Report - Financial Statements
T. Rowe Price Tax-Free Income Fund
August 31, 1996
Portfolio Highlights
Sector Diversification
Percent of Percent of
Net Assets Net Assets
2/29/96 8/31/96
Hospital Revenue 15% 14%
Nuclear Revenue 10 11
Dedicated Tax Revenue 8 10
General Obligation - State 8 8
Electric Revenue 7 8
Housing Finance Revenue 7 7
Lease Revenue 6 6
Water and Sewer Revenue 4 6
General Obligation - Local 6 6
Prerefunded Bonds 6 6
Escrowed to Maturity 5 5
Educational Revenue 5 4
Ground Transportation Revenue 5 3
Air and Sea Transportation Revenue 2 2
Industrial and Pollution
Control Revenue 2 2
All Others 2 2
Other Assets Less Liabilities 2 -
Total 100% 100%
T. Rowe Price Tax-Free Income Fund
Unaudited
Financial Highlights
For a share outstanding throughout each period
6 Months Year
Ended Ended
8/31/96 2/29/96 2/28/95 2/28/94 2/28/93 2/29/92
NET ASSET VALUE
Beginning of
period $ 9.66 $ 9.25 $ 9.66 $ 9.84 $ 9.09 $ 8.79
Investment activities
Net invest-
ment income 0.26 0.52 0.53 0.54 0.56 0.57
Net realized
and unrealized
gain (loss) (0.26) 0.41 (0.37) - 0.75 0.30
Total from
investment
activities - 0.93 0.16 0.54 1.31 0.87
Distributions
Net invest-
ment income (0.26) (0.52) (0.53) (0.54) (0.56) (0.57)
Net realized
gain - - (0.04) (0.18) - -
Total distri-
butions (0.26) (0.52) (0.57) (0.72) (0.56) (0.57)
NET ASSET VALUE
End of
period $ 9.40 $ 9.66 $ 9.25 $ 9.66 $ 9.84 $ 9.09
Ratios/Supplemental Data
Total return 0.01% 10.31% 1.90% 5.50% 14.88% 10.17%
Ratio of expenses
to average
net assets 0.57%! 0.58% 0.59% 0.59% 0.61% 0.62%
Ratio of net
investment income
to average
net assets 5.38%! 5.49% 5.80% 5.40% 5.98% 6.34%
Portfolio
turnover
rate 46.4%! 48.7% 49.3% 71.2% 76.7% 57.9%
Net assets, end
of period (in
millions) $ 1,337 $1,376 $ 1,329 $ 1,453 $ 1,442 $1,245
! Annualized.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Free Income Fund
Unaudited August 31, 1996
Statement of Net Assets
Par Value
In thousands
ALABAMA 2.4%
Alabama, GO
Zero Coupon, 9/1/03 $ 10,000 $ 6,874
Zero Coupon, 3/1/04 10,000 6,621
Zero Coupon, 9/1/04 5,500 3,511
Alabama Water Pollution Control Auth.
5.00%, 8/15/15 (AMBAC Insured) 4,000 3,626
6.75%, 8/15/17 (AMBAC Insured) 2,750 3,009
Alexander City Special Care Fac. Fin. Auth.
Russell Hosp. Corp., 6.00%, 12/1/22 3,250 2,927
Baldwin County, Eastern Shore Health Care Auth.
Thomas Hosp., 6.75%, 4/1/21 1,900 1,889
Mobile
Capital Improvement Warrants, GO
Zero Coupon, 8/15/16 (MBIA Insured) 4,330 1,223
Zero Coupon, 8/15/17 (MBIA Insured) 4,435 1,167
Mobile IDB, Mobile Energy Services, 6.95%, 1/1/20 1,500 1,563
Total Alabama (Cost $30,265) 32,410
ALASKA 1.1%
Alaska Housing Fin. Corp.
5.85%, 12/1/14 (MBIA Insured) 3,405 3,367
5.875%, 12/1/24 (MBIA Insured) 11,000 10,711
Anchorage, School,
GO, 6.00%, 10/1/14 (FGIC Insured) 1,000 1,030
Total Alaska (Cost $15,094) 15,108
ARIZONA 1.2%
Phoenix, Waste Water,
6.125%, 7/1/14 (Prerefunded 7/1/03!) 7,300 7,927
Salt River Agricultural Improvement and Power Dist.
Electric System, 6.50%, 1/1/22 8,000 8,362
Total Arizona (Cost $15,611) 16,289
ARKANSAS 0.5%
Little Rock Health Fac. Board, Baptist Medical Center
6.85%, 11/1/08 2,495 2,735
North Little Rock, Electric System,
6.50%, 7/1/15 (MBIA Insured) $ 4,000 $ 4,376
Total Arkansas (Cost $6,475) 7,111
CALIFORNIA 9.1%
California, GO, RAN, 4.50%, 6/30/97 14,300 14,378
Foothill / Eastern Transportation Corridor Agency
California Toll Road
Zero Coupon, 1/1/15 5,000 1,462
Zero Coupon, 1/1/17 20,000 5,104
Zero Coupon, 1/1/19 1,000 222
Zero Coupon, 1/1/26 5,000 677
Los Angeles
GO, 5.80%, 9/1/09 (FGIC Insured) 2,400 2,438
GO, 6.00%, 9/1/14 (MBIA Insured) 5,000 5,049
Wastewater, 7.15%, 6/1/20 (Prerefunded 6/1/00!) 10,500 11,635
Los Angeles County
Marina del Rey, COP
6.25%, 7/1/03 4,000 4,105
6.50%, 7/1/08 3,250 3,267
Los Angeles County Metropolitan Transportation Auth.
Sales Tax
7.40%, 7/1/15 5,530 5,997
6.25%, 7/1/13 (MBIA Insured) 8,965 9,365
Los Angeles Harbor Dept., 7.60%, 10/1/18
(Escrowed to Maturity) 3,200 3,858
Modesto Irrigation Dist., Geysers Geothermal Power, COP
7.25%, 10/1/15
(Prerefunded 10/1/96!) 5,000 5,115
Port of Oakland
7.25%, 11/1/16 (BIGI Insured) 12,275 12,749
7.30%, 11/1/09 (BIGI Insured) 1,650 1,714
Sacramento Fin. Auth., 5.375%, 11/1/14 (AMBAC Insured) 4,000 3,845
San Bernardino, Sisters of Charity Health Care System
7.00%, 7/1/21 3,000 3,347
San Francisco
City and County Airport
6.30%, 5/1/11 (AMBAC Insured) 2,000 2,100
5.25%, 5/1/14 (FGIC Insured) 2,035 1,912
San Mateo County Transit Dist.
5.25%, 6/1/16 (MBIA Insured) $ 6,000 $ 5,675
5.25%, 6/1/17 (MBIA Insured) 2,000 1,889
Southern California Public Power Auth.
6.00%, 7/1/12 5,000 5,021
6.75%, 7/1/11 4,050 4,480
Southern Transmission
5.00%, 7/1/22 (MBIA Insured) 7,265 6,351
Total California (Cost $115,852) 121,755
COLORADO 0.8%
Boulder County, Longmont United Hosp.
8.20%, 12/1/20
(Prerefunded 12/1/00!) 2,000 2,281
Jefferson County School Dist., GO
6.00%, 12/15/12 (AMBAC Insured) 8,000 8,220
Total Colorado (Cost $9,744) 10,501
CONNECTICUT 1.1%
Connecticut, State Special Tax, GO, 7.125%, 6/1/10 7,350 8,506
Connecticut HEFA, Yale-New Haven Hosp.
7.10%, 7/1/25 (MBIA Insured) 5,825 6,408
Total Connecticut (Cost $13,248) 14,914
DELAWARE 0.3%
Delaware HFA, Beebe Medical Center, 6.75%, 6/1/14 3,500 3,525
Total Delaware (Cost $3,423) 3,525
FLORIDA 3.8%
Broward County Resource Recovery
Broward Waste Energy, L.P. North
7.95%, 12/1/08 11,045 12,163
Broward Waste Energy, L.P. South
7.95%, 12/1/08 905 996
Dade County
Entitlement, Zero Coupon, 2/1/13 (MBIA Insured) $ 9,000 $ 3,459
Capital Appreciation
Zero Coupon, 2/1/09 (MBIA Insured) 12,185 6,137
Seaport, GO, 5.125%, 10/1/26 (MBIA Insured) 5,000 4,489
Florida Board of Ed.
Public Ed. Capital Outlay, GO
7.25%, 6/1/23 6,210 6,803
7.25%, 6/1/23 (Prerefunded 6/1/00!) 35 39
Florida Turnpike Auth., 5.00%, 7/1/15 (FGIC Insured) 4,500 4,124
Jacksonville Transportation Auth., GO
7.375%, 7/1/20 (Prerefunded 7/1/00!) 8,750 9,754
Port St. Lucie
Capital Appreciation
Zero Coupon, 9/1/16 (FGIC Insured) 5,000 1,481
Zero Coupon, 9/1/26 (FGIC Insured) 5,000 759
Total Florida (Cost $47,264) 50,204
GEORGIA 6.3%
Burke County Dev. Auth. PCR, Georgia Power Co.
VRDN (Currently 4.00%) 900 900
Fulton-Dekalb Hosp. Auth.
Grady Memorial Hosp., GO
6.80%, 1/1/07 (AMBAC Insured)
(Escrowed to Maturity) 5,530 6,207
6.80%, 1/1/08 (AMBAC Insured)
(Escrowed to Maturity) 5,905 6,625
6.85%, 1/1/09 (AMBAC Insured)
(Escrowed to Maturity) 6,310 7,095
6.85%, 1/1/10 (AMBAC Insured)
(Escrowed to Maturity) 6,745 7,583
Gwinnett County School Dist., GO
6.40%, 2/1/11 1,905 2,074
6.40%, 2/1/12 1,255 1,365
Henry County School Dist., GO, 6.45%, 8/1/11 2,100 2,272
Metropolitan Atlanta Rapid Transit Auth.
Sales Tax
6.55%, 7/1/20 $ 5,500 $ 5,777
6.90%, 7/1/16 (MBIA Insured) 5,655 6,276
Municipal Electric Auth. of Georgia
8.125%, 1/1/17 5,680 6,047
6.40%, 1/1/07 (AMBAC Insured) 7,500 8,168
7.25%, 1/1/24 (AMBAC Insured) 6,500 7,814
5.70%, 1/1/19 (FGIC Insured) 5,100 5,049
6.125%, 1/1/14 (FGIC Insured) 5,500 5,638
Paulding County, Water and Sewer
6.00%, 12/1/13 (MBIA Insured) 5,000 5,242
Total Georgia (Cost $78,023) 84,132
HAWAII 0.1%
Honolulu City and County,
GO, 5.00%, 11/1/12 (MBIA Insured) 1,000 928
Total Hawaii (Cost $947) 928
IDAHO 0.1%
Idaho HFA, St. Lukes Regional Med. Center
VRDN (Currently 3.85%) 1,200 1,200
Idaho Housing Agency, 7.70%, 7/1/17 (FHA Guaranteed) 710 746
Total Idaho (Cost $1,910) 1,946
ILLINOIS 3.5%
Chicago
GO, 5.50%, 1/1/18 (AMBAC Insured) 6,630 6,349
GO, 6.25%, 1/1/15 (AMBAC Insured) 1,000 1,050
GO, 5.125%, 1/1/16 (FGIC Insured) 11,200 10,128
Water, 5.00%, 11/1/20 (FGIC Insured) 4,890 4,270
Chicago-O'Hare Int'l. Airport, Passenger Fac.
5.625%, 1/1/14 (AMBAC Insured) 5,500 5,322
Cook, Dupage, Kane, Lake, McHenry, and Will Counties
Regional Transportation Auth.
7.75%, 6/1/19 (FGIC Insured) 5,350 6,634
Illinois EFA, Art Institute of Chicago,
VRDN (Currently 3.55%) 2,000 2,000
Illinois HFA, Hinsdale Health System, 9.00%, 11/15/15 $ 4,765 $ 5,328
Illinois Regional Transportation Auth.
6.70%, 11/1/21 (FGIC Insured) 5,000 5,542
Total Illinois (Cost $46,441) 46,623
INDIANA 0.2%
St. Joseph's County Hosp. Auth., St. Joseph's Medical Center
6.70%, 12/1/02 (MBIA Insured) 1,985 2,179
Total Indiana (Cost $1,985) 2,179
KENTUCKY 1.3%
Carroll County, PCR,
Kentucky Utilities, 7.45%, 9/15/16 15,000 16,963
Kentucky Turnpike Auth.
Economic Dev., 7.25%, 5/15/10
(Prerefunded 5/15/00!) 1,000 1,097
Total Kentucky (Cost $16,902) 18,060
LOUISIANA 2.1%
East Baton Rouge Mortgage Fin. Auth.
7.375%, 3/1/10
(Escrowed to Maturity) 2,800 3,010
Louisiana, GO
6.00%, 8/1/02 (FGIC Insured) 5,000 5,303
6.00%, 8/1/03 (FGIC Insured) 5,000 5,316
Louisiana Offshore Terminal Auth., LOOP, 7.60%, 9/1/10 10,440 11,369
Louisiana Public Fac. Auth.,
Willis Knighton Medical Center
VRDN (Currently 3.40%)
(AMBAC Insured) 3,000 3,000
Total Louisiana (Cost $26,843) 27,998
MAINE 0.2%
Maine Housing Auth., 6.10%, 11/15/15 (AMBAC Insured) 3,000 3,002
Total Maine (Cost $3,000) 3,002
MARYLAND 6.0%
Baltimore City, Convention Center,
6.00%, 9/1/17 (FGIC Insured) $ 1,750 $ 1,767
Baltimore County, Pickersgill Retirement Community
7.70%, 1/1/21 2,000 2,076
Frederick, General Improvement,
GO, VRDN (Currently 3.65%) 300 300
Gaithersburg Economic Auth., Asbury Methodist Home
7.85%, 1/1/20 (Prerefunded 1/1/00!) 3,000 3,358
Maryland CDA
Single Family
5.95%, 4/1/16 2,500 2,469
6.45%, 4/1/14 2,000 2,054
7.25%, 4/1/19 2,500 2,615
7.60%, 4/1/17 7,810 8,083
Maryland HHEFA
Greater Baltimore Medical Center
VRDN (Currently 3.60%) 300 300
Howard County General Hosp., 5.50%, 7/1/13 3,750 3,342
Johns Hopkins Hosp., Zero Coupon, 7/1/19 8,400 2,139
Johns Hopkins Univ., 7.50%, 7/1/20 9,475 10,123
Kennedy Kreiger Institute, 6.75%, 7/1/22 1,500 1,506
Pooled Loan Program, VRDN (Currently 3.50%) 7,500 7,500
Univ. of Maryland Medical System
5.00%, 7/1/20 (FGIC Insured) 8,005 7,061
7.00%, 7/1/22 (FGIC Insured) 1,500 1,735
Maryland Stadium Auth., Sports Fac.
5.75%, 3/1/18 (AMBAC Insured) 5,000 4,921
Maryland Water Quality Fin. Administration
Revolving Loan Fund
7.25%, 9/1/12 (Prerefunded 9/1/00!) 1,950 2,170
Montgomery County Housing Opportunities Commission
Single Family, 7.50%, 7/1/17 1,085 1,142
Prince George's County,
Dimensions Health Corp., 5.30%, 7/1/24 9,685 8,617
Univ. of Maryland, Auxiliary Fac. and Tuition,
5.75%, 4/1/17 7,465 7,376
Total Maryland (Cost $77,768) 80,654
MASSACHUSETTS 2.3%
Massachusetts Housing Fin. Agency, 6.30%, 12/1/14 $ 6,250 $ 6,381
Massachusetts Bay Transportation Auth.
General Transportation, GO
7.00%, 3/1/14 3,150 3,596
7.00%, 3/1/21 6,200 7,131
5.375%, 3/1/25 (AMBAC Insured) 3,500 3,266
Massachusetts HEFA
Harvard Univ., 6.25%, 4/1/20 5,000 5,320
Massachusetts General Hosp.
6.00%, 7/1/15 (AMBAC Insured) 4,500 4,500
Total Massachusetts (Cost $28,344) 30,194
MICHIGAN 1.6%
Kalamazoo Hosp. Fin. Auth., Borgess Medical Center,
5.625%, 6/1/14 (AMBAC Insured) 2,500 2,431
Michigan Strategic Fund, Dow Chemical,
VRDN (Currently 3.85%) 3,600 3,600
Michigan HDA
6.45%, 12/1/14 2,120 2,174
7.55%, 12/1/15 1,750 1,839
Michigan Hosp. Fin. Auth.
Bay Medical Center, 8.25%, 7/1/12 1,000 1,067
Henry Ford Hosp., 5.25%, 11/15/20 5,000 4,518
Royal Oak Hosp. Fin. Auth., William Beaumont Hosp.
6.25%, 1/1/11 4,695 4,940
Univ. of Michigan, Medical Service Plan,
3.85%, 12/1/27 1,000 1,000
Total Michigan (Cost $21,562) 21,569
MINNESOTA 1.4%
Northern Minnesota Municipal Power Agency,
7.35%, 1/1/02 5,000 5,378
Rochester Health Care Fac.
Mayo Foundation/Mayo Medical Center
5.90%, 11/15/10 4,000 4,161
6.25%, 11/15/21 3,000 3,073
Univ. of Minnesota, Residual Interest Bond / Inverse
Floater (Currently 5.671%), 8/15/03 5,800 5,669
Total Minnesota (Cost $17,048) 18,281
MISSISSIPPI 0.7%
Claiborne County, PCR
Systems Energy Resources
7.30%, 5/1/25 $ 2,750 $ 2,832
9.875%, 12/1/14 3,400 3,802
Mississippi Home Corp., Single Family
9.25%, 3/1/12 (FGIC Insured) 740 795
Warren County, PCR, Mississippi Power and Light,
7.00%, 4/1/22 1,500 1,546
Total Mississippi (Cost $8,740) 8,975
MISSOURI 0.2%
Joplin IDA, Tri-State Osteopathic Hosp. Assoc.,
8.25%, 12/15/14 1,410 1,498
Missouri HEFA, Bethesda Health Group, 7.50%, 8/15/12 1,250 1,257
Total Missouri (Cost $2,607) 2,755
NEBRASKA 0.2%
Omaha Public Power Dist., Electric System,
6.20%, 2/1/17 3,000 3,198
Total Nebraska (Cost $2,987) 3,198
NEVADA 0.6%
Clark County School Dist.,
Limited Tax School Improvement, GO
7.00%, 6/1/11 (MBIA Insured) 3,500 4,014
Nevada, Municipal Bond Bank, GO
7.25%, 11/1/10
(Escrowed to Maturity) 3,050 3,467
Nevada Housing Division, Single Family, 7.85%, 10/1/15 1,015 1,065
Total Nevada (Cost $7,507) 8,546
NEW JERSEY 1.8%
New Jersey EFA,
Univ. of Medicine and Dentistry of New Jersey
5.25%, 12/1/21 (AMBAC Insured) 6,070 5,630
New Jersey Sports and Exposition Auth., Monmouth Park
8.00%, 1/1/25 4,500 4,872
New Jersey Transportation Auth.
Transportation Systems
6.00%, 6/15/02 (AMBAC Insured) $ 10,000 $ 10,636
6.00%, 12/15/04 (MBIA Insured) 1,000 1,072
New Jersey Turnpike Auth.,
6.50%, 1/1/16 (MBIA Insured) 2,000 2,178
Total New Jersey (Cost $24,093) 24,388
NEW MEXICO 0.2%
Gallup, PCR,
Plains Electric Generation and Transmission Coop.
6.65%, 8/15/17 (MBIA Insured) 2,000 2,150
Total New Mexico (Cost $1,992) 2,150
NEW YORK 12.0%
Dormitory Auth. of the State of New York
City Univ.
5.75%, 7/1/13 10,000 9,603
6.00%, 7/1/14 10,000 9,870
5.75%, 7/1/18 (AMBAC Insured) 5,000 5,012
New York State Dept. of Health, 5.50%, 7/1/23 4,250 3,782
5.50%, 7/1/25 4,925 4,416
State Univ. Ed. Fac., 5.25%, 5/15/19 3,325 2,953
Vassar College, 7.25%, 7/1/15 2,000 2,224
New York City, GO
6.00%, 2/15/25 5,000 4,653
6.25%, 8/1/09 9,550 9,491
6.375%, 8/1/04 4,145 4,273
8.00%, 8/1/16 180 207
6.00%, 12/1/18 (FSA Insured)
(Escrowed to Maturity) 5,000 5,065
New York City IDA, Civic Fac., Rockefeller Foundation
5.375%, 7/1/23 1,500 1,417
New York City Municipal Water Fin. Auth., Water and Sewer
5.875%, 6/15/26 (MBIA Insured) 10,000 9,612
New York State Environmental Fac. Corp., PCR
State Water Revolving Fund, 6.90%, 11/15/15 5,365 6,014
New York State Housing Fin. Agency, State Univ. Construction
7.80%, 5/1/01 (Escrowed to Maturity) 2,000 2,264
New York State Local Gov't. Assistance Corp.
Public Benefit Corp.
5.50%, 4/1/21 $ 16,135 $ 14,929
7.20%, 4/1/04 5,000 5,534
New York State Medical Care Fac. Fin. Agency
Albany and St. John's Medical Center
6.20%, 2/15/28 (FHA Guaranteed) 3,480 3,507
Buffalo General Hosp.
6.00%, 8/15/14 (FHA Guaranteed) 9,005 8,888
Mental Health Services, 6.50%, 8/15/24 6,000 6,145
New York Hosp.
6.50%, 8/15/29 (AMBAC Insured) 4,625 4,945
Presbyterian Hosp.
5.50%, 8/15/24 (FHA Guaranteed) 5,500 5,087
New York State Urban Dev. Corp.
Correctional Capital Fac., 5.50%, 1/1/16 3,500 3,178
State Fac., 5.60%, 4/1/15 8,700 8,183
Triborough Bridge and Tunnel Auth., 5.50%, 1/1/17 20,000 19,403
Total New York (Cost $154,602) 160,655
NORTH CAROLINA 2.4%
Cumberland County, Civic Center, COP
6.40%, 12/1/24 (AMBAC Insured) 2,750 2,915
New Hanover County Hosp.,
New Hanover Regional Medical Center
5.75%, 10/1/26 (AMBAC Insured) 3,000 2,904
North Carolina Eastern Municipal Power Agency
6.00%, 1/1/26 3,500 3,419
6.50%, 1/1/18 (Escrowed to Maturity) 2,655 2,926
7.50%, 1/1/10 4,330 4,806
7.50%, 1/1/10 (Escrowed to Maturity) 4,650 5,509
North Carolina Housing Fin. Agency, 7.40%, 3/1/28 2,250 2,369
North Carolina Medical Care Commission,
Stanly Memorial Hosp.
7.80%, 10/1/19
(Prerefunded 10/1/99!) 3,000 3,336
Univ. of North Carolina, Univ. of North Carolina Hosp.
5.25%, 2/15/26 4,620 4,227
Total North Carolina (Cost $30,181) 32,411
NORTH DAKOTA 0.2%
Mercer County, PCR, Basin Electric Power
6.05%, 1/1/19 (AMBAC Insured) $ 3,000 $ 3,004
Total North Dakota (Cost $3,000) 3,004
OHIO 2.1%
Cleveland, Waterworks, 5.50%, 1/1/13 (MBIA Insured) 4,765 4,689
Dayton Special Fac., Emery Air Freight, 6.05%, 10/1/09 2,500 2,490
Franklin County
GO, 6.80%, 12/1/09
(Prerefunded 12/1/00!) 2,860 3,141
GO, 6.80%, 12/1/10
(Prerefunded 12/1/00!) 3,240 3,559
County Courthouse (Limited Tax), GO
6.375%, 12/1/17
(Prerefunded 12/1/01!) 2,000 2,183
Montgomery County Hosp. Fac., Kettering Medical Center
7.375%, 4/1/02 (MBIA Insured) 2,500 2,694
Ohio Building Auth., Adult Correctional Fac.
6.00%, 4/1/04 (AMBAC Insured) 3,500 3,714
Ohio Housing Fin. Agency,
Residential Mortgage, 5.70%, 3/1/17 2,500 2,421
Ohio Water Dev. Auth., PCR, Cleveland Electric,
7.70%, 8/1/25 2,700 2,735
Total Ohio (Cost $26,596) 27,626
OKLAHOMA 0.7%
Grand River Dam Auth., 5.50%, 6/1/13 (AMBAC Insured) 5,000 4,940
Tulsa County Home Fin. Auth., Single Family
6.90%, 8/1/10 (FGIC Insured)
(Escrowed to Maturity) 4,250 4,797
Total Oklahoma (Cost $9,172) 9,737
PENNSYLVANIA 4.0%
Beaver County IDA, PCR, Cleveland Electric,
7.75%, 7/15/25 3,900 3,979
Pennsylvania Convention Center Auth.
6.70%, 9/1/14 (FSA Insured) 5,000 5,442
Pennsylvania HEFA, Carnegie Mellon Univ.
VRDN (Currently 3.75%) $ 1,600 $ 1,600
Pennsylvania IDA, Economic Dev.
5.50%, 1/1/14 (AMBAC Insured) 5,750 5,575
Pennsylvania Intergovernmental Cooperative Auth.
Philadelphia Funding Program
6.00%, 6/15/02 (FGIC Insured) 9,000 9,512
Special Tax
6.75%, 6/15/21 (FGIC Insured)
(Prerefunded 6/15/05!) 4,750 5,321
5.00%, 6/15/22 (MBIA Insured) 5,000 4,383
Philadelphia
Water and Wastewater
5.50%, 6/15/06 (MBIA Insured) 12,750 13,039
5.50%, 6/15/07 (MBIA Insured) 4,000 4,052
Total Pennsylvania (Cost $52,175) 52,903
PUERTO RICO 1.8%
Puerto Rico Commonwealth, GO, 5.65%,
7/1/15 (MBIA Insured) 7,300 7,274
Puerto Rico Ind., Med.,
Higher Ed. and Environmental Pollution Control Fac.
Fin. Auth., Catholic Univ. of Puerto Rico
9.25%, 12/1/97 3,430 3,615
Puerto Rico Infrastructure Fin. Auth.
7.50%, 7/1/09 9,955 10,657
7.75%, 7/1/08 1,740 1,870
Total Puerto Rico (Cost $22,253) 23,416
RHODE ISLAND 1.5%
Rhode Island Health and Ed. Building Corp.
Bryant College, 6.125%, 6/1/19 (MBIA Insured) 5,000 4,972
Rhode Island Hosp., Residual Interest Bond/Inverse
Floater (Currently 9.8671%), 8/15/21
(FGIC Insured) 1,000 1,127
Rhode Island Housing and Mortgage Fin. Corp.
Homeownership Opportunity
6.70%, 10/1/14 $ 5,000 $ 5,200
7.85%, 10/1/16 8,000 8,421
Total Rhode Island (Cost $18,851) 19,720
SOUTH CAROLINA 2.8%
Greenville Hosp. System
Board of Trustees, Hosp. Fac.
5.25%, 5/1/17 3,500 3,172
5.50%, 5/1/16 5,250 4,966
Piedmont Municipal Power Agency
6.50%, 1/1/14 (FGIC Insured) 3,500 3,822
South Carolina Public Service Auth.
6.25%, 1/1/22 (AMBAC Insured) 17,750 18,330
5.50%, 7/1/21 (MBIA Insured) 5,015 4,687
Santee Cooper, 7.00%, 7/1/12
(Prerefunded 7/1/01!) 1,650 1,838
Total South Carolina (Cost $35,585) 36,815
SOUTH DAKOTA 0.5%
South Dakota Building Auth., 7.50%, 12/1/16 4,000 4,115
South Dakota HDA, Homeownership, 6.65%, 5/1/14 2,000 2,075
Total South Dakota (Cost $6,057) 6,190
TENNESSEE 1.7%
Chattanooga Health, Ed. and Housing Fac. Board
Memorial Hosp.
6.625%, 9/1/07 (MBIA Insured) 2,950 3,294
6.625%, 9/1/08 (MBIA Insured) 3,150 3,514
Metropolitan Gov't. of Nashville and Davidson Counties
Water and Sewer
Zero Coupon, 1/1/12 (FGIC Insured) 11,250 11,795
Shelby County Health Ed. and Housing Fac. Board
Le Bonhuer Children's Medical Center
5.50%, 8/15/12 (MBIA Insured)
(Escrowed to Maturity) $ 4,250 $ 4,203
Total Tennessee (Cost $22,143) 22,806
TEXAS 6.8%
Arlington Independent School Dist.,
Capital Appreciation, GO
Zero Coupon, 2/15/16 9,650 2,904
Brazos River Auth.,
Houston Lighting and Power, 8.25%, 5/1/15 18,000 19,179
Denison Hosp. Auth., Texoma Medical Center,
7.00%, 8/15/14 4,245 4,328
Harris County, Toll Road, GO
Zero Coupon, 8/15/04 (MBIA Insured) 6,000 3,969
Harris County Health Fac. Dev. Corp.
Memorial Hosp., 7.125%, 6/1/15 2,500 2,668
Methodist Hosp., VRDN (Currently 3.75%) 5,800 5,800
Sisters of Charity of the Incarnate Word
7.10%, 7/1/21 4,000 4,282
St. Luke's Episcopal Hosp.
VRDN (Currently 3.75%) 2,500 2,500
Texas Medical Center
7.375%, 5/15/20 (MBIA Insured) 7,645 8,360
Harris County Hosp. Dist.,
7.40%, 2/15/10 (AMBAC Insured) 1,500 1,743
Matagorda County Navigation Dist., PCR
Central Power and Light, 7.50%, 12/15/14 1,500 1,650
Houston Lighting and Power
7.20%, 12/1/18 (FGIC Insured) 3,600 3,927
Texas
GO, TRAN, 4.75%, 8/29/97 10,000 10,080
Veterans Housing Assistance, GO
6.25%, 12/1/15 3,790 3,827
7.40%, 12/1/20 14,205 15,451
Total Texas (Cost $86,185) 90,668
UTAH 2.6%
Intermountain Power Agency
5.75%, 7/1/19 $ 8,000 $ 7,476
6.15%, 7/1/14 16,000 16,281
7.20%, 7/1/19 6,200 6,435
7.50%, 7/1/21 4,750 5,044
Total Utah (Cost $34,392) 35,236
VERMONT 0.5%
Vermont Ed. and Health Buildings Fin. Agency
Medical Center Hosp. of Vermont
7.35%, 9/1/13 (FGIC Insured) 4,650 4,833
7.45%, 9/1/23 (FGIC Insured) 2,000 2,078
Total Vermont (Cost $6,650) 6,911
VIRGINIA 5.2%
Fairfax County IDA, Inova Health Care System,
6.00%, 8/15/26 10,815 10,681
Fairfax County Water Auth., 6.00%, 4/1/22 10,250 10,144
Hanover County IDA, Memorial Regional Medical Center
6.375%, 8/15/18 (MBIA Insured) 4,185 4,471
Henrico County IDA
Bon Secours Health System, St. John's Hosp.
7.50%, 9/1/15 (Prerefunded 7/1/00!) 1,800 1,999
Bon Secours Health System, St. Mary's Hosp.
7.50%, 9/1/07 (Prerefunded 8/1/00!) 1,580 1,726
Virginia HDA
6.25%, 7/1/11 5,000 5,094
6.75%, 7/1/14 7,435 7,765
6.80%, 7/1/17 8,900 9,259
6.90%, 7/1/13 11,100 11,457
Virginia Transportation Board,
Route 28 Project, 6.50%, 4/1/18 3,000 3,163
Winchester IDA
Winchester Medical Center, Inc.
Embedded Interest Rate Swap
(Currently 5.15%), 1/1/05
(AMBAC Insured) 1,500 1,450
Embedded Interest Rate Swap
(Currently 5.25%), 1/1/06
(AMBAC Insured) $ 1,500 $ 1,448
Embedded Interest Rate Swap
(Currently 5.35%), 1/1/07
(AMBAC Insured) 1,600 1,542
Total Virginia (Cost $68,797) 70,199
WASHINGTON 4.5%
Port of Seattle, 7.40%, 12/1/09 1,000 1,121
Tacoma
Electric
Residual Interest Bond / Inverse
Floater (Currently 9.092%), 1/2/15
(AMBAC Insured) 5,000 5,431
6.25%, 1/1/15 (FGIC Insured) 7,550 7,770
Washington, GO, 5.70%, 10/1/15 14,000 13,823
Washington HFA, Fred Hutchinson Cancer Research Center
VRDN (Currently 3.85%) 500 500
Washington Public Power Supply System
7.25%, 7/1/09 3,000 3,413
7.25%, 7/1/15 (Prerefunded 1/1/00!) 2,200 2,416
7.50%, 7/1/15 2,800 3,034
7.50%, 7/1/15 (Prerefunded 7/1/99!) 4,310 4,731
6.25%, 7/1/12 (FSA Insured) 5,000 5,226
5.60%, 7/1/15 (MBIA Insured) 6,500 6,118
6.25%, 7/1/17 (MBIA Insured) 6,000 6,122
Total Washington (Cost $56,199) 59,705
WEST VIRGINIA 0.8%
Kanawha County Building Commission
Charleston Area Medical Center
7.50%, 11/1/08
(Prerefunded 11/1/99!) 2,250 2,487
West Virginia Hosp. Fin. Auth.,
Charleston Area Medical Center
5.75%, 9/1/13 (MBIA Insured) 4,500 4,515
West Virginia State Parkways,
Economic Dev. and Tourism Auth.
Residual Interest Bond / Inverse Floater
(Currently 7.733%), 5/16/19
(FGIC Insured) $ 3,600 $ 3,388
Total West Virginia (Cost $10,202) 10,390
WISCONSIN 0.1%
Wisconsin Public Power Agency
7.00%, 7/1/02 (AMBAC Insured) 1,500 1,638
Total Wisconsin (Cost $1,461) 1,638
WYOMING 0.4%
Converse County, PCR, Pacificorp
VRDN (Currently 3.75%)
(AMBAC Insured) 1,500 1,500
Sweetwater County, PCR, Idaho Power
VRDN (Currently 3.85%) 3,500 3,500
Total Wyoming (Cost $5,000) 5,000
Total Investments in Securities
99.7% of Net Assets (Cost $1,275,176) $ 1,332,425
Futures Contracts
In thousands
Contract Unrealized
Expiration Value Gain (Loss)
___________ __________ ____________
Short, 109 U.S. Treasury
thirty-year contracts,
$450,000 of Municipal Bonds
pledged as initial margin 9/96 $(11,697) $ 140
Net payments (receipts) of
variation margin to date (51)
Variation margin receivable
(payable) on open futures contracts 89
Other Assets Less Liabilities 4,359
NET ASSETS $ 1,336,873
Net Assets Consist of:
Accumulated net investment income - net of distributions $ 641
Accumulated net realized gain/loss - net of distributions (10,897)
Net unrealized gain (loss) 57,389
Paid-in-capital applicable to 142,280,351 shares of $1.00 par
value capital stock outstanding; 500,000,000 shares authorized 1,289,740
NET ASSETS $ 1,336,873
NET ASSET VALUE PER SHARE $ 9.40
! Used in determining portfolio maturity
AMBAC AMBAC Indemnity Corp.
BIGI Bond Investors Guaranty Insurance
CDA Community Development Administration
COP Certificates of Participation
EFA Educational Facility Authority
FGIC Financial Guaranty Insurance Company
FHA Federal Housing Authority
FSA Financial Security Advisor
GO General Obligation
HDA Housing Development Authority
HEFA Health & Educational Facility Authority
HFA Health Facility Authority
HHEFA Health & Higher Educational Facility Authority
IDA Industrial Development Authority
IDB Industrial Development Board
MBIA Municipal Bond Investors Assurance Corp.
PCR Pollution Control Revenue
RAN Revenue Anticipation Note
TRAN Tax Revenue Anticipation Note
VRDN Variable Rate Demand Note
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Free Income Fund
Unaudited
Statement of Operations
In thousands
6 Months
Ended
8/31/96
Investment Income
Interest income $ 40,181
Expenses
Investment management 3,247
Shareholder servicing 388
Custody and accounting 127
Registration 21
Legal and audit 15
Prospectus and shareholder reports 10
Directors 8
Miscellaneous 29
Total expenses 3,845
Net investment income 36,336
Realized and Unrealized Gain/Loss
Net realized gain (loss) on
Securities (6,012)
Futures 920
Net realized gain (loss) (5,092)
Change in net unrealized gain or loss on
Securities (32,317)
Futures 397
Change in net unrealized gain or loss (31,920)
Net realized and unrealized gain (loss) (37,012)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ (676)
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Free Income Fund
Unaudited
Statement of Changes in Net Assets
In thousands
6 Months Year
Ended Ended
8/31/96 2/29/96
Increase (Decrease) in Net Assets
Operations
Net investment income $ 36,336 $ 74,269
Net realized gain (loss) (5,092) 19,515
Change in net unrealized gain or loss (31,920) 37,333
Increase (decrease) in net assets from operations (676) 131,117
Distributions to shareholders
Net investment income (36,336) (74,269)
Capital share transactions*
Shares sold 75,166 176,155
Distributions reinvested 24,177 49,694
Shares redeemed (100,965) (235,865)
Increase (decrease) in net assets from capital
share transactions (1,622) (10,016)
Net Assets
Increase (decrease) during period (38,634) 46,832
Beginning of period 1,375,507 1,328,675
End of period $ 1,336,873 $ 1,375,507
*Share information
Shares sold 7,993 18,568
Distributions reinvested 2,574 5,233
Shares redeemed (10,750) (24,917)
Increase (decrease) in shares outstanding (183) (1,116)
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Free Income Fund
Unaudited August 31, 1996
Notes to Financial Statements
Note 1 - Significant Accounting Policies
T. Rowe Price Tax-Free Income Fund, Inc. (the fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end management
investment company and commenced operations on October 26, 1976.
Valuation Debt securities are generally traded in the over-the-counter
market. Investments in securities are stated at fair value as furnished by
dealers who make markets in such securities or by an independent pricing
service, which considers yield or price of bonds of comparable quality,
coupon, maturity, and type, as well as prices quoted by dealers who make
markets in such securities. Financial futures contracts are valued at closing
settlement prices.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
fund, as authorized by the Board of Directors.
Premiums and Discounts Premiums and original issue discounts on municipal
securities are amortized for both financial reporting and tax purposes. Market
discounts are recognized upon disposition of the security as gain or loss for
financial reporting purposes and as ordinary income for tax purposes.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on the identified cost basis. Distributions to shareholders are
recorded by the fund on the ex-dividend date. Income and capital gain
distributions are determined in accordance with federal income tax regulations
and may differ from those determined in accordance with generally accepted
accounting principles. Payments ("variation margin") made or received by the
fund to settle the daily fluctuations in the value of futures contracts are
recorded as unrealized gain or loss until the contracts are closed. Unrealized
gains and losses on futures contracts are included in Change in net unrealized
gain or loss in the accompanying financial statements.
Note 2 - Investment Transactions
Consistent with its investment objective, the fund engages in the following
practices to manage exposure to certain risks or enhance performance. The
investment objective, policies, program, and risk factors of the fund are
described more fully in the fund's prospectus and Statement of Additional
Information.
Futures Contracts At August 31, 1996, the fund was a party to futures
contracts, which provide for the future sale by one party and purchase by
another of a specified amount of a specific financial instrument at an agreed
upon price, date, time, and place. Risks arise from possible illiquidity of
the futures market and from movements in security values.
Other Purchases and sales of portfolio securities, other than short-term
securities, aggregated $312,080,000 and $290,195,000, respectively, for the
six months ended August 31, 1996.
Note 3 - Federal Income Taxes
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of
its income. The fund has unused realized capital loss carryforwards for
federal income tax purposes of $4,521,000, which expires in 2003. The fund
intends to retain gains realized in future periods that may be offset by
available capital loss carryforwards.
At August 31, 1996, the aggregate cost of investments for federal income tax
and financial reporting purposes was $1,275,176,000, and net unrealized gain
aggregated $57,249,000, of which $62,478,000 related to appreciated
investments and $5,229,000 to depreciated investments.
Note 4 - Related Party Transactions
The investment management agreement between the fund and T. Rowe Price
Associates, Inc. (the manager) provides for an annual investment management
fee, of which $551,000 was payable at August 31, 1996. The fee is computed
daily and paid monthly, and consists of an individual fund fee equal to 0.15%
of average daily net assets and a group fee. The group fee is based on the
combined assets of certain mutual funds sponsored by the manager or Rowe
Price-Fleming International, Inc. (the group). The group fee rate ranges from
0.48% for the first $1 billion of assets to 0.305% for assets in excess of $50
billion. At August 31, 1996, and for the six months then ended, the effective
annual group fee rate was 0.33%. The fund pays a pro-rata share of the group
fee based on the ratio of its net assets to those of the group.
In addition, the fund has entered into agreements with the manager and a
wholly owned subsidiary of the manager, pursuant to which the fund receives
certain other services. The manager computes the daily share price and
maintains the financial records of the fund. T. Rowe Price Services, Inc., is
the fund's transfer and dividend disbursing agent and provides shareholder and
administrative services to the fund. The fund incurred expenses pursuant to
these related party agreements totaling approximately $356,000 for the six
months ended August 31, 1996, of which $68,000 was payable at period-end.
During fiscal year 1996, Coopers & Lybrand L.L.P. succeeded Price Waterhouse
LLP as independent accountants for the Tax-Free Income Fund, a decision that
was approved by the fund's Board of Directors. During the two fiscal years
preceding the change, the fund received unqualified opinions and had no
disagreements with Price Waterhouse LLP or reportable events that caused the
change.
T. Rowe Price
Investment Services And Information
Knowledgeable Service Representatives
By Phone 1-800-225-5132 Available Monday through Friday from
8 a.m. to 10 p.m. and weekends from 8:30 a.m. to 5 p.m. ET.
In Person Available in T. Rowe Price Investor Centers.
Account Services
Checking Available on most fixed income funds.
Automatic Investing From your bank account or paycheck.
Automatic Withdrawal Scheduled, automatic redemptions.
Distribution Options Reinvest all, some, or none of your distributions.
Automated 24-Hour Services Including Tele*Access(registered trademark) and
T. Rowe Price OnLine.
Discount Brokerage*
Individual Investments Stocks, bonds, options, precious metals,
and other securities at a savings over regular commission rates.
Investment Information
Combined Statement Overview of your T. Rowe Price accounts.
Shareholder Reports Fund managers' reviews of their strategies and results.
The T. Rowe Price Report Quarterly investment newsletter discussing
markets and financial strategies.
Performance Update Quarterly review of all T. Rowe Price fund results.
Insights Educational reports on investment strategies and financial markets.
Investment Guides Asset Mix Worksheet, College Planning Kit, Personal
Strategy Planner, Retirees Financial Guide, and Retirement Planning Kit.
*A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
For yield, price, last transaction, and current balance, 24 hours, 7 days a
week, call:
1-800-638-2587 toll free
For assistance with your existing fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
T. Rowe Price
100 East Pratt Street
Baltimore, Maryland 21202
http://www.troweprice.com
This report is authorized for distribution only to shareholders and to others
who have received a copy of the prospectus of the T. Rowe Price Tax-Free
Income Fund(registered trademark).
T. Rowe Price Investment Services, Inc., Distributor RPRTTFI 8/31/96
THE SHAREHOLDER LETTER AND REPORT FOR THE COMBINED TAX-FREE FUNDS IS ATTACHED
HERE BY ACCESSING THE FOLLOWING:
Semiannual Report
Tax-Free Funds
August 31, 1996
T. Rowe Price
Report Highlights
o The last six months saw the bond market give back the gains of the prior
six months as the economy grew stronger and expectations of further
easing by the Federal Reserve evaporated.
o The collapse of tax reform proposals helped municipals outperform the
taxable market.
o Most of the increase in interest rates took place during the first three
months of 1996. Since then, interest rates in the intermediate and long
end of the market have moved in a trading range. Very short-term rates
declined over the past year.
o All five funds generated greater returns than their peer group averages
during the 6- and 12-month periods ended August 31, despite the negative
environment so far this year.
o The Fed may tighten monetary policy in the next few months. We expect to
manage these portfolios with a cautious outlook on municipal bond
prices, focusing on improving income when we can.
Fellow Shareholders
The last six months saw the fixed income markets give back the gains realized
during the prior six months, as the economy strengthened and market
expectations of further easing by the Federal Reserve evaporated. The
municipal market declined less than the taxable market after the issue of tax
reform faded. While six-month returns were extremely modest, we are pleased to
report that all of the funds discussed here outperformed their peer group
averages during the 6- and 12-month periods ended August 31, 1996.
MARKET ENVIRONMENT
The economy regained strength in 1996 after slowing in 1995, with only a
modest pickup in inflation. Stronger growth alone was enough to reverse
expectations of any further Federal Reserve easing after two interest rate
cuts in the second half of 1995 and one earlier this year. While the Fed has
not yet tightened in 1996, it adopted a bias toward tightening in July. Market
rates moved up in anticipation of tighter monetary policy.
Most of the adjustment in interest rates occurred in the first quarter of
1996. The 30-year Treasury bond, which reached the 6% level at the end of
1995, backed up to 6.75% in the first quarter and has since traded within a
range of approximately 6.75% to 7.25%.
Chart 1 - Municipal Bond and Note Yields line chart
In the municipal market, rates rose roughly 50 basis points (100 basis points
equal one percent) from the lowest point reached in early 1996, but nowhere
near the high levels of late 1994. Long-term high-grade general obligation
bonds yielded 5.75% on August 31, 1996, versus 5.45% six months ago and 5.85%
a year ago. Five-year high-grade bonds were 25 basis points higher in yield
than in August 1995. Very short-term rates (less than 90 days) moved lower
over the past year, while one-year rates ended the last 12 months unchanged at
3.9% but 65 basis points higher than six months ago. The net result over the
past six months was a higher and flatter yield curve.
All was not doom and gloom in the municipal bond market over the past six
months. The fading of tax reform concerns caused the municipal market to
outperform taxable markets by a wide margin. As rates approached and then
exceeded 6%, strong retail demand for municipals provided support for the
market. During the summer of 1995, long-term municipal yields equaled 90% or
more of comparable taxable yields; this year, yields moved down to 81% of
taxable alternatives, allowing the municipal market to regain the ground it
lost.
Consistent with this environment, money market and short-term bond funds
provided the best overall returns for the past six months, while longer-term
funds provided the best returns over the 12-month period. High-yield funds
performed well over both periods as quality spreads narrowed, providing
additional price appreciation while their higher coupons cushioned them in the
market downturn.
For the first time since 1993 municipal issuance is rising, running 18% ahead
of 1995 levels through August. This coincides with a peaking last year in the
calling away of bonds issued at the higher interest rate levels of the 1980s,
possibly pointing to a better balance of supply and demand going forward.
Tax-Exempt Money Fund
The short-term yield curve steepened noticeably during the reporting period.
For the past six months, one-year securities averaged 40 basis points more
than overnight securities, providing us with an incentive to extend
maturities.
Tax-exempt money fund assets throughout the industry grew slightly since last
February but are up a significant 10% over year-ago levels. New issuance
declined modestly over the same period.
Performance Comparison chart
Periods Ended 8/31/96 6 Months 12 Months
Tax-Exempt Money Fund 1.52% 3.16%
Lipper Tax-Exempt Money
Market Funds Average 1.45 3.05
Regarding portfolio strategy, our weighted average maturity was 66 days on
August 31, little changed from the 65-day maturity at fiscal year-end.
However, this was longer than the average 57-day maturity of our peer group,
and we maintained a longer average maturity throughout the entire six-month
period due to the steepening yield curve and good balance between supply and
demand. This longer weighted average maturity helped fund performance in the
rate environment that has prevailed in recent months. Your fund outperformed
its peer group average during both the 6- and 12-month periods ended August
31, as shown in the table.
Tax-Free Short-Intermediate Fund
After extending the fund's duration (a measure of interest rate sensitivity)
last year to take advantage of falling rates, we began positioning the
portfolio for a rising rate environment in early 1996. Consequently, both the
weighted average maturity and duration of the portfolio were almost six months
shorter at the end of August than at the end of February. We increased our
weighting in bonds and notes maturing in under one year, which have less price
sensitivity, and lowered our holdings of bonds with 5- to 10-year maturities
from 21% to 11% of assets. At the same time, we tried to take advantage of
trading opportunities by lengthening and shortening maturities modestly each
time the market moved to temporarily undervalued or overvalued positions.
Performance Comparison
Periods Ended 8/31/96 6 Months 12 Months
Tax-Free Short-
Intermediate Fund 0.87% 3.84%
Lipper Short-Intermediate
Debt Funds Average 0.64 3.33
We also used higher-yielding securities to offset shorter durations and
preserve the portfolio's level of income. This strategy helped performance as
quality spreads narrowed and higher coupons cushioned the portfolio. The
fund's overall credit quality, which remained at AA as measured by T. Rowe
Price's ratings, is still quite strong.
These interest rate and credit strategies enabled your fund to outperform its
benchmark for both the 6- and 12-month periods ended August 31, as can be seen
in the table on page 3.
Tax-Free Insured Intermediate Bond Fund
We extended the fund's duration during the second half of 1995 as interest
rates declined, then maintained a slightly defensive posture at the beginning
of 1996 when rates began to rise again. Since March, we have managed the
portfolio to take advantage of the interest rate trading range, lengthening or
shortening duration around a neutral benchmark. The fund ended the six-month
period with a weighted average maturity of 7.7 years and a duration of 5.6
years, about where duration was at the end of February.
Performance Comparison chart
Periods Ended 8/31/96 6 Months 12 Months
Tax-Free Insured
Intermediate Bond Fund 0.19% 3.96%
Lipper Intermediate
Municipal Debt Funds Average 0.13 3.89
We also took steps to increase holdings in higher-yielding sectors of the
insured market. With insured municipal issuance running 40% above 1995 levels
in a rising and volatile rate environment, prices of insured bonds came under
pressure from time to time. We took advantage of an excellent opportunity to
increase positions in more yield-sensitive sectors of the insured market,
specifically hospital, solid waste disposal, and nuclear revenue bonds (see
the Sector Diversification table following this letter).
Your fund's performance surpassed that of the average for its peer group for
both the 6- and 12-month periods ended August 31, as shown in the table.
Tax-Free Income Fund
We began the last six months in an aggressive posture following the strong
market at the close of 1995, but reduced our exposure to rising interest rates
significantly from April to June. Over the most recent four months, we moved
the fund's duration from more than 8.0 years to below 7.5 years.
Performance Comparison chart
Periods Ended 8/31/96 6 Months 12 Months
Tax-Free Income Fund 0.01% 5.45%
Lipper General Municipal
Debt Funds Average -0.29 4.68
We accomplished this by selling longer-term bonds and reinvesting the proceeds
in maturities under 10 years, and by focusing on higher-coupon bonds with
defensive characteristics. On August 31, the fund's weighted average maturity
and duration were at the low end of their range for the past year and below
their peer group averages.
In developing our strategy, we elected to sell some of the low-coupon
long-term bonds that performed so well at the end of 1995, and maintained our
allocation to noncallable bonds since we believe the positive performance they
can provide during a rally is worth preserving for another day. We emphasized
states with high income tax rates in our portfolio, as they enjoy steady
demand even in rising rate environments.
The fund's duration moves paid off in terms of performance: we outpaced the
peer group average for both the six-month and one-year periods ended August
31, as shown in the table. The net asset value of the fund was essentially
unchanged from a year ago, with income providing all of the return.
Tax-Free High Yield Fund
The municipal high-yield market performed well over the past six and 12 months
thanks to continuing strong demand and relatively light new issuance. These
factors resulted in narrowing credit quality spreads for over a year - meaning
that yields tightened between higher- and lower-quality bonds.
We began the last six months with a somewhat defensive market stance, enabling
the fund to outperform its peer group as interest rates rose. For the rest of
the period, we maintained a more neutral posture. The fund's duration remained
in a range between 7.0 and 7.3 years. Cash levels averaged about 5%, and the
weighted average maturity hovered around 19 years.
Lower-quality bonds became less attractive to us as yield spreads narrowed. As
a result, we allowed the fund's exposure to below-investment-grade bonds to
drift to 25% of net assets from 30% over the past year. We are always
searching for high-yield opportunities, but in general we do not expect to
materially increase our exposure to lower-quality bonds in the near future.
The fund's average credit quality has been stable at BBB+ for almost a year.
Chart 2 - Quality Diversification pie chart
Performance Comparison chart
Periods Ended 8/31/96 6 Months 12 Months
Tax-Free High Yield Fund 0.81% 5.83%
Lipper High Yield Municipal
Debt Funds Average 0.28 5.43
At present, our market outlook is cautious as recent data suggest a rate of
economic growth stronger than the Federal Reserve might like. Absent an
unexpectedly large issuance of lower-quality bonds, we believe the municipal
high-yield market will maintain its present narrow spreads versus higher-
quality bonds. We are pleased to report that the various strategy moves
outlined above enabled your fund to outperform its peer group averages for
both the 6- and 12-month periods ended August 31, 1996, as shown in the table.
Outlook
The last six months have seen a major change in the outlook for the economy,
causing a shift in the shape and level of the municipal yield curve. The risk
of an overheating economy has grown, and the Fed will likely nudge rates
higher to cool things down in coming months. The current expansion is now over
five years old, roughly twice the length of an average expansion prior to
1982. However, old age is not a cause for an expansion to end. There is no
reason why the current expansion could not continue if interest rates are high
enough to restrain inflation, yet low enough to keep unemployment at bay.
Little has changed from a year ago in terms of interest rate levels, but much
has changed about market psychology. A year ago, this market was consumed with
worries about the impact of tax reform proposals on municipal bonds, and it
was convinced the economy was slowing down. Today, tax reform is on the back
burner and the economy has picked up steam.
As mentioned, we believe the Fed is likely to raise short-term rates, a move
that is at least partly discounted by the market. Municipal securities have
performed well this year in relation to their taxable counterparts, resulting
in lower yield relationships (as a percent of taxable yields) that will be
difficult to improve upon. An expected pickup in supply again after a quiet
summer may also put some pressure on the municipal market.
For these reasons, we expect to continue managing the funds with a cautious
perspective on interest rates, trying to add performance value both through
credit research and by taking advantage of trading ranges.
Respectfully submitted,
William T. Reynolds
Director
Fixed Income Division
Mary J. Miller
Director
Municipal Bond Department
September 20, 1996
Keeping Taxes To A Minimum
As the saying goes, it's not what you earn but what you keep that counts. The
ability to provide tax-exempt income is the chief appeal of municipal bond
funds, and investors in higher tax brackets often find these funds
advantageous. Some funds invest in securities that offer the triple benefit of
being free from federal, state, and local taxes.
Investors should remember, however, that the total return on most municipal
bond funds may not be entirely tax-free. To avoid federal income taxes,
municipal funds must distribute all of their capital gains to shareholders
each year. These distributions are fully taxable. On infrequent occasions,
municipal funds may also purchase securities whose income is taxable, if
permitted by the prospectus.
Therefore, to judge accurately how well a fund minimizes taxes, investors
should focus not just on income but on the gain or loss from the sale of
securities, since both components make up total return. A fund's overall tax
efficiency - the percentage of its return that actually winds up in
shareholders' pockets - is calculated by dividing its after-tax total return
by its pretax total return. For example, an optimum tax efficiency of 100%
would indicate that these two returns were equal - the shareholders paid no
taxes. In reality, most municipal funds fall somewhat below this level due
primarily to taxable capital gain distributions.
At T. Rowe Price, our main goal in managing municipal bond portfolios is to
provide competitive total return performance. At the same time, we strive to
minimize capital gain distributions and other factors that would saddle our
shareholders with taxes. "We don't allow tax considerations to drive our
portfolio management, but we remain sensitive to taxes in our overall approach
to management," says Mary J. Miller, Director of T. Rowe Price's Municipal
Bond Department.
Inevitably, there are times when market conditions necessitate the sale of a
security despite the tax consequences. However, we are generally able to
offset capital gains with losses incurred on the sale of other securities.
Under Internal Revenue Service rules, losses can be carried for up to eight
years to offset gains. "Our goal is to minimize capital gains by offsetting
them with losses, so there would be no taxable event to the shareholder," says
Ms. Miller.
While not intentionally pursuing losses, T. Rowe Price aims to take advantage
of them when they occur. For instance, when municipal bond prices have reached
a cyclical low, we may sell some securities that are trading below our
purchase price and reinvest the proceeds in higher-yielding securities. That
strategy enhances the fund's income and also provides a tax loss that can be
employed anytime in the following eight years to offset capital gains.
According to a report from Morningstar,* the Tax-Free Insured Intermediate
Bond Fund had an average tax efficiency rating of 98.1% during the three years
ended August 31, 1996; the figures for the other funds cover the five-year
period ended August 31 and are as follows: Tax-Free Short-Intermediate 100%;
Tax-Free Income 97.9%; and Tax-Free High Yield 96.7%. (Money funds are
presumed to be 100% efficient.) While our foremost goal is to provide
competitive total returns, we will continue to do our best to limit the amount
of money you have to surrender to the IRS.
*Although data are gathered from reliable sources, completeness and accuracy
cannot be guaranteed.
T. Rowe Price Tax-Free Funds
Portfolio Highlights
KEY STATISTICS
2/29/96 8/31/96
Tax-Exempt Money Fund
Price Per Share $1.00 $1.00
Dividends Per Share
For 6 months 0.016 0.015
For 12 months 0.033 0.031
Dividend Yield
(7-Day Compound) * 2.95% 3.06%
Weighted Average Maturity (days) 65 66
Weighted Average Quality ** First Tier First Tier
Tax-Free Short-Intermediate Fund
Price Per Share $5.37 $5.30
Dividends Per Share
For 6 months 0.11 0.12
For 12 months 0.23 0.23
Dividend Yield *
For 6 months 4.38% 4.32%
For 12 months 4.47 4.40
Weighted Average Maturity
(years) 3.6 3.2
Weighted Average Effective
Duration (years) 3.0 2.6
Weighted Average Quality *** AA AA
Tax-Free Insured Intermediate Bond Fund
Price Per Share $10.84 $10.62
Dividends Per Share
For 6 months 0.24 0.24
For 12 months 0.48 0.48
Dividend Yield *
For 6 months 4.48% 4.44%
For 12 months 4.61 4.51
Weighted Average Maturity
(years) 7.2 7.7
Weighted Average Effective Duration
(years) 5.5 5.6
Weighted Average Quality *** AA AA
Tax-Free Income Fund
Price Per Share $9.66 $9.40
Dividends Per Share
For 6 months 0.26 0.26
For 12 months 0.52 0.52
Dividend Yield *
For 6 months 5.45% 5.44%
For 12 months 5.62 5.52
Weighted Average Maturity
(years) 18.1 17.0
Weighted Average Effective Duration
(years) 8.3 7.5
Weighted Average Quality *** AA- AA-
Tax-Free High Yield Fund
Price Per Share $12.10 $11.84
Dividends Per Share
For 6 months 0.36 0.35
For 12 months 0.72 0.71
Dividend Yield *
For 6 months 6.00% 5.92%
For 12 months 6.22 6.05
Weighted Average Maturity
(years) 20.0 19.4
Weighted Average Effective Duration
(years) 7.2 7.1
Weighted Average Quality *** BBB+ BBB+
* Dividends earned and reinvested for the periods indicated are annualized
and divided by the average daily net asset values per share for the same
period.
** All securities purchased in the money fund are rated in the two highest
categories (tiers) as established by national rating agencies or, if
unrated, are deemed of comparable quality by T. Rowe Price.
*** Based on T. Rowe Price research.
T. Rowe Price Tax-Free Funds
Performance Comparison
These charts show the value of a hypothetical $10,000 investment in each fund
over the past 10 fiscal year periods or since inception (for funds lacking
10-year records). The result is compared with a broad-based average or index.
The index return does not reflect expenses, which have been deducted from the
fund's return.
Chart 3, 4, 5, 6, and 7 (SEC charts): Tax-Exempt Money Fund, Tax-Free Insured
Intermediate Bond Fund, Tax-Free Insured Intermediate Bond Fund, Tax-Free
Income Fund, Tax-Free High Yield Fund
Average Annual Compound Total Return
This table shows how each fund would have performed each year if its actual
(or cumulative) returns for the periods shown had been earned at a constant
rate.
Since Inception
Periods Ended 8/31/96 1 Year 5 Years 10 Years Inception Date
Tax-Exempt Money 3.16% 2.74% 3.82% - 4/8/81
Tax-Free
Short-Intermediate 3.84 5.08 5.32 - 12/23/83
Tax-Free Insured
Intermediate Bond 3.96 - - 6.57% 11/30/92
Tax-Free Income 5.45 7.47 6.56 - 10/26/76
Tax-Free High Yield 5.83 7.71 7.86 - 3/1/85
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original
purchase.
For yield, price, last transaction, and current balance, 24 hours, 7 days a
week, call:
1-800-638-2587 toll free
For assistance with your existing fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
T. Rowe Price
100 East Pratt Street
Baltimore, Maryland 21202
http://www.troweprice.com
This report is authorized for distribution only to shareholders and to others
who have received a copy of the prospectus of the T. Rowe Price Tax-Free
Funds.
T. Rowe Price Investment Services, Inc., Distributor RPRTTFF 8/31/96
APPENDIX
Chart 1 - Municipal Bond and Note Yields chart showing 30-year AAA GO, 5-year
AAA GO, and 1-year MIG1 note from 8/31/95 through 8/31/96.
Chart 2 - Quality Diversification pie chart showing quality diversification of
AAA 4%, AA 22%, A 18%, BBB 31%, and BB and Below 25% on 8/31/96
Charts 3, 4, 5, 6, and 7 - SEC graphs:
line charts showing the cumulative growth of $10,000 invested in the TEM,
TSTI, TFII, TFI, and TFH Funds over the past 10 years (or "from inception" for
funds lacking 10-year histories) compared with $10,000 invested in a
broad-based index or average over the same period.
