 Series F, 5.50% due 5/01/2019 (c) 3,243
AAA Aaa 5,000 Wisconsin State Transportation Revenue Bonds,
Series A, 5.50% due 7/01/2015 (b) 5,458
===================================================================================================================================
Puerto Rico--3.9% AAA Aaa 5,000 Puerto Rico Commonwealth, Highway and Transportation
Authority, Transportation Revenue Bonds, Series B, 6%
due 7/01/2005 (e)(g) 5,311
NR* Aaa 3,250 Puerto Rico Electric Power Authority, Power Revenue
Refunding Bonds, RIB, Series 449X, 9.66%
due 7/01/2016 (a)(h) 3,635
AAA Aaa 2,500 Puerto Rico Municipal Finance Agency, GO, Series A,
5.50% due 8/01/2023 (c) 2,672
---------------------------------------------------------------------------------------------------------
Total Municipal Bonds (Cost--$425,120)--147.0% 435,334
=========================================================================================================
===================================================================================================================================
Shares
Held Short-Term Securities
===================================================================================================================================
2,266 Merrill Lynch Institutional Tax-Exempt Fund (n) 2,266
---------------------------------------------------------------------------------------------------------
Total Short-Term Securities (Cost--$2,266)--0.8% 2,266
===================================================================================================================================
Total Investments (Cost--$427,386)--147.8% 437,600
Other Assets Less Liabilities--2.9% 8,469
Preferred Stock, at Redemption Value--(50.7%) (150,010)
--------
Net Assets Applicable to Common Stock--100.0% $296,059
========
(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 April 30, 2004.
(i) XL Capital Insured.
(j) FHA Insured.
(k) FNMA/GNMA Collateralized.
(l) Radian Insured.
(m) CIFG Insured.
(n) Investments in companies considered to be an affiliate of the Fund (such
companies are defined as "Affiliated Companies" in Section 2(a)(3) of the
Investment Company Act of 1940) are as follows:
(in Thousands)
--------------------------------------------------------------------------
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Institutional Tax-Exempt Fund (7,100) $30
--------------------------------------------------------------------------
* Not Rated.
** Represents a zero coupon or step bond; the interest rate shown reflects
the effective yield at the time of purchase by the Fund.
Forward interest rate swaps entered into as of April 30, 2004 were as
follows:
(in Thousands)
--------------------------------------------------------------------------
Notional Unrealized
Amount Appreciation
--------------------------------------------------------------------------
Receive a variable rate equal to 7-Day
Bond Market Association Municipal
Swap Index Rate and pay a fixed rate
equal to 4.175%
Broker, J.P. Morgan Chase Bank
Expires June 2024 $26,000 $ 633
Receive a variable rate equal to 7-Day
Bond Market Association Municipal
Swap Index Rate and pay a fixed rate
equal to 4.0025%
Broker, Morgan Stanley Capital Services, Inc.
Expires June 2024 $19,000 956
--------------------------------------------------------------------------
Total $1,589
======
See Notes to Financial Statements.
10 MUNIYIELD QUALITY FUND II, INC. APRIL 30, 2004
Statement of Net Assets
As of April 30, 2004
================================================================================================================
Assets
----------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value
(identified cost--$425,120,657) ........................ $ 435,334,314
Investments in affiliated securities, at value
(identified cost--$2,265,752) .......................... 2,265,752
Unrealized appreciation on forward interest rate swaps .. 1,588,921
Cash .................................................... 42,729
Receivables:
Interest ............................................. $ 8,784,191
Securities sold ...................................... 298,098
Dividends from affiliates ............................ 55 9,082,344
-----------
Prepaid expenses ........................................ 6,025
-------------
Total assets ............................................ 448,320,085
-------------
================================================================================================================
Liabilities
----------------------------------------------------------------------------------------------------------------
Payables:
Securities purchased ................................. 1,813,911
Investment adviser ................................... 215,436
Dividends to Common Stock shareholders ............... 206,546
Other affiliates ..................................... 3,140 2,239,033
-----------
Accrued expenses ........................................ 11,831
-------------
Total liabilities ....................................... 2,250,864
-------------
================================================================================================================
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) .............. 150,009,780
-------------
================================================================================================================
Net Assets Applicable to Common Stock
----------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Stock ................... $ 296,059,441
=============
================================================================================================================
Analysis of Net Assets Applicable to Common Stock
----------------------------------------------------------------------------------------------------------------
Common Stock, par value $.10 per share (22,366,930 shares
issued and outstanding) ................................ $ 2,236,693
Paid-in capital in excess of par ........................ 311,763,292
Undistributed investment income--net .................... $ 5,631,376
Accumulated realized capital losses on investments--net . (35,374,498)
Unrealized appreciation on investments--net ............. 11,802,578
-----------
Total accumulated losses--net ........................... (17,940,544)
-------------
Total--Equivalent to $13.24 net asset value per share of
Common Stock (market price--$11.80) .................... $ 296,059,441
=============
* Auction Market Preferred Stock.
See Notes to Financial Statements.
MUNIYIELD QUALITY FUND II, INC. APRIL 30, 2004 11
[LOGO] Merrill Lynch Investment Managers
Statement of Operations
For the Six Months Ended April 30, 2004
=============================================================================================================
Investment Income
-------------------------------------------------------------------------------------------------------------
Interest ............................................. $ 12,062,849
Dividends from affiliates ............................ 30,451
------------
Total income ......................................... 12,093,300
------------
=============================================================================================================
Expenses
-------------------------------------------------------------------------------------------------------------
Investment advisory fees ............................. $ 1,136,913
Commission fees ...................................... 180,408
Accounting services .................................. 77,187
Transfer agent fees .................................. 33,177
Professional fees .................................... 27,317
Printing and shareholder reports ..................... 23,039
Custodian fees ....................................... 12,844
Directors' fees and expenses ......................... 11,264
Listing fees ......................................... 10,646
Pricing fees ......................................... 8,543
Other ................................................ 22,099
-----------
Total expenses before reimbursement .................. 1,543,437
Reimbursement of expenses ............................ (7,095)
-----------
Total expenses after reimbursement ................... 1,536,342
------------
Investment income--net ............................... 10,556,958
------------
=============================================================================================================
Realized & Unrealized Loss on Investments--Net
-------------------------------------------------------------------------------------------------------------
Realized loss on investments--net .................... (935,537)
Change in unrealized appreciation on investments--net (3,933,767)
------------
Total realized and unrealized loss on investments--net (4,869,304)
------------
=============================================================================================================
Dividends to Preferred Stock Shareholders
-------------------------------------------------------------------------------------------------------------
Investment income--net ............................... (668,700)
------------
Net Increase in Net Assets Resulting from Operations . $ 5,018,954
============
See Notes to Financial Statements.
12 MUNIYIELD QUALITY FUND II, INC. APRIL 30, 2004
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
April 30, October 31,
Increase (Decrease) in Net Assets: 2004 2003
================================================================================================================
Operations
----------------------------------------------------------------------------------------------------------------
Investment income--net ............................... $ 10,556,958 $ 21,680,705
Realized gain (loss) on investments--net ............. (935,537) 2,981,291
Change in unrealized appreciation on investments--net (3,933,767) (1,118,913)
Dividends to Preferred Stock shareholders ............ (668,700) (1,502,640)
-------------------------------
Net increase in net assets resulting from operations . 5,018,954 22,040,443
-------------------------------
================================================================================================================
Dividends to Common Stock Shareholders
----------------------------------------------------------------------------------------------------------------
Investment income--net ............................... (9,461,211) (18,385,617)
-------------------------------
Net decrease in net assets resulting from dividends to
Common Stock shareholders ........................... (9,461,211) (18,385,617)
-------------------------------
================================================================================================================
Net Assets Applicable to Common Stock
----------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets applicable to
Common Stock ........................................ (4,442,257) 3,654,826
Beginning of period .................................. 300,501,698 296,846,872
-------------------------------
End of period* ....................................... $ 296,059,441 $ 300,501,698
===============================
* Undistributed investment income--net ............ $ 5,631,376 $ 5,204,329
===============================
See Notes to Financial Statements.
MUNIYIELD QUALITY FUND II, INC. APRIL 30, 2004 13
[LOGO] Merrill Lynch Investment Managers
Financial Highlights
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended For the Year Ended October 31,
April 30, ------------------------------------------
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001+++ 2000+++
====================================================================================================================================
Per Share Operating Performance
------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ...................... $13.44 $13.27 $13.21 $12.39 $12.31
-----------------------------------------------------
Investment income--net .................................... .47+ .97+ .94 .94 .99
Realized and unrealized gain (loss) on investments--net ... (.22) .09 --++ .84 .17
Dividends to Preferred Stock shareholders from investment
income--net .............................................. (.03) (.07) (.10) (.22) (.27)
-----------------------------------------------------
Total from investment operations .......................... .22 .99 .84 1.56 .89
-----------------------------------------------------
Less dividends to Common Stock shareholders from investment
income--net .............................................. (.42) (.82) (.78) (.74) (.81)
-----------------------------------------------------
Net asset value, end of period ............................ $13.24 $13.44 $13.27 $13.21 $12.39
=====================================================
Market price per share, end of period ..................... $11.80 $12.18 $11.75 $12.07 $11.50
=====================================================
====================================================================================================================================
Total Investment Return**
------------------------------------------------------------------------------------------------------------------------------------
Based on market price per share ........................... .17%@ 10.83% 3.95% 11.70% 7.35%
=====================================================
Based on net asset value per share ........................ 1.85%@ 8.28% 7.27% 13.47% 8.04%
=====================================================
====================================================================================================================================
Ratios Based on Average Net Assets of Common Stock
------------------------------------------------------------------------------------------------------------------------------------
Total expenses, net of reimbursement*** ................... 1.00%* 1.03% 1.06% 1.07% 1.08%
=====================================================
Total expenses*** ......................................... 1.01%* 1.03% 1.06% 1.07% 1.08%
=====================================================
Total investment income--net*** ........................... 6.90%* 7.17% 7.26% 7.36% 8.04%
=====================================================
Amount of dividends to Preferred Stock shareholders ....... .44%* .50% .78% 1.74% 2.21%
=====================================================
Investment income--net, to Common Stock shareholders ...... 6.46%* 6.67% 6.48% 5.62% 5.83%
=====================================================
====================================================================================================================================
Ratios Based on Average Net Assets of Common & Preferred Stock***
------------------------------------------------------------------------------------------------------------------------------------
Total expenses, net of reimbursement ...................... .67%* .68% .70% .70% .70%
=====================================================
Total expenses ............................................ .68%* .69% .70% .70% .70%
=====================================================
Total investment income--net .............................. 4.64%* 4.79% 4.79% 4.83% 5.19%
=====================================================
====================================================================================================================================
Ratios Based on Average Net Assets of Preferred Stock
------------------------------------------------------------------------------------------------------------------------------------
Dividends to Preferred Stock shareholders ................. .89%* 1.00% 1.51% 3.31% 4.02%
=====================================================
14 MUNIYIELD QUALITY FUND II, INC. APRIL 30, 2004
Financial Highlights (concluded)
For the Six
Months Ended For the Year Ended October 31,
The following per share data and ratios have been derived April 30, -----------------------------------------------
from information provided in the financial statements. 2004 2003 2002 2001+++ 2000+++
============================================================================================================================
Supplemental Data
----------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Stock, end of
period (in thousands) ...................... $296,059 $300,502 $296,847 $295,457 $277,229
============================================================
Preferred Stock outstanding, end of
period (in thousands) ...................... $150,000 $150,000 $150,000 $150,000 $150,000
============================================================
Portfolio turnover .......................... 8.73% 42.06% 42.89% 98.99% 142.46%
============================================================
============================================================================================================================
Leverage
----------------------------------------------------------------------------------------------------------------------------
Asset coverage per $1,000 ................... $ 2,974 $ 3,003 $ 2,979 $ 2,970 $ 2,848
============================================================
============================================================================================================================
Dividends Per Share on Preferred Stock Outstanding
----------------------------------------------------------------------------------------------------------------------------
Series A--Investment income--net ............ $ 108 $ 276 $ 390 $ 855 $ 1,017
============================================================
Series B--Investment income--net ............ $ 111 $ 240 $ 388 $ 853 $ 1,024
============================================================
Series C--Investment income--net ............ $ 115 $ 235 $ 351 $ 777 $ 986
============================================================
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
charges.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Based on average shares outstanding.
++ Amount is less than $.01 per share.
+++ Certain prior year amounts have been reclassified to conform to current
year presentation.
@ Aggregate total investment return.
See Notes to Financial Statements.
MUNIYIELD QUALITY FUND II, INC. APRIL 30, 2004 15
[LOGO] Merrill Lynch Investment Managers
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 amended, as a non-diversified, closed-end management
investment company. The Fund's financial statements are prepared in conformity
with accounting principles generally accepted in the United States of America,
which may require the use of management accruals and estimates. Actual results
may differ from these estimates. These unaudited financial statements reflect
all adjustments, which are, in the opinion of management, necessary to a fair
statement of the results for the interim period presented. All such adjustments
are of a normal, recurring nature. The Fund determines and makes available for
publication the net asset value of its Common Stock on a weekly basis. The
Fund's Common Stock is listed on the New York Stock Exchange under the symbol
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 last available bid price in the
over-the-counter market or on the basis of yield equivalents as obtained by the
Fund's pricing service from one or more dealers that make markets in the
securities. Financial futures contracts and options thereon, which are traded on
exchanges, are valued at their closing prices as of the close of such exchanges.
Options written or purchased are valued at the last sale price in the case of
exchange-traded options. In the case of options traded in the over-the-counter
market, valuation is the last asked price (options written) or the last bid
price (options purchased). Swap agreements are valued by quoted fair values
received daily by the Fund from the counterparty. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including valuations
furnished by a pricing service retained by the Fund, which may utilize a matrix
system for valuations. The procedures of the pricing service and its valuations
are reviewed by the officers of the Fund under the general supervision of the
Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the securities
markets. Losses may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
o Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts 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 may write covered call options and purchase put
options. When the Fund writes an option, an amount equal to the premium
received by the Fund is reflected as an asset and an equivalent liability.
The amount of the liability is subsequently marked to market to reflect
the current market value of the option written. When a security is
purchased or sold through an exercise of an option, the related premium
paid (or received) is added to (or deducted from) the basis of the
security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent
of the premiums received or paid (or gain or loss to the extent the cost
of the closing transaction exceeds the premium paid or received).
16 MUNIYIELD QUALITY FUND II, INC. APRIL 30, 2004
Notes to Financial Statements (continued)
Written and purchased options are non-income producing investments.
o Forward interest rate swaps -- The Fund may enter into forward interest
rate swaps. In a forward interest rate swap, the Fund and the counterparty
agree to make periodic net payments on a specified notional contract
amount, commencing on a specified future effective date, unless terminated
earlier. When the agreement is closed, the Fund records a realized gain or
loss in an amount equal to the value of the agreement.
(c) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis. The Fund amortizes all
premiums and discounts on debt securities.
(e) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of .50% of the Fund's average weekly net assets, including
proceeds from the issuance of Preferred Stock. For the six months ended April
30, 2004, FAM reimbursed the Fund in the amount of $7,095.
In addition, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), an
affiliate of FAM, received $2,000 in commissions on the execution of portfolio
security transactions for the Fund for the six months ended April 30, 2004.
For the six months ended April 30, 2004, the Fund reimbursed FAM $4,680 for
certain accounting services.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the six
months ended April 30, 2004 were $46,083,971 and $38,672,046, respectively.
Net realized gains (losses) for the six months ended April 30, 2004 and net
unrealized appreciation as of April 30, 2004 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Appreciation
--------------------------------------------------------------------------------
Long-term investments ......................... $ 1,632,689 $10,213,657
Forward interest rate swaps ................... (2,568,226) 1,588,921
-------------------------------
Total ......................................... $ (935,537) $11,802,578
===============================
As of April 30, 2004, net unrealized appreciation for Federal income tax
purposes aggregated $10,213,657, of which $18,800,199 related to appreciated
securities and $8,586,542 related to depreciated securities. The aggregate cost
of investments at April 30, 2004 for Federal income tax purposes was
$427,386,409.
4. Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of stock, including Preferred
Stock, par value $.10 per share, all of which were initially classified as
Common Stock. The Board of Directors is authorized, however, to reclassify any
unissued shares of stock without approval of the holders of Common Stock.
Preferred Stock
Auction Market Preferred Stock are redeemable shares of Preferred Stock of the
Fund, with a par value of $.05 per share and a liquidation preference of $25,000
per share plus accrued and unpaid dividends, that entitle their holders to
receive cash dividends at an annual rate that may vary for the successive
dividend periods. The yields in effect at April 30, 2004 were as follows: Series
A, 1.00%; Series B, .97%; and Series C, 1.02%.
MUNIYIELD QUALITY FUND II, INC. APRIL 30, 2004 17
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (concluded)
The Fund pays commissions to certain broker-dealers at the end of each auction
at an annual rate ranging from .25% to .375%, calculated on the proceeds of each
auction. For the six months ended April 30, 2004, MLPF&S earned $86,035 as
commissions.
5. Capital Loss Carryforward:
On October 31, 2003, the Fund had a net capital loss carryforward of
$32,151,759, of which $4,975,019 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.
6. Subsequent Event:
The Fund paid a tax-exempt income dividend to holders of Common Stock in the
amount of $.072000 per share on May 27, 2004 to shareholders of record on May
14, 2004.
Dividend Policy
The Fund's dividend policy is to distribute all or a portion of its net
investment income to its shareholders on a monthly basis. In order to provide
shareholders with a more stable level of dividend distributions, the Fund may at
times pay out less than the entire amount of net investment income earned in any
particular month and may at times in any month pay out such accumulated but
undistributed income in addition to net investment income earned in that month.
As a result, the dividends paid by the Fund for any particular month may be more
or less than the amount of net investment income earned by the Fund during such
month. The Fund's current accumulated but undistributed net investment income,
if any, is disclosed in the Statement of Assets, Liabilities and Capital, which
comprises part of the Financial Information included in this report.
Quality Profile
The quality ratings of securities in the Fund as of April 30, 2004 were as
follows:
--------------------------------------------------------------------------------
Percent of
S&P Rating/Moody's Rating Total Investments
--------------------------------------------------------------------------------
AAA/Aaa ........................................................... 83.7%
AA/Aa ............................................................. 4.3
A/A ............................................................... 1.5
BBB/Baa ........................................................... 8.2
BB/Ba ............................................................. 1.3
CC/Ca ............................................................. 0.2
NR (Not Rated) .................................................... 0.8
--------------------------------------------------------------------------------
18 MUNIYIELD QUALITY FUND II, INC. APRIL 30, 2004
Proxy Results
During the six-month period ended April 30, 2004, MuniYield Quality Fund II,
Inc.'s Common Stock shareholders voted on the following proposal. The proposal
was approved at a shareholders' meeting on April 27, 2004. A description of the
proposal and number of shares voted are as follows:
-----------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
-----------------------------------------------------------------------------------------
1. To elect the Fund's Directors: Joe Grills 20,359,070 616,208
Andre F. Perold 20,370,820 604,458
Roberta Cooper Ramo 20,377,781 597,497
Robert S. Salomon, Jr. 20,369,373 605,905
Stephen B. Swensrud 20,358,441 616,837
-----------------------------------------------------------------------------------------
During the six-month period ended April 30, 2004, MuniYield Quality Fund II,
Inc.'s Preferred Stock shareholders (Series A - C) voted on the following
proposal. The proposal was approved at a shareholders' meeting on April 27,
2004. A description of the proposal and number of shares voted are as follows:
----------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
----------------------------------------------------------------------------------------
1. To elect the Fund's Board of Directors:
James H. Bodurtha, Joe Grills, Herbert
I. London, Andre F. Perold, Roberta
Cooper Ramo, Robert S. Salomon, Jr.
and Stephen B. Swensrud 4,875 54
----------------------------------------------------------------------------------------
Officers and Directors
Terry K. Glenn, President and Director
James H. Bodurtha, Director
Joe Grills, Director
Herbert I. London, Director
Andre F. Perold, Director
Roberta Cooper Ramo, Director
Robert S. Salomon, Jr., Director
Stephen B. Swensrud, Director
Kenneth A. Jacob, Senior Vice President
John M. Loffredo, Senior Vice President
Michael A. Kalinoski, Vice President
Donald C. Burke, Vice President and Treasurer
Phillip S. Gillespie, Secretary
Custodian
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
101 Barclay Street -- 7 West
New York, NY 10286
NYSE Symbol
MQT
MUNIYIELD QUALITY FUND II, INC. APRIL 30, 2004 19
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
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.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2)
on www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
website at http://www.sec.gov.
MuniYield Quality Fund II, Inc.
Box 9011
Princeton, NJ
08543-9011
#16433 -- 4/04
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-annual
report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this
semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable to this
semi-annual report
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable to this semi-annual
report
Item 8 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 9 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 10 - Controls and Procedures
10(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
10(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the last fiscal half-year of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Item 11 - Exhibits attached hereto
11(a)(1) - Code of Ethics - Not Applicable to this semi-annual report
11(a)(2) - Certifications - Attached hereto
11(a)(3) - Not Applicable
11(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MuniYield Quality Fund II, Inc.
By: /s/ Terry K. Glenn
-------------------------------
Terry K. Glenn,
President of
MuniYield Quality Fund II, Inc.
Date: June 18, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
By: /s/ Terry K. Glenn
-------------------------------
Terry K. Glenn,
President of
MuniYield Quality Fund II, Inc.
Date: June 18, 2004
By: /s/ Donald C. Burke
-------------------------------
Donald C. Burke,
Chief Financial Officer of
MuniYield Quality Fund II, Inc.
Date: June 18, 2004