PAGE 1
Prospectus for the T. Rowe Price International Fixed Income
Funds, dated December 29, 1994, should be inserted here.
PAGE 2
STATEMENT OF ADDITIONAL INFORMATION
T. Rowe Price International Funds, Inc. (the "Corporation")
Short-Term Global Income Fund
Global Government Bond Fund
International Bond FundR
Emerging Markets Bond Fund
(the "Funds")
This Statement of Additional Information is not a prospectus
but should be read in conjunction with the Fund's prospectus
dated December 29, 1994, which may be obtained from T. Rowe Price
Investment Services, Inc., 100 East Pratt Street, Baltimore,
Maryland 21202.
The date of this Statement of Additional Information is
December 31, 1993, amended to December 29, 1994.
PAGE 3
TABLE OF CONTENTS
Page Page
Call and Put Options . . . Legal Counsel . . . . . . . .
Capital Stock . . . . . . . Lending of Portfolio
Code of Ethics . . . . . . Securities . . . . . . . . .
Custodian . . . . . . . . . Management of Funds . . . . .
Dealers Options . . . . . . Net Asset Value Per Share . .
Distributor for Funds . . . Portfolio Management
Dividends . . . . . . . . . Practices . . . . . . . . .
Federal and State Registration Portfolio Transactions . . .
of Shares . . . . . . . . Pricing of Securities . . . .
Foreign Currency Principal Holders of
Transactions . . . . . . . Securities . . . . . . . . .
Foreign Futures and Ratings of Corporate Debt
Options . . . . . . . . . Securities . . . . . . . . .
Futures Contracts . . . . . Repurchase Agreements . . . .
Hybrid Instruments . . . . Risk Factors of Foreign
Illiquid or Restricted Investing . . . . . . . . .
Securities . . . . . . . . Risk Factors of Investing in
Independent Accountants . . Debt Obligations . . . . . .
Investment Management Tax Status . . . . . . . . .
Services . . . . . . . . . Taxation of Foreign
Investment Objectives and Shareholders . . . . . . . .
Policies . . . . . . . . . When-Issued Securities and
Investment Performance . . Forward Commitment
Investment Programs . . . . Contracts . . . . . . . . .
Investment Restrictions . . Yield Information . . . . . .
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of
each Fund's investment objectives and policies discussed in the
prospectus. Unless otherwise specified, the investment program
and restrictions of each Fund are not fundamental policies. The
operating policies of each Fund are subject to change by its
Board of Directors without shareholder approval. However,
shareholders will be notified of a material change in an
operating policy. The fundamental policies of each Fund may not
be changed without the approval of at least a majority of the
outstanding shares of each Fund or, if it is less, 67% of the
shares represented at a meeting of shareholders at which the
holders of 50% or more of the shares are represented.
PAGE 4
INVESTMENT PROGRAMS
All Funds
The Funds' investment manager, Rowe Price-Fleming
International, Inc. ("Price-Fleming"), one of America's largest
managers of no-load international mutual fund assets, regularly
analyzes a broad range of international equity and fixed income
markets in order to assess the degree of risk and level of return
that can be expected from each market. Based upon its current
assessment, Price-Fleming believes a high level of current income
may be achieved by investing in high quality international fixed
income securities, high quality, short-term U.S. and foreign
fixed income securities, or high quality U.S. and foreign
government bonds. Of course, there can be no assurance that
Price-Fleming's forecasts of expected return will be reflected in
the actual returns achieved by the Funds.
Each Fund's share price will fluctuate with market, economic
and foreign exchange conditions, and your investment may be worth
more or less when redeemed than when purchased. The Funds should
not be relied upon as a complete investment program, nor used to
play short-term swings in the global bond or foreign exchange
markets. The Funds are subject to risks unique to international
investing. See discussion under "Risk Factors of Foreign
Investing" beginning on page ___. Further, there is no assurance
that the favorable trends discussed below will continue, and the
Funds cannot guarantee they will achieve their objectives.
Risk Factors of Foreign Investing
There are special risks in investing in the Funds. Certain of
these risks are inherent in any international mutual fund while
others relate more to the countries in which the Funds will
invest. Many of the risks are more pronounced for investments in
developing or emerging countries, such as many of the countries
of Southeast Asia, Latin America, Eastern Europe and the Middle
East. Although there is no universally accepted definition, a
developing country is generally considered to be a country which
is in the initial stages of its industrialization cycle with a
per capita gross national product of less than $8,000.
General. Investors should understand that all investments
have a risk factor. There can be no guarantee against loss
resulting from an investment in the Funds, and there can be no
assurance that the Funds' investment policies will be successful,
or that its investment objectives will be attained. The Funds
PAGE 5
are designed for individual and institutional investors seeking
to diversify beyond the United States in actively researched and
managed portfolios, and are intended for long-term investors who
can accept the risks entailed in investment in foreign
securities.
Political and Economic Factors. Individual foreign economies
of certain countries may differ favorably or unfavorably from the
United States' economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. The
internal politics of certain foreign countries are not as stable
as in the United States. For example, in 1991, the existing
government in Thailand was overthrown in a military coup. In
1992, there were two military coup attempts in Venezuela and in
1992 the President of Brazil was impeached. In addition,
significant external political risks currently affect some
foreign countries. Both Taiwan and China still claim sovereignty
of one another and there is a demilitarized border between North
and South Korea.
Governments in certain foreign countries continue to
participate to a significant degree, through ownership interest
or regulation, in their respective economies. Action by these
governments could have a significant effect on market prices of
securities and payment of dividends. The economies of many
foreign countries are heavily dependent upon international trade
and are accordingly affected by protective trade barriers and
economic conditions of their trading partners. The enactment by
these trading partners of protectionist trade legislation could
have a significant adverse effect upon the securities markets of
such countries.
Currency Fluctuations. The Funds will invest in securities
denominated in various currencies. Accordingly, a change in the
value of any such currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of the Funds'
assets denominated in that currency. Such changes will also
affect the Funds' income. Generally, when a given currency
appreciates against the dollar (the dollar weakens) the value of
the Fund's securities denominated in that currency will rise.
When a given currency depreciates against the dollar (the dollar
strengthens) the value of the Funds' securities denominated in
that currency would be expected to decline.
PAGE 6
Investment and Repatriation of Restrictions. Foreign
investment in the securities markets of certain foreign countries
is restricted or controlled in varying degrees. These
restrictions may limit at times and preclude investment in
certain of such countries and may increase the cost and expenses
of the Funds. Investments by foreign investors are subject to a
variety of restrictions in many developing countries. These
restrictions may take the form of prior governmental approval,
limits on the amount or type of securities held by foreigners,
and limits on the types of companies in which foreigners may
invest. Additional or different restrictions may be imposed at
any time by these or other countries in which the Funds invest.
In addition, the repatriation of both investment income and
capital from several foreign countries is restricted and
controlled under certain regulations, including in some cases the
need for certain government consents. For example, capital
invested in Chile normally cannot be repatriated for one year.
Market Characteristics. It is contemplated that most foreign
securities, other than Latin American securities, will be
purchased in over-the-counter markets or on stock exchanges
located in the countries in which the respective principal
offices of the issuers of the various securities are located, if
that is the best available market. Currently, it is anticipated
that many Latin American investments will be made through ADRs
traded in the United States. Foreign stock markets are generally
not as developed or efficient as, and may be more volatile than,
those in the United States. While growing in volume, they
usually have substantially less volume than U.S. markets and the
Funds' portfolio securities may be less liquid and subject to
more rapid and erratic price movements than securities of
comparable U.S. companies. Equity securities may trade at
price/earnings multiples higher than comparable United States
securities and such levels may not be sustainable. Fixed
commissions on foreign stock exchanges are generally higher than
negotiated commissions on United States exchanges, although the
Funds will endeavor to achieve the most favorable net results on
their portfolio transactions. There is generally less government
supervision and regulation of foreign stock exchanges, brokers
and listed companies than in the United States. Moreover,
settlement practices for transactions in foreign markets may
differ from those in United States markets. Such differences may
include delays beyond periods customary in the United States and
practices, such as delivery of securities prior to receipt of
payment, which increase the likelihood of a "failed settlement."
Failed settlements can result in losses to a Fund.
PAGE 7
Investment Funds. The Funds may invest in investment funds
which have been authorized by the governments of certain
countries specifically to permit foreign investment in securities
of companies listed and traded on the stock exchanges in these
respective countries. The Funds' investment in these funds is
subject to the provisions of the 1940 Act discussed on page 28.
If the Funds invest in such investment funds, the Funds'
shareholders will bear not only their proportionate share of the
expenses of the Funds (including operating expenses and the fees
of the investment manager), but also will bear indirectly similar
expenses of the underlying investment funds. In addition, the
securities of these investment funds may trade at a premium over
their net asset value.
Information and Supervision. There is generally less publicly
available information about foreign companies comparable to
reports and ratings that are published about companies in the
United States. Foreign companies are also generally not subject
to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those
applicable to United States companies. It also may be more
difficult to keep currently informed of corporate actions which
affect the prices of portfolio securities.
Taxes. The dividends and interest payable on certain of the
Funds' foreign portfolio securities may be subject to foreign
withholding taxes, thus reducing the net amount of income
available for distribution to the Funds' shareholders. A
shareholder otherwise subject to United States federal income
taxes may, subject to certain limitations, be entitled to claim a
credit or deduction for U.S. federal income tax purposes for his
or her proportionate share of such foreign taxes paid by the
Funds. (See "Tax Status," page ___.)
Costs. Investors should understand that the expense ratios of
the Funds can be expected to be higher than investment companies
investing in domestic securities since the cost of maintaining
the custody of foreign securities and the rate of advisory fees
paid by the Funds are higher.
Small Companies. Small companies may have less experienced
management and fewer management resources than larger firms. A
smaller company may have greater difficulty obtaining access to
capital markets, and may pay more for the capital it obtains. In
addition, smaller companies are more likely to be involved in
fewer market segments, making them more vulnerable to any
downturn in a given segment. Some of these factors may also
PAGE 8
apply, to a lesser extent, to medium size companies. Some of the
smaller companies in which the Funds will invest may be in major
foreign markets; others may be leading companies in emerging
countries outside the major foreign markets. Securities analysts
generally do not follow such securities, which are seldom held
outside of their respective countries and which may have
prospects for long-term investment returns superior to the
securities of well-established and well-known companies. Direct
investment in such securities may be difficult for United States
investors because, among other things, information relating to
such securities is often not readily available. Of course, there
are also risks associated with such investments, and there is no
assurance that such prospects will be realized.
Other. With respect to certain foreign countries, especially
developing and emerging ones, there is the possibility of adverse
changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the Funds, political or
social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
Emerging Market Investing
Eastern Europe and Russia. Changes occurring in Eastern
Europe and Russia today could have long-term potential
consequences. As restrictions fall, this could result in rising
standards of living, lower manufacturing costs, growing consumer
spending, and substantial economic growth. However, investment
in the countries of Eastern Europe and Russia is highly
speculative at this time. Political and economic reforms are too
recent to establish a definite trend away from centrally-planned
economies and state owned industries. In many of the countries
of Eastern Europe and Russia, there is no stock exchange or
formal market for securities. Such countries may also have
government exchange controls, currencies with no recognizable
market value relative to the established currencies of western
market economies, little or no experience in trading in
securities, no financial reporting standards, a lack of a banking
and securities infrastructure to handle such trading, and a legal
tradition which does not recognize rights in private property.
In addition, these countries may have national policies which
restrict investments in companies deemed sensitive to the
country's national interest. Further, the governments in such
countries may require governmental or quasi-governmental
authorities to act as custodian of a Fund's assets invested in
PAGE 9
such countries and these authorities may not qualify as a foreign
custodian under the Investment Company Act of 1940 and exemptive
relief from such Act may be required. All of these
considerations are among the factors which could cause
significant risks and uncertainties to investment in Eastern
Europe and Russia. Each Fund will only invest in a company
located in, or a government of, Eastern Europe and Russia, if it
believes the potential return justifies the risk.
Latin America
The political history of certain Latin American countries has
been characterized by political uncertainty, intervention by the
military in civilian and economic spheres, and political
corruption. Such developments, if they were to reoccur, could
reverse favorable trends toward market and economic reform,
privatization and removal of trade barriers and result in
significant disruption in securities markets. Persistent levels
of inflation or in some cases, hyperinflation, have led to high
interest rates, extreme measures by governments to keep inflation
in check and a generally debilitating effect on economic growth.
Although inflation in many countries has lessened, there is no
guarantee it will remain at lower levels. In addition, a number
of Latin American countries are also among the largest debtors of
developing countries. There have been moratoria on, and
reschedulings of, repayment with respect to these debts. Such
events can restrict the flexibility of these debtor nations in
the international markets and result in the imposition of onerous
conditions on their economies.
Certain Latin American countries may have managed currencies
which are maintained at artificial levels to the U.S. dollar
rather than at levels determined by the market. This type of
system can lead to sudden and large adjustments in the currency
which, in turn, can have a disruptive and negative effect on
foreign investors. Certain Latin American countries also may
restrict the free conversion of their currency into foreign
currencies, including the U.S. dollar. There is no significant
foreign exchange market for certain currencies and it would, as a
result, be difficult for the Fund to engage in foreign currency
transactions designed to protect the value of the Fund's
interests in securities denominated in such currencies.
PAGE 10
Risk Factors of Investing in Debt Obligations
Because of their investment policies, the Bond Funds may or
may not be suitable or appropriate for all investors. The Funds
are not money market funds and are not appropriate investments
for those whose primary objective is principal stability. There
is risk in all investment. The Short-Term Global Income Fund is
designed for the investor, who is willing to accept the risks of
international investing in seeking to participate in a
diversified portfolio of U.S. and foreign government short-term
high quality bonds and other debt securities which provide
greater stability in the rate of income than a money market fund
(average weighted maturity of less than 90 days) and less risk of
capital fluctuation than a portfolio of long-term debt
securities. The value of the portfolio securities of each Fund
will fluctuate based upon market, economic and foreign exchange
conditions. Although each Fund seeks to reduce risk by investing
in a diversified portfolio, such diversification does not
eliminate all risk. There can, of course, be no assurance that
the Funds will achieve these results.
Yields on short, intermediate, and long-term securities are
dependent on a variety of factors, including the general
conditions of the money, bond and foreign exchange markets, the
size of a particular offering,the maturity of the obligation, and
the rating of the issue. Debt securities with longer maturities
tend to produce higher yields and are generally subject to
potentially greater capital appreciation and depreciation than
obligations with shorter maturities and lower yields. The market
prices of debt securities usually vary, depending upon available
yields. An increase in interest rates will generally reduce the
value of portfolio investments, and a decline in interest rates
will generally increase the value of portfolio investments. The
ability of each Fund to achieve its investment objective is also
dependent on the continuing ability of the issuers of the debt
securities in which each Fund invests to meet their obligations
for the payment of interest and principal when due.
After purchase by a Fund, a security may cease to be rated or
its rating may be reduced below the minimum required for purchase
by the Fund. Neither event will require a sale of such security
by a Fund. However, Price-Fleming will consider such event in
its determination of whether a Fund should continue to hold the
security. To the extent that the ratings given by Moody's
Investors Service, Inc. ("Moody's") and Standard & Poor's
Corporation ("S&P") may change as a result of changes in such
organizations or their rating systems, the Funds will attempt to
PAGE 11
use comparable ratings as standards for investments in accordance
with the investment policies contained in the prospectus.
Special Risks of High Yield ("Junk Bond") Investing
Junk bonds are regarded as predominantly speculative with
respect to the issuer's continuing ability to meet principal and
interest payments. Because investment in low and lower-medium
quality bonds involves greater investment risk, to the extent the
Fund invests in such bonds, achievement of its investment
objective will be more dependent on Price-Fleming's credit
analysis than would be the case if the Fund was investing in
higher quality bonds. High yield bonds may be more susceptible
to real or perceived adverse economic conditions than investment
grade bonds. A projection of an economic downturn, or higher
interest rates, for example, could cause a decline in high yield
bond prices because the advent of such events could lessen the
ability of highly leverage issuers to make principal and interest
payments on their debt securities.
Because the market for lower rated securities may be thinner
and less active than for higher rated securities, there may be
market price volatility for these securities and limited
liquidity in the resale market. Nonrated securities are usually
not as attractive to as many buyers as rated securities are, a
factor which may make nonrated securities less marketable. These
factors may have the effect of limiting the availability of the
securities for purchase by the Fund and may also limit the
ability of the Fund to sell such securities at their fair value
either to meet redemption requests or in response to changes in
the economy or the financial markets. Adverse publicity and
investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower rated
debt securities, especially in a thinly traded market. To the
extent the Fund owns or may acquire illiquid or restricted lower
rated securities, these securities may involve special
registration responsibilities, liabilities and costs, and
liquidity and valuation difficulties. Changes in values of
debt securities which the Fund owns will affect its net asset
value per share. If market quotations are not readily available
for the Fund's lower rated or nonrated securities, these
securities will be valued by a method that the Fund's Board of
Directors believes accurately reflects fair value. Judgment
plays a greater role in valuing lower rated debt securities than
with respect to securities for which more external sources of
quotations and last sale information are available.
PAGE 12
In addition to the investments described in the Funds'
prospectus, the Funds may invest in the following:
Types of Securities
Hybrid Instruments
Hybrid Instruments have recently been developed and combine
the elements of futures contracts or options with those of debt,
preferred equity or a depository instrument (hereinafter "Hybrid
Instruments"). Often these Hybrid Instruments are indexed to the
price of a commodity, particular currency, or a domestic or
foreign debt or equity securities index. Hybrid Instruments may
take a variety of forms, including, but not limited to, debt
instruments with interest or principal payments or redemption
terms determined by reference to the value of a currency or
commodity or securities index at a future point in time,
preferred stock with dividend rates determined by reference to
the value of a currency, or convertible securities with the
conversion terms related to a particular commodity.
The risks of investing in Hybrid Instruments reflect a
combination of the risks from investing in securities, options,
futures and currencies, including volatility and lack of
liquidity. Reference is made to the discussion of futures,
options, and forward contracts herein for a discussion of these
risks. Further, the prices of the Hybrid Instrument and the
related commodity or currency may not move in the same direction
or at the same time. Hybrid Instruments may bear interest or pay
preferred dividends at below market (or even relatively nominal)
rates. Alternatively, Hybrid Instruments may bear interest at
above market rates but bear an increased risk of principal loss
(or gain). In addition, because the purchase and sale of Hybrid
Instruments could take place in an over-the-counter market or in
a private transaction between the Fund and the seller of the
Hybrid Instrument, the creditworthiness of the contra party to
the transaction would be a risk factor which the Fund would have
to consider. Hybrid Instruments also may not be subject to
regulation of the Commodities Futures Trading Commission
("CFTC"), which generally regulates the trading of commodity
futures by U.S. persons, the SEC, which regulates the offer and
sale of securities by and to U.S. persons, or any other
governmental regulatory authority.
PAGE 13
Illiquid or Restricted Securities
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a
registration statement is in effect under the Securities Act of
1933 (the "1933 Act"). Where registration is required, the Fund
may be obligated to pay all or part of the registration expenses
and a considerable period may elapse between the time of the
decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during
such a period, adverse market conditions were to develop, the
Fund might obtain a less favorable price than prevailed when it
decided to sell. Restricted securities will be priced at fair
value as determined in accordance with procedures prescribed by
the Fund's Board of Directors/Trustees. If through the
appreciation of illiquid securities or the depreciation of liquid
securities, the Fund should be in a position where more than 15%
of the value of its net assets are invested in illiquid assets,
including restricted securities, the Fund will take appropriate
steps to protect liquidity.
Notwithstanding the above, the Fund may purchase securities
which, while privately placed, are eligible for purchase and sale
under Rule 144A under the 1933 Act. This rule permits certain
qualified institutional buyers, such as the Fund, to trade in
privately placed securities even though such securities are not
registered under the 1933 Act. Price-Fleming under the
supervision of the Fund's Board of Directors/Trustees, will
consider whether securities purchased under Rule 144A are
illiquid and thus subject to the Fund's restriction of investing
no more than 15% of its net assets in illiquid securities. A
determination of whether a Rule 144A security is liquid or not is
a question of fact. In making this determination, Price-Fleming
will consider the trading markets for the specific security
taking into account the unregistered nature of a Rule 144A
security. In addition, Price-Fleming could consider the (1)
frequency of trades and quotes, (2) number of dealers and
potential purchases, (3) dealer undertakings to make a market,
and (4) the nature of the security and of marketplace trades
(e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). The liquidity
of Rule 144A securities would be monitored, and if as a result of
changed conditions it is determined that a Rule 144A security is
no longer liquid, the Fund's holdings of illiquid securities
would be reviewed to determine what, if any, steps are required
to assure that the Fund does not invest more than 15% of its net
PAGE 14
assets in illiquid securities. Investing in Rule 144A securities
could have the effect of increasing the amount of the Fund's
assets invested in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities.
Short-Term Global Income and Global Government Bond Funds
The securities of U.S. issuers in which both Funds may invest
include, but are not limited to, the following:
U.S. Government Obligations. Debt securities issued by the
U.S. Treasury. These are direct obligations of the U.S.
Government and differ mainly in the length of their maturities.
U.S. Government Agency Securities. Issued or guaranteed by
U.S. Government sponsored enterprises and federal agencies.
These include securities issued by the Federal National Mortgage
Association, Government National Mortgage Association, Federal
Home Loan Bank, Federal Land Banks, Farmers Home Administration,
Banks for Cooperatives, Federal Intermediate Credit Banks,
Federal Financing Bank, Farm Credit Banks, the Small Business
Association, and the Tennessee Valley Authority. Some of these
securities are supported by the full faith and credit of the U.S.
Treasury, and the remainder are supported only by the credit of
the instrumentality, which may or may not include the right of
the issuer to borrow from the Treasury.
Bank Obligations. Certificates of deposit, bankers'
acceptances, and other short-term debt obligations. Certificates
of deposit are short-term obligations of commercial banks. A
bankers' acceptance is a time draft drawn on a commercial bank by
a borrower, usually in connection with international commercial
transactions. Certificates of deposit may have fixed or variable
rates.
Savings and Loan Obligations. Negotiable certificates of
deposit and other short-term debt obligations of savings and loan
associations.
Collateralized Mortgage Obligations (CMOs). CMOs are
obligations fully collateralized by a portfolio of mortgages or
mortgage-related securities. Payments of principal and interest
on the mortgages are passed through to the holders of the CMOs on
the same schedule as they are received, although certain classes
of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type
PAGE 15
of CMOs in which a Fund invests, the investment may be subject to
a greater or lesser risk of prepayment than other types of
mortgage-related securities.
Asset Backed Receivables. The asset-backed securities that
may be purchased include, but are not limited to, Certificates
for Automobile Receivables (CARSsm) and Credit Card Receivable
Securities. CARSsm represent undivided fractional interests in a
trust whose assets consist of a pool of motor vehicle retail
installment sales contracts and security interests in the
vehicles securing these contracts. In addition to the general
risks pertaining to all asset-backed securities, CARSsm are
subject to the risks of delayed payments or losses if the full
amounts due on underlying sales contracts are not realized by the
trust due to unanticipated legal or administrative costs of
enforcing the contracts, or due to depreciation, damage or loss
of the vehicles securing the contracts. Credit Card Receivable
Securities are backed by receivables from revolving credit card
accounts. Since balances on revolving credit card accounts are
generally paid down more rapidly than CARSsm, issuers often
lengthen the maturity of these securities by providing for a
fixed period during which interest payments are passed through
and principal payments are used to fund the transfer of
additional receivables to the underlying pool. The failure of
the underlying receivables to generate principal payments may
therefore shorten the maturity of these securities. In addition,
unlike most other asset-backed securities, Credit Card Receivable
Securities are backed by obligations that are not secured by an
interest in personal or real property.
There are, of course, other types of securities that are, or
may become available, which are similar to the foregoing and the
Fund may invest in these securities.
Portfolio Management Practices
Lending of Portfolio Securities
Securities loans are made to broker-dealers or institutional
investors or other persons, pursuant to agreements requiring that
the loans be continuously secured by collateral at least equal at
all times to the value of the securities lent marked to market on
a daily basis. The collateral received will consist of cash,
U.S. government securities, letters of credit or such other
collateral as may be permitted under its investment program.
While the securities are being lent, the Fund will continue to
receive the equivalent of the interest or dividends paid by the
PAGE 16
issuer on the securities, as well as interest on the investment
of the collateral or a fee from the borrower. The Fund has a
right to call each loan and obtain the securities on five
business days' notice or, in connection with securities trading
on foreign markets, within such longer period of time which
coincides with the normal settlement period for purchases and
sales of such securities in such foreign markets. The Fund will
not have the right to vote securities while they are being lent,
but it will call a loan in anticipation of any important vote.
The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delay in
receiving additional collateral or in the recovery of the
securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to firms
deemed by Price-Fleming to be of good standing and will not be
made unless, in the judgment of Price-Fleming, the consideration
to be earned from such loans would justify the risk.
Other Lending/Borrowing
Subject to approval by the Securities and Exchange
Commission and certain state regulatory agencies, the Fund may
make loans to, or borrow funds from, other mutual funds sponsored
or advised by T. Rowe Price or Price-Fleming (collectively,
"Price Funds"). The Fund has no current intention of engaging in
these practices at this time.
Repurchase Agreements
The Fund may enter into a repurchase agreement through which
an investor (such as the Fund) purchases a security (known as the
"underlying security") from a well-established securities dealer
or a bank that is a member of the Federal Reserve System. Any
such dealer or bank will be on Price-Fleming's approved list and
have a credit rating with respect to its short-term debt of at
least A1 by Standard & Poor's Corporation, P1 by Moody's
Investors Service, Inc., or the equivalent rating by Price-
Fleming. At that time, the bank or securities dealer agrees to
repurchase the underlying security at the same price, plus
specified interest. Repurchase agreements are generally for a
short period of time, often less than a week. Repurchase
agreements which do not provide for payment within seven days
will be treated as illiquid securities. The Fund will only enter
into repurchase agreements where (i) the underlying securities
are of the type (excluding maturity limitations) which the Fund's
investment guidelines would allow it to purchase directly, (ii)
the market value of the underlying security, including interest
PAGE 17
accrued, will be at all times equal to or exceed the value of the
repurchase agreement, and (iii) payment for the underlying
security is made only upon physical delivery or evidence of book-
entry transfer to the account of the custodian or a bank acting
as agent. In the event of a bankruptcy or other default of a
seller of a repurchase agreement, the Fund could experience both
delays in liquidating the underlying security and losses,
including: (a) possible decline in the value of the underlying
security during the period while the Fund seeks to enforce its
rights thereto; (b) possible subnormal levels of income and lack
of access to income during this period; and (c) expenses of
enforcing its rights.
Options
Writing Covered Call Options
The Fund may write (sell) American or European style "covered"
call options and purchase options to close out options previously
written by a Fund. In writing covered call options, the Fund
expects to generate additional premium income which should serve
to enhance the Fund's total return and reduce the effect of any
price decline of the security or currency involved in the option.
Covered call options will generally be written on securities or
currencies which, in Price-Fleming's opinion, are not expected to
have any major price increases or moves in the near future but
which, over the long term, are deemed to be attractive
investments for the Fund.
A call option gives the holder (buyer) the "right to purchase"
a security or currency at a specified price (the exercise price)
at expiration of the option (European style) or at any time until
a certain date (the expiration date) (American style). So long
as the obligation of the writer of a call option continues, he
may be assigned an exercise notice by the broker-dealer through
whom such option was sold, requiring him to deliver the
underlying security or currency against payment of the exercise
price. This obligation terminates upon the expiration of the
call option, or such earlier time at which the writer effects a
closing purchase transaction by repurchasing an option identical
to that previously sold. To secure his obligation to deliver the
underlying security or currency in the case of a call option, a
writer is required to deposit in escrow the underlying security
or currency or other assets in accordance with the rules of a
clearing corporation.
PAGE 18
The Fund will write only covered call options. This means
that the Fund will own the security or currency subject to the
option or an option to purchase the same underlying security or
currency, having an exercise price equal to or less than the
exercise price of the "covered" option, or will establish and
maintain with its custodian for the term of the option, an
account consisting of cash, U.S. government securities or other
liquid high-grade debt obligations having a value equal to the
fluctuating market value of the optioned securities or
currencies.
Portfolio securities or currencies on which call options may
be written will be purchased solely on the basis of investment
considerations consistent with the Fund's investment objective.
The writing of covered call options is a conservative investment
technique believed to involve relatively little risk (in contrast
to the writing of naked or uncovered options, which the Fund will
not do), but capable of enhancing the Fund's total return. When
writing a covered call option, a Fund, in return for the premium,
gives up the opportunity for profit from a price increase in the
underlying security or currency above the exercise price, but
conversely retains the risk of loss should the price of the
security or currency decline. Unlike one who owns securities or
currencies not subject to an option, the Fund has no control over
when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any
time prior to the expiration of its obligation as a writer. If a
call option which the Fund has written expires, the Fund will
realize a gain in the amount of the premium; however, such gain
may be offset by a decline in the market value of the underlying
security or currency during the option period. If the call
option is exercised, the Fund will realize a gain or loss from
the sale of the underlying security or currency. The Fund does
not consider a security or currency covered by a call to be
"pledged" as that term is used in the Fund's policy which limits
the pledging or mortgaging of its assets.
The premium received is the market value of an option. The
premium the Fund will receive from writing a call option will
reflect, among other things, the current market price of the
underlying security or currency, the relationship of the exercise
price to such market price, the historical price volatility of
the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made,
Price-Fleming, in determining whether a particular call option
should be written on a particular security or currency, will
consider the reasonableness of the anticipated premium and the
PAGE 19
likelihood that a liquid secondary market will exist for those
options. The premium received by the Fund for writing covered
call options will be recorded as a liability of the Fund. This
liability will be adjusted daily to the option's current market
value, which will be the latest sale price at the time at which
the net asset value per share of the Fund is computed (close of
the New York Stock Exchange), or, in the absence of such sale,
the latest asked price. The option will be terminated upon
expiration of the option, the purchase of an identical option in
a closing transaction, or delivery of the underlying security or
currency upon the exercise of the option.
Closing transactions will be effected in order to realize a
profit on an outstanding call option, to prevent an underlying
security or currency from being called, or, to permit the sale of
the underlying security or currency. Furthermore, effecting a
closing transaction will permit the Fund to write another call
option on the underlying security or currency with either a
different exercise price or expiration date or both. If the Fund
desires to sell a particular security or currency from its
portfolio on which it has written a call option, or purchased a
put option, it will seek to effect a closing transaction prior
to, or concurrently with, the sale of the security or currency.
There is, of course, no assurance that the Fund will be able to
effect such closing transactions at favorable prices. If the
Fund cannot enter into such a transaction, it may be required to
hold a security or currency that it might otherwise have sold.
When the Fund writes a covered call option, it runs the risk of
not being able to participate in the appreciation of the
underlying securities or currencies above the exercise price, as
well as the risk of being required to hold on to securities or
currencies that are depreciating in value. This could result in
higher transaction costs. The Fund will pay transaction costs in
connection with the writing of options to close out previously
written options. Such transaction costs are normally higher than
those applicable to purchases and sales of portfolio securities.
Call options written by the Fund will normally have expiration
dates of less than nine months from the date written. The
exercise price of the options may be below, equal to, or above
the current market values of the underlying securities or
currencies at the time the options are written. From time to
time, the Fund may purchase an underlying security or currency
for delivery in accordance with an exercise notice of a call
option assigned to it, rather than delivering such security or
currency from its portfolio. In such cases, additional costs may
be incurred.
PAGE 20
The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than
the premium received from the writing of the option. Because
increases in the market price of a call option will generally
reflect increases in the market price of the underlying security
or currency, any loss resulting from the repurchase of a call
option is likely to be offset in whole or in part by appreciation
of the underlying security or currency owned by the Fund.
In order to comply with the requirements of several states,
the Fund will not write a covered call option if, as a result,
the aggregate market value of all portfolio securities or
currencies covering call or put options exceeds 25% of the market
value of the Fund's net assets. Should these state laws change
or should the Fund obtain a waiver of its application, the Fund
reserves the right to increase this percentage. In calculating
the 25% limit, the Fund will offset, against the value of assets
covering written calls and puts, the value of purchased calls and
puts on identical securities or currencies with identical
maturity dates.
Writing Covered Put Options
The Fund may write American or European style covered put
options and purchase options to close out options previously
written by the Fund. A put option gives the purchaser of the
option the right to sell, and the writer (seller) has the
obligation to buy, the underlying security or currency at the
exercise price during the option period (American style) or at
the expiration of the option (European style). So long as the
obligation of the writer continues, he may be assigned an
exercise notice by the broker-dealer through whom such option was
sold, requiring him to make payment of the exercise price against
delivery of the underlying security or currency. The operation
of put options in other respects, including their related risks
and rewards, is substantially identical to that of call options.
The Fund would write put options only on a covered basis,
which means that the Fund would maintain in a segregated account
cash, U.S. government securities or other liquid high-grade debt
obligations in an amount not less than the exercise price or the
Fund will own an option to sell the underlying security or
currency subject to the option having an exercise price equal to
or greater than the exercise price of the "covered" option at all
times while the put option is outstanding. (The rules of a
clearing corporation currently require that such assets be
PAGE 21
deposited in escrow to secure payment of the exercise price.)
The Fund would generally write covered put options in
circumstances where Price-Fleming wishes to purchase the
underlying security or currency for the Fund's portfolio at a
price lower than the current market price of the security or
currency. In such event the Fund would write a put option at an
exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the
Fund would also receive interest on debt securities or currencies
maintained to cover the exercise price of the option, this
technique could be used to enhance current return during periods
of market uncertainty. The risk in such a transaction would be
that the market price of the underlying security or currency
would decline below the exercise price less the premiums
received. Such a decline could be substantial and result in a
significant loss to the Fund. In addition, the Fund, because it
does not own the specific securities or currencies which it may
be required to purchase in exercise of the put, cannot benefit
from appreciation, if any, with respect to such specific
securities or currencies. In order to comply with the
requirements of several states, the Fund will not write a covered
put option if, as a result, the aggregate market value of all
portfolio securities or currencies covering put or call options
exceeds 25% of the market value of the Fund's net assets. Should
these state laws change or should the Fund obtain a waiver of its
application, the Fund reserves the right to increase this
percentage. In calculating the 25% limit, the Fund will offset,
against the value of assets covering written puts and calls, the
value of purchased puts and calls on identical securities or
currencies with identical maturity dates.
Purchasing Put Options
The Fund may purchase American or European style put
options. As the holder of a put option, the Fund has the right
to sell the underlying security or currency at the exercise price
at any time during the option period (American style) or at the
expiration of the option (European style). The Fund may enter
into closing sale transactions with respect to such options,
exercise them or permit them to expire. The Fund may purchase
put options for defensive purposes in order to protect against an
anticipated decline in the value of its securities or currencies.
An example of such use of put options is provided below.
The Fund may purchase a put option on an underlying security
or currency (a "protective put") owned by the Fund as a defensive
technique in order to protect against an anticipated decline in
PAGE 22
the value of the security or currency. Such hedge protection is
provided only during the life of the put option when the Fund, as
the holder of the put option, is able to sell the underlying
security or currency at the put exercise price regardless of any
decline in the underlying security's market price or currency's
exchange value. For example, a put option may be purchased in
order to protect unrealized appreciation of a security or
currency where Price-Fleming deems it desirable to continue to
hold the security or currency because of tax considerations. The
premium paid for the put option and any transaction costs would
reduce any capital gain otherwise available for distribution when
the security or currency is eventually sold.
The Fund may also purchase put options at a time when the Fund
does not own the underlying security or currency. By purchasing
put options on a security or currency it does not own, the Fund
seeks to benefit from a decline in the market price of the
underlying security or currency. If the put option is not sold
when it has remaining value, and if the market price of the
underlying security or currency remains equal to or greater than
the exercise price during the life of the put option, the Fund
will lose its entire investment in the put option. In order for
the purchase of a put option to be profitable, the market price
of the underlying security or currency must decline sufficiently
below the exercise price to cover the premium and transaction
costs, unless the put option is sold in a closing sale
transaction.
To the extent required by the laws of certain states, the Fund
may not be permitted to commit more than 5% of its assets to
premiums when purchasing put and call options. Should these
state laws change or should the Fund obtain a waiver of its
application, the Fund may commit more than 5% of its assets to
premiums when purchasing call and put options. The premium paid
by the Fund when purchasing a put option will be recorded as an
asset of the Fund. This asset will be adjusted daily to the
option's current market value, which will be the latest sale
price at the time at which the net asset value per share of the
Fund is computed (close of New York Stock Exchange), or, in the
absence of such sale, the latest bid price. This asset will be
terminated upon expiration of the option, the selling (writing)
of an identical option in a closing transaction, or the delivery
of the underlying security or currency upon the exercise of the
option.
PAGE 23
Purchasing Call Options
The Fund may purchase American or European style call
options. As the holder of a call option, the Fund has the right
to purchase the underlying security or currency at the exercise
price at any time during the option period (American style) or at
the expiration of the option (European style). The Fund may
enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. The Fund may
purchase call options for the purpose of increasing its current
return or avoiding tax consequences which could reduce its
current return. The Fund may also purchase call options in order
to acquire the underlying securities or currencies. Examples of
such uses of call options are provided below.
Call options may be purchased by the Fund for the purpose of
acquiring the underlying securities or currencies for its
portfolio. Utilized in this fashion, the purchase of call
options enables the Fund to acquire the securities or currencies
at the exercise price of the call option plus the premium paid.
At times the net cost of acquiring securities or currencies in
this manner may be less than the cost of acquiring the securities
or currencies directly. This technique may also be useful to the
Fund in purchasing a large block of securities or currencies that
would be more difficult to acquire by direct market purchases.
So long as it holds such a call option rather than the underlying
security or currency itself, the Fund is partially protected from
any unexpected decline in the market price of the underlying
security or currency and in such event could allow the call
option to expire, incurring a loss only to the extent of the
premium paid for the option.
To the extent required by the laws of certain states, the Fund
may not be permitted to commit more than 5% of its assets to
premiums when purchasing call and put options. Should these
state laws change or should the Fund obtain a waiver of its
application, the Fund may commit more than 5% of its assets to
premiums when purchasing call and put options. The Fund may also
purchase call options on underlying securities or currencies it
owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for
this purpose where tax considerations make it inadvisable to
realize such gains through a closing purchase transaction. Call
options may also be purchased at times to avoid realizing losses.
PAGE 24
Dealer (Over-the-Counter) Options
The Fund may engage in transactions involving dealer options.
Certain risks are specific to dealer options. While the Fund
would look to a clearing corporation to exercise exchange-traded
options, if the Fund were to purchase a dealer option, it would
rely on the dealer from whom it purchased the option to perform
if the option were exercised. Failure by the dealer to do so
would result in the loss of the premium paid by the Fund as well
as loss of the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid
market while dealer options have none. Consequently, the Fund
will generally be able to realize the value of a dealer option it
has purchased only by exercising it or reselling it to the dealer
who issued it. Similarly, when the Fund writes a dealer option,
it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction
with the dealer to which the Fund originally wrote the option.
While the Fund will seek to enter into dealer options only with
dealers who will agree to and which are expected to be capable of
entering into closing transactions with the Fund, there can be no
assurance that the Fund will be able to liquidate a dealer option
at a favorable price at any time prior to expiration. Until the
Fund, as a covered dealer call option writer, is able to effect a
closing purchase transaction, it will not be able to liquidate
securities (or other assets) or currencies used as cover until
the option expires or is exercised. In the event of insolvency
of the contra party, the Fund may be unable to liquidate a dealer
option. With respect to options written by the Fund, the
inability to enter into a closing transaction may result in
material losses to the Fund. For example, since the Fund must
maintain a secured position with respect to any call option on a
security it writes, the Fund may not sell the assets which it has
segregated to secure the position while it is obligated under the
option. This requirement may impair a Fund's ability to sell
portfolio securities or currencies at a time when such sale might
be advantageous.
The Staff of the SEC has taken the position that purchased
dealer options and the assets used to secure the written dealer
options are illiquid securities. The Fund may treat the cover
used for written OTC options as liquid if the dealer agrees that
the Fund may repurchase the OTC option it has written for a
maximum price to be calculated by a predetermined formula. In
such cases, the OTC option would be considered illiquid only to
PAGE 25
the extent the maximum repurchase price under the formula exceeds
the intrinsic value of the option. Accordingly, the Fund will
treat dealer options as subject to the Fund's limitation on
unmarketable securities. If the SEC changes its position on the
liquidity of dealer options, the Fund will change its treatment
of such instrument accordingly.
Futures Contracts
Transactions in Futures
Each Fund may enter into financial futures contracts,
including stock index, interest rate and currency futures
("futures or futures contracts"); however, the Funds have no
current intention of entering into stock index futures. The
Funds, however, reserve the right to trade in financial futures
of any kind.
Stock index futures contracts may be used to provide a hedge
for a portion of the Fund's portfolio, as a cash management tool,
or as an efficient way for Price-Fleming to implement either an
increase or decrease in portfolio market exposure in response to
changing market conditions. The Fund may, purchase or sell
futures contracts with respect to any stock index. Nevertheless,
to hedge the Fund's portfolio successfully, the Fund must sell
futures contacts with respect to indices or subindices whose
movements will have a significant correlation with movements in
the prices of the Fund's portfolio securities.
Interest rate or currency futures contracts may be used as a
hedge against changes in prevailing levels of interest rates or
currency exchange rates in order to establish more definitely the
effective return on securities or currencies held or intended to
be acquired by the Fund. In this regard, the Fund could sell
interest rate or currency futures as an offset against the effect
of expected increases in interest rates or currency exchange
rates and purchase such futures as an offset against the effect
of expected declines in interest rates or currency exchange
rates.
The Fund will enter into futures contracts which are traded on
national or foreign futures exchanges, and are standardized as to
maturity date and underlying financial instrument. Futures
exchanges and trading in the United States are regulated under
the Commodity Exchange Act by the CFTC. Futures are traded in
London at the London International Financial Futures Exchange in
Paris at the MATIF and in Tokyo at the Tokyo Stock Exchange.
PAGE 26
Although techniques other than the sale and purchase of futures
contracts could be used for the above-referenced purposes,
futures contracts offer an effective and relatively low cost
means of implementing the Fund's objectives in these areas.
Regulatory Limitations
The Fund will engage in futures contracts and options thereon
only for bona fide hedging, yield enhancement, and risk
management purposes, in each case in accordance with rules and
regulations of the CFTC and applicable state law.
The Fund may not purchase or sell futures contracts or related
options if, with respect to positions which do not qualify as
bona fide hedging under applicable CFTC rules, the sum of the
amounts of initial margin deposits and premiums paid on those
portions would exceed 5% of the net asset value of the Fund after
taking into account unrealized profits and unrealized losses on
any such contracts it has entered into; provided, however, that
in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in calculating
the 5% limitation. For purposes of this policy options on
futures contracts and foreign currency options traded on a
commodities exchange will be considered "related options". This
policy may be modified by the Board of Directors/Trustees without
a shareholder vote and does not limit the percentage of the
Fund's assets at risk to 5%.
In accordance with the rules of the State of California, the
Fund will apply above 5% test without excluding the value of
initial margin and premiums paid for bona fide hedging portions.
The Fund's use of futures contracts will not result in
leverage. Therefore, to the extent necessary, in instances
involving the purchase of futures contracts or the writing of
call or put options thereon by the Fund, an amount of cash, U.S.
government securities or other liquid, high-grade debt
obligations, equal to the market value of the futures contracts
and options thereon (less any related margin deposits), will be
identified in an account with the Fund's custodian to cover (such
as owning an offsetting position) the position, or alternative
cover will be employed. Assets used as cover or held in an
identified account cannot be sold while the position in the
corresponding option or future is open, unless they are replaced
with similar assets. As a result, the commitment of a large
portion of a Fund's assets to cover or identified accounts could
PAGE 27
impede portfolio management or the fund's ability to meet
redemption requests or over current obligations.
If the CFTC or other regulatory authorities adopt different
(including less stringent) or additional restrictions, the Fund
would comply with such new restrictions.
Trading in Futures Contracts
A futures contract provides for the future sale by one party
and purchase by another party of a specified amount of a specific
financial instrument (e.g., units of a debt security) for a
specified price, date, time and place designated at the time the
contract is made. Brokerage fees are incurred when a futures
contract is bought or sold and margin deposits must be
maintained. Entering into a contract to buy is commonly referred
to as buying or purchasing a contract or holding a long position.
Entering into a contract to sell is commonly referred to as
selling a contract or holding a short position.
Unlike when the Fund purchases or sells a security, no price
would be paid or received by the Fund upon the purchase or sale
of a futures contract. Upon entering into a futures contract,
and to maintain the Fund's open positions in futures contracts,
the Fund would be required to deposit with its custodian in a
segregated account in the name of the futures broker an amount of
cash, U.S. government securities, suitable money market
instruments, or liquid, high-grade debt securities, known as
"initial margin." The margin required for a particular futures
contract is set by the exchange on which the contract is traded,
and may be significantly modified from time to time by the
exchange during the term of the contract. Futures contracts are
customarily purchased and sold on margins that may range upward
from less than 5% of the value of the contract being traded.
If the price of an open futures contract changes (by increase
in the case of a sale or by decrease in the case of a purchase)
so that the loss on the futures contract reaches a point at which
the margin on deposit does not satisfy margin requirements, the
broker will require an increase in the margin. However, if the
value of a position increases because of favorable price changes
in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the Fund.
These subsequent payments, called "variation margin," to and
from the futures broker, are made on a daily basis as the price
of the underlying assets fluctuate making the long and short
PAGE 28
positions in the futures contract more or less valuable, a
process known as "marking to the market." The Fund expects to
earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require
actual future delivery of and payment for the underlying
instruments, in practice most futures contracts are usually
closed out before the delivery date. Closing out an open futures
contract purchase or sale is effected by entering into an
offsetting futures contract sale or purchase, respectively, for
the same aggregate amount of the identical securities and the
same delivery date. If the offsetting purchase price is less
than the original sale price, the Fund realizes a gain; if it is
more, the Fund realizes a loss. Conversely, if the offsetting
sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The
transaction costs must also be included in these calculations.
There can be no assurance, however, that the Fund will be able to
enter into an offsetting transaction with respect to a particular
futures contract at a particular time. If the Fund is not able
to enter into an offsetting transaction, the Fund will continue
to be required to maintain the margin deposits on the futures
contract.
As an example of an offsetting transaction in which the
underlying instrument is not delivered, the contractual
obligations arising from the sale of one contract of September
Treasury Bills on an exchange may be fulfilled at any time before
delivery of the contract is required (i.e., on a specified date
in September, the "delivery month") by the purchase of one
contract of September Treasury Bills on the same exchange. In
such instance, the difference between the price at which the
futures contract was sold and the price paid for the offsetting
purchase, after allowance for transaction costs, represents the
profit or loss to the Fund.
Special Risks of Transactions in Futures Contracts
Volatility and Leverage. The prices of futures contracts are
volatile and are influenced, among other things, by actual and
anticipated changes in the market and interest rates, which in
turn are affected by fiscal and monetary policies and national
and international political and economic events.
Most United States futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single
PAGE 29
trading day. The daily limit establishes the maximum amount that
the price of a futures contract may vary either up or down from
the previous day's settlement price at the end of a trading
session. Once the daily limit has been reached in a particular
type of futures contract, no trades may be made on that day at a
price beyond that limit. The daily limit governs only price
movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting
some futures traders to substantial losses.
Because of the low margin deposits required, futures trading
involves an extremely high degree of leverage. As a result, a
relatively small price movement in a futures contract may result
in immediate and substantial loss, as well as gain, to the
investor. For example, if at the time of purchase, 10% of the
value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract
would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then
closed out. A 15% decrease would result in a loss equal to 150%
of the original margin deposit, if the contract were closed out.
Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract.
However, the Fund would presumably have sustained comparable
losses if, instead of the futures contract, it had invested in
the underlying financial instrument and sold it after the
decline. Furthermore, in the case of a futures contract
purchase, in order to be certain that the Fund has sufficient
assets to satisfy its obligations under a futures contract, the
Fund earmarks to the futures contract money market instruments
equal in value to the current value of the underlying instrument
less the margin deposit.
Liquidity. The Fund may elect to close some or all of its
futures positions at any time prior to their expiration. The
Fund would do so to reduce exposure represented by long futures
positions or short futures positions. The Fund may close its
positions by taking opposite positions which would operate to
terminate the Fund's position in the futures contracts. Final
determinations of variation margin would then be made, additional
cash would be required to be paid by or released to the Fund, and
the Fund would realize a loss or a gain.
PAGE 30
Futures contracts may be closed out only on the exchange or
board of trade where the contracts were initially traded.
Although the Fund intends to purchase or sell futures contracts
only on exchanges or boards of trade where there appears to be an
active market, there is no assurance that a liquid market on an
exchange or board of trade will exist for any particular contract
at any particular time. In such event, it might not be possible
to close a futures contract, and in the event of adverse price
movements, the Fund would continue to be required to make daily
cash payments of variation margin. However, in the event futures
contracts have been used to hedge the underlying instruments, the
Fund would continue to hold the underlying instruments subject to
the hedge until the futures contracts could be terminated. In
such circumstances, an increase in the price of underlying
instruments, if any, might partially or completely offset losses
on the futures contract. However, as described below, there is
no guarantee that the price of the underlying instruments will,
in fact, correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures
contract.
Hedging Risk. A decision of whether, when, and how to hedge
involves skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of unexpected market
behavior, market or interest rate trends. There are several
risks in connection with the use by the Fund of futures contracts
as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures
contracts and movements in the prices of the underlying
instruments which are the subject of the hedge. Price-Fleming
will, however, attempt to reduce this risk by entering into
futures contracts whose movements, in its judgment, will have a
significant correlation with movements in the prices of the
Fund's underlying instruments sought to be hedged.
Successful use of futures contracts by the Fund for hedging
purposes is also subject to Price-Fleming's ability to correctly
predict movements in the direction of the market. It is possible
that, when the Fund has sold futures to hedge its portfolio
against a decline in the market, the index, indices, or
instruments underlying futures might advance and the value of the
underlying instruments held in the Fund's portfolio might
decline. If this were to occur, the Fund would lose money on the
futures and also would experience a decline in value in its
underlying instruments. However, while this might occur to a
certain degree, Price-Fleming believes that over time the value
of the Fund's portfolio will tend to move in the same direction
PAGE 31
as the market indices used to hedge the portfolio. It is also
possible that if the Fund were to hedge against the possibility
of a decline in the market (adversely affecting the underlying
instruments held in its portfolio) and prices instead increased,
the Fund would lose part or all of the benefit of increased value
of those underlying instruments that it has hedged, because it
would have offsetting losses in its futures positions. In
addition, in such situations, if the Fund had insufficient cash,
it might have to sell underlying instruments to meet daily
variation margin requirements. Such sales of underlying
instruments might be, but would not necessarily be, at increased
prices (which would reflect the rising market). The Fund might
have to sell underlying instruments at a time when it would be
disadvantageous to do so.
In addition to the possibility that there might be an
imperfect correlation, or no correlation at all, between price
movements in the futures contracts and the portion of the
portfolio being hedged, the price movements of futures contracts
might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First,
all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors might close
futures contracts through offsetting transactions, which could
distort the normal relationship between the underlying
instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements
in the securities markets, and as a result the futures market
might attract more speculators than the securities markets do.
Increased participation by speculators in the futures market
might also cause temporary price distortions. Due to the
possibility of price distortion in the futures market and also
because of the imperfect correlation between price movements in
the underlying instruments and movements in the prices of futures
contracts, even a correct forecast of general market trends by
Price-Fleming might not result in a successful hedging
transaction over a very short time period.
Options on Futures Contracts
The Fund may purchase and sell options on the same types of
futures in which it may invest.
Options on futures are similar to options on underlying
instruments except that options on futures give the purchaser the
right, in return for the premium paid, to assume a position in a
PAGE 32
futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase
or sell the futures contract, at a specified exercise price at
any time during the period of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the
option to the holder of the option will be accompanied by the
delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market
price of the futures contract, at exercise, exceeds (in the case
of a call) or is less than (in the case of a put) the exercise
price of the option on the futures contract. Purchasers of
options who fail to exercise their options prior to the exercise
date suffer a loss of the premium paid.
As an alternative to writing or purchasing call and put
options on interest rate futures, the Fund may write or purchase
call and put options on financial indices. Such options would be
used in a manner similar to the use of options on futures
contracts. From time to time, a single order to purchase or sell
futures contracts (or options thereon) may be made on behalf of
the Fund and other T. Rowe Price Funds. Such aggregated orders
would be allocated among the Funds and the other T. Rowe Price
Funds in a fair and non-discriminatory manner.
Special Risks of Transactions in Options on Futures Contracts
The risks described under "Special Risks of Transactions on
Futures Contracts" are substantially the same as the risks of
using options on futures. In addition, where the Fund seeks to
close out an option position by writing or buying an offsetting
option covering the same index, underlying instrument or contract
and having the same exercise price and expiration date, its
ability to establish and close out positions on such options will
be subject to the maintenance of a liquid secondary market.
Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient
trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or
series of options, or underlying instruments; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or
PAGE 33
series of options), in which event the secondary market on that
exchange (or in the class or series of options) would cease to
exist, although outstanding options on the exchange that had been
issued by a clearing corporation as a result of trades on that
exchange would continue to be exercisable in accordance with
their terms. There is no assurance that higher than anticipated
trading activity or other unforeseen events might not, at times,
render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by
an exchange of special procedures which may interfere with the
timely execution of customers' orders.
Additional Futures and Options Contracts
Although the Fund has no current intention of engaging in
futures or options transactions other than those described above,
it reserves the right to do so. Such futures and options trading
might involve risks which differ from those involved in the
futures and options described above.
Foreign Futures and Options
Participation in foreign futures and foreign options
transactions involves the execution and clearing of trades on or
subject to the rules of a foreign board of trade. Neither the
National Futures Association nor any domestic exchange regulates
activities of any foreign boards of trade, including the
execution, delivery and clearing of transactions, or has the
power to compel enforcement of the rules of a foreign board of
trade or any applicable foreign law. This is true even if the
exchange is formally linked to a domestic market so that a
position taken on the market may be liquidated by a transaction
on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures or
foreign options transaction occurs. For these reasons, when the
Fund trades foreign futures or foreign options contracts, it may
not be afforded certain of the protective measures provided by
the Commodity Exchange Act, the CFTC's regulations and the rules
of the National Futures Association and any domestic exchange,
including the right to use reparations proceedings before the
Commission and arbitration proceedings provided by the National
Futures Association or any domestic futures exchange. In
particular, funds received from the Fund for foreign futures or
foreign options transactions may not be provided the same
protections as funds received in respect of transactions on
United States futures exchanges. In addition, the price of any
foreign futures or foreign options contract and, therefore, the
PAGE 34
potential profit and loss thereon may be affected by any variance
in the foreign exchange rate between the time the Fund's order is
placed and the time it is liquidated, offset or exercised.
Foreign Currency Transactions
A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are principally traded in the
interbank market conducted directly between currency traders
(usually large, commercial banks) and their customers. A forward
contract generally has no deposit requirement, and no commissions
are charged at any stage for trades.
The Fund may enter into forward contracts for a variety of
purposes in connection with the management of the foreign
securities portion of its portfolio. The Fund's use of such
contracts would include, but not be limited to, the following:
First, when the Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, it may
desire to "lock in" the U.S. dollar price of the security. By
entering into a forward contract for the purchase or sale, for a
fixed amount of dollars, of the amount of foreign currency
involved in the underlying security transactions, the Fund will
be able to protect itself against a possible loss resulting from
an adverse change in the relationship between the U.S. dollar and
the subject foreign currency during the period between the date
the security is purchased or sold and the date on which payment
is made or received.
Second, when Price-Fleming believes that one currency may
experience a substantial movement against another currency,
including the U.S. dollar, it may enter into a forward contract
to sell or buy the amount of the former foreign currency,
approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency. Alternatively,
where appropriate, the Fund may hedge all or part of its foreign
currency exposure through the use of a basket of currencies or a
proxy currency where such currency or currencies act as an
effective proxy for other currencies. In such a case, the Fund
may enter into a forward contract where the amount of the foreign
currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging
PAGE 35
technique may be more efficient and economical than entering into
separate forward contracts for each currency held in the Fund.
The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible
since the future value of such securities in foreign currencies
will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered
into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the
successful execution of a short-term hedging strategy is highly
uncertain. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the
longer term investment decisions made with regard to overall
diversification strategies. However, Price-Fleming believes that
it is important to have the flexibility to enter into such
forward contracts when it determines that the best interests of
the Fund will be served.
The Fund may enter into forward contacts for any other purpose
consistent with the Fund's investment objective and program.
However, the Fund will not enter into a forward contract, or
maintain exposure to any such contract(s), if the amount of
foreign currency required to be delivered thereunder would exceed
the Fund's holdings of liquid, high-grade debt securities and
currency available for cover of the forward contract(s). In
determining the amount to be delivered under a contract, the Fund
may net offsetting positions.
At the maturity of a forward contract, the Fund may sell the
portfolio security and make delivery of the foreign currency, or
it may retain the security and either extend the maturity of the
forward contract (by "rolling" that contract forward) or may
initiate a new forward contract.
If the Fund retains the portfolio security and engages in an
offsetting transaction, the Fund will incur a gain or a loss (as
described below) to the extent that there has been movement in
forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward
contract to sell the foreign currency. Should forward prices
decline during the period between the Fund's entering into a
forward contract for the sale of a foreign currency and the date
it enters into an offsetting contract for the purchase of the
foreign currency, the Fund will realize a gain to the extent the
price of the currency it has agreed to sell exceeds the price of
PAGE 36
the currency it has agreed to purchase. Should forward prices
increase, the Fund will suffer a loss to the extent of the price
of the currency it has agreed to purchase exceeds the price of
the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange
contracts will generally be limited to the transactions described
above. However, the Fund reserves the right to enter into
forward foreign currency contracts for different purposes and
under different circumstances. Of course, the Fund is not
required to enter into forward contracts with regard to its
foreign currency-denominated securities and will not do so unless
deemed appropriate by Price-Fleming. It also should be realized
that this method of hedging against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices
of the securities. It simply establishes a rate of exchange at a
future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time, they tend to limit any
potential gain which might result from an increase in the value
of that currency.
Although the Fund values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign
currencies into U.S. dollars on a daily basis. It will do so
from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they
are buying and selling various currencies. Thus, a dealer may
offer to sell a foreign currency to the Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
Federal Tax Treatment of Options, Futures Contracts and Forward
Foreign Exchange Contracts
The Fund may enter into certain option, futures, and forward
foreign exchange contracts, including options and futures on
currencies, which will be treated as Section 1256 contracts or
straddles.
Transactions which are considered Section 1256 contracts will
be considered to have been closed at the end of the Fund's fiscal
year and any gains or losses will be recognized for tax purposes
at that time. Such gains or losses from the normal closing or
settlement of such transactions will be characterized as 60%
PAGE 37
long-term capital gain or loss and 40% short-term capital gain or
loss regardless of the holding period of the instrument. The
Fund will be required to distribute net gains on such
transactions to shareholders even though it may not have closed
the transaction and received cash to pay such distributions.
Options, futures and forward foreign exchange contracts,
including options and futures on currencies, which offset a
foreign dollar denominated bond or currency position may be
considered straddles for tax purposes, in which case a loss on
any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding
period of the securities or currencies comprising the straddle
will be deemed not to begin until the straddle is terminated.
For securities offsetting a purchased put, this adjustment of the
holding period may increase the gain from sales of securities
held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an
equity security will not include the period of time the option is
outstanding.
Losses on written covered calls and purchased puts on
securities, excluding certain "qualified covered call" options on
equity securities, may be long-term capital loss, if the security
covering the option was held for more than twelve months prior to
the writing of the option.
In order for the Fund to continue to qualify for federal
income tax treatment as a regulated investment company, at least
90% of its gross income for a taxable year must be derived from
qualifying income; i.e., dividends, interest, income derived from
loans of securities, and gains from the sale of securities or
currencies. Pending tax regulations could limit the extent that
net gain realized from option, futures or foreign forward
exchange contracts on currencies is qualifying income for
purposes of the 90% requirement. In addition, gains realized on
the sale or other disposition of securities, including option,
futures or foreign forward exchange contracts on securities or
securities indexes and, in some cases, currencies, held for less
than three months, must be limited to less than 30% of the Fund's
annual gross income. In order to avoid realizing excessive gains
on securities or currencies held less than three months, the Fund
may be required to defer the closing out of option, futures or
foreign forward exchange contracts beyond the time when it would
otherwise be advantageous to do so. It is anticipated that
unrealized gains on Section 1256 option, futures and foreign
forward exchange contracts, which have been open for less than
PAGE 38
three months as of the end of the Fund's fiscal year and which
are recognized for tax purposes, will not be considered gains on
securities or currencies held less than three months for purposes
of the 30% test.
Under certain circumstances, each Fund, with the exception of
International Bond Fund, may commit a substantial portion or the
entire value of its assets to the consummation of these
contracts. Price-Fleming will consider the effect a substantial
commitment of its assets to forward contracts would have on the
investment program of the Fund and the flexibility of the Fund to
purchase additional securities. In regard to International Bond
Fund, Price-Fleming does not intend to enter into such forward
contracts if, as a result, the Fund will have more than 50% of
the value of its total assets committed to the consummation of
such contracts.
When-Issued Securities and Forward Commitment Contracts
The Fund may purchase securities on a "when-issued" or delayed
delivery basis ("When-Issueds") and may purchase securities on a
forward commitment basis ("Forwards"). The Fund may invest
without limitation in When-Issueds and Forwards. The price of
such securities, which may be expressed in yield terms, is fixed
at the time the commitment to purchase is made, but delivery and
payment take place at a later date. Normally, the settlement
date occurs within 90 days of the purchase for When-Issueds, but
may be substantially longer for Forwards. During the period
between purchase and settlement, no payment is made by the Fund
to the issuer and no interest accrues to the Fund. The purchase
of these securities will result in a loss if their value declines
prior to the settlement date. This could occur, for example, if
interest rates increase prior to settlement. The longer the
period between purchase and settlement, the greater the risks
are. At the time the Fund makes the commitment to purchase these
securities, it will record the transaction and reflect the value
of the security in determining its net asset value. The Fund
will cover these securities by maintaining cash and/or liquid,
high-grade debt securities with its custodian bank equal in value
to commitments for them during the time between the purchase and
the settlement. Therefore, the longer this period, the longer
the period during which alternative investment options are not
available to the Fund (to the extent of the securities used for
cover). Such securities either will mature or, if necessary, be
sold on or before the settlement date.
PAGE 39
To the extent the Fund remains fully or almost fully invested
(in securities with a remaining maturity of more than one year)
at the same time it purchases these securities, there will be
greater fluctuations in the Fund's net asset value than if the
Fund did not purchase them.
INVESTMENT RESTRICTIONS
The investment restrictions described below have been adopted
by each Fund. Fundamental policies of each Fund may not be
changed without the approval of the lesser of (1) 67% of a Fund's
shares present at a meeting of shareholders if the holders of
more than 50% of the outstanding shares are present in person or
by proxy or (2) more than 50% of a Fund's outstanding shares.
Other restrictions, in the form of operating policies, are
subject to change by the Funds' Board of Directors without
shareholder approval. Any investment restriction which involves
a maximum percentage of securities or assets shall not be
considered to be violated unless an excess over the percentage
occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowings by, the Fund.
Fundamental Policies
As a matter of fundamental policy, the Fund may not:
(1) Borrowing. Borrow money except that each Fund may (i)
borrow for non-leveraging, temporary or emergency
purposes and (ii) engage in reverse repurchase agreements
and make other investments or engage in other
transactions, which may involve a borrowing, in a manner
consistent with each Fund's investment objective and
program, provided that the combination of (i) and (ii)
shall not exceed 33 1/3% of the value of each Fund's
total assets (including the amount borrowed) less
liabilities (other than borrowings) or such other
percentage permitted by law. Any borrowings which come
to exceed this amount will be reduced in accordance with
applicable law. Each Fund may borrow from banks, other
Price Funds or other persons to the extent permitted by
applicable law.
(2) Commodities. Purchase or sell physical commodities;
except that it may enter into futures contracts and
options thereon;
PAGE 40
(3) Industry Concentration (Global Government Bond and Short-
Term Global Income Funds). Purchase the securities of
any issuer if, as a result, more than 25% of the value of
a Fund's total assets would be invested in the securities
of issuers having their principal business activities in
the same industry;
Industry Concentration (International Bond Fund).
Purchase the securities of any issuer if, as a result,
more than 25% of the value of a Fund's total assets would
be invested in the securities of issuers having their
principal business activities in the same industry;
provided, however, that the Fund will normally
concentrate 25% or more of its assets in securities of
the banking industry when the Fund's position in issues
maturing in one year or less equals 35% or more of the
Fund's total assets;
(4) Loans. Make loans, although each Fund may (i) lend
portfolio securities and participate in an interfund
lending program with other Price Funds provided that no
such loan may be made if, as a result, the aggregate of
such loans would exceed 33 1/3% of the value of a Fund's
total assets; (ii) purchase money market securities and
enter into repurchase agreements; and (iii) acquire
publicly-distributed or privately-placed debt securities
and purchase debt;
(5) Real Estate. Purchase or sell real estate unless
acquired as a result of ownership of securities or other
instruments (but this shall not prevent a Fund from
investing in securities or other instruments backed by
real estate or securities of companies engaged in the
real estate business;
(6) Senior Securities. Issue senior securities except in
compliance with the Investment Company Act of 1940; or
(7) Underwriting. Underwrite securities issued by other
persons, except to the extent that a Fund may be deemed
to be an underwriter within the meaning of the Securities
Act of 1933 in connection with the purchase and sale of
its portfolio securities in the ordinary course of
pursuing its investment program.
PAGE 41
NOTES
The following notes should be read in connection with the
above-described fundamental policies. The notes are not
fundamental policies.
With respect to investment restrictions (1) and (4), each
Fund will not borrow from or lend to any other T. Rowe
Price Fund unless each Fund applies for and receives an
exemptive order from the SEC or the SEC issues rules
permitting such transactions. Each Fund has no current
intention of engaging in any such activity and there is
no assurance the SEC would grant any order requested by a
Fund or promulgate any rules allowing the transactions.
With respect to investment restriction (2), the Fund does
not consider currency contracts or hybrid investments to
be commodities.
For purposes of investment restriction (3), U.S., state
or local governments, or related agencies or
instrumentalities, are not considered an industry.
Industries are determined by reference to the
classifications of industries set forth in the Fund's
semi-annual and annual reports.
For purposes of investment restriction (4), the Fund will
consider the acquisition of a debt security to include
the execution of a note or other evidence of an extension
of credit with a term of more than nine months.
Operating Policies
As a matter of operating policy, the Funds may not:
(1) Borrowing. Each Fund will not purchase additional
securities when money borrowed exceeds 5% of its total
assets.
(2) Control of Portfolio Companies. Invest in companies for
the purpose of exercising management or control;
(3) Futures Contracts. Purchase a futures contract or an
option thereon if, with respect to positions in futures
or options on futures which do not represent bona fide
hedging, the aggregate initial margin and premiums on
PAGE 42
such positions would exceed 5% of each Fund's net asset
value.
(4) Illiquid Securities. Purchase illiquid securities and
securities of unseasoned issuers if, as a result, more
than 15% of its net assets would be invested in such
securities;
(5) Investment Companies. Purchase securities of open-end or
closed-end investment companies except in compliance with
the Investment Company Act of 1940 and applicable state
law. Duplicate fees may result from such purchases;
(6) Margin. Purchase securities on margin, except (i) for
use of short-term credit necessary for clearance of
purchases of portfolio securities and (ii) it may make
margin deposits in connection with futures contracts or
other permissible investments;
(7) Mortgaging. Mortgage, pledge, hypothecate or, in any
manner, transfer any security owned by a Fund as security
for indebtedness except as may be necessary in connection
with permissible borrowings or investments and then such
mortgaging, pledging or hypothecating may not exceed 33
1/3% of a Fund's total assets at the time of borrowing or
investment;
(8) Oil and Gas Programs. Purchase participations or other
direct interests or enter into leases with respect to,
oil, gas, or other mineral exploration or development
programs;
(9) Options, Etc. Invest in puts, calls, straddles, spreads,
or any combination thereof, except to the extent
permitted by the prospectus and Statement of Additional
Information;
(10) Ownership of Portfolio Securities by Officers and
Directors. Purchase or retain the securities of any
issuer if those officers and directors of a Fund, and of
its investment manager, who each own beneficially more
than .5% of the outstanding securities of such issuer,
together own beneficially more than 5% of such
securities;
(11) Short Sales. Effect short sales of securities;
PAGE 43
(12) Unseasoned Issuers. Purchase a security (other than
obligations issued or guaranteed by the U.S., any state
or local government, or any foreign government, their
agencies or instrumentalities) if, as a result, more than
5% of the value of each Fund's total assets would be
invested in the securities issuers which at the time of
purchase had been in operation for less than three years
(for this purpose, the period of operation of any issuer
shall include the period of operation of any predecessor
or unconditional guarantor of such issuer). This
restriction does not apply to securities of pooled
investment vehicles or mortgage or asset-backed
securities; or
(13) Warrants. Invest in warrants if, as a result thereof,
more than 2% of the value of the net assets of each Fund
would be invested in warrants which are not listed on the
New York Stock Exchange, the American Stock Exchange, or
a recognized foreign exchange, or more than 5% of the
value of the net assets of each Fund would be invested in
warrants whether or not so listed. For purposes of these
percentage limitations, the warrants will be valued at
the lower of cost or market and warrants acquired by the
Funds in units or attached to securities may be deemed to
be without value.
In addition to the restrictions described above, some foreign
countries limit, or prohibit, all direct foreign investment in
the securities of their companies. However, the governments of
some countries have authorized the organization of investment
funds to permit indirect foreign investment in such securities.
For tax purposes these funds may be known as Passive Foreign
Investment Companies. Each Fund is subject to certain percentage
limitations under the 1940 Act and certain states relating to the
purchase of securities of investment companies, and may be
subject to the limitation that no more than 10% of the value of
the Fund's total assets may be invested in such securities.
INVESTMENT PERFORMANCE
Total Return Performance
Each Fund's calculation of total return performance includes
the reinvestment of all capital gain distributions and income
dividends for the period or periods indicated, without regard to
tax consequences to a shareholder in each Fund. Total return is
PAGE 44
calculated as the percentage change between the beginning value
of a static account in each Fund and the ending value of that
account measured by the then current net asset value, including
all shares acquired through reinvestment of income and capital
gains dividends. The results shown are historical and should not
be considered indicative of the future performance of each Fund.
Each average annual compound rate of return is derived from the
cumulative performance of each Fund over the time period
specified. The annual compound rate of return for each Fund over
any other period of time will vary from the average.
International Bond Fund
Cumulative Performance Percentage Change
Since
1 Year 5 Years Inception
Ended Ended 9/10/86-
12/31/93+ 12/31/9312/31/93++
________ _________ _________
International Bond Fund 20.00% 62.55% 110.82%
International Stock Fund 40.11 76.63 137.57
Fidelity Global Bond Fund 21.88 73.92 N/A
Massachusetts Financial World
Wide Government Trust "A" 18.10 71.85 N/A
Merrill Lynch Retirement Global
Bond Fund "B" 12.39 69.53 128.47
Paine Webber Master Global
Income Fund "B" 13.43 56.68 N/A
J.P. Morgan Non-U.S. Dollar Gov't.
Bond Index 14.53 52.04 N/A
Salomon Brothers Non-U.S. Dollar
World Gov't. Bond Index 15.12 56.09 122.15*
Lipper General World Income
Funds Avg. 17.03 64.86 102.91
*Since 9/30/86
PAGE 45
Average Annual Compound Rates of Return
Since
1 Year 5 Years Inception
Ended Ended 9/10/86-
12/31/93+ 12/31/93 12/31/93++
________ _________ _________
International Bond Fund 20.00% 10.20% 10.75%
International Stock Fund 40.11 12.05 12.56
Fidelity Global Bond Fund 21.88 11.70 N/A
Massachusetts Financial World
Wide Government Trust "A" 18.10 11.43 N/A
Merrill Lynch Retirement Global
Bond Fund "B" 12.39 11.13 12.06
Paine Webber Master Global
Income Fund "B" 13.43 9.39 N/A
J.P. Morgan Non-U.S. Dollar Gov't.
Bond Index 14.53 8.74 11.19*
Salomon Brothers Non-U.S. Dollar
World Gov't. Bond Index 15.12 9.31 11.63*
Lipper General World Income
Funds Avg. 17.03 10.51 10.24*
+ If you invested $1,000 at the beginning of 1993, the total
return on December 31, 1993 would be $1,200 ($1,000 X .20).
++ Assumes purchase of one share of the International Bond Fund
at the inception price of $10.00 on 9/10/86.
+++ Since September 30, 1986
* Since 9/30/86
PAGE 46
Global Government Bond Fund
Cumulative Performance Percentage Change
Since
1 Year Inception
Ended 12/28/90-
12/31/93+ 12/31/93++
_________ __________
Global Government Bond Fund 11.15% 27.48%
International Bond Fund 20.00 44.68
International Stock Fund 40.11 56.71
Fidelity Global Bond Fund 21.88 43.52
Massachusetts Financial World
Wide Government Trust "A" 18.10 35.75
Merrill Lynch Retirement Global
Bond Fund "B" 12.39 38.79
Paine Webber Master Global
Income Fund "B" 13.43 26.20
J.P. Morgan Global (50%) and Global
Hedged (50%) Gov't. Bond Index 12.59 38.52
J.P. Morgan Global Gov't. Bond
Index 12.27 35.50
J.P. Morgan Global Gov't. Bond
Hedged Index 12.16 35.28
Lipper General World Income
Funds Avg. 17.03 10.90
PAGE 47
Average Annual Compound Rates of Return
Since
1 Year Inception
Ended 12/28/90-
12/31/93+ 12/31/93++
_________ __________
Global Government Bond Fund 11.15% 8.51%
International Bond Fund 20.00 13.10
International Stock Fund 40.11 16.15
Fidelity Global Bond Fund 21.88 12.79
Massachusetts Financial World
Wide Government Trust "A" 18.10 10.71
Merrill Lynch Retirement Global
Bond Fund "B" 12.39 11.53
Paine Webber Master Global
Income Fund "B" 13.43 8.06
J.P. Morgan Global (50%) and Global
Hedged (50%) Gov't. Bond Index 12.59 11.46
J.P. Morgan Global Gov't. Bond
Index 12.27 10.65
J.P. Morgan Global Gov't. Bond
Hedged Index 12.16 10.59
Lipper General World Income
Funds Avg. 17.03 10.90
+ If you invested $1,000 at the beginning of 1993, the total
return on December 31, 1993 would be $1,111 ($1,000 X
.111).
++ Assumes purchase of one share of the Global Government Bond
Fund at the inception price of $10.00 on 12/28/90.
PAGE 48
Short-Term Global Income Fund
Cumulative Performance Percentage Change
Since
1 Year Inception
Ended 06/30/92-
12/31/93+ 12/31/93++
_________ __________
Short-Term Global Income Fund 7.87% 7.63%
Alliance Short-Term Multi-Market
Trust "A" 7.79 4.95
Blanchard Short-Term Global
Income Fund 8.53 9.47
Fidelity Short-Term World
Income Fund 12.59 13.09
Scudder Short-Term Global
Income Fund 6.74 8.18
Lipper Short World Multi-Market
Income Funds Average 5.41 1.28
Average Annual Compound Rates of Return
Since
1 Year Inception
Ended 06/30/92-
12/31/93+ 12/31/93++
_________ __________
Short-Term Global Income Fund 7.87% 5.01%
Alliance Short-Term Multi-Market
Trust "A" 7.79 3.26
Blanchard Short-Term Global
Income Fund 8.53 6.20
Fidelity Short-Term World
Income Fund 12.59 8.52
Scudder Short-Term Global
Income Fund 6.74 5.37
Lipper Short World Multi-Market
Income Funds Average 5.41 0.85
+ If you invested $1,000 at the beginning of 1993, the total
return on December 31, 1993 would be $1,079 ($1,000 X
.07870).
++ Assumes purchase of one share of the Short-Term Global
Income Fund at the inception price of $10.00 on 06/30/92.
PAGE 49
Short-Term Global Income, Global Government Bond, and
International Bond Funds
From time to time, in reports and promotional literature, one
or more of the T. Rowe Price funds, including these Funds, may
compare its performance to Overnight Government Repurchase
Agreements, Treasury bills, notes, and bonds, certificates of
deposit, and six-month money market certificates. Performance
may also be compared to (1) indices of broad groups of managed
and unmanaged securities considered to be representative of or
similar to Fund portfolio holdings (2) other mutual funds or (3)
other measures of performance set forth in publications such as:
Advertising News Service, Inc., "Bank Rate Monitor+ - The
Weekly Financial Rate Reporter" is a weekly publication which
lists the yields on various money market instruments offered
to the public by 100 leading banks and thrift institutions in
the U.S., including loan rates offered by these banks. Bank
certificates of deposit differ from mutual funds in several
ways: the interest rate established by the sponsoring bank is
fixed for the term of a CD; there are penalties for early
withdrawal from CDs; and the principal on a CD is insured.
Consumer Price Index - prepared monthly by the Department of
Commerce, this index is based on the price of selected
consumer goods and is widely accepted as an indicator of U.S.
price levels in general.
Donoghue Organization, Inc., "Donoghue's Money Fund Report"
is a weekly publication which tracks net assets, yield,
maturity and portfolio holdings on approximately 380 money
market mutual funds offered in the U.S. These funds are
broken down into various categories such as U.S. Treasury,
Domestic Prime and Euros, Domestic Prime and Euros and
Yankees, and Aggressive.
First Boston High Yield Index shows statistics on the
Composite Index and analytical data on new issues in the
marketplace and low-grade issuers.
International Bond Fund Major Competitors - the average of
the following mutual funds: Massachusetts Financial Global
Bond Fund, Merrill-Lynch Retirement Global Bond Fund,
Prudential-Bache Global Yield Fund, or other similar mutual
funds;
PAGE 50
Lipper Analytical Services, Inc. Average of World Income
Funds - a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives,
and assets.
Lipper Analytical Services, Inc., "Lipper-Fixed Income Fund
Performance Analysis" is a monthly publication which tracks
net assets, total return, principal return and yield on
approximately 950 fixed income mutual funds offered in the
United States.
Merrill Lynch Global Government Bond Indices - provides
detailed compound returns for individual countries and a
market weighted index beginning in 1986. Returns are broken
down into local market and currency components.
Merrill Lynch, Pierce, Fenner & Smith, Inc., "Taxable Bond
Indices" is a monthly publication which lists principal,
coupon and total return on over 100 different taxable bond
indices which Merrill Lynch tracks, together with the par
weighted characteristics of each Index. The index used as a
benchmark for the High Yield Fund is the High Yield Index.
The two indices used as benchmarks for the Short-Term Bond
Fund are the 91-Day Treasury Bill Index and the 1-2.99 Year
Treasury Note Index.
Morningstar, Inc. is a widely used independent research firm
which rates mutual funds by overall performance, investment
objectives, and assets.
Reuters Reports. Reuters is a news and information
organization which provides statistics and analytical data on
yields available in various countries.
Salomon Brothers Broad Investment Grade Index - a widely used
index composed of U.S. domestic government, corporate, and
mortgage-backed fixed income securities.
Salomon Brothers Inc. "Bond Market Round-up" is a weekly
publication which tracks the yields and yield spreads on a
large, but select, group of money market instruments, public
corporate debt obligations, and public obligations of the
U.S. Treasury and agencies of the U.S. Government.
Salomon Brothers Inc. "Market Performance" is a monthly
publication which tracks principal return, total return and
PAGE 51
yield on the Salomon Brothers Broad investment - Grade Bond
Index and the components of the Index.
Salomon Brothers World Bond Index and related subindices -
provides detailed compound returns for individual countries
and a market-weighted index beginning in 1978. Returns are
broken down into local market and currency components.
Salomon Brothers World Government Bond Index and related
subindices - provides detailed compound returns for
individual countries and a market weighted index beginning in
1985. Returns are broken down into local market and currency
components.
Shearson Lehman American Express Government/Corporate Bond
Index - a widely used index composed of U.S. domestic
government and corporate fixed income securities.
Shearson Lehman Brothers, Inc. "The Bond Market Report" is a
monthly publication which tracks principal, coupon and total
return on the Shearson Lehman Govt./Corp. Index and Shearson
Lehman Aggregate Bond Index, as well as all the components of
these Indices.
Standard & Poor's "500" Index - a widely recognized index
composed of the capitalization-weighted average of the price
of 500 of the largest publicly traded stocks.
Telerate Systems, Inc., a computer system to which we
subscribe which tracks the daily rates on money market
instruments, public corporate debt obligations and public
obligations of the U.S. Treasury and agencies of the U.S.
Government.
Wall Street Journal, a daily newspaper publication which
lists the yields and current market values on money market
instruments, public corporate debt obligations, public
obligations of the U.S. Treasury and agencies of the U.S.
Government as well as common stocks, preferred stocks,
convertible preferred stocks, options and commodities; in
addition to indices prepared by the research departments of
such financial organizations as Shearson Lehman/American
Express Inc. and Merrill Lynch, Pierce, Fenner and Smith,
Inc., including information provided by the Federal Reserve
Board.
PAGE 52
Indices prepared by the research departments of such financial
organizations as Salomon Brothers, Inc., Merrill Lynch, Pierce,
Fenner & Smith, Inc., Bear Stearns & Co., Inc., and Ibbotson
Associates will be used, as well as information provided by the
Federal Reserve Board.
Performance rankings and ratings reported periodically in
national financial publications such as MONEY, FORBES, BUSINESS
WEEK, and BARRON'S, etc. may also be used.
Benefits of Investing in High-Quality Bond Funds
o Higher Income
Bonds have generally provided a higher income than money
market securities because yields have usually increased with
longer maturities. For instance, the yield on the 30-year
Treasury bond usually exceeds the yield on the 1-year Treasury
bill or 5-year Treasury note. However, securities with longer
maturities fluctuate more in price than those with shorter
maturities. Therefore, the investor must weigh the advantages
of higher yields against the possibility of greater
fluctuation in the principal value of your investment.
o Income Compounding
Investing in bond mutual funds allows investors to benefit
from easy and convenient compounding, because you can
automatically reinvest monthly dividends in additional fund
shares. Each month investors earn interest on a larger number
of shares. Also, reinvesting dividends removes the temptation
to spend the income.
o Broad Diversification
Each share of a mutual fund represents an interest in a
large pool of securities, so even a small investment is
broadly diversified by maturity. Since most bonds trade
efficiently only in very large blocks, mutual funds provide a
degree of diversification that may be difficult for individual
investors to achieve on their own.
o Lower Portfolio Volatility
Investing a portion of one's assets in longer term, high-
quality bonds can help smooth out the fluctuations in your
overall investment results, because bond prices do not
PAGE 53
necessarily move with stock prices. Also, bonds usually have
higher income yields than stocks, thus increasing the total
income component of your portfolio. This strategy should also
add stability to overall results, as income is always a
positive component of total return.
o Liquidity
A bond fund can supplement a money market fund or bank
account as a source of capital for unexpected contingencies.
T. Rowe Price fixed-income funds offer you easy access to
money through free checkwriting and convenient redemption or
exchange features. Of course, the value of a bond fund's
shares redeemed through checkwriting may be worth more or less
than their value at the time of their original purchase.
Suitability
High-quality bond funds are most suitable for the
following objectives: obtaining a higher current income with
minimal credit risk; compounding of income over time; or
diversifying overall investments to reduce volatility.
GOVERNMENT BOND YIELDS+
The Fund can invest in the world's highest yielding
government bonds, wherever they are found.
Chart 1
Global Government Bond Fund
+ Semiannual equivalent yields on 10-year government bonds,
1984 through 1994.
Source: Datastream
IRAs
An IRA is a long-term investment whose objective is to
accumulate personal savings for retirement. Due to the long-term
nature of the investment, even slight differences in performance
will result in significantly different assets at retirement.
Mutual funds, with their diversity of choice, can be used for IRA
investments. Generally, individuals may need to adjust their
PAGE 54
underlying IRA investments as their time to retirement and
tolerance for risk changes.
Other Features and Benefits
Each Fund is a member of the T. Rowe Price Family of Funds and
may help investors achieve various long-term investment goals,
such as investing money for retirement, saving for a down payment
on a home, or paying college costs. To explain how the Fund
could be used to assist investors in planning for these goals and
to illustrate basic principles of investing, various worksheets
and guides prepared by T. Rowe Price Associates, Inc. and/or T.
Rowe Price Investment Services, Inc. may be made available.
These currently include: the Asset Mix Worksheet which is
designed to show shareholders how to reduce their investment risk
by developing a diversified investment plan: the College Planning
Guide which discusses various aspects of financial planning to
meet college expenses and assists parents in projecting the costs
of a college education for their children; the Retirement
Planning Kit (also available in a PC version) which includes a
detailed workbook to determine how much money you may need for
retirement and suggests how you might invest to reach your goal;
and the Retirees Financial Guide which includes a detailed
workbook to determine how much money you can afford to spend and
still preserve your purchasing power and suggest how you might
invest to reach your goal. From time to time, other worksheets
and guides may be made available as well. Of course, an
investment in the Fund cannot guarantee that such goals will be
met.
To assist investors in understanding the different returns and
risk characteristics of various investments, the aforementioned
guides will include presentation of historical returns of various
investments using published indices. An example of this is shown
on the next page.
PAGE 55
Historical Returns for Different Investments
Annualized returns for periods ended 12/31/94
50 years 20 years 10 years 5 years
Small-Company Stocks 14.4% 20.3% 11.1% 11.8%
Large-Company Stocks 11.9 14.6 14.4 8.7
Foreign Stocks N/A 16.3 17.9 1.8
Long-Term Corporate Bonds 5.3 10.0 11.6 8.4
Intermediate-Term U.S.
Gov't. Bonds 5.6 9.3 9.4 7.5
Treasury Bills 4.7 7.3 5.8 4.7
U.S. Inflation 4.5 5.5 3.6 3.5
Sources: Ibbotson Associates, Morgan Stanley. Foreign stocks
reflect performance of The Morgan Stanley Capital International
EAFE Index, which includes some 1,000 companies representing the
stock markets of Europe, Australia, New Zealand, and the Far
East. This chart is for illustrative purposes only and should
not be considered as performance for, or the annualized return
of, any T. Rowe Price Fund. Past performance does not guarantee
future results.
Also included will be various portfolios demonstrating how
these historical indices would have performed in various
combinations over a specified time period in terms of return. An
example of this is shown on the next page.
PAGE 56
Performance of Retirement Portfolios*
Asset Mix Average Annualized Value
Returns 20 Years of
Ended 12/31/94 $10,000
Investment
After Period
________________ __________________ ____________
Nominal Real Best Worst
Portfolio GrowthIncomeSafety ReturnReturn**Year Year
I. Low
Risk 40% 40% 20% 12.4% 6.9% 24.9% 0.1% $ 92,515
II. Moderate
Risk 60% 30% 10% 13.5% 8.1% 29.1% -1.8% $118,217
III. High
Risk 80% 20% 0% 14.5% 9.1% 33.4% -5.2% $149,200
Source: T. Rowe Price Associates; data supplied by Lehman
Brothers, Wilshire Associates, and Ibbotson Associates.
* Based on actual performance for the 20 years ended 1993 of
stocks (85% Wilshire 5000 and 15% Europe, Australia, Far East
[EAFE] Index), bonds (Lehman Brothers Aggregate Bond Index
from 1976-94 and Lehman Brothers Government/Corporate Bond
Index from 1975), and 30-day Treasury bills from January 1975
through December 1994. Past performance does not guarantee
future results. Figures include changes in principal value
and reinvested dividends and assume the same asset mix is
maintained each year. This exhibit is for illustrative
purposes only and is not representative of the performance of
any T. Rowe Price fund.
** Based on inflation rate of 5.5% for the 20-year period ended
12/31/94.
Insights
From time to time, Insights, a T. Rowe Price publication of
reports on specific investment topics and strategies, may be
included in the Fund's fulfillment kit. Such reports may include
information concerning: calculating taxable gains and losses on
mutual fund transactions, coping with stock market volatility,
PAGE 57
benefiting from dollar cost averaging, understanding
international markets, investing in high-yield "junk" bonds,
growth stock investing, conservative stock investing, value
investing, investing in small companies, tax-free investing,
fixed income investing, investing in mortgage-backed securities,
as well as other topics and strategies.
YIELD INFORMATION
From time to time, the Funds may advertise a yield figure
calculated in the following manner:
In conformity with regulations of the Securities and Exchange
Commission, an income factor is calculated for each security in
the portfolio, based upon the security's market value at the
beginning of the period and expected yield-to-maturity. The
income factors are then totalled for all securities in the
portfolio. Next, expenses of the Fund for the period, net of
expected reimbursements, are deducted from the income to arrive
at net income, which is then converted to a per-share amount by
dividing net income by the average number of shares outstanding
during the period. The net income per share is divided by the
net asset value on the last day of the period to produce a
monthly yield which is then annualized. Quoted yield factors are
for comparison purposes only, and are not intended to indicate
future performance or forecast the dividend per share of the
Fund.
Global Government Bond Fund
The Fund's yield calculated as set forth above for the month
ended March 31, 1994 was 5.11%.
Short-Term Global Income Fund
The Fund's yield calculated as set forth above for the month
ended March 31, 1994 was 6.64%.
International Bond Fund
The Fund's yield calculated as set forth above for the month
ended March 31, 1994 was 6.93%.
PAGE 58
Redemptions in Kind
In the unlikely event a shareholder in any of the
International Funds were to receive an in kind redemption of
portfolio securities of a Fund, brokerage fees could be incurred
by the shareholder in subsequent sale of such securities.
Issuance of Fund Shares for Securities
Transactions involving issuance of a fund's shares for
securities or assets other than cash will be limited to (1) bona
fide reorganizations; (2) statutory mergers; or (3) other
acquisitions of portfolio securities that: (a) meet the
investment objectives and policies of the Funds; (b) are acquired
for investment and not for resale except in accordance with
applicable law; (c) have a value that is readily ascertainable
via listing on or trading in a recognized United States or
international exchange or market; and (d) are not illiquid.
MANAGEMENT OF FUNDS
The officers and directors of the Funds are listed below.
Unless otherwise noted, the address of each is 100 East Pratt
Street, Baltimore, Maryland 21202. Except as indicated, each has
been an employee of T. Rowe Price for more than five years. In
the list below, the Funds' directors who are considered
"interested persons" of T. Rowe Price or the Fund as defined
under Section 2(a)(19) of the Investment Company Act of 1940 are
noted with an asterisk (*). These directors are referred to as
inside directors by virtue of their officership, directorship,
and/or employment with T. Rowe Price.
LEO C. BAILEY, Director--Retired; Address: 3396 South Placita
Fabula, Green Valley, Arizona 85614
ANTHONY W. DEERING, Director--Director, President and Chief
Executive Officer, The Rouse Company, real estate developers,
Columbia, Maryland; Advisory Director, Kleinwort, Benson (North
America) Corporation, a registered broker-dealer; Address: 10275
Little Patuxent Parkway, Columbia, Maryland 21044
DONALD W. DICK, JR., Director--Principal, Overseas Partners,
Inc., a financial investment firm; formerly (6/65-3/89) Director
and Vice President-Consumer Products Division, McCormick &
Company, Inc., international food processors; Director, Waverly,
Inc., Baltimore, Maryland; Address: 111 Pavonia Avenue, Suite
334, Jersey City, New Jersey 07310
PAGE 59
ADDISON LANIER, Director--Financial management; President and
Director, Thomas Emery's Sons, Inc., and Emery Group, Inc.;
Director, Scinet Development and Holdings, Inc.; Address: 441
Vine Street, #2310, Cincinnati, Ohio 45202-2913
*M. DAVID TESTA, Chairman of the Board--Chairman of the Board,
Price-Fleming; Managing Director, T. Rowe Price; Vice President
and Director, T. Rowe Price Trust Company; Chartered Financial
Analyst; Chartered Investment Counselor
*MARTIN G. WADE, President and Director--President, Price-
Fleming; Director, Robert Fleming Holdings Limited; Address: 25
Copthall Avenue, London, EC2R 7DR, England
CHRISTOPHER D. ALDERSON, Vice President--Vice President, Price-
Fleming
PETER B. ASKEW, Vice President--Executive Vice President, Price-
Fleming
RICHARD J. BRUCE, Vice President--Vice President of Price-
Fleming; formerly (1985-1990) Investment Manager, Jardine Fleming
Investment Advisers, Tokyo
ROBERT P. CAMPBELL, Vice President--Vice President, T. Rowe Price
and Rowe Price-Fleming International Inc.; formerly (4/80-5/90)
Vice President and Director, Private Finance, New York Life
Insurance Company, New York, New York
MARK J. T. EDWARDS, Vice President--Vice President, Price-Fleming
JOHN R. FORD, Vice President--Executive Vice President, Price-
Fleming
HENRY H. HOPKINS, Vice President--Vice President, Price-Fleming
and T. Rowe Price Retirement Plan Services, Inc.; Managing
Director, T. Rowe Price; Vice President and Director, T. Rowe
Price Investment Services, Inc., T. Rowe Price Services, Inc. and
T. Rowe Price Trust Company
ROBERT C. HOWE, Vice President--Vice President, Price-Fleming and
T. Rowe Price
STEPHEN ILOTT, Vice President--Employee, Price-Fleming; formerly
(1988-1991) portfolio management, Fixed Income Portfolios Group,
Robert Fleming Holdings Limited, London
GEORGE A. MURNAGHAN, Vice President--Vice President, Price-
Fleming, T. Rowe Price, T. Rowe Price Trust Company, and T. Rowe
Price Investment Services, Inc.
JAMES S. RIEPE, Vice President--Managing Director, T. Rowe Price;
Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe
Price Retirement Plan Services, Inc. and T. Rowe Price Trust
Company; President and Director, T. Rowe Price Investment
Services, Inc.; Director, Rhone-Poulenc Rorer, Inc.
CHRISTOPHER ROTHERY, Vice President--Vice President,
Price-Fleming; formerly (1987-1989) employee of Robert Fleming
Holdings Limited, London
JAMES B. M. SEDDON, Vice President--Vice President, Price-Fleming
PAGE 60
CHARLES P. SMITH, Vice President--Managing Director, T. Rowe
Price; Vice President, Rowe Price-Fleming International, Inc.
BENEDICT R. F. THOMAS, Vice President--Vice President, Price-
Fleming
PETER VAN DYKE, Vice President--Managing Director, T. Rowe Price;
Vice President, Rowe Price-Fleming International, Inc.
DAVID J. L. WARREN, Vice President--Executive Vice President,
Price-Fleming
WILLIAM F. WENDLER, II, Vice President--Vice President, Price-
Fleming, T. Rowe Price and T. Rowe Price Investment Services,
Inc.
EDWARD A. WIESE, Vice President--Vice President, T. Rowe Price,
Rowe Price-Fleming International, Inc. and T. Rowe Price Trust
Company
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
PATRICIA S. BUTCHER, Assistant Secretary--Assistant Vice
President, T. Rowe Price
CARMEN F. DEYESU, Treasurer--Vice President, T. Rowe Price, T.
Rowe Price Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, Controller--Vice President, T. Rowe Price, T.
Rowe Price Services, Inc., and T. Rowe Price Trust Company
ANN B. CRANMER, Assistant Vice President--Vice President, Price-
Fleming
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Price-Fleming and Vice President, T. Rowe Price
LEAH P. HOLMES, Assistant Vice President--Vice President, Price-
Fleming and Assistant Vice President, T. Rowe Price
EDWARD T. SCHNEIDER, Assistant Vice President--Assistant Vice
President, T. Rowe Price and Vice President, T. Rowe Price
Services, Inc.
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T.
Rowe Price
The Funds' Executive Committee, comprised of Messrs. Testa and
Wade, has been authorized by the Board of Directors to exercise
all of the powers of the Board to manage the Funds in the
intervals between meetings of the Board, except the powers
prohibited by statute from being delegated.
PRINCIPAL HOLDERS OF SECURITIES
As of the date of the prospectus, the officers and directors
of the Funds, as a group, owned less than 1% of the outstanding
shares of each Fund.
PAGE 61
As of December 31, 1993, the following shareholders
beneficially owned more than 5% of the outstanding shares of the
Short-Term Global Income Fund: The Challenge Fund, 11 Magnolia
Parkway, Chevy Chase, Maryland 20815-4206; and the International
Bond Fund: Charles Scwab & Co. Inc., Reinvest Account, Attn.:
Mutual Fund Dept., 101 West Montgomery Street, San Francisco,
California 94104-4122; and Yachtcrew & Co., FDO Spectrum Income
Fund Account, Attn.: Mark White, State Street Bank and Trust Co.,
1776 Heritage Drive - 4W, North Quincy, Massachusetts 02171-2101.
INVESTMENT MANAGEMENT SERVICES
Services
Under the Management Agreement, Price-Fleming provides each
Fund with discretionary investment services. Specifically,
Price-Fleming is responsible for supervising and directing the
investments of each Fund in accordance with the Fund's investment
objective, program, and restrictions as provided in its
prospectus and this Statement of Additional Information. Price-
Fleming is also responsible for effecting all security
transactions on behalf of each Fund, including the negotiation of
commissions and the allocation of principal business and
portfolio brokerage. In addition to these services, Price-
Fleming provides the Funds with certain corporate administrative
services, including: maintaining the Funds' corporate existence,
corporate records, and registering and qualifying Fund shares
under federal and state laws; monitoring the financial,
accounting, and administrative functions of each Fund;
maintaining liaison with the agents employed by each Fund such as
the Fund's custodian and transfer agent; assisting each Fund in
the coordination of such agents' activities; and permitting
Price-Fleming's employees to serve as officers, directors, and
committee members of each Fund without cost to the Fund.
The Management Agreement also provides that Price-Fleming, its
directors, officers, employees, and certain other persons
performing specific functions for each Fund will only be liable
to the Fund for losses resulting from willful misfeasance, bad
faith, gross negligence, or reckless disregard of duty.
Under the Management Agreement, Price-Fleming is permitted to
utilize the services or facilities of others to provide it or the
Funds with statistical and other factual information, advice
regarding economic factors and trends, advice as to occasional
transactions in specific securities, and such other information,
PAGE 62
advice or assistance as Price-Fleming may deem necessary,
appropriate, or convenient for the discharge of its obligations
under the Management Agreement or otherwise helpful to the Funds.
Certain administrative support is provided by T. Rowe Price
which receives from Price-Fleming a fee of .15% of the market
value of all assets in equity accounts, .15% of the market value
of all assets in active fixed income accounts and .035% of the
market value of all assets in passive fixed income accounts under
Price-Fleming's management.
Price-Fleming has entered into separate letters of agreement
with Fleming Investment Management Limited ("FIM") and Jardine
Fleming Investment Holdings Limited ("JFIH"), wherein FIM and
JFIH have agreed to render investment research and administrative
support to Price-Fleming. FIM is a wholly-owned subsidiary of
Robert Fleming Asset Management Limited which is a wholly-owned
subsidiary of Robert Fleming Holdings Limited ("Robert Fleming
Holdings"). JFIH is an indirect wholly-owned subsidiary of
Jardine Fleming Group Limited. Under the letters of agreement,
these companies will provide Price-Fleming with research material
containing statistical and other factual information, advice
regarding economic factors and trends, advice on the allocation
of investments among countries and as between debt and equity
classes of securities, and research and occasional advice with
respect to specific companies. For these services, FIM and JFIH
each receives a fee of .075% of the market value of all assets in
equity accounts under Price-Fleming's management. JFIH receives
a fee of .075% of the market value of all assets in active fixed
income accounts and .0175% of such market value in passive fixed
income accounts under Price-Fleming's management.
Robert Fleming personnel have extensive research resources
throughout the world. A strong emphasis is placed on direct
contact with companies in the research universe. Robert Fleming
personnel, who frequently speak the local language, have access
to the full range of research products available in the market
place and are encouraged to produce independent work dedicated
solely to portfolio investment management, which adds value to
that generally available.
Management Fee
Each Fund pays Price-Fleming a fee ("Fee") which consists of
two components: a Group Management Fee ("Group Fee") and an
Individual Fund Fee ("Fund Fee"). The Fee is paid monthly to
PAGE 63
Price-Fleming on the first business day of the next succeeding
calendar month and is calculated as described below.
The monthly Group Fee ("Monthly Group Fee") is the sum of the
daily Group Fee accruals ("Daily Group Fee Accruals") for each
month. The Daily Group Fee Accrual for any particular day is
computed by multiplying the Price Funds' group fee accrual as
determined below ("Daily Price Funds' Group Fee Accrual") by the
ratio of each Fund's net assets for that day to the sum of the
aggregate net assets of the Price Funds for that day. The Daily
Price Funds' Group Fee Accrual for any particular day is
calculated by multiplying the fraction of one (1) over the number
of calendar days in the year by the annualized Daily Price Funds'
Group Fee Accrual for that day as determined in accordance with
the following schedule:
Price Funds'
Annual Group Base Fee
Rate for Each Level of Assets
_________________________________
0.480% First $1 billion
0.450% Next $1 billion
0.420% Next $1 billion
0.390% Next $1 billion
0.370% Next $1 billion
0.360% Next $2 billion
0.350% Next $2 billion
0.340% Next $5 billion
0.330% Next $10 billion
0.320% Next $10 billion
0.310% Thereafter
For the purpose of calculating the Group Fee, the Price Funds
include all the mutual funds distributed by T. Rowe Price
Investment Services, Inc. (excluding T. Rowe Price Spectrum Fund,
Inc. and any institutional or private label mutual funds). For
the purpose of calculating the Daily Price Funds' Group Fee
Accrual for any particular day, the net assets of each Price Fund
are determined in accordance with the Funds' prospectus as of the
close of business on the previous business day on which the Fund
was open for business.
The monthly Fund Fee ("Monthly Fund Fee") is the sum of the
daily Fund Fee accruals ("Daily Fund Fee Accruals") for each
month. The Daily Fund Fee Accrual for any particular day is
computed by multiplying the fraction of one (1) over the number
PAGE 64
of calendar days in the year by the Fund Fee Rate of 0.25% for
the Short-Term Global Income Fund and 0.35% each for the Global
Government Bond and International Bond Funds, and multiplying
this product by the net assets of the Fund for that day, as
determined in accordance with the Funds' prospectus as of the
close of business on the previous business day on which the Fund
was open for business.
The Short-Term Global Income Fund paid management fees for the
year 1993, $341,000 and did not pay any management fees to Price-
Fleming for the fiscal year ended 1992, Global Government Bond
Fund paid management fees for the years 1993, and 1992, $269,000,
$253,000 and did not pay any management fees to Price-Fleming for
the fiscal year ended 1991. The management fees paid by the
International Bond Fund for the years 1993, 1992, and 1991, were
$4,363,000, $3,567,000, and $2,502,000, respectively.
Limitation on Fund Expenses
The Management Agreement between each Fund and Price-Fleming
provides that each Fund will bear all expenses of its operations
not specifically assumed by Price-Fleming. However, in
compliance with certain state regulations, Price-Fleming will
reimburse each Fund for certain expenses which in any year exceed
the limits prescribed by any state in which the Fund's shares are
qualified for sale. Presently, the most restrictive expense
ratio limitation imposed by any state is 2.5% of the first $30
million of a Fund's average daily net assets, 2% of the next $70
million of the average daily net assets, and 1.5% of net assets
in excess of $100 million. For the purpose of determining
whether a Fund is entitled to reimbursement, the expenses of each
Fund are calculated on a monthly basis. If the Fund is entitled
to reimbursement, that month's management fee will be reduced or
postponed, with any adjustment made after the end of the year.
Emerging Markets Bond Fund
In the interest of limiting the expenses of the Fund during
its initial period of operations, Price-Fleming agreed to bear
any expenses through December 31, 1996, which would cause the
Fund's ratio of expenses to average net assets to exceed 1.25%.
Expenses paid or assumed under this agreement are subject to
reimbursement to Price-Fleming by the Fund whenever the Fund's
expense ratio is below 1.25%; however no reimbursement will be
made to Price-Fleming after December 31, 1998, or if it would
result in the expense ratio exceeding 1.25%. The Management
Agreement also provides that one or more additional expense
PAGE 65
limitation periods (of the same or different levels and time
periods) may be implemented after the expiration of the current
one on December 31, 1996, and that with respect to any such
additional limitation period, the Fund may reimburse Price-
Fleming, provided the reimbursement does not result in the Fund's
aggregate expenses exceeding the additional expense
limitation.
Short-Term Global Income Fund
In the interest of limiting the expenses of the Fund during
its initial period of operations, Price-Fleming agreed to bear
any expenses through December 31, 1993, which would cause the
Fund's ratio of expenses to average net assets to exceed 1.00%.
Expenses paid or assumed under this agreement are subject to
reimbursement to Price-Fleming by the Fund whenever the Fund's
expense ratio is below 1.00%; however no reimbursement will be
made to Price-Fleming after December 31, 1995, or if it would
result in the expense ratio exceeding 1.00%. The Management
Agreement also provides that one or more additional expense
limitation periods (of the same or different levels and time
periods) may be implemented after the expiration of the current
one on December 31, 1993, and that with respect to any such
additional limitation period, the Fund may reimburse Price-
Fleming, provided the reimbursement does not result in the Fund's
aggregate expenses exceeding the additional expense limitation.
Pursuant to this agreement, $149,000 of management fees were not
accrued by the Fund for the period ended December 31, 1992, and
$37,000 of other expenses were borne by Price-Fleming.
Pursuant to the Fund's expense limitations, management fees
aggregating $109,000, were not accrued for the year ended
December 31, 1993. In addition, pursuant to past expense
limitations, $186,000 of unaccrued fees and other expenses are
subject to reimbursement through December 31, 1995.
Global Government Bond Fund
In the interest of limiting the expenses of the Fund during
its initial period of operations, Price-Fleming agreed to bear
any expenses through December 31, 1992, which would cause the
Fund's ratio of expenses to average net assets to exceed 1.20%.
Effective January 1, 1993 Price-Fleming agreed to extend the
Fund's existing expense limitation of 1.20% for a period of two
years through December 31, 1994. The Management Agreement also
provides that one or more additional expense limitation periods
PAGE 66
(of the same or different time periods) may be implemented after
the expiration of the current one on December 31, 1992, and that
with respect to any such additional limitation period, the Fund
may reimburse Price-Fleming, provided the reimbursement does not
result in the Fund's aggregate expenses exceeding the additional
expense limitation or any applicable state expense limitation.
Expenses paid or assumed under each agreement are subject to
reimbursement to Price-Fleming by the Fund whenever the Fund's
expense ratio is below 1.20%; however, no reimbursement will be
made after December 31, 1994 (for the initial agreement) or
December 31, 1996 (for the second agreement), or if it would
result in the expense ratio exceeding 1.50%.
Pursuant to the Fund's expense limitations, management fees
aggregating $98,000, were not accrued for the year ended December
31, 1993. In addition, pursuant to past expense limitations,
$388,000 of unaccrued fees and other expenses are subject to
reimbursement through December 31, 1995.
International Bond Fund
The Fund is a party to a Special Servicing Agreement
("Agreement") between and among T. Rowe Price Spectrum Fund, Inc.
("Spectrum Fund"), T. Rowe Price, T. Rowe Price Services, Inc.
and various other T. Rowe Price funds which, along with the
Funds, are funds in which Spectrum Fund invests (collectively all
such funds "Underlying Price Funds").
The Agreement provides that, if the Board of
Directors/Trustees of any Underlying Price Fund determines that
such Underlying Fund's share of the aggregate expenses of
Spectrum Fund is less than the estimated savings to the
Underlying Price Fund from the operation of Spectrum Fund, the
Underlying Price Fund will bear those expenses in proportion to
the average daily value of its shares owned by Spectrum Fund,
provided further that no Underlying Price Fund will bear such
expenses in excess of the estimated savings to it. Such savings
are expected to result primarily from the elimination of numerous
separate shareholder accounts which are or would have been
invested directly in the Underlying Price Funds and the resulting
reduction in shareholder servicing costs. Although such cost
savings are not certain, the estimated savings to the Underlying
Price Funds generated by the operation of Spectrum Fund are
expected to be sufficient to offset most, if not all, of the
expenses incurred by Spectrum Fund.
PAGE 67
DISTRIBUTOR FOR FUNDS
T. Rowe Price Investment Services, Inc. ("Investment
Services"), a Maryland corporation formed in 1980 as a wholly-
owned subsidiary of T. Rowe Price, serves as the Funds'
distributor. Investment Services is registered as a broker-
dealer under the Securities Exchange Act of 1934 and is a member
of the National Association of Securities Dealers, Inc. The
offering of each Fund's shares is continuous.
Investment Services is located at the same address as the
Funds and T. Rowe Price -- 100 East Pratt Street, Baltimore,
Maryland 21202.
Investment Services serves as distributor to the Funds
pursuant to an Underwriting Agreement ("Underwriting Agreement"),
which provides that each Fund will pay all fees and expenses in
connection with: registering and qualifying its shares under the
various state "blue sky" laws; preparing, setting in type,
printing, and mailing its prospectuses and reports to
shareholders; and issuing its shares, including expenses of
confirming purchase orders.
The Underwriting Agreement provides that Investment Services
will pay all fees and expenses in connection with: printing and
distributing prospectuses and reports for use in offering and
selling Fund shares; preparing, setting in type, printing, and
mailing all sales literature and advertising; Investment
Services' federal and state registrations as a broker-dealer; and
offering and selling Fund shares, except for those fees and
expenses specifically assumed by each Fund. Investment Services'
expenses are paid by T. Rowe Price.
Investment Services acts as the agent of each Fund in
connection with the sale of its shares in all states in which the
shares are qualified and in which Investment Services is
qualified as a broker-dealer. Under the Underwriting Agreement,
Investment Services accepts orders for Fund shares at net asset
value. No sales charges are paid by investors or the Funds.
CUSTODIAN
State Street Bank and Trust Company (the "Bank") is the
custodian for the Funds' U.S. securities and cash, but it does
not participate in the Funds' investment decisions. Portfolio
PAGE 68
securities purchased in the U.S. are maintained in the custody of
the Bank and may be entered into the Federal Reserve Book Entry
System, or the security depository system of the Depository Trust
Corporation. The Funds have entered into a Custodian Agreement
with The Chase Manhattan Bank, N.A., London, pursuant to which
portfolio securities which are purchased outside the United
States are maintained in the custody of various foreign branches
of The Chase Manhattan Bank and such other custodians, including
foreign banks and foreign securities depositories in accordance
with regulations under the Investment Company Act of 1940. The
Bank's main office is at 225 Franklin Street, Boston,
Massachusetts 02110. The address for The Chase Manhattan Bank,
N.A., London is Woolgate House, Coleman Street, London, EC2P 2HD,
England.
CODE OF ETHICS
The Funds' investment adviser (Price-Fleming) has a written
Code of Ethics which requires all employees to obtain prior
clearance before engaging in any personal securities
transactions. In addition, all employees must report their
personal securities transactions within ten days of their
execution. Employees will not be permitted to effect
transactions in a security: If there are pending client orders in
the security; the security has been purchased or sold by a client
within seven calendar days; the security is being considered for
purchase for a client; the security is subject to internal
trading restrictions. In addition, employees are prohibited from
engaging in short-term trading (e.g., purchases and sales
involving the same security within 60 days. Any material
violation of the Code of Ethics is reported to the Board of the
Fund. The Board also reviews the administration of the Code of
Ethics on an annual basis.
PORTFOLIO TRANSACTIONS
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio
securities on behalf of the Fund are made by Price-Fleming.
Price-Fleming is also responsible for implementing these
decisions, including the negotiation of commissions and the
allocation of portfolio brokerage and principal business. The
Fund's purchases and sales of fixed-income portfolio securities
are normally done on a principal basis and do not involve the
PAGE 69
payment of a commission although they may involve the designation
of selling concessions. That part of the discussion below
relating solely to brokerage commissions would not normally apply
to the Fund. However, it is included because Price-Fleming does
manage a significant number of common stock portfolios which do
engage in agency transactions and pay commissions and because
some research and services resulting from the payment of such
commissions may benefit the Fund.
How Brokers and Dealers are Selected
Equity Securities
In purchasing and selling each Fund's portfolio securities, it
is Price-Fleming's policy to obtain quality execution at the most
favorable prices through responsible broker-dealers and, in the
case of agency transactions, at competitive commission rates
where such rates are negotiable. However, under certain
conditions, a Fund may pay higher brokerage commissions in return
for brokerage and research services. In selecting broker-dealers
to execute a Fund's portfolio transactions, consideration is
given to such factors as the price of the security, the rate of
the commission, the size and difficulty of the order, the
reliability, integrity, financial condition, general execution
and operational capabilities of competing brokers and dealers,
their expertise in particular markets and the brokerage and
research services they provide to Price-Fleming or the Funds. It
is not the policy of Price-Fleming to seek the lowest available
commission rate where it is believed that a broker or dealer
charging a higher commission rate would offer greater reliability
or provide better price or execution.
Transactions on stock exchanges involve the payment of
brokerage commissions. In transactions on stock exchanges in the
United States, these commissions are negotiated. Traditionally,
commission rates have generally not been negotiated on stock
markets outside the United States. In recent years, however, an
increasing number of overseas stock markets have adopted a system
of negotiated rates, although a number of markets continue to be
subject to an established schedule of minimum commission rates.
It is expected that equity securities will ordinarily be
purchased in the primary markets, whether over-the-counter or
listed, and that listed securities may be purchased in the
over-the-counter market if such market is deemed the primary
market. In the case of securities traded on the over-the-counter
markets, there is generally no stated commission, but the price
usually includes an undisclosed commission or markup. In
PAGE 70
underwritten offerings, the price includes a disclosed, fixed
commission or discount.
Fixed Income Securities
For fixed income securities, it is expected that purchases and
sales will ordinarily be transacted with the issuer, the issuer's
underwriter, or with a primary market maker acting as principal
on a net basis, with no brokerage commission being paid by the
Fund. However, the price of the securities generally includes
compensation which is not disclosed separately. Transactions
placed though dealers who are serving as primary market makers
reflect the spread between the bid and asked prices.
With respect to equity and fixed income securities, Price-
Fleming may effect principal transactions on behalf of the Funds
with a broker or dealer who furnishes brokerage and/or research
services, designate any such broker or dealer to receive selling
concessions, discounts or other allowances or otherwise deal with
any such broker or dealer in connection with the acquisition of
securities in underwritings. The prices the Fund pays to
underwriters of newly-issued securities usually include a
concession paid by the issuer to the underwriter. Price-Fleming
may receive research services in connection with brokerage
transactions, including designations in fixed price offerings.
Price-Fleming may cause a Fund to pay a broker-dealer who
furnishes brokerage and/or research services a commission for
executing a transaction that is in excess of the commission
another broker-dealer would have received for executing the
transaction if it is determined that such commission is
reasonable in relation to the value of the brokerage and/or
research services which have been provided. In some cases,
research services are generated by third parties but are provided
to Price-Fleming by or through broker-dealers.
Descriptions of Research Services Received from Brokers and
Dealers
Price-Fleming receives a wide range of research services from
brokers and dealers covering investment opportunities throughout
the world, including information on the economies, industries,
groups of securities, individual companies, statistics, political
developments, technical market action, pricing and appraisal
services, and performance analyses of all the countries in which
a Fund's portfolio is likely to be invested. Price-Fleming
cannot readily determine the extent to which commissions charged
PAGE 71
by brokers reflect the value of their research services, but
brokers occasionally suggest a level of business they would like
to receive in return for the brokerage and research services they
provide. To the extent that research services of value are
provided by brokers, Price-Fleming may be relieved of expenses
which it might otherwise bear. In some cases, research services
are generated by third parties but are provided to Price-Fleming
by or through brokers.
Commissions to Brokers who Furnish Research Services
Certain broker-dealers which provide quality execution
services also furnish research services to Price-Fleming. Price-
Fleming has adopted a brokerage allocation policy embodying the
concepts of Section 28(e) of the Securities Exchange Act of 1934,
which permits an investment adviser to cause its clients to pay a
broker which furnishes brokerage or research services a higher
commission than that which might be charged by another broker
which does not furnish brokerage or research services, or which
furnishes brokerage or research services deemed to be of lesser
value, if such commission is deemed reasonable in relation to the
brokerage and research services provided by the broker, viewed in
terms of either that particular transaction or the overall
responsibilities of the adviser with respect to the accounts as
to which it exercises investment discretion. Accordingly, Price-
Fleming may assess the reasonableness of commissions in light of
the total brokerage and research services provided by each
particular broker.
Miscellaneous
Research services furnished by brokers through which Price-
Fleming effects securities transactions may be used in servicing
all accounts managed by Price-Fleming, Conversely, research
services received from brokers which execute transactions for a
particular Fund will not necessarily be used by Price-Fleming
exclusively in connection with the management of that Fund.
Some of Price-Fleming's other clients have investment
objectives and programs similar to those of the Funds. Price-
Fleming may occasionally make recommendations to other clients
which result in their purchasing or selling securities
simultaneously with the Funds. As a result, the demand for
securities being purchased or the supply of securities being sold
may increase, and this could have an adverse effect on the price
of those securities. It is Price-Fleming's policy not to favor
one client over another in making recommendations or in placing
PAGE 72
orders. Price-Fleming frequently follows the practice of
grouping orders of various clients for execution which generally
results in lower commission rates being attained. In certain
cases, where the aggregate order is executed in a series of
transactions at various prices on a given day, each participating
client's proportionate share of such order reflects the average
price paid or received with respect to the total order. Price-
Fleming has established a general investment policy that it will
ordinarily not make additional purchases of a common stock of a
company for its clients (including the T. Rowe Price Funds) if,
as a result of such purchases, 10% or more of the outstanding
common stock of such company would be held by its clients in the
aggregate.
None of the Funds allocates business to any broker-dealer on
the basis of its sales of the Fund's shares. However, this does
not mean that broker-dealers who purchase Fund shares for their
clients will not receive business from the Fund.
Transactions with Related Brokers and Dealers
As provided in the Investment Management Agreement between
each Fund and Price-Fleming, Price-Fleming is responsible not
only for making decisions with respect to the purchase and sale
of the Fund's portfolio securities, but also for implementing
these decisions, including the negotiation of commissions and the
allocation of portfolio brokerage and principal business. It is
expected that Price-Fleming will often place orders for a Fund's
portfolio transactions with broker-dealers through the trading
desks of certain affiliates of Robert Fleming Holdings Limited
("Robert Fleming"), an affiliate of Price-Fleming. Robert
Fleming, through Copthall Overseas Limited, a wholly-owned
subsidiary, owns 25% of the common stock of Price-Fleming. Fifty
percent of the common stock of Price-Fleming is owned by TRP
Finance, Inc., a wholly-owned subsidiary of T. Rowe Price, and
the remaining 25% is owned by Jardine Fleming Holdings Limited, a
subsidiary of Jardine Fleming Group Limited ("JFG"). JFG is 50%
owned by Robert Fleming and 50% owned by Jardine Matheson
Holdings Limited. The affiliates through whose trading desks
such orders may be placed include Fleming Investment Management
Limited ("FIM"), and Robert Fleming & Co. Limited ("RF&Co.").
FIM and RF&Co. are wholly-owned subsidiaries of Robert Fleming.
These trading desks will operate under strict instructions from
the Fund's portfolio manager with respect to the terms of such
transactions. Neither Robert Fleming, JFG, nor their affiliates
will receive any commission, fee, or other remuneration for the
use of their trading desks, although orders for a Fund's
PAGE 73
portfolio transactions may be placed with affiliates of Robert
Fleming and JFG who may receive a commission.
The Board of Directors of the Funds has authorized Price-
Fleming to utilize certain affiliates of Robert Fleming and JFG
in the capacity of broker in connection with the execution of
each Fund's portfolio transactions, provided that Price-Fleming
believes that doing so will result in an economic advantage (in
the form of lower execution costs or otherwise) being obtained
for each Fund. These affiliates include Jardine Fleming
Securities Limited ("JFS"), a wholly-owned subsidiary of JFG,
RF&Co., Jardine Fleming Australia Securities Limited, and Robert
Fleming, Inc. (a New York brokerage firm).
The above-referenced authorization was made in accordance with
Section 17(e) of the Investment Company Act of 1940 (the "1940
Act") and Rule 17e-1 thereunder which require the Funds'
independent directors to approve the procedures under which
brokerage allocation to affiliates is to be made and to monitor
such allocations on a continuing basis. Except with respect to
tender offers, it is not expected that any portion of the
commissions, fees, brokerage, or similar payments received by the
affiliates of Robert Fleming in such transactions will be
recaptured by the Funds. The directors have reviewed and from
time to time may continue to review whether other recapture
opportunities are legally permissible and available and, if they
appear to be, determine whether it would be advisable for a Fund
to seek to take advantage of them.
Other
For the fiscal years ended December 31, 1993, December 31,
1992 and December 31, 1991, the Global Government Bond Fund
engaged in portfolio transactions involving broker-dealers
totaling $144,423,000, $129,060,000 and $174,169,000,
respectively. The entire amounts for each year represented
principal transactions as to which the Global Government Bond
Fund has no knowledge of the profits or losses realized by the
respective broker-dealers. For the fiscal years ended December
31, 1993, December 31, 1992 and December 31, 1991, approximately
0%, 0% and 30%, respectively, were placed with firms which
provided research, statistical, or other services to Price-
Fleming in connection with the management of the Global
Government Bond Fund or, in some cases, to the Global Government
Bond Fund.
PAGE 74
For the fiscal year ended December 31, 1993 and fiscal period
ended December 31, 1992, the Short-Term Global Income Fund
engaged in portfolio transactions involving broker-dealers
totaling $4,780,555,000 and $582,425,000, respectively. The
entire amount for the period represented principal transactions
as to which the Short-Term Global Income Fund had no knowledge of
the profits or losses realized by the respective dealers. Of
these portfolio transactions, approximately 0%, was paid to firms
which provided research, statistical, or other services to Price-
Fleming in connection with the management of the Short-Term
Global Income Fund or, in some cases, to the Short-Term Global
Income Fund.
For the fiscal years ended December 31, 1993, December 31,
1992 and December 31, 1991, the International Bond Fund engaged
in portfolio transactions involving broker-dealers totaling
$157,373,000, $6,813,188,000 and $5,874,607,000, respectively.
The entire amounts for each year represented principal
transactions as to which the International Bond Fund has no
knowledge of the profits or losses realized by the respective
broker-dealers. Of all such portfolio transactions, 0%, 0% and
33%, respectively, were placed with firms which provided
research, statistical, or other services to Price-Fleming in
connection with the management of the International Bond Fund or,
in some cases, to the International Bond Fund.
PRICING OF SECURITIES
Fixed income securities are generally traded in the over-the-
counter market and are valued at a price deemed best to reflect a
fair value as quoted by dealers who make markets in these
securities or by an independent pricing service.
For purposes of determining each Fund's net asset value per
share, all assets and liabilities initially expressed in foreign
currencies are converted into U.S. dollars at the mean of the bid
and offer prices of such currencies against U.S. dollars quoted
by any major bank. If such quotations are not available, the
rate of exchange will be determined in accordance with policies
established in good faith by the Board of Directors.
Securities or other assets for which the above valuation
procedures are deemed not to reflect fair value will be appraised
at prices deemed best to reflect their fair value. Such
determinations will be made in good faith by or under the
PAGE 75
supervision of the officers of the Fund, as authorized by the
Board of Directors.
Trading in the portfolio securities of each Fund may take
place in various foreign markets on certain days (such as
Saturday) when the Funds are not open for business and do not
calculate their net asset values. In addition, trading in a
Fund's portfolio securities may not occur on days when the Fund
is open. The calculation of each Fund's net asset value normally
will not take place contemporaneously with the determination of
the value of the Fund's portfolio securities. Events affecting
the values of portfolio securities that occur between the time
their prices are determined and the time each Fund's net asset
value is calculated will not be reflected in the Fund's net asset
value unless Price-Fleming, under the supervision of the Fund's
Board of Directors, determines that the particular event should
be taken into account in computing the Fund's net asset value.
NET ASSET VALUE PER SHARE
The purchase and redemption price of each Fund's shares is
equal to that Fund's net asset value per share or share price.
Each Fund determines its net asset value per share by subtracting
its liabilities (including accrued expenses and dividends
payable) from its total assets (the market value of the
securities the Fund holds plus cash and other assets, including
income accrued but not yet received) and dividing the result by
the total number of shares outstanding. The net asset value per
share of each Fund is calculated as of the close of trading on
the New York Stock Exchange ("NYSE") every day the NYSE is open
for trading. The NYSE is closed on the following days: New
Year's Day, Washington's Birthday, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Determination of net asset value (and the offering, sale,
redemption and repurchase of shares) for a Fund may be suspended
at times (a) during which the NYSE is closed, other than
customary weekend and holiday closings, (b) during which trading
on any of such Exchanges is restricted (c) during which an
emergency exists as a result of which disposal by a Fund of
securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Fund fairly to determine the value
of its net assets, or (d) during which a governmental body having
jurisdiction over the Fund may by order permit such a suspension
for the protection of the Fund's shareholders; provided that
applicable rules and regulations of the Securities and Exchange
PAGE 76
Commission (or any succeeding governmental authority) shall
govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
DIVIDENDS
Unless you elect otherwise, the Fund's annual capital gain
distributions, if any, will be reinvested on the reinvestment
date using the NAV per share of that date. The reinvestment date
normally precedes the payment date by about 10 days although the
exact timing is subject to change.
TAX STATUS
Each Fund intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986,
as amended ("Code").
Dividends and distributions paid by the Funds are not eligible
for the dividends-received deduction for corporate shareholders,
if as expected, none of the Fund's income consists of dividends
paid by United States corporations. Capital gain distributions
paid from these Funds are never eligible for this deduction. For
tax purposes, it does not make any difference whether dividends
and capital gain distributions are paid in cash or in additional
shares. Each Fund must declare dividends equal to at least 98%
of ordinary income (as of December 31) and capital gains (as of
October 31) in order to avoid a federal excise tax and distribute
100% of ordinary income and capital gains as of December 31 to
avoid federal income tax.
Foreign currency gains and losses, including the portion of
gain or loss on the sale of debt securities attributable to
foreign exchange rate fluctuations are taxable as ordinary
income. If the net effect of these transactions is a gain, the
dividend paid by the fund will be increased; if the result is a
loss, for the Funds, a portion of the income dividends paid could
be classified as a return of capital. Adjustments, to reflect
these gains and losses will be made at the end of each Fund's
taxable year.
At the time of your purchase, each Bond Fund's net asset value
may reflect undistributed capital gains or net unrealized
appreciation of securities held by the Fund. A subsequent
distribution to you of such amounts, although constituting a
PAGE 77
return of your investment, would be taxable either as dividends
or capital gain distributions. For federal income tax purposes,
each Fund is permitted to carry forward its net realized capital
losses, if any, for eight years, and realize net capital gains up
to the amount of such losses without being required to pay taxes
on, or distribute such gains. On March 31, 1994, the books of
each Fund indicated that each Fund's aggregate net assets
included undistributed net income, net realized capital gains or
losses, and unrealized appreciation or depreciation which are
listed below.
Net Realized Unrealized
Fund Capital Losses Depreciation
Short-Term Global Income $ 3,324,000 $ 2,554,000
Global Government Bond 781,000 721,000
International Bond 10,099,000 15,121,000
Income received by each Fund from sources within various
foreign countries may be subject to foreign income taxes withheld
at the source. Under the Code, if more than 50% of the value of
a Fund's total assets at the close of its taxable year comprise
securities issued by foreign corporations, the Fund may file an
election with the Internal Revenue Service to "pass through" to
the Fund's shareholders the amount of any foreign income taxes
paid by the Fund. Pursuant to this election, shareholders will
be required to: (i) include in gross income, even though not
actually received, their respective pro rata share of foreign
taxes paid by the Fund; (ii) treat their pro rata share of
foreign taxes as paid by them; and (iii) either deduct their pro
rata share of foreign taxes in computing their taxable income, or
use it as a foreign tax credit against U.S. income taxes (but not
both). No deduction for foreign taxes may be claimed by a
shareholder who does not itemize deductions.
Each Fund intends to meet the requirements of the Code to
"pass through" to its shareholders foreign income taxes paid, but
there can be no assurance that a Fund will be able to do so.
Each shareholder will be notified within 60 days after the close
of each taxable year of a Fund, that Fund will "pass through"
foreign taxes paid for that year, and, if so, the amount of each
shareholder's pro rata share (by country) of (i) the foreign
taxes paid, and (ii) the Fund's gross income from foreign
sources. Of course, shareholders who are not liable for federal
income taxes, such as retirement plans qualified under Section
401 of the Code, will not be affected by any such "pass through"
of foreign tax credits.
PAGE 78
If, in any taxable year, a Fund should not qualify as a
regulated investment company under the Code: (i) the Fund would
be taxed at normal corporate rates on the entire amount of its
taxable income without deduction for dividends or other
distributions to shareholders; (ii) the Fund's distributions to
the extent made out of the Fund's current or accumulated earnings
and profits would be taxable to shareholders as ordinary
dividends (regardless of whether they would otherwise have been
considered capital gain dividends), and the Funds would qualify
for the 70% deduction for dividends received by corporations; and
(iii) foreign tax credits would not "pass through" to
shareholders.
Passive Foreign Investment Companies
The Fund may purchase the securities of certain foreign
investment funds or trusts called passive foreign investment
companies. Capital gains on the sale of such holdings will be
deemed to be ordinary income regardless of how long the Fund
holds it investment. In addition to bearing their proportionate
share of the funds expenses (management fees and operating
expenses) shareholders will also indirectly bear similar expenses
of such funds. In addition, the Fund may be subject to corporate
income tax and an interest charge on certain dividends and
capital gains earned from these investments, regardless of
whether such income and gains were distributed to shareholders.
In accordance with tax regulations, the Fund intends to treat
these securities as sold on the last day of the Fund's fiscal
year and recognize any gains for tax purposes at that time;
losses will not be recognized. Such gains will be considered
ordinary income which the Fund will be required to distribute
even though it has not sold the security and received cash to pay
such distributions.
Taxation of Foreign Shareholders
The Code provides that dividends from net income (which are
deemed to include for this purpose each shareholder's pro rata
share of foreign taxes paid by each Fund - see discussion of
"pass through" of the foreign tax credit to U.S. shareholders),
will be subject to U.S. tax. For shareholders who are not
engaged in a business in the U.S., this tax would be imposed at
the rate of 30% upon the gross amount of the dividend in the
PAGE 79
absence of a Tax Treaty providing for a reduced rate or exemption
from U.S. taxation. Distributions of net long-term capital gains
realized by each Fund are not subject to tax unless the foreign
shareholder is a nonresident alien individual who was physically
present in the U.S. during the tax year for more than 182 days.
CAPITAL STOCK
The T. Rowe Price International Funds, Inc. (the
"Corporation") was originally organized in 1979 as a Maryland
corporation under the name T. Rowe Price International Fund, Inc.
("the Old Corporation"). Pursuant to the Annual Meeting of
Shareholders held on April 22, 1986, an Agreement and Plan of
Reorganization and Liquidation was adopted in order to convert
the Old Corporation from a Maryland corporation to a
Massachusetts Business Trust, named the T. Rowe Price
International Trust ("the Trust"). This conversion became
effective on May 1, 1986. Pursuant to the Annual Meeting of
Shareholders held on April 19, 1990, an Agreement and Plan of
Reorganization and Liquidation was adopted in order to convert
the Trust from a Massachusetts Business Trust to a Maryland
corporation. This conversion become effective May 1, 1990. The
Corporation is registered with the Securities and Exchange
Commission under the 1940 Act as a diversified, open-end
investment company, commonly known as a "mutual fund."
Currently, the Corporation consists of nine series, each of
which represents a separate class of the Corporation's shares and
has different objectives and investment policies. The
International Bond Fund was added as a separate series of the
Trust in 1986, and the designation of the existing series of the
Trust was, at that time, changed to the International Stock Fund.
In 1988 and 1990, respectively, the International Discovery and
European Stock Funds were added as separate series of the Trust.
Effective May 1, 1990, all series of the Trust became series of
the Corporation. In the same year, after the May 1, 1990
reorganization, the New Asia and Global Government Bond Funds
were added as separate series of the Corporation. The Japan,
Short-Term Global Income and Latin America Funds were added as
separate series of the Corporation in 1991, 1992, and 1993,
respectively. The International Stock, International Discovery,
European Stock, Japan and New Asia Funds are described in a
separate Statement of Additional Information. The Charter also
provides that the Board of Directors may issue additional series
of shares.
PAGE 80
The Funds' Charter authorizes the Board of Directors to
classify and reclassify any and all shares which are then
unissued, including unissued shares of capital stock into any
number of classes or series, each class or series consisting of
such number of shares and having such designations, such powers,
preferences, rights, qualifications, limitations, and
restrictions, as shall be determined by the Board subject to the
Investment Company Act and other applicable law. The shares of
any such additional classes or series might therefore differ from
the shares of the present class and series of capital stock and
from each other as to preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption, subject to
applicable law, and might thus be superior or inferior to the
capital stock or to other classes or series in various
characteristics. The Board of Directors may increase or decrease
the aggregate number of shares of stock or the number of shares
of stock of any class or series that each Fund has authorized to
issue without shareholder approval.
Each share of each series has equal voting rights with every
other share of every other series, and all shares of all series
vote as a single group except where a separate vote of any class
or series is required by the 1940 Act, the laws of the State of
Maryland, the Corporation's Articles of Incorporation, the By-
Laws of the Corporation, or as the Board of Directors may
determine in its sole discretion. Where a separate vote is
required with respect to one or more classes or series, then the
shares of all other classes or series vote as a single class or
series, provided that, as to any matter which does not affect the
interest of a particular class or series, only the holders of
shares of the one or more affected classes or series is entitled
to vote. The preferences, rights, and other characteristics
attaching to any series of shares, including the present series
of capital stock, might be altered or eliminated, or the series
might be combined with another series, by action approved by the
vote of the holders of a majority of all the shares of all series
entitled to be voted on the proposal, without any additional
right to vote as a series by the holders of the capital stock or
of another affected series.
Shareholders are entitled to one vote for each full share held
(and fractional votes for fractional shares held) and will vote
in the election of or removal of directors (to the extent
hereinafter provided) and on other matters submitted to the vote
of shareholders. There will normally be no meetings of
shareholders for the purpose of electing directors unless and
PAGE 81
until such time as less than a majority of the directors holding
office have been elected by shareholders, at which time the
directors then in office will call a shareholders' meeting for
the election of directors. Except as set forth above, the
directors shall continue to hold office and may appoint successor
directors. Voting rights are not cumulative, so that the holders
of more than 50% of the shares voting in the election of
directors can, if they choose to do so, elect all the directors
of the Fund, in which event the holders of the remaining shares
will be unable to elect any person as a director. As set forth
in the By-Laws of the Corporation, a special meeting of
shareholders of the Corporation shall be called by the Secretary
of the Corporation on the written request of shareholders
entitled to cast at least 10% of all the votes of the
Corporation, entitled to be cast at such meeting. Shareholders
requesting such a meeting must pay to the Corporation the
reasonably estimated costs of preparing and mailing the notice of
the meeting. The Corporation, however, will otherwise assist the
shareholders seeking to hold the special meeting in communicating
to the other shareholders of the Corporation to the extent
required by Section 16(c) of the 1940 Act.
FEDERAL AND STATE REGISTRATION OF SHARES
Each Fund's shares are registered for sale under the
Securities Act of 1933, and the Funds or their shares are
registered under the laws of all states which require
registration, as well as the District of Columbia and Puerto
Rico.
LEGAL COUNSEL
Shereff, Friedman, Hoffman, & Goodman, L.L.P., whose address
is 919 Third Avenue, New York, New York 10022, is legal counsel
to the Funds.
INDEPENDENT ACCOUNTANTS
International Bond Fund
Price Waterhouse, LLP, 7 St. Paul Street, Suite 1700,
Baltimore, Maryland 21202, are independent accountants to the
Fund. The financial statements of the International Bond Fund
for the year ended December 31, 1993, and the report of
PAGE 82
independent accountants are included in the Fund's Annual Report
for the year ended December 31, 1993, on pages 6-15. Also
included are the unaudited financial statements of the Fund dated
June 30, 1994, on pages 5-14. A copy of the Annual and Semi-
Annual Reports accompanies this Statement of Additional
Information. The following financial statements and the report
of independent accountants appearing in the Annual Report for the
year ended December 31, 1993, and the unaudited financial
statements for the Fund's Semi-Annual Report dated June 30, 1994,
are incorporated into this Statement of Additional Information by
reference:
International
Bond Fund
Annual Report
Page
___________
Report of Independent Accountants 15
Statement of Net Assets,
December 31, 1993 6-8
Statement of Operations, year ended
December 31, 1993 9
Statement of Changes in Net Assets,
years ended December 31, 1993 and
December 31, 1992 10
Notes to Financial Statements,
December 31, 1993 11-13
Financial Highlights 14
International
Bond Fund Semi-Annual
Report Page
_____________________
Portfolio of Investments, June 30, 1994
(Unaudited) 5-8
Statement of Assets and Liabilities,
June 30, 1994 (Unaudited) 9
Statement of Operations, six months
ended June 30, 1994 (Unaudited) 10
Statement of Changes in Net Assets, year
ended December 31, 1993 and six months
ended June 30, 1994 (Unaudited) 11
Notes to Financial Statements,
June 30, 1994 (Unaudited) 12-14
Financial Highlights (Unaudited) 14
PAGE 83
Short-Term Global Income and Global Government Bond Funds
Coopers & Lybrand, L.L.P., 217 East Redwood Street, Baltimore,
Maryland 21202, are independent accountants to each Fund. The
financial statements of the Short-Term Global Income and Global
Government Bond Funds for the year ended December 31, 1993, and
the report of independent accountants are included in each Fund's
Annual Report for the year ended December 31, 1993, on pages 8-19
and 10-19, respectively. Also included are the unaudited
financial statements of the Short-Term Global Income and Global
Government Bond Funds dated June 30, 1994, on pages 6-8, 9-10,
and 11-16, respectively. A copy of each Annual and Semi-Annual
Report accompanies this Statement of Additional Information. The
following financial statements and the report of independent
accountants appearing in each Annual Report for the year ended
December 31, 1993, and the unaudited financial statements for
each Fund's Semi-Annual Report dated June 30, 1994, are
incorporated into this Statement of Additional Information by
reference:
Short-Term
Global Income
Fund Annual
Report Page
___________
Report of Independent Accountants 19
Portfolio of Investments,
December 31, 1993 8-9
Statement of Assets and Liabilities,
December 31, 1993 12
Statement of Operations, December 31, 1993 13
Statement of Changes in Net Assets,
year ended December 31, 1993 and
June 30, 1992 (Commencement of
Operations) to December 31, 1992 14
Notes to Financial Statements,
December 31, 1993 15-17
Financial Highlights, year ended
December 31, 1993 and June 30, 1992
(Commencement of Operations) to
December 31, 1992 18
PAGE 84
Short-Term
Global Income
Fund Semi-Annual
Report Page
_________________
Portfolio of Investments,
June 30, 1994 (Unaudited) 6-8
Statement of Assets and Liabilities,
June 30, 1994 (Unaudited) 11
Statement of Operations, six months ended
June 30, 1994 (Unaudited) 12
Statement of Changes in Net Assets, year
ended December 31, 1993 and six months
ended June 30, 1994 (Unaudited) 13
Notes to Financial Statements,
June 30, 1994 (Unaudited) 14-16
Financial Highlights, year ended
December 31, 1993, June 30, 1992
(Commencement of Operations) to
December 31, 1992, and six months
ended June 30, 1994 (Unaudited) 17
Global
Government
Bond Fund
Annual
Report Page
___________
Report of Independent Accountants 19
Statement of Net Assets,
December 31, 1993 10-11
Statement of Operations, year ended
December 31, 1993 13
Statement of Changes in Net Assets,
year ended December 31, 1993 and
December 28, 1992 14
Notes to Financial Statements,
December 31, 1993 15-17
Financial Highlights 18
PAGE 85
Global
Government
Bond Fund
Semi-Annual
Report Page
_____________
Portfolio of Investments,
June 30, 1994 (Unaudited) 9-10
Statement of Assets and Liabilities,
June 30, 1994 (Unaudited) 11
Statement of Operations, six months
ended June 30, 1994 (Unaudited) 12
Statement of Changes in Net Assets,
year ended December 31, 1993 and six
months ended June 30, 1994 (Unaudited) 13
Notes to Financial Statements,
June 30, 1994 (Unaudited) 14-16
Financial Highlights, year ended
December 28, 1990 (Commencement of
Operations) to December 31, 1991,
years ended December 31, 1992 and
December 31, 1993, and six months
ended June 30, 1994 (Unaudited) 18
RATINGS OF CORPORATE DEBT SECURITIES
Moody's Investors Services, Inc.
Aaa - Bonds rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge."
Aa - Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds.
A - Bonds rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations.
Baa - Bonds rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
PAGE 86
characteristics and in fact have speculative characteristics as
well.
Ba-Bonds rated Ba are judged to have speculative elements:
their futures cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterize
bonds in this class.
B-Bonds rated B generally lack the characteristics of a
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa-Bonds rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with
respect to principal or interest.
Ca-Bonds rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked short-comings.
C-Lowest-rated; extremely poor prospects of ever attaining
investment standing.
Standard & Poor's Corporation
AAA - This is the highest rating assigned by Standard & Poor's
to a debt obligation and indicates an extremely strong capacity
to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt
obligations. Capacity to pay principal and interest is very
strong.
A - Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions.
BBB - Bonds rated BBB are regarded as having an adequate
capacity to pay principal and interest. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
PAGE 87
BB, C, CCC, CC-Bonds rated BB, B, CCC, and CC are regarded on
balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal. BB
indicates the lowest degree of speculation and CC the highest
degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse
conditions.
D-In default.
PAGE 88
APPENDIX A
Chart 1
A line graph follows which plots semiannual equivalent yields
on 10-year government bonds from 1984 through 1994. The yields
for the United Kingdom, Germany, United States and Japan, during
this time period, are graphed on a scale of 4 to 14.
