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<SEC-DOCUMENT>0000950146-96-000452.txt : 19960318
<SEC-HEADER>0000950146-96-000452.hdr.sgml : 19960318
ACCESSION NUMBER:		0000950146-96-000452
CONFORMED SUBMISSION TYPE:	N-30D
PUBLIC DOCUMENT COUNT:		1
CONFORMED PERIOD OF REPORT:	19960131
FILED AS OF DATE:		19960315
SROS:			NONE

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			KEYSTONE HIGH INCOME BOND FUND B-4
		CENTRAL INDEX KEY:			0000055614
		STANDARD INDUSTRIAL CLASSIFICATION:	 []
		IRS NUMBER:				042394421
		FISCAL YEAR END:			0731

	FILING VALUES:
		FORM TYPE:		N-30D
		SEC ACT:		1940 Act
		SEC FILE NUMBER:	811-00095
		FILM NUMBER:		96535067

	BUSINESS ADDRESS:	
		STREET 1:		200 BERKELEY STREET
		CITY:			BOSTON
		STATE:			MA
		ZIP:			02116
		BUSINESS PHONE:		6173383200

	MAIL ADDRESS:	
		STREET 1:		200 BERKELEY STREET
		CITY:			BOSTON
		STATE:			MA
		ZIP:			02116
</SEC-HEADER>
<DOCUMENT>
<TYPE>N-30D
<SEQUENCE>1
<DESCRIPTION>HIGH INCOME BOND FUND (B-4) SAR
<TEXT>



PAGE 1 
Keystone High Income Bond Fund (B-4) 
Seeks generous income primarily from high yield corporate bonds. 

Dear Shareholder: 

We are writing to report to you on the performance of Keystone High Income 
Bond Fund (B-4) for the six-month period which ended January 31, 1996. 

Performance 

Keystone High Income Bond Fund (B-4) produced a total return of -0.79% for 
the six-month period and 10.87% for the twelve months which ended January 31, 
1996. The Lehman Aggregate Bond Index returned 7.25% and 16.94% for the same 
six- and twelve-month periods. 

  Despite positive performance from most of your Fund's holdings, problems 
with several bond holdings held back Fund returns during the six-month 
period. Our strategy of upgrading the overall portfolio quality and 
increasing the trading liquidity of portfolio holdings contributed positively 
to Fund performance. But these gains were limited by price declines of a few 
issues. We have been making efforts to reduce our exposure to these issues by 
continuing our policy of upgrading the quality and liquidity of the portfolio 
and by reducing selected holdings. We think this approach has been 
appropriate, especially in light of slowing economic growth. 

  We have continued to make changes to the portfolio to reduce the potential 
for price fluctuations. During the period, we reduced the Fund's equity 
holdings to 6% of the portfolio, replacing these holdings with income- 
producing bonds. We also have increased the diversification of the portfolio 
to reduce the affect of individual holdings on overall Fund performance. This 
process has involved both increasing the number of issues and reducing the 
size of some of your Fund's largest holdings. At the same time, we also 
decreased holdings of less liquid positions whenever possible to improve 
trading liquidity. 

  We believe these changes, which focus on higher quality, more liquid 
holdings and a more diversified portfolio, give your Fund greater opportunity 
to achieve consistent performance. 

Attractive income in a low rate environment 

In today's environment, we think high yield corporate bonds continue to offer 
investors relatively good yields. As interest rates declined during the 
period, many investors moved into the high yield market to maintain income. 
In fact, after subtracting inflation, real yields have been near historical 
highs. 

  The changes to the Fund's asset allocation should provide the opportunity 
for relatively high income and consistent total returns. We have continued to 
select bonds based on what we think are good values, weighing the opportunity 
for higher yield against a careful examination of liquidity and credit risk. 
Our goal remains to provide shareholders with above average yield and 
consistent performance over the long term. 


                                                                   -continued- 



<PAGE>
 
PAGE 2 
Keystone High Income Bond Fund (B-4) 

Outlook 

As we move into 1996, we have attempted to position your Fund for the 
environment. Over the next twelve months we expect interest rates to remain 
low and economic growth should be slow. Historically, this type of 
environment has not favored high yield bonds because they tend to be affected 
by the economic cycle. Based on this outlook, high yield bonds may experience 
some price declines. We expect that your Fund's total returns may be slightly 
less than the Fund's dividend. Nevertheless, we believe we are prepared for 
this environment by our emphasis on higher quality bonds with good liquidity 
and improved diversification. 

  On January 31, 1996, Donald Keller retired from Keystone Investments after 
many years of distinguished service at Keystone and as portfolio manager of 
your Fund. Mr. Keller shared responsibility for leading Keystone's high yield 
bond group with Richard Cryan, who has assumed responsibility for managing 
your Fund. Mr. Cryan has more than 16 years of investment experience and is 
also portfolio manager of Keystone Strategic Income Fund. We look forward to 
Mr. Cryan's contribution as portfolio manager of your Fund. 

  Thank you for your continued support of Keystone High Income Bond Fund 
(B-4). We encourage you to write to us with questions or comments about your 
investment. 

Sincerely, 

[signature]Albert H Elfner III 
Albert H. Elfner, III 
Chairman and President 
Keystone Investments, Inc. 

[signature]George S Bissell 
George S. Bissell 
Chairman of the Board 
Keystone Funds 

March 1996 

           [photo]                 [photo] 
  Albert H. Elfner, III       George S. Bissell 

Keystone Introduces Investment Insight Line for Shareholders 
Now you can keep up-to-date on your fund's current strategy and outlook by 
calling Keystone Investment Insight Line. You can hear 
senior portfolio manager Richard Cryan discuss his latest strategy for 
Keystone's high yield bond funds. You can also listen to 
Keystone's overall market outlook from James McCall, chief investment 
officer. The service is available 24 hours a day, seven days 
a week and updated at least monthly. 

Keystone Investment Insight Line                       1-800-346-3858, Press 2 
Keystone High Yield Bond Update                        Press 5 

<PAGE>
 
PAGE 3 

                              A Discussion With 
                              Your Fund Manager 


                                   [photo] 
Richard Cryan is a portfolio manager of the Fund and heads Keystone's high 
yield bond team. Mr. Cryan has more than 16 years of investment experience, 
and served as president of Wasserstein Perella Asset Management and also as 
portfolio manager at Fidelity Investments. Dick received his BS from the 
University of Colorado and his MBA from Columbia University. With the six 
members of the high yield bond team, Mr. Cryan and his team research, analyze 
and evaluate high yield bonds for the Fund. 


[Q] How would you characterize the investment climate for bonds over the past 
six months? 

[A] The market environment was generally positive for government and 
investment grade corporate bonds, but less so for high yield corporate 
issues. The decline in interest rates and slower economy were a boon for 
Treasury bonds. For high yield bond investors, however, slower economic 
growth correlates with a higher possibility of defaults. In addition, 
volatility in certain sectors of the stock market, notably high technology 
stocks, affected the high yield bonds issued by those companies. 

[Q] What was your strategy in this environment? 

[A] With prospects of slower growth on the horizon, we used a three-part 
strategy in managing your Fund: 

 1) We continued upgrading the portfolio with higher quality bonds to 
increase liquidity and reduce exposure to default risk, a defensive strategy 
we initiated about two years ago. Higher quality bonds have tended to be more 
liquid than lower quality issues. As of January 31, 1996, higher quality 
BB-rated bonds accounted for about 28% of portfolio holdings, up from 23% on 
July 31, 1995. 

 2) We decreased our equity exposure and reinvested the proceeds in higher 
quality corporate bonds. We reduced the percentage of equity holdings from 
12% to 6% of net assets during the six-month period. Traditionally, higher 
quality high yield bonds, such as those rated BB, offer greater liquidity and 
stability in uncertain market environments. 

 3) We increased diversification, both by adding to holdings and reducing 
large positions. The total number of issues rose from 135 on July 31, 1995 to 
139 as of January 31, 1996 and individual holdings are more evenly 
distributed. We believe that greater diversification should help reduce the 
affect of any one credit on the Fund's performance. 

Fund Profile 
Objective: Seeks generous income primarily from high yield 
corporate bonds 
Commencement of investment operations: September 11, 1935 
Number of issues: 139 
Average quality: B+ 
Net assets: $668 million 
Newspaper listing: "HiIncB4" 

<PAGE>
 
PAGE 4 
Keystone High Income Bond Fund (B-4) 

[Q] How did the Fund fare during the six months? 

[A] Despite positive performance for most of the Fund's holdings, a few 
issues were disappointing, which held back overall Fund performance. In 
September, AMPEX, our largest holding, lost about 25% of its value when the 
company's stock experienced a significant price decline. Since the end of the 
period, the Fund's holding of AMPEX stock has rebounded strongly. The 
following month, Drypers, another significant holding, was hit with 
unanticipated credit problems. Although it was very thinly traded, we were 
able to sell it and limit our exposure to further losses. A third issue, 
Grand Palais, provided an unpleasant surprise to many experienced investors. 
The bonds were part of a high profile partnership to build the world's 
largest casino in downtown New Orleans. In November, senior management of one 
of the partners filed comments with the Securities and Exchange Commission 
indicating that the project was on track. Four days later, the bank pulled 
the project's construction loan and Grand Palais bonds essentially lost 
their value. 

 These events had a dampening effect on the Fund's performance during the 
six-month period. An experience like this demonstrates that despite the most 
thorough research and ongoing monitoring of Fund holdings, business and 
credit problems do occasionally arise in this segment of the bond market. 
Lower-rated corporate bonds historically have provided high yields, but they 
also entail greater risks than other bond investments. By upgrading the 
quality of the Fund's holdings and increasing our level of diversification, 
we believe we can minimize but not necessarily eliminate the possibility of 
similar events in the future. 

[Q] What types of bonds did you emphasize? 

[A] We emphasized bonds in several areas. Many of our holdings were in media 
and cable issues, such as wireless communications and telecommunications. We 
believe these industries offer attractive opportunities for steady growth, 
regardless of economic conditions. We also increased our holdings in the 
health care area. This sector has improving fundamentals and defensive 
characteristics which we like in a slow growth economy. We also emphasized 
several transportation issues which we think should benefit from worldwide 
shipping and from increased global trade. Packaging is another area of 
interest which we believe has been experiencing improving fundamentals and 
cost cutting. 

[Q] What is your outlook? 

[A] Supply and demand characteristics remain positive for high yield bonds. 
Investor demand is very heavy, because rates on other income investments are 
close to historic lows. Heading into 1996, we expect supply to be plentiful, 
but not overwhelming. New issues have recently been well-received and seem 
favorably priced. We will continue to pay careful attention to research and 
credit quality as we move into this slower growth environment. We expect that 
most of investors' returns will come from income rather than appreciation in 
the coming months. 

[Q] Are high yield bonds still a good investment? 

[A] We believe high yield bonds will continue to be valuable for long-term 
investors who want to maximize income. The greater risk associated with high 
yield bonds requires investors to be more prepared for the possibility of 
price changes than investors in high quality bonds. It also argues for the 
professional management and diversification provided by mutual funds. 

<PAGE>
 
PAGE 5 

Your Fund's Performance 

***************************[mountain chart]*********************************** 

Growth of an investment in 
Keystone High Income Bond Fund (B-4) 

In Thousands 

         Initial         Reinvested 
         Investment      Distributions 

1/86     10000           10000 
          9988           11337 
1/88      8502           10821 
          8366           12047 
1/90      6460           10705 
          4319            8568 
1/92      5594           12893 
          5829           14967 
1/94      6708           18965 
          5223           16131 
1/96      5186           17884 

Total Value: $17,884 

A $10,000 investment in Keystone High Income Bond (B-4) made on January 31, 
1986 with all distributions reinvested was worth $17,884 on January 31, 1996. 
Past performance is no guarantee of future results. 
*******************************************************************************

Six-Month Performance                                   as of January 31, 1996 

Total return*                   -0.79% 
Net asset value 7/31/95        $ 4.42 
1/31/96                        $ 4.19 
Dividends                      $ 0.19 
Capital gains                   None 

* Before deduction of contingent deferred sales charge (CDSC). 


Historical Record                                       as of January 31, 1996 

                              If you       If you did 
Cumulative total return       redeemed     not redeem 
1-year                           7.89%        10.87% 
5-year                         108.72%       108.72% 
10-year                         78.84%        78.84% 
Average annual total return 
1-year                           7.89%        10.87% 
5-year                          15.85%        15.85% 
10-year                          5.99%         5.99% 


Top 10 Holdings 
as of January 31, 1996 
                                             Percent of 
Security/Yield/Maturity date                 net assets 
Ampex                                            2.3 
Specialty Equipment (common stock)               2.0 
Ampex 9.56%,* 1997                               1.8 
Iowa Select Farms, 15.26%,* 2004                 1.6 
Reliance Group Holdings, 9.750%, 2003            1.6 
Comcast Cellular, 13.42%,* 2000                  1.5 
Arcadian Partners LP, 10.750%, 2005              1.5 
Iowa Select Farms, 13.72%,* 2004                 1.3 
Great American Cookie, 10.875%, 2001             1.2 
Key Plastics, 14.000%, 1999                      1.2 

* effective yield 

The "If you redeemed" returns reflect the deduction of the 3% contingent 
deferred sales charge (CDSC) for those investors who bought and sold Fund 
shares after one calendar year. Investors who retained their fund investment 
earned the returns reported in the second column of the table. 

  The investment return and principal value will fluctuate so that your 
shares, when redeemed, may be worth more or less than the original cost. 

  You may exchange your shares for another Keystone fund by phone or in 
writing for a $10 fee. The exchange fee is waived for individual investors 
who make an exchange using Keystone's Automated Response Line (KARL). The 
Fund reserves the right to change or terminate the exchange offer. 

<PAGE>
 
PAGE 6 

Keystone High Income Bond Fund (B-4) 

SCHEDULE OF INVESTMENTS--January 31, 1996 
(Unaudited) 

<TABLE>
<CAPTION>
                                                               Interest  Maturity       Par           Market 
                                                                  Rate      Date       Value          Value 
- ----------------------------------------------------------------------------------------------------------------
<S>                                   <C>                        <C>        <C>     <C>            <C>
FIXED INCOME (90.2%) 
INDUSTRIAL BONDS & NOTES (88.3%) 
ADVERTISING & PUBLISHING (2.6%) 
EZ Communications, Inc.               Sr. Notes (Subord.)         9.750%    2005    $ 3,000,000    $  3,060,000 
K III Communications Corp. (g)        Sr. Notes                   8.500     2006      4,000,000       4,015,000 
Lamar Advertising Co.                 Sr. Secd. Notes            11.000     2003      4,000,000       4,120,000 
Sinclair Broadcast Group, Inc.        Sr. Notes (Subord.)        10.000     2005      6,000,000       6,210,000 
- ----------------------------------------------------------------------------------------------------------------
                                                                                                     17,405,000 
- ----------------------------------------------------------------------------------------------------------------
AEROSPACE (1.0%) 
SabreLiner, Inc.                      Sr. Notes                  12.500     2003      7,600,000       6,992,000 
- ----------------------------------------------------------------------------------------------------------------
AIR TRANSPORTATION (2.7%) 
Atlas Air, Inc.                       Pass thru Cert.            12.250     2002      4,000,000       4,200,000 
CHC Helicopter Corp.                  Sr. Notes (Subord.)        11.500     2002      7,500,000       6,693,750 
Continental Airlines, Inc.            Sr. Equip.Trust Cert.      16.000     1999      1,206,824       1,206,824 
Northwest Airlines Trust              Notes (Subord.)            13.875     2008      5,000,000       5,900,000 
- ----------------------------------------------------------------------------------------------------------------
                                                                                                     18,000,574 
- ----------------------------------------------------------------------------------------------------------------
AMUSEMENTS (4.1%) 
Affinity Group, Inc.                  Gtd. Sr. Notes              
                                        (Subord.)                11.500     2003      7,000,000       7,175,000 
Grand Casinos, Inc.                   1st Mtg. Notes             10.125     2003      4,000,000       4,320,000 
Hemmeter Enterprises, Inc. (a)        Unit (Sr. Secd. PIK 
  (d) (g)                             Notes/Wts.)                12.000     2000     16,097,838       5,634,329 
Resorts International Hotel           1st Mtge. Notes            11.000     2003      6,000,000       5,820,000 
Six Flags Theme Parks, Inc.           Sr. Notes (Subord.)        12.250     2005      5,000,000       4,250,000 
Starcraft Corp. (01/13/88-- 
  $1,378,018) (a) (b) (d)             Notes (Subord.)            16.500     1998      6,925,000         138,500 
- ----------------------------------------------------------------------------------------------------------------
                                                                                                     27,337,829 
- ----------------------------------------------------------------------------------------------------------------
BROADCASTING (1.5%) 
Fundy Cable LTD                       Sr. Notes                  11.000     2005      4,825,000       5,078,311 
People's Choice T.V. Corp.            Unit (Sr. Disc. 
  (Eff. Yield 12.47%) (c)             Notes/Wts.)                 0.000     2004      8,000,000       5,080,000 
- ----------------------------------------------------------------------------------------------------------------
                                                                                                     10,158,311 
- ----------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS (4.2%) 
Alpine Group, Inc. (g)                Sr. Notes                  12.250     2003      7,000,000       6,860,000 
HMH Properties, Inc.                  Sr. Secd. Notes             9.500     2005      7,000,000       7,210,000 
Koppers Industries, Inc.              Sr. Notes                   8.500     2004      4,000,000       3,920,000 
Schuller International Group, 
  Inc.                                Sr. Notes                  10.875     2004      6,000,000       6,750,000 
Teekay Shipping Corp.                 1st Pfd. Ship. Mtge. 
                                        Notes                     8.320     2008      3,000,000       3,015,000 
- ----------------------------------------------------------------------------------------------------------------
                                                                                                     27,755,000 
- ----------------------------------------------------------------------------------------------------------------

<PAGE>
 
PAGE 7 

SCHEDULE OF INVESTMENTS--January 31, 1996 
(Unaudited) 
                                                               Interest  Maturity       Par           Market 
                                                                  Rate      Date       Value          Value 
- ----------------------------------------------------------------------------------------------------------------
CABLE (7.0%) 
Adelphia Communications Corp.         Sr. Notes                  12.500%    2002    $ 6,000,000    $  6,045,000 
Bell Cablemedia PLC (Eff. Yield 
  10.67%) (c)                         Sr. Disc. Notes             0.000     2005      6,675,000       4,397,156 
Cablevision Systems Corp.             Sr. Disc. Notes             9.875     2013      5,000,000       5,350,000 
Comcast Celluar Corp. (Eff. Yield 
  13.42%) (c)                         Part. Disc. Notes           0.000     2000     13,000,000      10,010,000 
Comcast Corp.                         Sr. (Subord.)(Deb.)        10.625     2012      7,000,000       7,980,000 
Continental Cablevision, Inc.         Sr. Deb.                    9.000     2008      1,000,000       1,052,500 
Continental Cablevision, Inc.         Sr. Deb.                    9.500     2013      6,000,000       6,495,000 
Marcus Cable (Eff. Yield 12.06%) 
  (c)                                 Sr. Disc. Notes             0.000     2004      7,000,000       5,267,500 
- ----------------------------------------------------------------------------------------------------------------
                                                                                                     46,597,156 
- ----------------------------------------------------------------------------------------------------------------
CAPITAL GOODS (0.8%) 
Lanesborough Corp. (e)                Sr. Secd. Notes 
                                        (Subord.)                10.000     2000      6,601,000       5,346,810 
- ----------------------------------------------------------------------------------------------------------------
CHEMICALS (6.4%) 
Arcadian Partners LP                  Sr. Notes                  10.750     2005      9,000,000       9,990,000 
G I Holdings, Inc. (Eff. Yield 
  8.70%) (c)                          Sr. Notes                   0.000     1998      6,500,000       5,216,250 
Harris Chemicals North America, 
  Inc. 
  (Eff. Yield 10.56%) (c)             Sr. Sec. Disc. Notes        0.000     2001      7,000,000       6,965,000 
Key Plastics, Inc.                    Sr. Notes, Series B        14.000     1999      8,000,000       8,180,000 
Scotts Co.                            Sr. Notes (Subord.)         9.875     2004      3,000,000       3,255,000 
Sherritt Gordon Ltd.                  Sr. Notes                   9.750     2003      6,000,000       6,502,500 
Sifto Canada, Inc.                    Sr. Notes                   8.500     2000      3,000,000       2,977,500 
- ----------------------------------------------------------------------------------------------------------------
                                                                                                     43,086,250 
- ----------------------------------------------------------------------------------------------------------------
CONSUMER GOODS (1.7%) 
International Semi-Tech 
  Electronics, Inc. 
  (Eff. Yield 11.96%) (c)             Sr. Secd. Disc. Notes       0.000     2003     11,000,000       6,435,000 
Revlon Consumer Products Corp.        Sr. Notes (Subord.)        10.500     2003      5,000,000       5,175,000 
- ----------------------------------------------------------------------------------------------------------------
                                                                                                     11,610,000 
- ----------------------------------------------------------------------------------------------------------------
DIVERSIFIED COMPANIES (0.4%) 
Jordan Industries, Inc.               Sr. Notes                  10.375     2003      3,000,000       2,703,750 
- ----------------------------------------------------------------------------------------------------------------

FINANCE (2.7%) 
American Life Holding Co.             Sr. Notes (Subord.)        11.250     2004      5,500,000       5,830,000 
APP International Finance Co. 
  B.V.                                Gtd. Secd. Sr. Notes       11.750     2005      5,000,000       4,925,000 
PMI Acquisition Corp.                 Sr. Notes (Subord.)        10.250     2003      1,750,000       1,820,000 
Tembec Finance Corp.                  Gtd. Sr. Notes              9.875     2005      5,500,000       5,307,500 
- ----------------------------------------------------------------------------------------------------------------
                                                                                                     17,882,500
- ----------------------------------------------------------------------------------------------------------------

                                                                                        (continued on next page)

<PAGE>
 
PAGE 8

Keystone High Income Bond Fund (B-4)

SCHEDULE OF INVESTMENTS--January 31, 1996 
(Unaudited) 
                                                               Interest  Maturity       Par           Market 
                                                                  Rate      Date       Value          Value 
- ----------------------------------------------------------------------------------------------------------------
FOODS (6.5%) 
American Rice, Inc.                   Mtg. Notes                 13.000%    2002    $ 7,500,000    $  7,050,000 
Bruno's Supermarket, Inc.             Sr. Notes                  10.500     2005      5,000,000       4,925,000 
Cott Corp.                            Sr. Notes                   9.375     2005      3,500,000       3,552,500 
Iowa Select Farms (Eff. Yield 
  13.72%) (2/04/94--$14,480,865) 
  (b) (c) (e)                         Sr. Disc. Notes             0.000     2004     17,063,000       8,487,989 
Iowa Select Farms (Eff. Yield 
  15.26%) (8/02/94--$8,977,379)       Sr. Disc. Notes, 
  (b) (c) (e)                         Series A                    0.000     2004     21,370,000      10,630,507 
PM Holdings Corp. (Eff. Yield         Unit (Sr. Disc. 
  11.62%) (c)                         Notes/Wts.)                 0.000     2005      8,812,000       4,758,480 
TLC Beatrice International 
  Holdings, Inc.                      Sr. Secd. Notes            11.500     2005      4,000,000       4,000,000 
- ----------------------------------------------------------------------------------------------------------------
                                                                                                     43,404,476 
- ----------------------------------------------------------------------------------------------------------------
HEALTHCARE SERVICES (4.2%) 
Community Health Systems, Inc.        Sr. Deb. (Subord.)         10.250     2003      6,000,000       6,540,000 
Dynacare, Inc.                        Sr. Notes                  10.750     2006      2,400,000       2,472,000 
Livingwell, Inc. (5/28/86-- 
  $1,972,500) (a) (b) (d)             Sr. Deb. (Subord.)         13.875     1996      2,200,000          44,000 
Livingwell, Inc. (5/28/86-- 
  $2,153,250) (a) (b) (d)             Sr. Deb. (Subord.)         13.125     2001      2,000,000          40,000 
Prime Hospitality Corp.               1st Mtge. Notes             9.250     2002      5,000,000       5,006,250 
Quorum Health Group, Inc.             Sr. (Subord.) Notes         8.750     2005      7,000,000       7,437,500 
Tenet Healthcare Corp.                Sr. Notes                   8.625     2003      6,150,000       6,595,875 
- ----------------------------------------------------------------------------------------------------------------
                                                                                                     28,135,625 
- ----------------------------------------------------------------------------------------------------------------
INSURANCE (3.6%) 
CCP Insurance                         Sr. Notes                  10.500     2004      7,000,000       7,717,500 
Chartwell Re Corp.                    Sr. Notes                  10.250     2004      5,500,000       5,843,750 
Reliance Group Holdings, Inc.         Sr. Deb. (Subord.)          9.750     2003     10,000,000      10,350,000 
- ----------------------------------------------------------------------------------------------------------------
                                                                                                     23,911,250 
- ----------------------------------------------------------------------------------------------------------------
METALS & MINING (3.5%) 
Algoma Steel, Inc.                    1st Mtge. Notes            12.375     2005      2,000,000       1,840,000 
Bethlehem Steel Corp.                 Sr. Notes                  10.375     2003      4,000,000       4,300,000 
Inland Steel Co.                      Unsecd. Notes              12.750     2002      5,000,000       5,700,000 
NS Group, Inc.                        Units (Sr. Secd. 
                                        Notes/Wts.)              13.500     2003      1,675,000       1,524,250 
WCI Steel, Inc.                       Sr. Notes, Series B        10.500     2002      5,000,000       4,968,750 
Wheeling Pittsburgh Corp.             Sr. Notes                   9.375     2003      5,000,000       4,800,000 
- ----------------------------------------------------------------------------------------------------------------
                                                                                                     23,133,000 
- ----------------------------------------------------------------------------------------------------------------
NATURAL GAS (1.1%) 
TransTexas Gas Corp.                  Sr. Notes                  11.500     2002      7,000,000       7,175,000 

<PAGE>
 
PAGE 9 

SCHEDULE OF INVESTMENTS--January 31, 1996 
(Unaudited) 
                                                               Interest  Maturity       Par           Market 
                                                                  Rate      Date       Value          Value 
- ----------------------------------------------------------------------------------------------------------------
OIL (4.3%) 
Chatwins Group, Inc.                  Sr. Notes                  13.000%    2003    $ 4,500,000    $  3,735,000 
Crown Central Petroleum Corp.         Sr. Notes                  10.875     2005      7,000,000       7,385,000 
Plains Resources, Inc.                Sr. Notes (Subord.)        12.000     1999      5,000,000       5,250,000 
Stena AB                              Sr. Notes                  10.500     2005      7,000,000       7,262,500 
Vintage Pete, Inc.                    Sr. Notes (Subord.)         9.000     2005      5,000,000       5,150,000 
- ----------------------------------------------------------------------------------------------------------------
                                                                                                     28,782,500 
- ----------------------------------------------------------------------------------------------------------------
OIL SERVICES (1.6%) 
Dual Drilling Co.                     Sr. Notes (Subord.)         9.875     2004      4,550,000       5,016,375 
Gulf Canada Resources Ltd.            Sr. Notes (Subord.)         9.625     2005      5,175,000       5,524,313 
- ----------------------------------------------------------------------------------------------------------------
                                                                                                     10,540,688 
- ----------------------------------------------------------------------------------------------------------------
PAPER & PACKAGING (3.7%) 
Calmar, Inc. (g)                      Sr. (Subord.) Notes        11.500     2005      7,000,000       7,087,500 
Gaylord Container Corp. (Eff. 
  Yield 8.25%) (c)                    Sr. Notes                   0.000     2005      6,000,000       5,940,000 
Owens--Illinois, Inc.                 Sr. Deb.                   11.000     2003      6,000,000       6,795,000 
Repap New Brunswick, Inc.             Sr. Notes                  10.625     2005      5,000,000       4,850,000 
- ----------------------------------------------------------------------------------------------------------------
                                                                                                     24,672,500 
- ----------------------------------------------------------------------------------------------------------------
RESTAURANTS (2.3%) 
Great American Cookie Co., Inc.       Sr. Secd. Notes, 
  (12/01/93--$9,950,000) (b)          Series B                   10.875     2001     10,000,000       8,250,000 
Pantry, Inc.                          Sr. Notes, Series B        12.000     2000      7,000,000       6,877,500 
- ----------------------------------------------------------------------------------------------------------------
                                                                                                     15,127,500 
- ----------------------------------------------------------------------------------------------------------------
RETAIL (4.6%) 
Big 5 Holdings, Inc.                  Sr. Notes (Subord.)        13.625     2002      5,500,000       4,812,500 
Cole National Group, Inc.             Sr. Notes                  11.250     2001      4,500,000       4,556,250 
Finlay Fine Jewelry Corp.             Sr. Notes                  10.625     2003      5,000,000       4,825,000 
Pamida, Inc.                          Sr. Notes (Subord.)        11.750     2003      7,000,000       5,180,000 
Ralphs Grocery Co.                    Sr. Notes                  10.450     2004      5,500,000       5,472,500 
Service Merchandise Co.               Sr. Deb. (Subord.)          9.000     2004      7,000,000       5,775,000 
- ----------------------------------------------------------------------------------------------------------------
                                                                                                     30,621,250 
- ----------------------------------------------------------------------------------------------------------------
TECHNOLOGY (1.8%) 
Ampex Corp. (Eff. Yield 9.56%) 
  (03/22/94--$9,380,778) (b) (c)      Disc. Conv. Bonds, 
  (e)                                 Series C                    0.000     1997     10,273,000      11,998,864 
- ----------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (11.8%) 
American Media Operations, Inc.       Sr. Notes (Subord.)        11.625     2004      6,000,000       6,225,000 
Centennial Cellular Corp.             Sr. Notes                   8.875     2001      5,000,000       4,962,500 
Diamond Cable Communications 
  (Eff. Yield 11.35%) (c)             Sr. Disc. Notes             0.000     2005      2,175,000       1,326,750 

                                                                                        (continued on next page)

<PAGE>
 
PAGE 10

Keystone High Income Bond Fund (B-4) 

SCHEDULE OF INVESTMENTS--January 31, 1996 
(Unaudited) 
                                                               Interest  Maturity       Par           Market 
                                                                  Rate      Date       Value          Value 
- ----------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (CONTINUED) 
Diamond Cable (Eff. Yield 11.57%) 
  (c)                                 Sr. Disc. Notes             0.000%    2004    $ 7,000,000    $  5,092,500 
MFS Communication (Eff. Yield 
  8.60%) (c)                          Sr. Disc. Notes             0.000     2006      5,000,000       3,281,250 
MFS Communication (Eff. Yield 
  8.49%) (c)                          Sr. Disc. Notes             0.000     2004      8,000,000       6,340,000 
Mobile Telecommunication              Sr. (Subord.) Disc. 
  Technology                          Notes                      13.500     2002      7,000,000       7,787,500 
One Communications Corp. (Eff. 
  Yield 13.42%) (c)                   Sr. Disc. Notes             0.000     2004     10,000,000       5,525,000 
Pagemart, Inc. (Eff. Yield            Unit (Sr. Disc. 
  10.36%) (c)                         Notes/Wts.)                 0.000     2003      9,000,000       6,840,000 
Pagemart Nationwide, Inc. (Eff.       Unit (Sr. Disc. 
  Yield 10.80%) (c)                   Notes/Wts.)                 0.000     2005      7,000,000       4,672,500 
Paxson Communications Corp. (g)       Sr. Notes (Subord.)        11.625     2002      4,000,000       4,210,000 
Pricecellular Wireless Corp. 
  (Eff. Yield 10.64%) (c)             Sr. Disc. Notes             0.000     2003      5,750,000       4,628,750 
Telewest PLC (Eff. Yield 9.86%) 
  (c)                                 Sr. Disc. Deb.              0.000     2007     11,000,000       6,765,000 
Videotron Group Ltd.                  Deb. (Subord.) Voting 
                                        Conv.                      10.625     2005      3,750,000       4,096,875 
Videotron Holdings PLC (Eff. 
  Yield 9.97%) (c)                    Sr. Disc. Notes             0.000     2005     11,000,000       7,150,000 
- ----------------------------------------------------------------------------------------------------------------
                                                                                                     78,903,625 
- ----------------------------------------------------------------------------------------------------------------
TRANSPORTATION (3.0%) 
Eletson Holdings, Inc.                1st Pfd. Mtge. Notes        9.250     2003      6,000,500       6,030,503 
Gearbulk Holding Ltd.                 Sr. Notes                  11.250     2004      6,500,000       7,036,250 
Viking Star Shipping, Inc.            1st Pfd. Ship. Mtge. 
                                        Notes                     9.625     2003      7,000,000       7,332,500 
- ----------------------------------------------------------------------------------------------------------------
                                                                                                     20,399,253 
- ----------------------------------------------------------------------------------------------------------------
UTILITIES (1.2%) 
Consolidated Hydro, Inc. 
  (6/15/93--$8,811,783) 
  (Eff. Yield 12.26%) (b) (c)         Sr. Disc. Notes             0.000     2003     13,400,000       5,360,000 
KCS Energy, Inc. (g)                  Sr. Notes                  11.000     2003      2,470,000       2,531,750 
- ----------------------------------------------------------------------------------------------------------------
                                                                                                      7,891,750 
- ----------------------------------------------------------------------------------------------------------------
TOTAL INDUSTRIAL BONDS & NOTES (COST--$605,331,024)                                                 589,572,461 
- ----------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (U.S. DOLLARS) 
(1.9%) 
Indah Kiat International Finance 
  Co. B.V.                            Gtd. Secd. Notes           11.875     2002      8,000,000       8,160,000 
Yacimientos Petroliteros Fiscales 
  S.A. (YPF)                          Unsecd. Deb.                8.000     2004      4,500,000       4,286,250 
- ----------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS (U.S. DOLLARS) (COST--$12,029,106)                                               12,446,250 
- ----------------------------------------------------------------------------------------------------------------
TOTAL FIXED INCOME (COST $617,360,130)                                                              602,018,711 
- ----------------------------------------------------------------------------------------------------------------
                                                                                       Shares 
- ----------------------------------------------------------------------------------------------------------------
COMMON STOCKS/RIGHTS/WARRANTS (4.2%) 
Ampex Corp., Class A 
  (11/20/92--$2,496,443) (b) (d) (e)                                                    947,348       3,552,555 
Ampex Corp., Class C 
  (11/20/92--$1,433,908) (b) (d) (e)                                                  1,067,094       4,001,602 
Chatwins Group, Inc., wts. 
  (d)                                                                                     9,500           4,750 
CHC Helicopter Corp., wts. 
  (d)                                                                                    76,000          38,000 

<PAGE>
 
PAGE 11 

SCHEDULE OF INVESTMENTS--January 31, 1996 
(Unaudited) 
                                                                                                    Market 
                                                                                       Shares       Value 
- ----------------------------------------------------------------------------------------------------------------
COMMON STOCKS/RIGHTS/WARRANTS (CONTINUED) 
Cookies USA, Inc., wts. (d)                                                               1,800    $     22,500 
Dial Page, Inc., wts. (d)                                                                 9,510              95 
Dimac Corp. (d) (g)                                                                      55,481       1,525,727 
Finlay Enterprises, Inc. (d)                                                              4,533          49,863 
Grand Palais Casinos, Inc., Series A, wts. (8/15/94--$2,507) (a) (b) 
  (d) (e)                                                                               250,735             251 
Grand Palais Casinos, Inc., Series B, wts. 
  (8/15/94--$1,368) (a) (b) (d) (e)                                                     136,765             137 
Grand Palais Casinos, Inc., Series C, wts. (8/15/94--$12,080) (a) (b) 
  (d) (e)                                                                             1,208,088           1,208 
Grand Palais Casinos, Inc., Series D, wts. (1/28/93--$680,643) (a) 
  (b) (d) (e)                                                                           680,643             681 
Grand Palais Casinos, Inc., Ltd. Liab. Int. (8/15/94--$0) (a) (b) (d) 
  (e)                                                                                   931,379             931 
Hemmeter Enterprises, Inc., wts. (a) (d) 
  (g)                                                                                   270,532             271 
Hemmeter Enterprises, Inc., wts. (a) (d) 
  (g)                                                                                   695,643             696 
Hollywood Casino Corp., Class A (d)                                                     722,865       3,162,534 
Iowa Select Farm, wts. (2/04/97--$3,116,147) (b) (d) (e)                                384,330         384,330 
Lanesborough Corp. (d) (e)                                                                9,065              91 
Pagemart, Inc., wts. (d) (g)                                                             83,030         332,120 
PM Holdings Corp. (d)                                                                     2,964               3 
Sabreliner Corp., wts. (d)                                                                7,600               8 
Specialty Equipment Cos., Inc. (d) (e)                                                1,183,200      13,311,000 
Specialty Foods Acquisition Corp. (d)                                                   131,250          98,437 
UCC Investors Holding, Inc. (d)                                                         199,600       1,796,400 
- ----------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS/RIGHTS/WARRANTS (COST--$14,086,892)                                              28,284,190 
- ----------------------------------------------------------------------------------------------------------------
PREFERRED STOCK (2.2%) 
Ampex Corp. (11/22/92--$23,987,332) (b) (d) (e)                                          24,562      15,004,312 
US Africa Airways (06/02/94--$11,000,000) (a) (b) (d) (e)                                11,000              11 
- ----------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK (COST $34,987,332)                                                             15,004,323 
- ----------------------------------------------------------------------------------------------------------------
MISCELLANEOUS INVESTMENT (0.0%) (COST--$424,084) 
Gold River Hotel and Casino Corp. 
  (09/01/92--$424,084) (a) (b) (d) Liquidating R.E. 
  Trust                                                                              10,775,000         107,750 
- ----------------------------------------------------------------------------------------------------------------
                                                                 Interest   Maturity     Maturity 
                                                                   Rate       Date        Value 
- ----------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (0.7%) 
Keystone Joint Repurchase Agreement 
  (Investments in repurchase agreements, 
  in a joint trading account, purchased 
  1/31/96) (Cost $4,521,000) (f)                                  5.939   02/01/96  $ 4,521,746        4,521,000 
- ----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$671,379,438)                                                               649,935,974 
- ----------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--NET (2.7%)                                                              17,686,911 
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS (100.0%)                                                                                $ 667,622,885 
- ----------------------------------------------------------------------------------------------------------------
</TABLE>

                                                      (continued on next page) 

<PAGE>
 
PAGE 12 
Keystone High Income Bond Fund (B-4) 

SCHEDULE OF INVESTMENTS--January 31, 1996 
(Unaudited) 

(a) Securities which have defaulted on payment of interest and/or principal. 
    The Fund has stopped accruing income on those securities. 

(b) All or a portion of these securities are either (1) restricted (i.e., 
    securities which may not be publicly sold without registration under the 
    Federal Securities Act of 1933) or (2) otherwise illiquid and are valued 
    using market quotations where readily available. In the absence of market 
    quotations, the securities are valued based upon their fair value 
    determined under procedures approved by the Board of Trustees. The Fund 
    may make investments in an amount up to 15% of the value of the Fund's 
    net assets in such securities. Date of acquisition and cost are set forth 
    in parentheses after the title of the restricted securities. On the date 
    of acquisition there were no market quotations on similar securities and 
    the above securities were valued at acquisition cost. At January 31, 
    1996, the fair value of these restricted securities was $68,003,628 
    (10.2% of the Fund's net assets). 

(c) Effective yield (calculated at date of purchase) is the yield at which 
    the bond accretes on an annual basis until maturity date. 

(d) Non-income-producing security. 

(e) Affiliated issuers are those in which the Fund's holdings of an issuer 
    represents 5% or more of the outstanding voting securities of the issuer. 
    The Fund has never owned enough of the outstanding voting securities of 
    any issuer to have control (as defined in the Investment Company Act of 
    1940) of that issuer. At January 31, 1996, the fair value of these 
    securities was $72,721,279 (10.9% of the Fund's net assets). 

(f) The repurchase agreements are fully collateralized by U.S. Government 
    and/or agency obligations based on market prices at January 31, 1996. 

(g) Securities that may be resold to "qualified institutional buyers" under 
    Rule 144A or securities offered pursuant to Section 4(2) of the 
    Securities Act of 1933, as amended. These securities have been determined 
    to be liquid under guidelines established by the Board of Trustees. 

See Notes to Financial Statements. 

<PAGE>
 
PAGE 13 

FINANCIAL HIGHLIGHTS 
(For a share outstanding throughout each period) 

<TABLE>
<CAPTION>
                                                                            Year Ended July 31, 
                                                           ---------------------------------------------------- 
                                          Six Months 
                                             Ended 
                                       January 31, 1996      1995       1994       1993       1992        1991 
===================================    =================    =======    =======    =======    =======   ======== 
                                          (Unaudited) 
<S>                                        <C>             <C>        <C>        <C>        <C>         <C>
Net asset value beginning of period        $   4.42        $   4.68   $   5.13   $   4.74   $   4.19    $   5.02 
- -----------------------------------      ---------------      -----      -----      -----      -----      ------ 
Income from investment operations 
Net investment income                          0.18            0.38       0.38       0.45       0.49        0.61 
Net realized and unrealized gain 
  (loss) on investments                       (0.22)          (0.15)     (0.38)      0.44       0.58       (0.72) 
- -----------------------------------      ---------------      -----      -----      -----      -----      ------ 
Total income from investment 
  operations                                  (0.04)           0.23       0.00       0.89       1.07       (0.11) 
- -----------------------------------      ---------------      -----      -----      -----      -----      ------ 
Less distributions from 
Net investment income                         (0.19)          (0.37)     (0.38)     (0.45)     (0.50)      (0.72) 
In excess of net investment income             0.00           (0.02)     (0.07)     (0.05)     (0.02)       0.00 
Tax basis return of capital                    0.00           (0.10)      0.00       0.00       0.00        0.00 
- -----------------------------------      ---------------      -----      -----      -----      -----      ------ 
Total distributions                           (0.19)          (0.49)     (0.45)     (0.50)     (0.52)      (0.72) 
- -----------------------------------      ---------------      -----      -----      -----      -----      ------ 
Net asset value end of period              $   4.19        $   4.42   $   4.68   $   5.13   $   4.74    $   4.19 
===================================      ===============      =====      =====      =====      =====      ====== 
Total Return (a)                              (0.79%)          5.66%     (0.41%)    20.28%     27.25%       0.03% 
Ratios/supplemental data 
Ratios to average net assets 
 Total expenses                                1.96%(b)(c)     2.03%      1.84%      2.06%      2.17%       2.34% 
 Net investment income                         8.24%(c)        8.64%      7.57%      9.30%     10.86%      14.64% 
Portfolio turnover rate                          46%             82%       110%       125%        94%         78% 
- -----------------------------------      ---------------      -----      -----      -----      -----      ------ 
Net assets end of period 
  (thousands)                              $667,623        $764,965   $766,283   $972,164   $841,757    $710,590 
===================================      ===============      =====      =====      =====      =====      ====== 
</TABLE>
(a) Excluding applicable sales charges. 

(b) The annualized expense ratio includes indirectly paid expenses for the 
    six months ended January 31, 1996. Excluding indirectly paid expenses, 
    the expense ratio would have been 1.94%. 

(c) Annualized. 

See Notes to Financial Statements. 

<PAGE>
 
PAGE 14 
Keystone High Income Bond Fund (B-4) 

STATEMENT OF ASSETS AND LIABILITIES-- 
January 31, 1996 (Unaudited) 

Assets (Note 1) 
 Investments at market value 
  Unaffiliated issuers (identified cost-- 
    $592,904,025)                                  $  577,214,695 
  Affiliated issuers (identified 
    cost--$78,475,413)                                 72,721,279 
- ------------------------------------------------      ----------- 
   Total investments                               $  649,935,974 
- ------------------------------------------------      ----------- 
 Cash                                                          53 
 Receivable for: 
  Investments sold                                     24,806,124 
  Dividends and interest                               12,240,719 
  Fund shares sold                                        670,463 
 Prepaid expenses and other assets                      2,109,634 
- ------------------------------------------------      ----------- 
   Total assets                                       689,762,967 
- ------------------------------------------------      ----------- 
Liabilities (Notes 1, 2 and 4) 
 Payable for: 
  Investments purchased                                19,238,740 
  Fund shares redeemed                                    458,743 
  Distributions to shareholders                         2,073,054 
 Due to related parties                                     3,143 
 Other accrued expenses                                   366,402 
- ------------------------------------------------      ----------- 
   Total liabilities                                   22,140,082 
- ------------------------------------------------      ----------- 
Net assets                                         $  667,622,885 
================================================      =========== 
Net assets represented by (Note 1) 
 Paid-in capital                                   $1,209,073,259 
 Accumulated distributions in excess of net 
   investment income                                   (8,317,502) 
 Accumulated net realized loss on investments 
   and foreign currency related transactions         (511,689,408) 
 Net unrealized depreciation on investments           (21,443,464) 
- ------------------------------------------------      ----------- 
   Total net assets                                   667,622,885 
================================================      =========== 
Net Asset Value per share (Note 2) 
 Net asset value of $667,622,885 / 159,436,210 
   outstanding shares of beneficial interest       $         4.19 
================================================      =========== 

STATEMENT OF OPERATIONS-- 
Six Months Ended January 31, 1996 (Unaudited) 

Investment income (Note 1) 
 Interest: 
  Unaffiliated issuers (net of foreign 
     withholding taxes of $17,988)                     $ 36,270,631 
  Affiliated issuers                                        482,182 
- --------------------------------------      -------      ----------- 
   Total income                                          36,752,813 
- --------------------------------------      -------      ----------- 
Expenses (Notes 2 and 4) 
 Management fee                          $2,023,753 
 Transfer agent fees                        956,778 
 Accounting, auditing and legal             113,650 
 Printing                                    15,564 
 Custodian fees                             217,866 
 Trustees' fees and expenses                 31,745 
 Distribution Plan expenses               3,618,642 
 Registration fees                           53,108 
 Miscellaneous expenses                      35,869 
- --------------------------------------      -------      ----------- 
   Total expenses                         7,066,975 
Less: Expenses paid indirectly 
  (Note 4)                                  (60,873) 
- --------------------------------------      -------      ----------- 
Net expenses                                              7,006,102 
- --------------------------------------      -------      ----------- 
Net investment income                                    29,746,711 
- --------------------------------------      -------      ----------- 
Net realized and unrealized loss on investments and 
   foreign currency related transactions (Notes 1 and 3) 
Net realized gain on investments and 
   foreign currency related 
  transactions                                            9,457,206 
Net change in unrealized depreciation 
   on investments                                       (46,369,673) 
- --------------------------------------      -------      ----------- 
Net realized and unrealized loss 
   on investments                                       (36,912,467) 
- --------------------------------------      -------      ----------- 
Net decrease in net assets resulting 
   from operations                                     ($  7,165,756) 
======================================      =======      =========== 

See Notes to Financial Statements. 

<PAGE>
 
PAGE 15 

STATEMENTS OF CHANGES IN NET ASSETS 

<TABLE>
<CAPTION>
                                                                       Six Months Ended       Year Ended 
                                                                       January 31, 1996     July 31, 1995 
- ------------------------------------------------------------------     ------------------   -------------- 
                                                                         (Unaudited) 
<S>                                                                     <C>                 <C>
Operations (Notes 1 and 3) 
Net investment income                                                   $  29,746,711       $  61,233,352 
Net realized gain (loss) on investments and foreign currency 
  related transactions                                                      9,457,206         (91,818,044) 
Net change in unrealized appreciation (depreciation) on 
  investments                                                             (46,369,673)         71,736,709 
- ------------------------------------------------------------------      ----------------      ------------ 
  Net increase (decrease) in net assets resulting from operations          (7,165,756)         41,152,017 
- ------------------------------------------------------------------      ----------------      ------------ 
Distributions to shareholders (Note 1) 
 Net investment income                                                    (32,235,440)        (60,319,059) 
  In excess of net investment income                                                0          (3,043,529) 
  Tax basis return of capital                                                       0         (17,099,886) 
- ------------------------------------------------------------------      ----------------      ------------ 
    Total distributions to shareholders                                   (32,235,440)        (80,462,474) 
- ------------------------------------------------------------------      ----------------      ------------ 
Capital share transactions (Note 2) 
 Proceeds from shares sold                                                 67,900,895         233,171,940 
 Payments for shares redeemed                                            (144,227,933)       (240,425,711) 
 Net asset value of shares issued in reinvestment of dividends and 
  distributions                                                            18,386,233          45,245,958 
- ------------------------------------------------------------------      ----------------      ------------ 
  Net increase (decrease) in capital share transactions                   (57,940,805)         37,992,187 
- ------------------------------------------------------------------      ----------------      ------------ 
   Total decrease in net assets                                           (97,342,001)         (1,318,270) 
- ------------------------------------------------------------------      ----------------      ------------ 
Net assets 
 Beginning of period                                                      764,964,886         766,283,156 
- ------------------------------------------------------------------      ----------------      ------------ 
End of period [Including accumulated distributions in excess of 
  net investment income as follows: 1996--($8,317,502) 
  and 1995--(5,828,773)] (Note 1)                                       $ 667,622,885       $ 764,964,886 
==================================================================      ================    ==============
</TABLE>
See Notes to Financial Statements. 

<PAGE>
 
PAGE 16 
Keystone High Income Bond Fund (B-4) 

NOTES TO FINANCIAL STATEMENTS 
(Unaudited) 

(1.) Significant Accounting Policies 

Keystone High Income Bond Fund (B-4) (formerly Keystone Custodian Fund, 
Series B-4) (the "Fund") is a common law trust for which Keystone Management, 
Inc. ("KMI") is the Investment Manager and Keystone Investment Management 
Company (formerly Keystone Custodian Funds, Inc.) ("Keystone") is the 
Investment Adviser. The Fund is registered under the Investment Company Act 
of 1940, as amended (the "1940 Act"), as a diversified, open-end investment 
company. The Fund seeks generous income primarily from high yield corporate 
bonds. 

Keystone is a wholly-owned subsidiary of Keystone Investments Inc. (formerly 
Keystone Group, Inc.) ("KII"), a Delaware corporation. KII is privately owned 
by an investor group consisting predominantly of members of current and 
former management of Keystone and its affiliates. Keystone Investor Resource 
Center, Inc. ("KIRC"), a wholly-owned subsidiary of Keystone, is the Fund's 
transfer and dividend disbursing agent. 

The following is a summary of significant accounting policies consistently 
followed by the Fund in the preparation of its financial statements. The 
policies are in conformity with generally accepted accounting principles 
which requires management to make estimates and assumptions that affect 
amounts reported herein. Although actual results could differ form these 
estimates, any such differences are expected to be immaterial to the net 
assets of the Fund. 

A. Investments are usually valued at the closing sales price or, in the 
absence of sales and for over-the-counter securities, the mean of bid and 
asked quotations. Management values the following securities at prices it 
deems in good faith to be fair: (a) securities (including restricted 
securities) for which complete quotations are not readily available and (b) 
listed securities if, in the opinion of management, the last sales price does 
not reflect a current value or if no sale occurred. Short-term investments 
maturing in sixty days or less are valued at amortized cost (original 
purchase cost as adjusted for amortization of premium or accretion of 
discount), which, when combined with accrued interest, approximates market. 
Short-term investments maturing in more than sixty days for which market 
quotations are readily available are valued at current market value. 
Short-term investments maturing in more than sixty days when purchased which 
are held on the sixtieth day prior to maturity are valued at amortized cost 
(market value on the sixtieth day adjusted for amortization of premium or 
accretion of discount), which, when combined with accrued interest, 
approximates market. Short-term investments denominated in a foreign currency 
are adjusted daily to reflect changes in exchange rates. Market quotations 
are not considered to be readily available for long-term corporate bonds and 
notes; such investments are stated at fair value on the basis of valuations 
furnished by a pricing service, approved by the Trustees, which determines 
valuations for normal institutional-size trading units of such securities 
using methods based on market transactions for comparable securities and 
various relationships between securities which are generally recognized by 
institutional traders. 

B. When the Fund enters into a repurchase agreement (a purchase of securities 
whereby the seller agrees to repurchase the securities at a mutually agreed 
upon date and price) the repurchase price of the securities will generally 
equal the amount paid by the Fund plus a negotiated interest amount. The 
seller under the repurchase agreement will be required to provide securities 
("collateral") to the Fund whose value will be maintained at an amount not 
less than the repurchase price, and which generally will be maintained at 
101% of the repurchase price. The Fund monitors the value of collateral on a 
daily basis, and if the value of the collateral falls below required levels, 
the Fund intends to seek additional collateral from the seller or terminate 
the repurchase agreement. If the seller 

<PAGE>
 
PAGE 17 

defaults, the Fund would suffer a loss to the extent that the proceeds from 
the sale of the underlying securities were less than the repurchase price. 
Any such loss would be increased by any cost incurred on disposing of such 
securities. If bankruptcy proceedings are commenced against the seller under 
the repurchase agreement, the realization on the collateral may be delayed or 
limited. Repurchase agreements entered into by the Fund will be limited to 
transactions with dealers or domestic banks believed to present minimal 
credit risks, and the Fund will take constructive receipt of all securities 
underlying repurchase agreements until such agreements expire. 

  Pursuant to an exemptive order issued by the Securities and Exchange 
Commission, the Fund, along with certain other Keystone funds, may transfer 
uninvested cash balances into a joint trading account. These balances are 
invested in one or more repurchase agreements that are fully collateralized 
by U.S. Treasury and/or Federal Agency obligations. 

C. The Fund enters into currency and other financial futures contracts as a 
hedge against changes in interest or currency rates. A futures contract is an 
agreement between two parties to buy and sell a specific amount of a 
commodity, security, financial instrument, or, in the case of a stock index, 
cash at a set price on a future date. Upon entering into a futures contract 
the Fund is required to deposit with a broker an amount ("initial margin") 
equal to a certain percentage of the purchase price indicated in the futures 
contract. Subsequent payments ("variation margin") are made or received by 
the Fund each day, as the value of the underlying instrument or index 
fluctuates, and are recorded for book purposes as unrealized gains or losses 
by the Fund. For federal tax purposes, any futures contracts which remain 
open at fiscal year-end are marked-to-market and the resultant net gain or 
loss is included in federal taxable income. In addition to market risk, the 
Fund is subject to the credit risk that the other party will not be able to 
complete the obligations of the contract. 

  Foreign currency amounts are translated into United States dollars as 
follows: market value of investments, assets and liabilities at the daily 
rate of exchange, purchases and sales of investments, income and expenses at 
the rate of exchange prevailing on the respective dates of such transactions. 
Net unrealized foreign exchange gains/losses are a component of unrealized 
appreciation/depreciation of investments. 

D. In connection with portfolio purchases and sales denominated in foreign 
currency, the Fund may enter into forward foreign currency exchange contracts 
("contracts") to hedge certain foreign currency assets. Contracts are 
recorded at the forward rate and are marked-to- market daily. Realized gains 
and losses arising from such transactions are included in net realized gain 
(loss) on foreign currency related transactions. The Fund is subject to the 
credit risk that the other party will not complete the obligations of the 
contract. 

E. Securities transactions are accounted for on the day after trade date. 
Realized gains and losses are computed on the identified cost basis. Interest 
income is recorded on the accrual basis and dividend income is recorded on 
the ex-dividend date. All discounts are amortized for both financial 
reporting and federal income tax purposes. 

F. The Fund distributes net investment income to shareholders monthly and net 
capital gains, if any, annually. Distributions to shareholders are recorded 
at the close of business on the ex-dividend date. Distributions are 
determined from taxable net investment income and net capital gains and can 
differ from book basis net investment income and net capital gains. The 
significant differences between financial statement amounts available for 
distribution and distributions made in accordance with income tax regulations 
are primarily due to the different treatment of 12b-1 expenses prior to April 
1995 and net operating losses. 

<PAGE>
 
PAGE 18 
Keystone High Income Bond Fund (B-4) 

G. The Fund has qualified, and intends to qualify in the future, as a 
regulated investment company under the Internal Revenue Code of 1986, as 
amended ("Internal Revenue Code"). Thus, the Fund is relieved of any federal 
income tax liability by distributing all of its net taxable investment income 
and net taxable capital gains, if any, to its shareholders. The Fund intends 
to avoid any excise tax liability by making the required distributions under 
the Internal Revenue Code. 

(2.) Capital Share Transactions 

The Trust agreement authorizes the issuance of an unlimited number of shares 
of beneficial interest with a par value of $1.00. Transactions in shares of 
the Fund were as follows: 

                                        Six Months Ended       Year Ended 
                                        January 31, 1996     July 31, 1995 
- -----------------------------------     ------------------   -------------- 
Sales                                      15,940,241          53,793,683 
Redemptions                               (33,879,167)        (55,102,608) 
Reinvestment of dividends and 
  distributions                             4,322,823          10,479,964 
- -----------------------------------      ----------------      ------------ 
Net increase (decrease)                   (13,616,103)          9,171,039 
===================================      ================      ============ 

  The Fund bears some of the costs of selling its shares under a Distribution 
Plan adopted pursuant to Rule 12b-1 under the 1940 Act. Under the 
Distribution Plan, the Fund pays Keystone Investment Distributors Company 
(formerly Keystone Distributors, Inc.) ("KIDC"), the principal underwriter 
and a wholly-owned subsidiary of Keystone, amounts which in total may not 
exceed the Distribution Plan maximum. 

  In connection with the Distribution Plan and subject to the limitations 
discussed below, Fund shares are offered for sale at net asset value without 
any initial sales charge. From the amounts received by KIDC in connection 
with the Distribution Plan, and subject to the limitations discussed below, 
KIDC generally pays dealers or others a commission equal to 4.00% of the 
price paid to the Fund for each sale of a Fund share as well as a shareholder 
service fee at a rate of 0.25% per annum of the net asset value of shares 
sold by such brokers or others. 

  To the extent Fund shares are redeemed within four calendar years of 
original issuance, the Fund may be eligible to receive a deferred sales 
charge from the investor as partial reimbursement for sales commissions 
previously paid on those shares. This charge is based on declining rates, 
which begin at 4.00%, applied to the lesser of the net asset value of shares 
redeemed or the total cost of such shares. 

  The Distribution Plan provides that the Fund may incur certain expenses 
which may not exceed a maximum amount equal to 0.3125% of the Fund's average 
daily net assets for any calendar year (approximately 1.25% annually) 
occurring after the inception of the Distribution Plan. Rules adopted by the 
National Association of Securities Dealers, Inc. ("NASD") limit the annual 
expenditures that the Fund may incur under the Distribution Plan to 1% of 
which 0.75% may be used to pay such distribution expenses and 0.25% may be 
used to pay shareholder service fees. NASD rules also will limit the 
aggregate amount which the Fund may pay for such distribution costs to 6.25% 
of gross share sales since the inception of the Fund's 12b-1 Distribution 
Plan, plus interest at the prime rate plus 1.00% on unpaid amounts thereof 
(less any contingent deferred sales charges paid by the shareholders to 
KIDC). 

  KIDC intends, but is not obligated, to continue to pay or accrue 
distribution charges that exceed current annual payments permitted to be 
received by KIDC from the Fund. KIDC intends to seek full payment of such 
charges from the Fund (together with annual interest thereon at the prime 
rate plus one percent) at such time in the future as, and to the extent that, 
payment thereof by the Fund would be within permitted limits. KIDC currently 
intends to seek payment of 

<PAGE>
 
PAGE 19 

interest only on such charges paid or accrued by KIDC subsequent to January 
1, 1992. 

  Commencing on July 8, 1992, contingent deferred sales charges applicable to 
shares of the Fund issued after January 1, 1992 have, to the extent permitted 
by the NASD Rule, been paid to KIDC rather than to the Fund. 

  During the six months ended January 31, 1996, the Fund paid $3,618,642 under 
its Distribution Plan, net of deferred sales charges, all of which was paid 
to KIDC. Under the NASD Rule, the maximum uncollected amount for which KIDC 
may seek payment from the Fund under its Distribution Plan is $6,942,148 
(1.04% of the Fund's net assets at January 31, 1996). 

(3.) Securities Transactions 

As of July 31, 1995, the Fund had a capital loss carryover for federal income 
tax purposes of approximately $517,160,000 which expires as follows: 1996-- 
$16,070,000; 1997--$43,981,000; 1998-- $93,048,000; 1999--$91,149,000; 2000-- 
$122,350,000; 2002--$44,605,000; 2003-- $105,957,000. 

 Cost of purchases and proceeds from sales of investment securities excluding 
short-term securities during the six months ended January 31, 1996 were 
$318,142,439 and $382,199,879 respectively. 

(4.) Investment Management Agreement and Other Transactions 

Under the terms of the Investment Management Agreement between KMI and the 
Fund, KMI provides investment management and administrative services to the 
Fund. In return, KMI is paid a management fee computed and paid daily at a 
rate of 2.0% of the Fund's gross investment income plus an amount determined 
by applying percentage rates, that start at 0.50% and decline, as net assets 
increase to 0.25% per annum, to the net asset value of the Fund. 

  KMI has entered into an Investment Advisory Agreement with Keystone, under 
which Keystone provides investment advisory and management services to the 
Fund and receives for its services an annual fee representing 85% of the 
management fee received by KMI. 

  During the six months ended January 31, 1996, the Fund paid or accrued to 
KMI investment management and administrative services fees of $2,023,753 
which represented 0.56% of the Fund's average net assets on an annualized 
basis. Of such amount paid to KMI, $1,720,190 was paid to Keystone for its 
services to the Fund. 

  During the six months ended January 31, 1996, the Fund paid or accrued to 
KII $6,497 for certain accounting services and to KIRC $956,778 for transfer 
agent fees. 

  The Fund has entered into an expense offset arrangement with its custodian. 
For the six months ended January 31, 1996 the Fund paid custody fees in the 
amount of $156,993 and received a credit of $60,873 pursuant to the expense 
offset arrangement resulting in a total expense of $217,866. The assets 
deposited with the custodian under the expense offset arrangement could have 
been invested in income-producing assets. 

(5.) Distributions to Shareholders 

A distribution of net investment income of $0.031 per share was declared 
payable on March 6, 1996 to shareholders of record February 23, 1996. This 
distribution is not reflected in the accompanying financial. 

<PAGE>
 






[1 pg. cover]

[front]

                                    KEYSTONE

                     [photo of man and boy w/baseball mitt]

                                   HIGH INCOME
                                 BOND FUND (B-4)


                                [keystone logo]

                               SEMIANNUAL REPORT
                                JANUARY 31, 1996

[back]

                                  [boxed copy]
                                    KEYSTONE
                                 FAMILY OF FUNDS
                                    [diamond]
                               Balanced Fund (K-1)
                          Diversified Bond Fund (B-2)
                          Growth and Income Fund (S-1)
                          High Income Bond Fund (B-4)
                            International Fund, Inc.
                                  Liquid Trust
                           Mid-Cap Growth Fund (S-3)
                         Precious Metals Holdings, Inc.
                            Quality Bond Fund (B-1)
                        Small Company Growth Fund (S-4)
                          Strategic Growth Fund (K-2)
                                 Tax Free Fund


This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Keystone funds, contact your
financial adviser or call Keystone.

[logo] KEYSTONE
       INVESTMENTS

       P.O. Box 2121
       Boston, Massachusetts 02106-2121

B-4-SAR-3/96
51M                                 [recycled symbol]

</TEXT>
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