PAGE 1
Prospectus for the T. Rowe Price International Fixed Income
Funds, dated May 1, 1997, should be inserted here.
<PAGE>
PROSPECTUS
May 1, 1997
Foreign Bond Funds
A choice of worldwide income funds for investors seeking various combinations
of high current income, diversification, and capital appreciation from foreign
and U.S. fixed income securities.
<PAGE>
FACTS AT A GLANCE
Investment Goals
High current income and capital appreciation from investments in fixed income
securities throughout the world. As with any mutual fund, there is no guarantee
these funds will achieve their goals.
Strategy and Risk/Reward
Each fund's share price will fluctuate with changing economic, market, and
currency exchange conditions. Emerging Markets Bond Fund and International Bond
Fund represent greater potential risk and reward than the Global Government
Bond Fund.
Global Government Bond Fund Invests primarily in high-quality foreign and U.S.
government bonds.
International Bond Fund Invests outside the U.S. primarily in a diversified
portfolio of nondollar-denominated government and corporate bonds with
high-quality credit ratings.
Emerging Markets Bond Fund Invests primarily in high-yielding and high-risk
government and corporate debt securities of less-developed countries. Emerging
market bonds carry a much greater risk of default and price decline than
higher-rated bonds of developed countries. Before investing, you should
consider the greater risks explained in detail in the "Risk Factors" section.
Investor Profile
Those seeking high current income and capital appreciation, as well as greater
diversification for their fixed income investments, who can accept the
volatility and special risks inherent in international investing. Appropriate
for both regular and tax-deferred accounts, such as IRAs.
Fees and Charges
100% no load. No sales charges; free telephone exchange; no 12b-1 marketing
fees.
Investment Manager
Rowe Price-Fleming International, Inc. ("Price-Fleming") was founded in 1979 as
a joint venture between T. Rowe Price Associates, Inc. and Robert Fleming
Holdings, Ltd. As of December 31, 1996, Price-Fleming managed over $29 billion
in foreign stocks and bonds through its offices in Baltimore, London, Tokyo,
Singapore, and Hong Kong.
<PAGE>
T. Rowe Price International Funds, Inc.
Prospectus
May 1, 1997
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
T. ROWE PRICE 2
CONTENTS
1
ABOUT THE FUNDS
Transaction and Fund Expenses 2
Financial Highlights 4
Fund, Market, and Risk Characteristics 6
2
ABOUT YOUR ACCOUNT
Pricing Shares and Receiving Sale Proceeds 14
Distributions and Taxes 15
Transaction Procedures and Special Requirements 18
3
MORE ABOUT THE FUNDS
Organization and Management 21
Understanding Performance Information 25
Investment Policies and Practices 26
4
INVESTING WITH T. ROWE PRICE
Account Requirements and Transaction Information 38
Opening a New Account 38
Purchasing Additional Shares 40
Exchanging and Redeeming 40
Shareholder Services 42
Discount Brokerage 44
Investment Information 45
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
funds, dated May 1, 1997, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a free
copy, call 1-800-638-5660.
<PAGE>
ABOUT THE FUNDS
1
TRANSACTION AND FUND EXPENSES
----------------------------------------------------------
o Like all T. Rowe Price funds, these funds are 100% no load.
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.
Shareholder Transaction Expenses in Table 1 shows that you pay no sales
charges. All the money you invest in the fund goes to work for you, subject
to the fees explained below. Annual Fund Expenses provides an estimate of how
much it will cost to operate each fund for a year, based on 1996 fiscal year
expenses (and any expense limitations shown in Table 3). These are costs you
pay indirectly, because they are deducted from the funds' total assets before
the daily share price is calculated and before dividends and other
distributions are made. In other words, you will not see these expenses on
your account statement.
<TABLE>
Table 1
<CAPTION>
<S> <S> <C> <C> <C>
Shareholder
Transaction Expenses
Global Government Bond International Emerging Markets Bond
Bond
Sales charge "load" on
purchases None None None
Sales charge "load" on
reinvested
distributions None None None
Redemption fees None None None
Exchange fees None None None
Annual Fund Expenses Percentage of Fiscal 1996 Average Net Assets
(after reduction)/a//
/(after
reduction)/ab/
Management fee 0.35% 0.68% 0.00%
Marketing fees (12b-1) None None None
Total other
(shareholder
servicing, custodial,
auditing, etc.) 0.85% 0.19% 1.25%
Total fund expenses 1.20% 0.87% 1.25%
- -----------------------------------------------------------------------------------------------------
</TABLE>
/a/Had Price-Fleming not agreed to waive management fees and bear certain
expenses in accordance with expense limitation agreements, fees for the
following funds would have been higher: the Global Government Bond Fund's
management fee and total expense ratio would have been 0.68% and 1.53%,
respectively; and the Emerging Markets Bond Fund's management fee, other
/b/
Organization expenses will be charged to the fund for a period not to exceed
Note:A $5 fee is charged for wire redemptions under $5,000, subject to change
without notice, and a $10 fee is charged for small accounts when applicable
(see Small Account Fee under Transaction Procedures and Special
Requirements).
<PAGE>
T. ROWE PRICE 4
The main types of expenses, which all mutual funds may charge against fund
assets, are:
o A management fee The percent of fund assets paid to the fund's investment
manager. Each fund's fee comprises both a group fee, 0.33% as of December 31,
1996, and an individual fund fee, as follows: 0.35% each for the Global
Government Bond and International Bond Funds; and 0.45% for Emerging Markets
Bond Fund. Because the investment programs of the funds are more costly to
implement and maintain, their management fees are higher than those paid by
most U.S. investment companies.
o "Other" administrative expenses Primarily the servicing of shareholder
accounts, such as providing statements and reports and disbursing dividends,
as well as providing custodial services. For the year ended December 31,
1996, the funds paid the fees shown in Table 6 to T. Rowe Price Services,
Inc., for transfer and dividend disbursing functions and shareholder
services; to T. Rowe Price Retirement Plan Services, Inc., for recordkeeping
services for certain retirement plans; and to T. Rowe Price for accounting
services.
o Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.
For further details on fund expenses, please see Organization and Management.
o Hypothetical example Assume you invest $1,000, the fund returns 5% annually,
expense ratios remain as listed previously, and you close your account at the
end of the time periods shown. Your expenses would be:
<TABLE>
Table 2
<CAPTION>
<S> <S> <C> <C> <C> <C>
Hypothetical Fund Expenses
Fund 1 year 3 years 5 years 10 years
Global Government Bond $12 $38 $66 $145
International Bond 9 28 48 107
Emerging Markets Bond 13 40 69 151
- -----------------------------------------------------------------------------
</TABLE>
o Table 2 is just an example; actual expenses can be higher or lower than
those shown.
Table 3 sets forth expense ratio limitations and the periods for which they
are effective. For each, Price-Fleming has agreed to waive management fees
and bear certain expenses which would cause the funds' ratio of expenses to
average net assets to exceed the indicated percentage limitations. The
expenses borne by Price-Fleming are subject to reimbursement by the fund
through the indicated reimbursement date, but no reimbursement will be made
if it would result in the funds' expense ratio exceeding its specified limit.
Any amounts reimbursed will have the effect of increasing fees otherwise paid
by a fund.
<PAGE>
ABOUT THE FUNDS 5
<TABLE>
Table 3
<CAPTION>
<S> <C> <C> <C> <C>
Expense Ratio Limitations
Limitation Period Expense Ratio Reimbursement Date
Limitation
Global Government
Bond/a/ 1/1/97-12/31/98 1.20% 12/31/00
Emerging Markets 1/1/97-12/31/98 1.25% 12/31/00
Bond/b/
- --------------------------------------------------------------------------------------------
</TABLE>
/a/
The Global Government Bond Fund previously operated under a 1.20% limitation
that expired December 31, 1996. The reimbursement period for this limitation
extends though December 31, 1998.
/b/
The Emerging Markets Bond Fund previously operated under a 1.25% limitation
that expired December 31, 1996. The reimbursement period for this limitation
extends through December 31, 1998.
FINANCIAL HIGHLIGHTS
----------------------------------------------------------
Table 4, which provides information about each fund's financial history, is
based on a single share outstanding throughout each fiscal year. Each fund's
section of the table is part of the financial statements which are included
in its annual report, and are incorporated by reference into the Statement of
Additional Information (available upon request). The financial statements in
each fund's annual report were audited by the funds' independent accountants.
<TABLE>
Table 4 Financial Highlights
<CAPTION> Income From Investment Activities Less Distributions
Period Net Asset Net Net Realized Total From Net Net Realized
Ended Value, Investment & Unrealized Investment Investment Gain (Loss) Tax Return
Beginning Income (Loss) Gain (Loss) on Activities Income (Loss) of Capital
of Period Investments
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Global Government Bond
1991/a/ $10.00 $0.77/b/ $ 0.30 $ 1.07 $(0.77) -- --
--
1992 10.30 0.76/b/ (0.44) 0.32 (0.76) $(0.01) --
--
1993 9.85 0.56 /b/ 0.51 1.07 (0.56) (0.28) --
--
1994 10.08 0.54 /b/ (0.84) (0.30) (0.51) (0.02) $(0.03)
--
1995 9.22 0.59 /b/ 1.04 1.63 (0.59) -- --
1996 10.26 0.56 /b/ 0.09 0.65 (0.56) -- --
- -----------------------------------------------------------------------------------------------------------------------------
(continued on next
Footnotes appear on page 6. page)
International Bond
1987 $10.01 $1.01/c/ $ 1.64 $ 2.65 $(1.01) $(0.05) --
--
1988 11.60 0.91 (1.09) (0.18) (0.91) (0.26) --
--
1989 10.25 0.75 (1.10) (0.35) (0.75) -- --
--
1990 9.15 0.83 0.55 1.38 (0.83) (0.17) --
--
1991 9.53 0.77 0.82 1.59 (0.77) -- --
--
1992 10.35 0.87 (0.63) 0.24 (0.83) (0.15) --
--
1993 9.61 0.69 1.18 1.87 (0.69) (0.45) --
--
1994 10.34 0.60 (0.79) (0.19) (0.60) (0.21) --
--
1995 9.34 0.62 1.24 1.86 (0.62) (0.12) --
--
1996 10.46 0.60 0.11 0.71 (0.60) (0.11) --
Emerging Markets Bond
1995/d/ $10.00 $1.03 /e/ $ 1.38 $ 2.41 $(1.02) $(0.72) --
1996 10.67 1.00 /e/ 2.72 3.72 (1.01) (0.41) --
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION> Net Asset Value
Total Net Asset
Distributions Value,
End of Period
- -----------------------------------
<S> <C> <C>
$(0.77) $10.30
(0.77) 9.85
(0.84) 10.08
(0.56) 9.22
(0.59) 10.26
(0.56) 10.35
- -----------------------------------
$(1.06) $11.60
(1.17) 10.25
(0.75) 9.15
(1.00) 9.53
(0.77) 10.35
(0.98) 9.61
(1.14) 10.34
(0.81) 9.34
(0.74) 10.46
(0.71) 10.46
$(1.74) $10.67
(1.42) 12.97
- -----------------------------------
</TABLE>
<PAGE>
T. ROWE PRICE 6
Footnotes appear on page 6. (continued on next page)
<TABLE>
Table 4 Financial Highlights (continued)
<CAPTION>
Returns, Ratios, and Supplemental Data
Total Return Ratio of Ratio of Net
Period (Includes Net Assets Expenses to Investment Portfolio
Ended Reinvested ($ thousands) Average Net Income to Turnover
Dividends) Assets Average Net Rate
Assets
<S> <C> <C> <C> <C> <C> <C>
Global Government Bond
1991/a/ 11.31 %/b/ $ 39,775 1.20 %/b/ 8.07 %/b/ 93.6%
1992 3.26 /b/ 53,546 1.20 /b/ 7.51/b/ 236.6
1993 11.15 /b/ 48,758 1.20 /b/ 5.57 /b/ 134.0
1994 (3.06 )/b/ 36,516 1.20/b/ 5.57 /b/ 254.1
1995 18.13/b/ 28,207 1.20 /b/ 6.08 /b/ 290.7
1996 6.59/b/ 55,869 1.20 /b/ 5.48 /b/ 262.6/f/
- -------------------------------------------------------------------------------------------------
International Bond
1987 27.57 %/c/ $ 400,173 1.25 %/c/ 9.47 %/c/ 284.3%
1988 (1.27 ) 407,021 1.20 8.73 368.1
1989 (3.19 ) 303,897 1.23 8.11 293.1
1990 16.05 430,386 1.15 9.04 211.4
1991 17.75 413,985 1.24 8.11 295.6
1992 2.39 513,927 1.08 8.66 357.7
1993 20.00 745,244 0.99 6.58 395.7
1994 (1.84 ) 738,103 0.98 6.07 345.2
1995 20.30 1,015,666 0.90 6.10 237.1
1996 7.13 969,453 0.87 5.86 234.0
Emerging Markets Bond
1995/d/ 25.81 %/e/ $ 9,989 1.25 %/e/ 10.20 %/e/ 273.5%
1996 36.77/e/ 39,862 1.25 /e/ 8.37 /e/ 168.7
- -------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ABOUT THE FUNDS 7
/a/For the period December 31, 1990 (commencement of operations) to December
31, 1991.
/b/Excludes expenses in excess of a 1.20% voluntary expense limitation in
effect through December 31, 1996.
/c/Excludes expenses in excess of a 1.25% voluntary expense limitation in
effect through December 31, 1987.
/d/For the period December 30, 1994 (commencement of operations) to December
31, 1995.
/e/Excludes expenses in excess of a 1.25% voluntary expense limitation in
effect through December 31, 1996.
/f/Excludes the effect of the acquisition of the assets of the T. Rowe Price
the Short-Term Global Income Fund on November 1, 1996.
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
----------------------------------------------------------
Why invest in an international fund?
To help you decide whether an international fixed income fund is appropriate
for you, this section takes a closer look at the funds' investment programs
and the markets in which they invest.
Interest rates vary from country to country depending on local economic
conditions and monetary and fiscal policies. By investing in foreign fixed
income markets, U.S. investors can benefit from potentially higher yields
than their own market provides. Also, foreign bond markets often move
independently of one another and the U.S. market. Therefore, diversifying
internationally across various countries can help reduce portfolio volatility
and smooth out returns.
<PAGE>
T. ROWE PRICE 8
What is the difference between international and global funds?
Global funds invest worldwide, including both foreign and U.S. markets, while
international funds invest in markets outside the U.S.
<TABLE>
Table 5
<CAPTION>
<S> <C> <C> <C> <C> <C>
International Funds Comparison Guide
Fund Geographic Quality of Securities Normal Currency Risk Profile (Relative to
Emphasis Exposure One Another)
Global Government Bond Worldwide Primarily High Varies Moderate
Quality
International Bond Outside U.S. Primarily High High High
Quality
Emerging Markets Bond Outside U.S. Primarily Lower Varies Highest
Quality
- -------------------------------------------------------------------------------------------------------------
</TABLE>
What are some of the advantages of international and global fixed income funds?
Buying foreign bonds can be difficult and costly for the individual investor,
and gaining access to many foreign markets can be complicated. Few investors
have the time, the expertise, or the resources to evaluate foreign markets
effectively on their own. Therefore, the professional management, broad
diversification, and relative simplicity of mutual funds make them an
attractive, low-cost vehicle for this type of investing.
What are the funds' objectives and investment programs?
The three funds described below offer a range of objectives and strategies to
meet a variety of investment goals. The first two invest primarily in
high-quality securities but differ in terms of currency risk as well as in
investment approaches, which range from conservative to aggressive. Emerging
Markets Bond Fund invests predominantly in noninvestment-grade bonds in
emerging markets and offers both the highest potential reward and the
greatest potential risk of loss.
o The fund or funds you select should not be relied upon as a complete
investment program, nor be used for short-term trading purposes.
o Global Government Bond Fund This fund's objective is to provide high current
income and, secondarily, capital appreciation and protection of principal by
investing primarily in high-quality foreign and U.S. government bonds. The
fund will normally have at least 65% of its assets in bonds issued or
guaranteed by the U.S. or foreign governments or their agencies and by
foreign authorities, provinces, and municipalities. The fund may also invest
up to 20% of total assets in below-investment-grade, high-risk bonds
including bonds in default or those with the lowest rating.
<PAGE>
ABOUT THE FUNDS 9
o The fund has wide flexibility to engage in hedging strategies to reduce the
impact of currency fluctuations on the share price.
To reduce the effect of interest rate changes on the fund's share price while
seeking higher yields, the weighted average maturity of the portfolio is
likely to average around five to seven years, although the fund may adopt
longer or shorter maturities in anticipation of falling or rising interest
rates. The fund may also hold individual securities with maturities longer or
shorter than five or seven years.
o International Bond Fund The fund's objective is to provide high current
income and capital appreciation by investing in high-quality,
nondollar-denominated government and corporate bonds outside the U.S. The
fund also seeks to moderate price fluctuation by actively managing its
maturity structure and currency exposure. The fund will invest at least 65%
of its assets in high-quality bonds but may invest up to 20% of assets in
below-investment-grade, high-risk bonds, including bonds in default or those
with the lowest rating. Up to 20% of the fund's assets may be invested in
foreign bonds denominated in dollars, such as Brady and other emerging market
bonds.
Price-Fleming bases its investment decisions on fundamental market factors,
currency trends, and credit quality. The fund generally invests in countries
where the combination of fixed income returns and currency exchange rates
appears attractive, or, if the currency trend is unfavorable, where the
currency risk can be minimized through hedging.
Although the fund expects to maintain an intermediate to long weighted
average maturity, it has no maturity restrictions on the overall portfolio or
on individual securities. Normally, the fund does not hedge its foreign
currency exposure back to the dollar, nor involve more than 50% of total
assets in cross hedging transactions. Therefore, changes in foreign interest
rates and currency exchange rates are likely to have a significant impact on
total return and the market value of portfolio securities. Such changes
provide greater opportunities for capital gains and greater risks of capital
loss. Price-Fleming attempts to reduce these risks through diversification
among foreign securities and active management of maturities and currency
exposures.
o Emerging Markets Bond Fund The fund's objective is to provide high income
and capital appreciation. The fund invests at least 65% (and potentially all)
of its total assets in the government and corporate debt securities of
emerging nations. Since these countries are less developed and their bonds
carry a greater risk of default, such bonds are typically below investment
grade and are considered junk bonds in the U.S.
<PAGE>
T. ROWE PRICE 10
The fund may invest in the lowest-rated bonds, including those in default.
While these investments may offer significantly greater total returns than
higher-quality bonds of developed foreign markets, they entail a higher
degree of risk and are subject to sharp price declines.
There are no maturity restrictions on the fund. Its weighted average maturity
normally ranges between 5 and 10 years, but may vary substantially because of
market conditions. Under normal circumstances, most of the fund's total
assets are expected to be denominated in U.S. dollars, and the fund will not
usually hedge foreign currency holdings back to U.S. dollar. Currency
fluctuations can have a significant impact on the value of the fund's
holdings.
What other kinds of securities can the funds invest in?
Global Government Bond and International Bond Funds invest primarily in
high-quality securities to reduce credit risk. However, each of them may also
invest a portion of assets in high-risk securities in an effort to enhance
performance. Emerging Markets Bond Fund normally invests a significant
portion (and may invest all) of its assets in high-risk, noninvestment-grade
securities in pursuit of maximum income and capital appreciation. All funds
ordinarily invest in the securities of at least three countries; however, all
may invest in the securities of one country, including the U.S., for
temporary defensive purposes.
o All of these funds are considered "nondiversified" for purposes of the
Investment Company Act of 1940.
How does currency fluctuation affect the performance of an international or
global fund?
Fluctuating currencies can have either a positive or negative impact on all
international and global funds regardless of the credit quality of their
holdings. U.S. shareholders benefit when foreign currencies appreciate
against the dollar and are injured when foreign currencies lose value against
the dollar.
Price-Fleming may actively manage currency risk in the Global Government Bond
Fund in an effort to reduce the negative impact of a strong dollar.
International Bond Fund invests almost exclusively outside the U.S. and is
normally heavily exposed to foreign currencies to provide maximum potential
income, appreciation and diversification but with higher risk than Global
Government Bond Fund. Emerging Markets Bond Fund is the most aggressive of
the funds because of the greater potential for political and economic
setbacks in developing countries. Bonds issued by these countries are often
denominated in U.S. dollars to improve their marketability, but this does not
protect them from substantial price declines in the face of political and/or
economic turmoil.
<PAGE>
ABOUT THE FUNDS 11
What are the main risks of investing in these funds?
The risks are the usual ones associated with investments in U.S. or foreign
fixed income securities, including:
o Interest rate or market risk The decline in bond prices that accompanies a
rise in the overall level of interest rates. (Bond prices and interest rates
move in opposite directions.) Because prices of long-term bonds are more
sensitive to interest rate changes than prices of short-term bonds, the funds
discussed in this prospectus have greater interest rate risk than short-term
bond funds.
o Credit risk The chance that any of a fund's holdings will have its credit
downgraded or will default, potentially reducing the fund's share price and
income level. Among these three funds, Emerging Markets Bond has the highest
credit risk because the average credit quality of its holdings is lowest.
Please see each fund's program discussion for further credit quality
information.
o Currency risk The possibility that a fund's foreign holdings will be
adversely affected by fluctuations in currency markets. For detailed
discussion of this risk, please see the previous question that addressed
currency fluctuation and also the succeeding question.
What are the particular risks associated with international and global
investing and these funds?
International investing involves additional risks which can increase the
potential for losses in the funds. These risks can be significantly magnified
for investments in emerging markets. Currency risk can not be eliminated
entirely, and there is no guarantee that hedging will always work. In
addition, it may not be possible to effectively hedge the currencies of
certain countries, particularly in emerging markets. Furthermore, hedging
costs can be significant; and they are paid out of a fund's capital and are
reflected in the net asset value.
o Before investing, be sure to review the risks associated with international
fixed income investing.
o Currency fluctuations Transactions in foreign securities are conducted in
local currencies, so dollars must often be exchanged for another currency
when a stock is bought or sold or a dividend is paid. Likewise, share price
quotations and total return information reflect conversion into dollars.
Fluctuations in foreign exchange rates can significantly increase or decrease
the dollar value of a foreign investment, boosting or offsetting its local
market return. For example, if a French bond rose 10% in price during a year,
but the U.S. dollar gained 5% against the French franc during that time, the
U.S. investor's return would be reduced to 5%. This is because the franc
would "buy" fewer dollars at the end of the year than at the beginning, or,
conversely, a dollar would buy more francs.
<PAGE>
T. ROWE PRICE 12
o Increased costs It is more expensive for U.S. investors to trade in foreign
markets than in the U.S. Mutual funds offer an efficient way for individuals
to invest abroad, but the overall expense ratios of international funds are
usually higher than those of typical domestic funds.
o Political and economic factors The economies, markets, and political
structures of a number of the countries in which each fund can invest do not
compare favorably with the U.S. and other mature economies in terms of wealth
and stability. Therefore, investments in these countries will be riskier and
more subject to erratic and abrupt price movements. This is especially true
for emerging markets such as those found in Latin America, Asia, Eastern
Europe, and Africa. However, even investments in countries with highly
developed economies are subject to risk.
o While certain countries have made progress in economic growth,
liberalization, fiscal discipline, and political and social stability, there
is no assurance these trends will continue.
Some economies are less well developed (for example, various countries in
Latin America, Eastern Europe, Africa, and Asia), overly reliant on
particular industries, and more vulnerable to the ebb and flow of
international trade, trade barriers, and other protectionist or retaliatory
measures (for example, Japan, Southeast Asia, Latin America, Eastern Europe,
and Africa). This makes investment in such markets significantly riskier than
in other countries. Some countries, particularly those in Latin America and
other emerging markets have legacies of hyperinflation and currency
devaluations versus the dollar (which adversely affects returns to U.S.
investors). Investments in countries that have recently begun moving away
from central planning and state-owned industries toward free markets, such as
Eastern Europe, China, and Africa, should be regarded as speculative.
Certain countries have histories of political instability and upheaval (for
example, Latin America and Africa) that could cause their governments to act
in a detrimental or hostile manner toward private enterprise or foreign
investment. Actions such as nationalizing a company or industry,
expropriating assets, or imposing punitive taxes could have a severe effect
on security prices and impair a fund's ability to repatriate capital or
income. Significant external risks, including war, currently affect some
countries. Governments in many emerging market countries participate to a
significant degree in their economies and securities markets.
o Legal, regulatory, and operational Certain countries lack uniform
accounting, auditing, and financial reporting standards, have less
governmental supervision of financial markets than in the U.S., do not honor
legal rights enjoyed in the U.S., and have settlement practices, such as
delays, which could subject a fund
<PAGE>
ABOUT THE FUNDS 13
to risks not customary in the U.S. In addition, securities markets in these
countries have substantially lower trading volumes than U.S. markets,
resulting in less liquidity and more volatility than in the U.S.
o Pricing Portfolio securities may be listed on foreign exchanges that are
open days (such as Saturdays) when the funds do not compute their prices. As
a result, a fund's net asset value may change significantly on days when
shareholders cannot make transactions.
o For more details on potential risks of foreign investments, please see
Investment Policies and Practices.
How does the portfolio manager try to reduce risk?
Consistent with each fund's objective, the portfolio manager actively seeks
to reduce risk and increase total return. Risk management tools include:
o Diversification of assets to reduce the impact of a single holding on the
funds' net asset value.
o Thorough credit research by our own analysts.
o Adjustment of fund duration to try to reduce the negative impact of rising
interest rates or take advantage of the benefits of falling rates. (Duration
is a more sensitive measure than maturity of a fund's sensitivity to interest
rate changes.)
o Each of the funds has a different approach to managing the impact of foreign
currency changes on the fund's portfolio, as discussed previously.
How can I decide which fund is most appropriate for me?
First, be sure that your investment objective is consistent with the fund's.
Second, your decision should take into account whether you have any other
foreign investments. If not, you may want to invest in one or more of the
funds to gain the broadest exposure to overseas opportunities.
Third, consider your risk tolerance and the risk profile of each fund, as
previously described. Also, consider your investment time horizon. Long-term
bond funds are suitable only for investors with long-term investment goals.
o If you will be needing the money you plan to invest in the near future, none
of these funds is suitable.
Is there other information I need to review before making a decision?
Be sure to read Investment Policies and Practices in Section 3, which
discusses the principal types of portfolio securities that the fund may
purchase as well as the types of management practices that the fund may use.
<PAGE>
ABOUT YOUR ACCOUNT
2
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
international fund.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for each
fund, is calculated at 4 p.m. ET each day the New York Stock Exchange is open
for business. To calculate the NAV, a fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
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.
o The various ways you can buy, sell, and exchange shares are explained at the
end of this prospectus and on the New Account Form. These procedures may
differ for institutional and employer-sponsored retirement accounts.
How your purchase, sale, or exchange price is determined
If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.
<PAGE>
ABOUT YOUR ACCOUNT 15
How you can receive the proceeds from a sale
o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.
If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH is an automated method of initiating payments from and receiving
payments in your financial institution account. ACH is a payment system
supported by over 20,000 banks, savings banks, and credit unions, which
electronically exchanges the transactions primarily through the Federal
Reserve Banks. Proceeds sent by bank wire should be credited to your account
the next business day.
o Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to five business days
after receiving your sale or exchange request. If you were exchanging into a
bond or money fund, your new investment would not begin to earn dividends
until the sixth business day.
o If for some reason we cannot accept your request to sell shares, we will
contact you.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
o All net investment income and realized capital gains are distributed to
shareholders.
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office cannot deliver your check, or if your
check remains uncashed for six months, the fund reserves the right to
reinvest your distribution check in your account at the NAV on the business
day of the reinvestment and to reinvest all subsequent distributions in
shares of the fund.
<PAGE>
T. ROWE PRICE 16
Income dividends
o Bond funds declare income dividends daily at 4 p.m. ET to shareholders of
record at that time provided payment has been received on the previous
business day.
o Bond funds pay dividends on the first business day of each month.
o Bond fund shares will earn dividends through the date of redemption; also,
share redeemed on a Friday or prior to a holiday will continue to earn
dividends until the next business day. Generally, if you redeem all of yours
shares at any time during the month, you will also receive all dividends
earned through the date of redemption in the same check. When you redeem only
a portion of your shares, all dividends accrued on those shares will be
reinvested, or paid in cash, on the next dividend payment date.
Capital gains
o A capital gain or loss is the difference between the purchase and sale price
of a security.
o If the fund has net capital gains for the year (after subtracting any
capital losses), they are usually declared and paid in December to
shareholders of record on a specified date that month. If a second
distribution is necessary, it is usually declared and paid during the first
quarter of the following year.
Tax Information
o You will be sent timely information for your tax filing needs.
You need to be aware of the possible tax consequences when:
o You sell fund shares, including an exchange from one fund to another.
o The fund makes a distribution to your account.
Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes.
In January, you will be sent Form 1099-B, indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For accounts opened new or by exchange in 1983
or later, we will provide you with the gain or loss of the shares you sold
during the year, based on the "average cost" method. This information is not
reported to the IRS, and you do not have to use it. You may calculate the
cost basis using other methods acceptable to the IRS, such as "specific
identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.
<PAGE>
ABOUT YOUR ACCOUNT 17
Taxes on fund distributions
The following summary does not apply to retirement accounts, such as IRAs,
which are tax-deferred until you withdraw money from them.
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distribution made to you. This information will
also be reported to the IRS. All distributions made by the funds are taxable
to you for the year in which they were paid. The only exception is that
distributions declared during the last three months of the year and paid in
January are taxed as though they were paid by December 31. You will be sent
any additional information you need to determine your taxes on fund
distributions, such as the portion of your dividend, if any, that may be
exempt from state income taxes.
Short-term capital gain distributions are taxable as ordinary income and
long-term gain distributions are taxable at the applicable long-term gain
rate. The gain is long- or short-term depending on how long the fund held the
securities, not how long you held shares in the fund. If you realize a loss
on the sale or exchange of fund shares held six months or less, your
short-term loss recognized is reclassified to long-term to the extent of any
long-term capital gain distribution received.
Distributions resulting from the sale of certain foreign currencies and debt
securities, to the extent of foreign exchange gains, are taxed as ordinary
income or loss. If the fund pays nonrefundable taxes to foreign governments
during the year, the taxes will reduce the fund's dividends but will still be
included in your taxable income. However, you may be able to claim an
offsetting credit or deduction on your tax return for your portion of foreign
taxes paid by the fund.
o Distributions are taxable whether reinvested in additional shares or
received in cash.
Tax effect of buying shares before a capital gain distribution
If you buy shares shortly before or on the "record date"- the date that
establishes you as the person to receive the upcoming distribution-you will
receive, in the form of a taxable distribution, a portion of the money you
just invested. Therefore, you may also wish to find out the fund's record
date before investing. Of course, the fund's share price may, at any time,
reflect undistributed capital gains or income and unrealized appreciation.
When these amounts are eventually distributed, they are taxable.
Note: For information on the tax consequences of hedging, please see
Investment Policies and Practices.
<PAGE>
T. ROWE PRICE 18
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
o Following these procedures helps assure timely and accurate transactions.
Purchase Conditions
Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by the fund or transfer agent, and the fund
can redeem shares you own in this or another identically registered T. Rowe
Price fund as reimbursement. The fund and its agents have the right to reject
or cancel any purchase, exchange, or redemption due to nonpayment.
U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.
Sale (Redemption) Conditions
10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. If your redemption request was sent by mail or mailgram,
proceeds will be mailed no later than the seventh calendar day following
receipt unless the check or ACH transfer has not cleared. If, during the
clearing period, we receive a check drawn against your bond or money market
account, it will be marketed "uncollected." (The 10-day hold does not apply
to the following: purchases paid for by bank wire; cashier's, certified, or
treasurer's checks; or automatic purchases through your paycheck.)
Telephone, Tele*Access/(R)/, and personal computer transactions
These exchange and redemption services are established automatically when you
sign the New Account Form unless you check the box which states that you do
not want these services. The fund uses reasonable procedures (including
shareholder identity verification) to confirm that instructions given by
telephone are genuine and is not liable for acting on these instructions. If
these procedures are not followed, it is the opinion of certain regulatory
agencies that the fund may be liable for any losses that may result from
acting on the instructions given. A confirmation is sent promptly after the
telephone transaction. All conversations are recorded.
<PAGE>
ABOUT YOUR ACCOUNT 19
Redemptions over $250,000
Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of the fund's net assets,
the fund has the right to delay sending your proceeds for up to five business
days after receiving your request, or to pay the difference between the
redemption amount and the lesser of the two previously mentioned figures with
securities from the fund.
Excessive Trading
o T. Rowe Price may bar excessive traders from purchasing shares.
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses. We define "excessive trading" as
exceeding one purchase and sale involving the same fund within any 120-day
period.
For example, you are in fund A. You can move substantial assets from fund A
to fund B and, within the next 120 days, sell your shares in fund B to return
to fund A or move to fund C.
If you exceed the number of trades described above, you may be barred
indefinitely from further purchases of T. Rowe Price funds.
Three types of transactions are exempt from excessive trading guidelines: 1)
trades solely between money market funds; 2) redemptions that are not part of
exchanges; and 3) systematic purchases or redemptions (see Shareholder
Services).
Keeping Your Account Open
Due to the relatively high cost to the funds of maintaining small accounts,
we ask you to maintain an account balance of at least $1,000. If your balance
is below $1,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.
Small Account Fee
Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the funds' transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum level. The valuation of accounts and the
deduction are expected to take place during the last five business days of
September. The fee will be deducted from accounts with balances below $2,000,
except for UGMA/ UTMA accounts, for which the limit is $500. The fee will be
waived for any investor whose aggregate T. Rowe Price mutual fund investments
total $25,000
<PAGE>
T. ROWE PRICE 20
or more. Accounts employing automatic investing (e.g., payroll deduction,
automatic purchase from a bank account, etc.) are also exempt from the
charge. The fee will not apply to IRAs and other retirement plan accounts. (A
separate custodial fee may apply to IRAs and other retirement plan accounts.)
Signature Guarantees
o A signature guarantee is designed to protect you and the T. Rowe Price funds
from fraud by verifying your signature.
You may need to have your signature guaranteed in certain situations, such
as:
o Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.
o Remitting redemption proceeds to any person, address, or bank account not on
record.
o Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
o Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
<PAGE>
MORE ABOUT THE FUNDS
3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
How are the funds organized?
T. Rowe Price International Funds, Inc., currently consists of 11 series,
each representing a separate class of shares and having different objectives
and investment policies. The 11 series and the years in which each was
established are as follows: International Stock Fund, 1979; International
Bond Fund, 1986; International Discovery Fund, 1988; European Stock Fund, New
Asia Fund, Global Government Bond Fund, 1990; Japan Fund, 1991; Latin America
Fund, 1993; Emerging Markets Bond Fund, 1994; Emerging Markets Stock Fund and
Global Stock Fund, 1995. (The equity funds are described in a separate
prospectus.) The Corporation's Charter provides that the Board of Directors
may issue additional series of shares and/or additional classes of shares for
each series.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
o Receive a proportional interest in a fund's income and capital gain
distributions.
o Cast one vote per share on certain fund matters, including the election of
fund directors, changes in fundamental policies, or approval of changes in
the fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The funds are not required to hold annual meetings and, in order to avoid
unnecessary costs to fund shareholders, do not intend to do so except when
certain matters, such as a change in a fund's fundamental policies, are to be
decided. In addition, shareholders representing at least 10% of all eligible
votes may call a special meeting if they wish for the purpose of voting on
the removal of any fund director or trustee. If a meeting is held and you
cannot attend, you can vote by proxy. Before the meeting, the fund will send
you proxy materials that explain the issues to be decided and include a
voting card for you to mail back.
<PAGE>
T. ROWE PRICE 22
Who runs the funds?
General Oversight
The Corporation is governed by a Board of Directors that meets regularly to
review the funds' investments, performance, expenses, and other business
affairs. The Board elects the funds' officers. The policy of the funds is
that a majority of the Board members will be independent of Price-Fleming.
Investment Manager
Price-Fleming is responsible for selection and management of each fund's
portfolio investments. Price-Fleming's U.S. office is located at 100 East
Pratt Street, Baltimore, Maryland 21202. Price-Fleming also has offices in
London, Tokyo, Singapore, and Hong Kong. Price-Fleming was incorporated in
Maryland in 1979 as a joint venture between T. Rowe Price and Robert Fleming
Holdings Limited (Flemings).
o Flemings is a diversified investment organization which participates in a
global network of regional investment offices in New York, London, Zurich,
Geneva, Tokyo, Hong Kong, Manila, Kuala Lumpur, Seoul, Taipei, Bombay,
Jakarta, Singapore, Bangkok, and Johannesburg.
T. Rowe Price, Flemings, and Jardine Fleming are owners of Price-Fleming. The
common stock of Price-Fleming is 50% owned by a wholly owned subsidiary of T.
Rowe Price, 25% by a subsidiary of Flemings, and 25% by a subsidiary of
Jardine Fleming Group Limited (Jardine Fleming). (Half of Jardine Fleming is
owned by Flemings and half by Jardine Matheson Holdings Limited.) T. Rowe
Price has the right to elect a majority of the Board of Directors of
Price-Fleming, and Flemings has the right to elect the remaining directors,
one of whom will be nominated by Jardine Fleming.
o All decisions regarding the purchase and sale of fund investments are made
by Price-Fleming-specifically by the funds' portfolio managers.
Portfolio Management
Each fund has an Investment Advisory Group that has day-to-day responsibility
for managing the portfolio and developing and executing each fund's
investment program. The advisory group for each fund consists of Peter Askew,
Christopher Rothery and Michael Conelius.
Peter Askew joined Price-Fleming in 1988 and has 21 years of experience
managing multicurrency fixed income portfolios.
Christopher Rothery joined Price-Fleming in 1994 and has nine years of
experience managing multicurrency fixed income portfolios. Before joining
Price-Fleming, he worked with Fleming International Fixed Income Management
Limited since 1987.
<PAGE>
ABOUT YOUR ACCOUNT 23
Michael Conelius joined Price-Fleming in 1995. Prior to that, he had been
with T. Rowe Price since 1988.
Portfolio Transactions
Decisions with respect to the purchase and sale of a fund's portfolio
securities on behalf of each fund are made by Price-Fleming. The
Corporation's Board of Directors has authorized Price-Fleming to utilize
affiliates of Flemings and Jardine Fleming in the capacity of broker in
connection with the execution of a fund's portfolio transactions if
Price-Fleming believes that doing so would result in an economic advantage
(in the form of lower execution costs or otherwise) being obtained by the
fund.
Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of this and all other T. Rowe Price funds.
Shareholder Services
T. Rowe Price Services, Inc., another wholly owned subsidiary, acts as the
fund's transfer and dividend disbursing agent and provides shareholder and
administrative services. Services for certain types of retirement plans are
provided by T. Rowe Price Retirement Plan Services, Inc., also a wholly owned
subsidiary. The address for each is 100 East Pratt St., Baltimore, MD 21202.
How are fund expenses determined?
The management agreement spells out the expenses to be paid by each fund. In
addition to the management fee, the funds pay for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Fund Transfer Agent Subaccounting Accounting
Global Government Bond $ 60,000 $ 3,000 $ 100,000
International Bond 972,000 46,000 125,000
Emerging Markets Bond 50,000 -- 100,000
- ---------------------------------------------------------------------------
</TABLE>
Table 6 Service Fees Paid
The Management Fee
This fee has two parts- an "individual fund fee" (discussed under Transaction
and Fund Expenses), which reflects a fund's particular investment management
costs, and a "group fee." The group fee, which is designed to reflect the
benefits of the shared resources of the T. Rowe Price investment management
complex, is calculated daily based on the combined net assets of all T. Rowe
Price funds (except Equity Index and the Spectrum Funds and any institutional
or private
<PAGE>
T. ROWE PRICE 24
label mutual funds). The group fee schedule (shown below) is graduated,
declining as the asset total rises, so shareholders benefit from the overall
growth in mutual fund assets.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
0.480% First $1 billion 0.360% Next $2 billion 0.310% Next $16 billion
--------------------------
0.450% Next $1 billion 0.350% Next $2 billion 0.305% Next $30 billion
----------------------------------------------------
0.420% Next $1 billion 0.340% Next $5 billion 0.300% Thereafter
----------------------------------------------------
0.390% Next $1 billion 0.330% Next $10 billion
------------------------------------------------------------------------------
0.370% Next $1 billion 0.320% Next $10 billion
</TABLE>
The fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the Price funds described
previously. Based on combined T. Rowe Price funds' assets of approximately
$61 billion at December 31, 1996, the group fee was 0.33%.
Research and Administration
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. Additional investment research and
administrative support for equity investments is provided to Price-Fleming by
Fleming Investment Management Limited (FIM) and Jardine Fleming International
Holdings Limited (JFIH), for which each receives from Price-Fleming a fee of
.075% of the market value of all assets in equity accounts under
Price-Fleming's management. Fleming International Asset Management Limited
(FIAM) and JFIH provide research and administration support for fixed income
accounts for which each receive 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. FIM and JFIH
are wholly owned subsidiaries of Flemings and Jardine Fleming, respectively,
and FIAM is an indirect subsidiary of Flemings.
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us, in our newsletter, The Price Report, in Insights articles, in T.
Rowe Price advertisements, and in the media.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were
<PAGE>
MORE ABOUT THE FUNDS 25
reinvested in additional shares. Including reinvested distributions means
that total return numbers include the effect of compounding, i.e., you
receive income and capital gain distributions on a rising number of shares.
Advertisements for a fund may include cumulative or compound average annual
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
o Total return is the most widely used performance measure. Detailed
performance information is included in the fund's annual and semiannual
shareholder reports, which are all available without charge.
Cumulative Total Return
This is the actual rate of return on an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated between the beginning and the end of the period specified.
Average Annual Total Return
This is always hypothetical. Working backward from the actual cumulative
return, it tells you what constant year-by-year return would have produced
the actual cumulative return. By smoothing out all the variations in annual
performance, it gives you an idea of the investment's annual contribution to
your portfolio provided you held it for the entire period in question.
Yield
The current or "dividend" yield on a fund or any investment tells you the
relationship between the investment's current level of annual income and its
price on a particular day. The dividend yield reflects the actual income paid
to shareholders for a given period, annualized, and divided by the fund's net
asset value. For example, a fund providing $5 of annual income per share and
a price of $50 has a current yield of 10%. Yields can be calculated for any
time period.
INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
This section takes a detailed look at some of the types of securities the
funds may hold in their portfolios and the various kinds of investment
practices that may be used in day-to-day portfolio management. The funds'
investment program is subject to further restrictions and risks described in
the Statement of Additional Information.
Shareholder approval is required to substantively change a fund's objectives
and certain investment restrictions noted in the following section as
"fundamental policies." The managers also follow certain "operating
policies," which can be changed without shareholder approval. However,
significant changes are
<PAGE>
T. ROWE PRICE 26
discussed with shareholders in fund reports. A fund adheres to applicable
investment restrictions and policies at the time it makes an investment. A
later change in circumstances does not cause a violation of the restriction
and will not require the sale of an investment if it was proper at the time
it was made.
The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth herein. For instance, each
fund is not permitted to invest more than 10% of total assets in hybrid
instruments. While these restrictions provide a useful level of detail about
a fund's investment program, investors should not view them as an accurate
gauge of the potential risk of such investments. For example, in a given
period, a 5% investment in hybrid instruments could have significantly more
of an impact on a fund's share price than its weighting in the portfolio. The
net effect of a particular investment depends on its volatility and the size
of its overall return in relation to the performance of all the funds' other
investments.
Changes in a fund's holdings, a fund's performance, and the contribution of
various investments are discussed in the shareholder reports sent to you.
o Fund managers have considerable leeway in choosing investment strategies and
selecting securities they believe will help the funds achieve their
objectives.
Types of Portfolio Securities
In seeking to meet their investment objectives, the funds may invest in any
type of security whose investment characteristics are consistent with the
funds' investment programs. The following pages describe the principal types
of portfolio securities and investment management practices of the funds.
Fixed Income Securities
The funds' investments may include but shall not be limited to: (1) Debt
obligations issued or guaranteed by: (a) a foreign sovereign government or
one of its agencies, authorities, instrumentalities, or political
subdivisions, including a foreign state, province or municipality, and (b)
supranational organizations such as the World Bank, Asian Development Bank,
European Investment Bank, and European Economic Community; (2) Debt
obligations: (a) of foreign banks and bank holding companies, and (b) of
domestic banks and corporations issued in foreign currencies; and (3) Foreign
corporate debt securities and commercial paper. Such securities may take a
variety of forms including those issued in the local currency of the issuer,
Brady bonds, Euro bonds, and bonds denominated in the ECU. Normally, the
International Bond Fund will only purchase bonds denominated in foreign
currencies (other than Brady and other emerging market bonds). The Global
Government Bond and Emerging Markets Bond Funds may also invest in: such
dollar denominated fixed income securities as (1) Debt obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities; (2)
Domestic corporate debt securities; (3)
<PAGE>
MORE ABOUT THE FUNDS 27
Domestic commercial paper, including commercial paper indexed to certain
specific foreign currency exchange rates; (4) Debt obligations of domestic
banks and bank holding companies; and (5) Collateralized mortgage obligations
or asset-backed bonds. The funds may from time to time purchase securities on
a when-issued basis, invest in repurchase agreements, and purchase bonds
convertible into equities.
Nondiversified Investment Company
The funds are able to invest more than 5% of their assets in the fixed income
securities of individual foreign governments. Each fund generally will not
invest more than 5% of its assets in any individual corporate issuer,
provided that (1) a fund may place assets in bank deposits or other
short-term bank instruments with a maturity of up to 30 days provided that
(i) the bank has a short-term credit rating of A1+ (or, if unrated, the
equivalent as determined by Price-Fleming) and (ii) no fund may maintain more
than 10% of its total assets with any single bank; and (2) a fund may
maintain more than 5% of its total assets, including cash and currencies, in
custodial accounts or deposits of the funds' custodian or sub-custodians. In
addition, each fund intends to qualify as a regulated investment company for
purposes of the Internal Revenue Code. Such qualification requires each fund
to limit its investments so that, at the end of each calendar quarter, with
respect to at least 50% of its total assets, not more than 5% of such assets
are invested in the securities of a single issuer, and with respect to the
remaining 50%, no more than 25% is invested in a single issuer. Since, as a
nondiversified investment company, each fund is permitted to invest a greater
proportion of its assets in the securities of a smaller number of issuers,
the funds may be subject to greater credit risk with respect to their
portfolio securities than an investment company that is more broadly
diversified.
Hybrid Instruments
These instruments (a type of potentially high-risk derivative) can combine
the characteristics of securities, futures, and options. For example, the
principal amount or interest rate of a hybrid could be tied (positively or
negatively) to the price of some commodity, currency, or securities index or
another interest rate (each a "benchmark"). Hybrids can be used as an
efficient means of pursuing a variety of investment goals, including currency
hedging, duration management, and increased total return. Hybrids may not
bear interest or pay dividends. The value of a hybrid or its interest rate
may be a multiple of a benchmark and, as a result, may be leveraged and move
(up or down) more steeply and rapidly than the benchmark. These benchmarks
may be sensitive to economic and political events, such as commodity
shortages and currency devaluations, which cannot be readily foreseen by the
purchaser of a hybrid. Under certain conditions, the redemption value of a
hybrid could be zero. Thus, an investment in a hybrid may entail significant
market risks that are not associated with a similar investment in a
traditional, U.S. dollar-denominated bond that has a fixed
<PAGE>
T. ROWE PRICE 28
principal amount and pays a fixed rate or floating rate of interest. The
purchase of hybrids also exposes the fund to the credit risk of the issuer of
the hybrid. These risks may cause significant fluctuations in the net asset
value of the fund.
o Hybrids can have volatile prices and limited liquidity and their use by the
fund may not be successful.
Operating policy Each fund may invest up to 10% of its total assets in hybrid
instruments.
Private Placements
These securities are sold directly to a small number of investors, usually
institutions. Unlike public offerings, such securities are not registered
with the SEC. Although certain of these securities may be readily sold, for
example, under Rule 144A, others may be illiquid, and their sale may involve
substantial delays and additional costs.
Operating policy Each fund will not invest more than 15% of its net assets in
illiquid securities.
Loan Participations and Assignments
Large loans to corporations or governments, including governments of less
developed countries (LDCs), may be shared or syndicated among several
lenders, usually banks. Each fund could participate in such syndicates, or
could buy part of a loan, becoming a direct lender. Participations and
assignments involve special types of risk, including limited marketability
and the risks of being a lender. If a fund purchases a participation, it may
only be able to enforce its rights through the lender, and it may assume the
credit risk of the lender in addition to the borrower. In assignments, the
funds' rights against the borrower may be more limited than those held by the
original lender.
Operating policy Global Government Bond and International Bond Funds may not
invest more than 5% and Emerging Markets Bond Fund not more than 20% of total
assets in loan participations and assignments.
High-Yield/High-Risk Securities
While investments in high-yield, lower-quality securities offer the
opportunity for substantial income and capital appreciation, there are
significant risks associated with such investments, including:
Greater credit risk Companies and governments issuing lower-rated bonds are
not as strong financially as those with higher credit ratings and their bonds
are often viewed as speculative investments. Such issuers are more vulnerable
to real or perceived business setbacks and to changes in the economy, such as
a recession, that might impair their ability to make timely interest and
principal payments. Certain less developed governments have in the past
defaulted on
<PAGE>
MORE ABOUT THE FUNDS 29
payment of interest and principal on debt they have issued. As a result, your
fund manager relies heavily on proprietary Price-Fleming research when
selecting these investments.
Reduced market liquidity High-yielding emerging market bonds are generally
less "liquid" than higher-quality bonds issued by companies and governments
in developed countries. Consequently, large purchases or sales of certain
high-yield, emerging market debt issues may cause significant changes in
their prices. Because many of these bonds do not trade frequently, when they
do trade, their price may be substantially higher or lower than had been
expected. A lack of liquidity also means that judgment may play a bigger role
when seeking to establish the fair value of the securities.
Other factors The major factor influencing prices of high-quality bonds is
changes in interest rate levels; but this is only one of several factors
affecting prices of lower-quality bonds. Because the credit quality of the
issuer is lower, such bonds are more sensitive to developments affecting the
issuer's underlying fundamentals, such as changes in financial condition, or
a given country's economy in general. In addition, the entire bond market in
an emerging market can experience sudden and sharp price swings due to a
variety of factors, including changes in economic forecasts, stock market
activity, large or sustained sales by such investors, a high-profile default,
a political upheaval of some kind, or just a change in the market's
psychology. This type of volatility is usually associated more with stocks
than bonds, but investors in lower-quality bonds should also anticipate it.
Since mutual funds can be a major source of demand in certain markets,
substantial cash flows into and out of these funds can affect high-yield bond
prices. If, for example, a significant number of funds were to sell bonds to
meet shareholder redemptions, both bond prices and a fund's share price could
fall more than underlying fundamentals might justify.
o Defaulted bonds are acquired only if the fund manager foresees the potential
for significant capital appreciation.
Brady Bonds Brady bonds, named after former U.S. Secretary of the Treasury
Nicholas Brady, are used as a means of restructuring the external debt burden
of a government in certain emerging markets. A Brady bond is created when an
outstanding commercial bank loan to a government or private entity is
exchanged for a new bond in connection with a debt restructuring plan. Brady
bonds may be collateralized or uncollateralized and issued in various
currencies (although typically in the U.S. dollar). They are often fully
collateralized as to principal in U.S. Treasury zero coupon bonds. However,
even with this collateralization feature, Brady bonds are often considered
speculative, below-investment-grade investments because the timely payment of
interest is the
<PAGE>
T. ROWE PRICE 30
responsibility of the issuing party (for example, a Latin American country)
and the value of the bonds can fluctuate significantly based on the issuer's
ability or perceived ability to make these payments. Finally, some Brady
bonds may be structured with floating rate or low fixed rate coupons.
Operating policy Global Government Bond and International Bond Funds may each
invest up to 20% of total assets in below-investment-grade ("junk") bonds.
The Emerging Markets Bond Fund may invest substantially all of its assets in
such bonds.
Emerging Markets Bond Fund
Convertible Bonds Convertible bonds are debt instruments convertible into
equity of the issuing company at certain times in the future and according to
a certain exchange ratio. Typically, convertible bonds are callable by the
company, which may, in effect, force conversion before the holder would
otherwise choose.
While the fund intends to invest primarily in debt securities, it may invest
in convertible bonds or equity securities. While some countries or companies
may be regarded as favorable investments, pure fixed income opportunities may
be unattractive or limited due to insufficient supply, legal or technical
restrictions. In such cases, the fund may consider equity securities or
convertible bonds to gain exposure to such markets.
Operating policy The fund may invest up to 10% of its total assets in
convertible bonds and equity securities.
Concentration of Investments From time to time, the fund may invest more than
25% of its total assets in the securities of foreign governmental and
corporate entities located in the same country. However, the fund will not
invest more than 25% of its total assets in any single foreign governmental
issuer or in two or more such issuers subject to a common, explicit
guarantee.
International Bond Fund
Concentration in 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, the fund
will, as a matter of fundamental policy, normally have 25% or more of its
assets concentrated in securities in the banking industry. Investments in the
banking industry may be affected by general economic conditions and exposure
to credit losses arising from possible financial difficulties of borrowers.
The profitability of the banking industry is largely dependent on the
availability and cost of funds for the purpose of financing lending
operations under prevailing money market conditions.
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MORE ABOUT THE FUNDS 31
Types of Management Practices
Foreign Currency Transactions
Each fund may engage in foreign currency transactions either on a spot (cash)
basis at the rate prevailing in the currency exchange market at the time or
through forward currency contracts ("forwards") with terms generally of less
than one year. Forwards will be used primarily to adjust the foreign exchange
exposure of each fund with a view to protecting the portfolio from adverse
currency movements, based on Price-Fleming's outlook, and the funds might be
expected to enter into such contracts under the following circumstances:
Lock In When management desires to lock in the U.S. dollar price on the
purchase or sale of a security denominated in a foreign currency.
Cross Hedge If a particular currency is expected to decrease against another
currency, a fund may sell the currency expected to decrease and purchase a
currency which is expected to increase against the currency sold in an amount
approximately equal to some or all of a fund's portfolio holdings denominated
in the currency sold.
Direct Hedge If Price-Fleming wants to eliminate substantially all of the
risk of owning a particular currency, and/or if Price-Fleming believes the
portfolio may benefit from price appreciation in a given country's bonds but
does not want to hold the currency, it may employ a direct hedge back into
the U.S. dollar. In either case, a fund would enter into a forward contract
to sell the currency in which a portfolio security is denominated and
purchase U.S. dollars at an exchange rate established at the time it
initiated the contract. The cost of the direct hedge transaction may offset
most, if not all, of the yield advantage offered by the foreign security, but
a fund would hope to benefit from an increase (if any) in value of the bond.
o It is often not possible to effectively hedge the currency risk associated
with emerging market bonds because their currency markets are not
sufficiently developed.
Proxy Hedge Price-Fleming might choose to use a proxy hedge, which is less
costly than a direct hedge. In this case, a fund, having purchased a bond,
will sell a currency whose value is believed to be closely linked to the
currency in which the bond is denominated. Interest rates prevailing in the
country whose currency was sold would be expected to be closer to those in
the U.S. and lower than those of bonds denominated in the currency of the
original holding. This type of hedging entails greater risk than a direct
hedge because it is dependent on a stable relationship between the two
currencies paired as proxies, and because the relationships can be very
unstable at times.
<PAGE>
T. ROWE PRICE 32
Forward contracts involve other risks, including, but not limited to,
significant volatility in currency markets. In addition, currency moves may
not occur exactly as Price-Fleming expected, so use of forward contracts
could adversely affect a fund's total return.
Costs of Hedging When a fund purchases a foreign bond with a higher interest
rate than is available on U.S. bonds of a similar maturity, the additional
yield on the foreign bond could be substantially lost if the fund were to
enter into a direct hedge by selling the foreign currency and purchasing the
U.S. dollar.
This is what is known as the "cost" of hedging. Proxy hedging attempts to
reduce this cost through an indirect hedge back to the U.S. dollar.
It is important to note that hedging costs are treated as capital
transactions and are not, therefore, deducted from a fund's dividend
distribution and are not reflected in its yield. Instead such costs will,
over time, be reflected in a fund's net asset value per share.
Tax Consequences of Hedging Under applicable tax law, the funds may be
required to limit their gains from hedging in foreign currency forwards,
futures, and options. Although the funds are expected to comply with such
limits, the extent to which these limits apply is subject to tax regulations
as yet unissued. Hedging may also result in the application of the
mark-to-market and straddle provisions of the Internal Revenue Code. These
provisions could result in an increase (or decrease) in the amount of taxable
dividends paid by the funds and could affect whether dividends paid by the
funds are classified as capital gains or ordinary income.
Cash Position
Each fund will hold a certain portion of its assets in U.S. and foreign
dollar-denominated money market securities, including repurchase agreements,
in the two highest rating categories, maturing in one year or less. For
temporary, defensive purposes, a fund may invest without limitation in such
securities. This reserve position provides flexibility in meeting
redemptions, expenses, and the timing of new investments, and serves as a
short-term defense during periods of unusual market volatility.
Borrowing Money and Transferring Assets
Each fund can borrow money from banks as a temporary measure for emergency
purposes, to facilitate redemption requests, or for other purposes consistent
with each fund's investment objective and program. Such borrowings may be
collateralized with fund assets, subject to restrictions.
Fundamental policy Borrowings may not exceed 33/1//\\/3/\\% of total fund
assets.
<PAGE>
MORE ABOUT THE FUNDS 33
Operating policy Each fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33/1//\\/3/\\% of a
fund's total assets. A fund may not purchase additional securities when
borrowings exceed 5% of total assets.
Futures and Options
Futures (a type of potentially high-risk derivative) are often used to manage
risk because they enable the investor to buy or sell an asset in the future
at an agreed upon price. Options (another type of potentially high-risk
derivative) give the investor the right, but not the obligation, to buy or
sell an asset at a predetermined price in the future. The funds may buy and
sell futures and options contracts for a number of reasons including: to
manage exposure to changes in interest rates, securities prices, and foreign
currencies; as an efficient means of adjusting overall exposure to certain
markets; in an effort to enhance income; to protect the value of portfolio
securities; and to adjust the portfolios' duration. The funds may purchase,
sell, or write call and put options on securities, financial indices, and
foreign currencies.
Futures contracts and options may not always be successful hedges; their
prices can be highly volatile. Using them could lower the fund's total
return, and the potential loss from the use of futures can exceed the fund's
initial investment in such contracts. In many foreign countries futures and
options markets do not exist or are not sufficiently developed to be
effectively used by the funds.
Operating policies Futures: Initial margin deposits and premiums on options
used for non-hedging purposes will not equal more than 5% of the fund's net
asset value. Options on securities: The total market value of securities
against which the fund has written call or put options may not exceed 25% of
its total assets. The fund will not commit more than 5% of its total assets
to premiums when purchasing call or put options.
Lending of Portfolio Securities
Like other mutual funds, the funds may lend securities to broker-dealers,
other institutions, or other persons to earn additional income. The principal
risk is the potential insolvency of the broker-dealer or other borrower. In
this event, a fund could experience delays in recovering its securities and
possibly capital losses.
Fundamental policy The value of loaned securities may not exceed
33/1//\\/3/\\% of total fund assets.
When-Issued Securities and Forward Commitment Contracts
The funds may purchase securities on a when-issued or delayed delivery basis
or may purchase or sell securities on a forward commitment basis. There is no
limit on the funds' investment in these securities. The price of these
securities is
<PAGE>
T. ROWE PRICE 34
fixed at the time of the commitment to buy, but delivery and payment can take
place a month or more later. During the interim period, the market value of
the securities can fluctuate, and no interest accrues to the purchaser. At
the time of delivery, the value of the securities may be more or less than
the purchase or sale price. To the extent the funds remain fully or almost
fully invested (in securities with a remaining maturity of more than one
year) at the same time they purchases these securities, there will be greater
fluctuations in the funds' net asset values than if the funds did not
purchase them.
Portfolio Turnover
Turnover is an indication of trading frequency. The funds may purchase and
sell securities without regard to the length of time they are held. A high
turnover rate may increase transaction costs and result in additional taxable
gains. The funds' portfolio turnover rates for the previous three years are
shown in Table 7.
<TABLE>
Table 7
<CAPTION>
<S> <C> <C> <C> <C>
Portfolio Turnover Rates
Fund 1994 1995 1996
Global Government Bond 254.1% 290.7% 262.6%
International Bond 345.2% 237.1% 234.0%
Emerging Markets Bond * 273.5% 168.7%
- -------------------------------------------------------------
</TABLE>
Emerging Markets Bond Fund
Location of Company
In determining the domicile or nationality of a company, the fund would
primarily consider the following factors: whether the company is organized
under the laws of a particular country; or whether the company derives a
significant proportion (at least 50%) of its revenues or profits from goods
produced or sold, investments made, or services performed in the country or
has at least 50% of its assets situated in that country.
The fund will invest at least 65% of its total assets in the securities of
emerging market governments or companies located (as defined above) in
emerging market countries.
Bond Ratings and High-Yield Bonds
Larger bond issues are evaluated by rating agencies such as Moody's and
Standard & Poor's on the basis of the issuer's ability to meet all required
interest and principal payments. The highest ratings are assigned to issuers
perceived to be the best credit risks. T. Rowe Price research analysts also
evaluate all portfolio holdings of each fund, including those rated by an
outside agency. Other things being equal, lower-rated bonds have higher
yields due to greater risk. High-yield bonds, also called "junk" bonds, are
those rated below BBB.
<PAGE>
MORE ABOUT THE FUNDS 35
Table 8 shows the rating scale used by the major rating agencies. T. Rowe
Price considers publicly available ratings but emphasizes its own credit
analysis when selecting investments.
<TABLE>
Table 8
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratings of Corporate Debt Securities
Moody's Standard Fitch Definition
Investor & Poor's Investors
Services Services Services, Inc.
Long Term Aaa AAA AAA Highest quality
Aa AA AA High quality
A A A Upper medium grade
Baa BBB BBB Medium grade
Ba BB BB Speculative
B B B Highly speculative
C
Caa CCC, CC CCC, CC Vulnerable to default
C
Ca C C Default is imminent
C D DDD, DD, D Probably in default
Moody's S&P Fitch
Commercial P-1 Superior quality A-1+ Extremely strong F-1+ Exceptionally strong quality
Paper
C
A-1 Strong quality F-1 Very strong quality
C
P-2 Strong quality A-2 Satisfactory quality F-2 Good credit quality
C
P-3 Acceptable quality A-3 Adequate quality F-3 Fair credit quality
C
B Speculative quality F-3 Weak credit quality
C
C Doubtful quality
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
T. ROWE PRICE 36
Table 9 shows the average credit quality allocation of the Emerging Markets
Bond Fund's assets for the fiscal year ended December 31, 1996. (Equities and
reserves are excluded.) Percentages are computed on a dollar-weighted basis
and are an average of 12 monthly calculations.
<TABLE>
Table 9
<CAPTION>
<S> <C> <C> <C>
Emerging Markets Bond Fund's Asset Composition
Standard & Poor's Percentage of T. Rowe Price's
Rating Total Assets Assessment of Not
Rated Securities
AAA 0.2% 0.0%
AA 0.0 0.0
A 0.6 0.0
BBB 1.4 0.3
BB 42.5 10.7
B 14.5 13.9
CCC 0.0 6.7
CC 0.0 1.1
C 0.0 0.0
D 0.0 0.0
Not Rated 33.3 0.5
92.5% 33.2%
- ------------------------------------------------------------
</TABLE>
<PAGE>
INVESTING WITH T. ROWE PRICE
4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. If this
information is not received within 60 days after your account is established,
Always verify your transactions by carefully reviewing the confirmation we send
Employer-Sponsored Retirement Plans and Institutional Accounts T. Rowe Price
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name and
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check together with the New Account Form to the address
on the next page. We do not accept third party checks to open new accounts,
except for IRA Rollover checks that are properly endorsed.
<PAGE>
T. ROWE PRICE 38
Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account#
1004397951 account name and account number
Complete a New Account Form and mail it to one of the appropriate addresses
listed above.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plans cannot be
opened by wire.
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under Shareholder Services). The new account will have the
same registration as the account from which you are exchanging. Services for the
new account may be carried over by telephone request if preauthorized on the
existing account. For limitations on exchanging, see explanation of Excessive
Trading under Transaction Procedures and Special Requirements.
In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.
<PAGE>
INVESTING WITH T. ROWE PRICE 39
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for retirement plans, Automatic Asset
Builder, and gifts or transfers to minors (UGMA/UTMA) accounts
By ACH Transfer
Use Tele*Access, your personal computer, or call Investor Services if you have
established electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
2. Mail the check to us at the address shown below with either a fund
reinvestment slip or a note indicating the fund you want to buy and your fund
account number.
3. Remember to provide your account number and the fund name on the memo line of
your check.
Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500
/(For mailgrams, express, registered, or certified mail, see previous /
/section.)/
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
EXCHANGING AND REDEEMING SHARES
----------------------------------------------------------
By Phone
Call Shareholder Services
If you find our phones busy during unusually volatile markets, please consider
placing your order by your personal computer, Tele*Access (if you have
previously authorized telephone services), mailgram, or express mail. For
exchange policies, please see Transaction Procedures and Special Requirements
- -Excessive Trading.
<PAGE>
T. ROWE PRICE 40
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers -By Wire under Shareholder Services.
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please mail
to the appropriate address below. T. Rowe Price requires the signatures of all
owners exactly as registered, and possibly a signature guarantee (see
Transaction Procedures and Special Requirements-Signature Guarantees).
Regular Mail
For nonretirement and IRA accounts
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220
For employer-sponsored retirement accounts
T. Rowe Price Trust Company P.O. Box 89000 Baltimore, MD 21289-0300
/(For mailgrams, express, registered, or certified mail, see addresses / /under
Opening a New Account.)/
Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
Rights Reserved by the Fund
The fund and its agents reserve the right to waive or lower investment minimums;
to accept initial purchases by telephone or mailgram; to refuse any purchase
order; to cancel or rescind any purchase or exchange (for example, if an account
has been restricted due to excessive trading or fraud) upon notice to the
shareholder within five business days of
<PAGE>
INVESTING WITH T. ROWE PRICE 41
the trade or if the written confirmation has not been received by the
shareholder, whichever is sooner; to freeze any account and suspend account
services when notice has been received of a dispute between the registered or
beneficial account owners or there is reason to believe a fraudulent transaction
may occur; to otherwise modify the conditions of purchase and any services at
any time; or to act on instructions believed to be genuine.
SHAREHOLDER SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 1-410-625-6500 Investor Services
1-800-638-5660 1-410-547-2308
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize on the New Account Form. By
signing up for services on the New Account Form rather than later on, you avoid
having to complete a separate form and obtain a signature guarantee. This
section reviews some of the principal services currently offered. Our Services
Guide contains detailed descriptions of these and other services.
If you are a new T. Rowe Price investor, you will receive a Services Guide with
our Welcome Kit.
Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs (profit sharing, money
purchase pension), 401(k), and 403(b)(7). For information on IRAs, call Investor
Services. For information on all other retirement plans, including our no-load
variable annuity, please call our Trust Company at 1-800-492-7670.
Exchange Service
You can move money from one account to an existing identically registered
account, or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into
<PAGE>
T. ROWE PRICE 42
a state tax-free fund are limited to investors living in states where the funds
are registered.) Some of the T. Rowe Price funds may impose a redemption fee of
0.5% to 2% on shares held for less than six months or one year, as specified in
the prospectus. The fee is paid to the fund.
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers below).
T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access, but is designed specifically to
meet the needs of retirement plan investors.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.
Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.
<PAGE>
INVESTING WITH T. ROWE PRICE 43
Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.
Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:
Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.
Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
DISCOUNT BROKERAGE
----------------------------------------------------------
This additional service gives you the opportunity to easily consolidate all of
your investments with one company. Through our discount brokerage, you can buy
and sell individual securities - stocks, bonds, options, and others - at
considerable commission savings over full-service brokers. We also provide a
wide range of services, including:
To open an account 1-800-638-5660 For existing discount brokerage investors
1-800-225-7720
Automated telephone and on-line services
You can enter trades, access quotes, and review account information 24 hours a
day, seven days a week. Any trades executed through these programs save you an
additional 10% on commissions.
Note: Discount applies to our current commission schedule, subject to our $35
minimum commission.
Investor information
A variety of informative reports, such as our Brokerage Insights series, S&P
Market Month Newsletter, and select stock reports can help you better evaluate
economic trends and investment opportunities.
<PAGE>
T. ROWE PRICE 44
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this
service-free of charge.
/Discount Brokerage is a division of //T. Rowe Price// Investment / /Services,
Inc., Member NASD/SIPC./
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.
Shareholder Reports
Fund managers' reviews of their strategies and results. If several members of a
household own the same fund, only one fund report is mailed to that address. To
receive additional copies, please call Shareholder Services or write to us at
100 East Pratt Street, Baltimore, Maryland 21202.
The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.
Performance Update
Quarterly review of all T. Rowe Price fund results.
Insights
Educational reports on investment strategies and financial markets.
Investment Guides
Asset Mix Worksheet, College Planning Kit, Personal Strategy Planner, Retirees
Financial Guide, Retirement Planning Kit, Tax Considerations for Investors, and
Diversifying Overseas: A T. Rowe Price Guide to International Investing.
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To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
To Open a Mutual Fund Account
Investor Services
1-800-638-5660 1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
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investors
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T. Rowe Price
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10090 Red Run Blvd.
Owings Mills, MD 21117
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900 17th Street, N.W.
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Tampa, FL 33607
Internet Address
www.troweprice.com
C02-040 5/1/97
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PAGE 2
STATEMENT OF ADDITIONAL INFORMATION
T. Rowe Price International Funds, Inc. (the "Corporation")
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 each Fund's prospectus
dated May 1, 1997, which may be obtained from T. Rowe Price
Investment Services, Inc., 100 East Pratt Street, Baltimore,
Maryland 21202.
If you would like a prospectus for a Fund of which you are not
a shareholder, please call 1-800-638-5660. A prospectus with
more complete information, including management fees and expenses
will be sent to you. Please read it carefully.
The date of this Statement of Additional Information is May 1,
1997.
SAI-INTFI 5/1/97
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PAGE 3
TABLE OF CONTENTS
Page Page
Call and Put Options. .11 Legal Counsel . . . . . . . .49
Capital Stock. . . . . . .48 Lending of Portfolio
Code of Ethics . . . . . .40 Securities . . . . . . . . .10
Custodian. . . . . . . . .40 Management of Funds . . . . .31
Dealers Options. . . . . .15 Net Asset Value Per Share . .45
Distributor for Funds. . .39 Portfolio Management
Dividends. . . . . . . . .45 Practices. . . . . . . . . .10
Federal Registration Portfolio Transactions. . .41
of Shares . . . . . . . .49 Pricing of Securities . . . .44
Foreign Currency Principal Holders of
Transactions. . . . . . .22 Securities . . . . . . . . .35
Foreign Futures and Ratings of Corporate Debt
Options . . . . . . . . .21 Securities . . . . . . . . .51
Futures Contracts. . . . .16 Repurchase Agreements . . . .11
Hybrid Instruments . . . . 8 Risk Factors of Foreign
Illiquid or Restricted Investing. . . . . . . . . . 3
Securities. . . . . . . . 8 Risk Factors of Investing in
Independent Accountants. .49 Debt Obligations . . . . . . 6
Investment Management Shareholder Services. . . . .40
Services. . . . . . . . .35 Tax Status. . . . . . . . . .46
Investment Objectives and Taxation of Foreign
Policies. . . . . . . . . 2 Shareholders . . . . . . . .47
Investment Performance . .28 When-Issued Securities and
Investment Programs. . . . 2 Forward Commitment
Investment Restrictions. .25 Contracts. . . . . . . . . .24
Yield Information.30
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. 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. When you sell your shares, you
may lose money. 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" below.
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, the Middle
East, and Africa. 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
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
PAGE 5
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.
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
PAGE 6
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 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. However, some
investments may be made through ADRs traded in the United States.
Foreign stock and bond 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 and bond
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.
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
PAGE 7
subject to the provisions of the 1940 Act. 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.")
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
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
PAGE 8
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
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
PAGE 9
located in, or a government of, Eastern Europe and Russia, if it
believes the potential return justifies the risk.
Latin America
Inflation. Most Latin American countries have experienced, at
one time or another, severe and persistent levels of inflation,
including, in some cases, hyperinflation. This has, in turn, 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.
Political Instability. 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.
Foreign Currency. 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. For example, in late 1994 the value
of the Mexican peso lost more than one-third of its value
relative to the dollar. 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.
Sovereign Debt. A number of Latin American countries are
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.
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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 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
use comparable ratings as standards for investments in accordance
with the investment policies contained in the prospectus.
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PAGE 11
Special Risks of High Yield ("Junk Bond") Investing
The following special considerations are additional risk
factors associated with the Fund's investments in lower rated
debt securities.
Youth and Growth of the Lower Rated Debt Securities Market.
The market for lower rated debt securities is relatively new and
its growth has paralleled a long economic expansion. Past
experience may not, therefore, provide an accurate indication of
future performance of this market, particularly during periods of
economic recession. An economic downturn or increase in interest
rates is likely to have a greater negative effect on this market,
the value of lower rated debt securities in the Fund's portfolio,
the Fund's net asset value and the ability of the bonds' issuers
to repay principal and interest, meet projected business goals
and obtain additional financing than on higher rated securities.
These circumstances also may result in a higher incidence of
defaults than with respect to higher rated securities. An
investment in this Fund is more speculative than investment in
shares of a fund which invests only in higher rated debt
securities.
Sensitivity to Interest Rate and Economic Changes. Prices of
lower rated debt securities may be more sensitive to adverse
economic changes or corporate developments than higher rated
investments. Debt securities with longer maturities, which may
have higher yields, may increase or decrease in value more than
debt securities with shorter maturities. Market prices of lower
rated debt securities structured as zero coupon or pay-in-kind
securities are affected to a greater extent by interest rate
changes and may be more volatile than securities which pay
interest periodically and in cash. Where it deems it appropriate
and in the best interests of Fund shareholders, the Fund may
incur additional expenses to seek recovery on a debt security on
which the issuer has defaulted and to pursue litigation to
protect the interests of security holders of its portfolio
companies.
Liquidity and Valuation. 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
PAGE 12
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.
Taxation. Special tax considerations are associated with
investing in lower rated debt securities structured as zero
coupon or pay-in-kind securities. The Fund accrues income on
these securities prior to the receipt of cash payments. The Fund
must distribute substantially all of its income to its
shareholders to qualify for pass-through treatment under the tax
laws and may, therefore, have to dispose of its portfolio
securities to satisfy distribution requirements.
Reference is also made to the sections entitled "Types of
Securities" and "Portfolio Management Practices" for discussions
of the risks associated with the investments and practices
described therein as they apply to the Fund.
In addition to the investments described in the Funds'
prospectus, the Funds may invest in the following. References to
"the Fund" are intended to refer to each of the Funds unless
otherwise indicated.
Types of Securities
Hybrid Instruments
Hybrid Instruments (a type of potentially high risk
derivative) 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
PAGE 13
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.
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
PAGE 14
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
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.
Global Government Bond and Emerging Markets Bond Funds
The securities of U.S. issuers in which these 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.
PAGE 15
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
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
PAGE 16
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
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
PAGE 17
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
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.
<PAGE>
PAGE 18
Options
Options are a type of potentially high-risk derivative.
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.
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.
PAGE 19
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
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.
PAGE 20
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.
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.
The Fund will not write a covered call option if, as a result,
the aggregate market value of all portfolio securities or
PAGE 21
currencies covering written call or put options exceeds 25% of
the market value of the Fund's net assets. In calculating the
25% limit, the Fund will offset, against the value of assets
covering written calls and puts, the aggregate market value of
all assets underlying 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
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
PAGE 22
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. The Fund will not write a covered put
option if, as a result, the aggregate market value of all
portfolio securities or currencies covering written put or call
options exceeds 25% of the market value of the Fund's net assets.
In calculating the 25% limit, the Fund will offset, against the
value of assets covering written puts and calls, the aggregate
market value of all assets underlying 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
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
PAGE 23
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.
The Fund will not commit more than 5% of its assets to
premiums when purchasing put and call 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.
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
PAGE 24
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.
The Fund will not 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.
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
PAGE 25
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.
Futures Contracts
Futures are a type of potentially high-risk derivative.
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.
PAGE 26
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.
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.
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%.
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
PAGE 27
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
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.
PAGE 28
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
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.
PAGE 29
Most United States futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single
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 cash, liquid high-grade
debt or other appropriate cover, 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
PAGE 30
cash would be required to be paid by or released to the Fund, and
the Fund would realize a loss or a gain.
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
PAGE 31
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
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.
<PAGE>
PAGE 32
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
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
PAGE 33
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
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,
PAGE 34
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
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,
PAGE 35
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
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,
currency available for cover of the forward contract(s) or other
suitable cover. 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
PAGE 36
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
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.
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 of 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.
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.
PAGE 37
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%
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
PAGE 38
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
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.
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
Emerging Markets Bond 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, including
limited partnership interests therein, 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>
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. It is
the position of the staff of the Securities and Exchange
Commission that foreign governments are industries for
purposes of this restriction. For as long as this staff
position is in effect, each Fund will not invest more
than 25% of its total assets in the securities of any
single foreign governmental issuer. For purposes of this
restriction, governmental entities are considered
separate issuers. 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.
PAGE 42
(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
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;
(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 if, as a result thereof, more than 5% of the
value of the stated assets of the Fund would be invested
in such 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) Short Sales. Effect short sales of securities; or
PAGE 43
(11) Warrants. Invest in warrants if, as a result thereof,
more than 10% of the value of the net assets of each Fund
would be invested in warrants.
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
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.
Cumulative Performance Percentage Change
1 Yr. 5 Yrs. 10 Yrs. Since
Ended Ended Ended Inception-
12/31/96+12/31/96 12/31/96 12/31/96
International Bond Fund
International Bond Fund 7.13% 55.45% 159.00% 166.71%
(9/10/86)
PAGE 44
Global Government Bond Fund
T. Rowe Price Global
Government Bond Fund 6.59% 4.10% 55.95%
(12/31/90)
Emerging Markets Bond Fund
T. Rowe Price Emerging
Markets Bond Fund 36.77% 72.07%
(12/30/94)
Average Annual Compound Rates of Return
1 Yr. 5 Yrs. 10 Yrs. Since
Ended Ended Ended Inception-
12/31/96+12/31/96 12/31/96 12/31/96++
International Bond Fund
International Bond Fund 7.13% 9.22% 9.98% 9.99%
(9/10/86)
+ If you invested $1,000 at the beginning of 1996, the total
return on December 31, 1996 would be $1,071.30 ($1,000 X
.0713).
++ Assumes purchase of one share of the International Bond Fund
at the inception price of $10.00 on 9/10/86.
Global Government Bond Fund
T. Rowe Price Global
Government Bond Fund 6.59% 6.98% 7.69%
(12/31/90)
+ If you invested $1,000 at the beginning of 1996, the total
return on December 31, 1996 would be $1,065.90 ($1,000 X
.0659).
++ Assumes purchase of one share of the Global Government Bond
Fund at the inception price of $10.00 on 12/28/90.
Emerging Markets Bond Fund
T. Rowe Price Emerging
Markets Bond Fund 36.77% 31.13%
(12/30/94)
PAGE 45
+ If you invested $1,000 at the beginning of 1996, the total
return on December 31, 1996 would be $1,367.70 ($1,000 X
.3677).
All Funds
Outside Sources of Information
From time to time, in reports and promotional literature: (1)
the Fund's total return performance, ranking, or any other
measure of the Fund's performance may be compared to any one or
combination of the following: (i) a broad based index; (ii)
other groups of mutual funds, including T. Rowe Price Funds,
tracked by independent research firms ranking entities, or
financial publications; (iii) indices of stocks comparable to
those in which the Fund invests; (2) the Consumer Price Index (or
any other measure for inflation, government statistics, such as
GNP may be used to illustrate investment attributes of the Fund
or the general economic, business, investment, or financial
environment in which the Fund operates; (3) various financial,
economic and market statistics developed by brokers, dealers and
other persons may be used to illustrate aspects of the Fund's
performance; (4) the effect of tax-deferred compounding on the
Fund's investment returns, or on returns in general in both
qualified and non-qualified retirement plans or any other tax
advantage product, may be illustrated by graphs, charts, etc.;
and (5) the sectors or industries in which the Fund invests may
be compared to relevant indices or surveys in order to evaluate
the Fund's historical performance or current or potential value
with respect to the particular industry or sector.
Other Publications
From time to time, in newsletters and other publications
issued by T. Rowe Price Investment Services, Inc., T. Rowe Price
mutual fund portfolio managers may discuss economic, financial
and political developments in the U.S. and abroad and how these
conditions have affected or may affect securities prices or the
Fund; individual securities within the Fund's portfolio; and
their philosophy regarding the selection of individual stocks,
including why specific stocks have been added, removed or
excluded from the Fund's portfolio.
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
PAGE 46
goals, which include, but are not limited to, 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.
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 December 31, 1996 was 5.22%.
International Bond Fund
The Fund's yield calculated as set forth above for the month
ended December 31, 1996 was 5.45%.
Emerging Markets Bond Fund
The Fund's yield calculated as set forth above for the month
ended December 31, 1996 was 6.94%.
<PAGE>
PAGE 47
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, Retired (April 1996) Director--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, Eurocapital Advisors,
LLC, an acquisition and management advisory Firm (from 7/95-to
present), Principal, Overseas Partners, Inc., a financial
investment firm (5/89-6/95); formerly (6/65-3/89) Director and
Vice President-Consumer Products Division, McCormick & Company,
Inc., international food processors; Director, Waverly, Inc.,
PAGE 48
Baltimore, Maryland; Address: P.O. Box 491, Chilmark, MA 02535-
0491
ADDISON LANIER, Retired (April 1996) Director--Financial
management; Manager, Thomas Emery's Sons, LLC, Alternative Asset
Holdings, LLC, President, Emery Group, Inc.; Director, Scinet
Development and Holdings, Inc.; Address: 441 Vine Street, #2300,
Cincinnati, Ohio 45202-2913
PAUL M. WYTHES, Director--Founding General Partner, Sutter Hill
Ventures, a venture capital limited partnership, providing equity
capital to young high technology companies throughout the United
States; Director, Teltone Corporation (Seattle, WA) and
Interventional Technologies Inc. (San Diego, CA); Address: 755
Page Mill Road, Suite A200, Palo Alto, California 94304
*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 and Director,
Price-Fleming; Director, Robert Fleming Holdings Limited;
Director, Robert Fleming Asset Management; Address: 25 Copthall
Avenue, London, EC2R 7DR, England
PETER B. ASKEW, Executive Vice President--Executive Vice
President, Price-Fleming
EDWARD A. WIESE, Executive Vice President--Vice President,
T. Rowe Price, Price-Fleming and T. Rowe Price Trust Company
CHRISTOPHER D. ALDERSON, Vice President--Vice President, Price-
Fleming
ROBERT P. CAMPBELL, Vice President--Vice President, T. Rowe Price
and Price-Fleming; formerly (4/80-5/90) Vice President and
Director, Private Finance, New York Life Insurance Company, New
York, New York
FRANCES DYDASCO, Vice President--Vice President and portfolio
manager of Price-Fleming (Singapore); formerly an Investment
Manager at LGT Asset Management Ltd. (Hong Kong)
MARK J. T. EDWARDS, Vice President--Vice President, Price-Fleming
JOHN R. FORD, Vice President--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
STEPHEN ILOTT, Vice President--Vice President, 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.
PAGE 49
NICHOLA PEASE, Vice President--Vice President and portfolio
manager of Price-Fleming; formerly a Director of Smith New Court
PLC
JAMES S. RIEPE, Vice President--Managing Director and 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--Employee, Price-Fleming;
formerly (1987-1989) employee of Robert Fleming Holdings Limited,
London
JAMES B. M. SEDDON, Vice President--Vice President, Price-Fleming
MARK C. J. BICKFORD-SMITH, Vice President--Vice President and
portfolio manager of Price-Fleming; formerly a Director and
portfolio manager of Jardine Fleming Investment Management
CHARLES P. SMITH, Vice President--Managing Director, T. Rowe
Price; Vice President, Price-Fleming
BENEDICT R. F. THOMAS, Vice President--Vice President, Price-
Fleming
PETER VAN DYKE, Vice President--Managing Director, T. Rowe Price;
Vice President, Price-Fleming
DAVID J. L. WARREN, Vice President--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,
Price-Fleming 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 and T. Rowe Price Investment Services,
Inc.
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 T. Rowe Price
LEAH P. HOLMES, Assistant Vice President--Vice President, Price-
Fleming and Assistant Vice President T. Rowe Price
INGRID I. VORDEMBERGE, Assistant Vice President--Employee,
T. Rowe Price
<PAGE>
PAGE 50
COMPENSATION TABLE
The Funds do not pay pension or retirement benefits to their
officers or directors. Also, any director of a Fund who is an
officer or employee of Price-Fleming or T. Rowe Price does not
receive any remuneration from the Fund.
_________________________________________________________________
Total Compensation
from Fund and
Name of Aggregate Fund Complex
Person, Compensation Paid to
Position from Fund(a) Directors(b)
_________________________________________________________________
International Bond
Leo C. Bailey, $830 $42,083
Director(c)
Donald W. Dick, Jr., 2,384 72,917
Director
Addison Lanier, 830 42,083
Director(c)
Paul M. Wythes, 1,965 69,667
Director(d)
_________________________________________________________________
Global Government Bond Fund
Leo C. Bailey, $387 $42,083
Director(c)
Donald W. Dick, Jr., 1,567 72,917
Director
Addison Lanier, 387 42,083
Director(c)
Paul M. Wythes, 1,353 69,667
Director(d)
<PAGE>
PAGE 51
_________________________________________________________________
Short-Term Global Income Fund
Leo C. Bailey, $391 $42,083
Director(c)
Donald W. Dick, Jr., 1,288 72,917
Director
Addison Lanier, 391 42,083
Director(c)
Paul M. Wythes, 1,072 69,667
Director(d)
_________________________________________________________________
Emerging Markets Bond Fund
Leo C. Bailey, $379 $42,083
Director(c)
Donald W. Dick, Jr., 1,555 72,917
Director
Addison Lanier, 379 42,083
Director(c)
Paul M. Wythes, 1,345 69,667
Director(d)
(a) Amounts in this Column are based on compensation accrued for
the period January 1, 1996 through December 31, 1996.
(b) Amounts in this column are for calendar year 1996.
(c) Messrs. Bailey and Lanier retired from their positions with
the Funds in April 1996.
(d) Mr. Wythes was appointed to the Board of Directors in January
1996.
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.
<PAGE>
PAGE 52
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.
As of March 31, 1997, the following shareholders owned of
record more than 5% of the outstanding shares of 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; Northern Trust Co., FBO Teacher
Retirement System of Texas Trust DTD 10/1/93, P.O. Box 92956,
Chicago, Illinois 60690.
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
PAGE 53
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,
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.
Additional investment research and administrative support for
equity investments is provided to Price-Fleming by Fleming
Investment Management Limited (FIM) and Jardine Fleming
Investment Holdings Limited (JFIH) for which each receives from
Price-Fleming a fee of .075% of the market value of all assets in
equity accounts under Price-Fleming's management. Fleming
International Asset Management Limited (FIAM) and JFIH provide
research and administrative support for fixed income accounts for
which each receive a fee of .075% of the market value of all
assets in active fixed income accounts and 0.175% of such market
value in passive fixed income accounts under Price-Fleming's
management. FIM and JFIH are wholly owned subsidiaries of
Flemings and Jardine Fleming, respectively, and FIAM is an
indirect subsidiary of Flemings.
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
PAGE 54
Individual Fund Fee ("Fund Fee"). The Fee is paid monthly to
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% Next $16 billion
0.305% Next $30 billion
0.300% 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 Equity Index
Fund and 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.
PAGE 55
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
of calendar days in the year by the Fund Fee Rate of 0.35% each
for the Global Government Bond and International Bond Funds; and
0.45% for the Emerging Markets Bond Fund, 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 following chart sets forth the total management fees if
any, paid to Price-Fleming by the Funds, during the last three
years:
International Bond Global Government Bond
1996 $6,824,000 1996 $116,000
1995 $6,201,000 1995 $ 60,000
1994 $5,206,000 1994 $159,000
Emerging Markets Bond
1996 -0-
1995 -0-
1994 *
*Prior to commencement of Fund operations.
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. Set forth below are
details of various expense limitations agreed to by Price-Fleming
and the Funds.
Emerging Markets Bond Fund
In the interest of limiting the expenses of the Fund during
its initial period of operations, Price-Fleming agreed to waive
fees and bear any expenses through December 31, 1996, which would
cause the Fund's ratio of expenses to average net assets to
exceed 1.25%. Fees waived or expenses paid or assumed under this
agreement are subject to reimbursement to Price-Fleming by the
PAGE 56
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 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.
Pursuant to the Fund's expense limitations, management fees
aggregating $165,000 were not accrued for the year ended December
31, 1996, and $10,000 of other expenses were borne by Price-
Fleming. Unaccrued management fees and other expenses subject to
reimbursement through December 31, 1998, aggregate $357,000.
Global Government Bond Fund
In the interest of limiting the expenses of the Fund during
its initial period of operations, Price-Fleming agreed to waive
fees and bear any expenses through December 31, 1992, which would
cause the Fund's ratio of expenses to average net assets to
exceed 1.20%. The Management Agreement also provides that one or
more additional expense limitation periods (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. 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. Effective January 1, 1995, Price-
Fleming agreed to extend the fund's 1.20% expense limitation for
a period of two years through December 31, 1996. Fees waived or
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),
December 31, 1996 (for the second agreement), or December 31,
1998 (for the third agreement), or if it would result in the
expense ratio exceeding 1.50%.
Pursuant to the Fund's expense limitations, management fees
aggregating $144,000, were not accrued for the year ended
PAGE 57
December 31, 1994. In addition, pursuant to past expense
limitations, $388,000 of unaccrued fees and other expenses borne
by Price-Fleming were permanently waived at December 31, 1994,
and an additional $98,000 of unaccrued fees from 1993 remain
subject to reimbursement through December 31, 1996.
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, Price-Fleming, 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 Spectrum Fund 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 Spectrum Fund 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.
Accounting Services for Funds
T. Rowe Price Associates, Inc. ("T. Rowe Price"), a Maryland
corporation, provides each Fund with daily accounting services.
The following chart sets forth the total accounting fees, if
any, paid to T. Rowe Price by the Funds, during the last three
years:
International Bond Global Government Bond
1996 $125,000 1996 $100,000
1995 $125,000 1995 $100,000
1994 $125,000 1994 $100,000
PAGE 58
Emerging Markets Bond
1996 $100,000
1995 $100,000
1994 *
* Prior to commencement of fund operations.
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: necessary state filings; preparing, setting in
type, printing, and mailing the Fund 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 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 the various states
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.
PAGE 59
SHAREHOLDER SERVICES
The Fund from time to time may enter into agreements with
outside parties through which shareholders hold Fund shares. The
shares would be held by such parties in omnibus accounts. The
agreements would provide for payments by the Fund to the outside
party for such shareholder services provided to shareholders in
the omnibus accounts.
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
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. State
Street 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 personal securities transactions.
Transactions must be executed within three business days of their
clearance. In addition, all employees must report their personal
securities transactions within ten days of their execution.
Employees will generally 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; or the security is subject to internal
trading restrictions. In addition, employees are prohibited from
profiting from short-term trading (e.g., purchases and sales
involving the same security within 60 days. Any material
PAGE 60
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
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.
PAGE 61
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
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
PAGE 62
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 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.
<PAGE>
PAGE 63
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
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
PAGE 64
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
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.
PAGE 65
Other
For the fiscal years ended December 31, 1996, December 31,
1995, and December 31, 1994, the Global Government Bond Fund
engaged in portfolio transactions involving broker-dealers
totaling $442,166,000, $611,644,000, and $707,718,000,
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, 1996, December 31, 1995, and December 31, 1994, none of the
transactions 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.
For the fiscal years ended December 31, 1996, December 31,
1995, and December 31, 1994, the International Bond Fund engaged
in portfolio transactions involving broker-dealers totaling
$8,215,010,000, $11,084,876,000, and $10,978,017,000,
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%, 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.
For the fiscal year ended December 31, 1996 and December 31,
1995, the Emerging Markets Bond Fund engaged in portfolio
transactions involving broker-dealers totaling $334,337,000 and
$105,389,000, respectively. The entire amount for the period
represented principal transactions as to which the Emerging
Markets Bond 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 Emerging Markets Bond Fund
or, in some cases, to the Emerging Markets Bond Fund.
PRICING OF SECURITIES
Debt securities are generally traded in the over-the-counter
market and are valued at a price deemed best to reflect fair
PAGE 66
value as provided 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, the U.S. dollar value of all assets and liabilities
initially expressed in foreign currencies is determined by using
the mean of the bid and offer prices of such currencies against
U.S. dollars as provided by a major bank.
Assets and liabilities for which the above valuation
procedures are inappropriate or are deemed not to reflect fair
value are stated at fair value as determined in good faith by or
under the supervision of the officers of each 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.
PAGE 67
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
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 by
December 31 of each year 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 within 12 months
100% of ordinary income and capital gains as of December 31 to
avoid federal income tax.
PAGE 68
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
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 February 28, 1997, 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.
Undistri-
Undistri- ibuted
buted Net
Net Realized
Investment Capital Unrealized
Fund Income Gains(Losses) Appreciation
Global Government Bond $ 51,000 $(175,000)$ (1,405,000)
International Bond 5,060,000 2,117,000 (32,865,000)
Emerging Markets Bond 20,000 543,000 5,906,000
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
PAGE 69
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.
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.
PAGE 70
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
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
"International Corporation") is a Maryland corporation. The
Institutional International Funds, Inc. (the "Institutional
Corporation") was organized in 1989, as a Maryland corporation.
Each 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 International Corporation consists of the
following eleven series, each of which represents a separate
class of the Corporation's shares and has different objectives
and investment policies. The International Bond, International
Stock, International Discovery, European Stock, New Asia, Global
Government Bond, Japan, Latin America, Emerging Markets Bond,
Emerging Markets Stock, and Global Stock Funds. The Global
Government Bond, International Bond, and Emerging Markets Bond
Funds are described in a separate Statement of Additional
Information. Currently, the Institutional Corporation consists
of one series, the Foreign Equity Fund. Each Charter also
provides that the Board of Directors may issue additional series
of shares.
PAGE 71
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 72
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 REGISTRATION OF SHARES
Each Fund's shares are registered for sale under the
Securities Act of 1933. Registration of the Fund's shares is not
required under any state law, but the Fund is required to make
certain filings with and pay fees to the states in order to sell
its shares in the states.
LEGAL COUNSEL
Shereff, Friedman, Hoffman, & Goodman, LLP, whose address is
919 Third Avenue, New York, New York 10022, is legal counsel to
the Funds.
INDEPENDENT ACCOUNTANTS
International Bond and Emerging Markets Bond Funds
Price Waterhouse LLP, Gateway International II, 1306 Concourse
Drive, Suite 100, Linthicum, Maryland 21090-1020, are independent
accountants to each Fund. The financial statements of the
International Bond and Emerging Markets Bond Funds for the year
PAGE 73
ended December 31, 1996, and the report of independent
accountants are included in the Funds' Annual Report for the year
ended December 31, 1996. A copy of the Annual Report 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,
1996, are incorporated into this Statement of Additional
Information by reference:
ANNUAL REPORT REFERENCES:
INTERNATIONAL
BOND FUND
_____________
Report of Independent Accountants 45
Statement of Net Assets, December 31, 1996 21-28
Statement of Operations, year ended
December 31, 1996 35
Statement of Changes in Net Assets, years ended
December 31, 1996 and December 31, 1995 37
Notes to Financial Statements, December 31, 1996 39-43
Financial Highlights 11
EMERGING MARKETS
BOND FUND
________________
Report of Independent Accountants 45
Portfolio of Investments, December 31, 1996 29-33
Statement of Assets and Liabilities, year ended
December 31, 1996 34
Statement of Operations, year ended
December 31, 1996 35
Statement of Changes in Net Assets, year ended
December 31, 1996 and fiscal year ended
December 30, 1994 (commencement of operations)
to December 31, 1995 38
Notes to Financial Statements, December 31, 1996 39-43
Financial Highlights 12
Global Government Bond Fund
Coopers & Lybrand L.L.P., 217 East Redwood Street, Baltimore,
Maryland 21202, are independent accountants to the Fund. The
financial statement of the Global Government Bond Fund for the
year ended December 31, 1996, and the report of independent
PAGE 74
accountants are included in the Fund's Annual Report for the year
ended December 31, 1996. A copy of the Annual Report accompanies
this Statement of Additional Information. The following
financial statement and the report of independent accountants
appearing in the Annual Report for the year ended December 31,
1996, is incorporated into this Statement of Additional
Information by reference:
ANNUAL REPORT REFERENCES:
GLOBAL GOVERNMENT
BOND FUND
_________________
Report of Independent Accountants 44
Statement of Net Assets, December 31, 1996 13-20
Statement of Operations, year ended
December 31, 1996 35
Statement of Changes in Net Assets, years ended
December 31, 1996 and December 31, 1995 37
Notes to Financial Statements, December 31, 1995 39-43
Financial Highlights 10
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 characteristics and in
fact have speculative characteristics as well.
PAGE 75
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.
BB, C, CCC, CC - Bonds rated BB, B, CCC, and CC are regarded on
balance, as predominantly speculative with respect to the
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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.
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