<PAGE>
FELLOW SHAREHOLDERS
MARKET REVIEW
Over the Fund's fiscal year ended February 28, 1994, the economy strengthened
by virtually every measure. While in the first half of calendar 1993 the
economy grew at less than a 1.5% rate, it surged at over a 5% rate in the
second half. The ranks of the unemployed dropped steadily in 1993, capacity
utilization rose regularly, and personal gains were impressive. Based on
stronger spending by consumers on durable goods and housing and by businesses
on fixed equipment, the economy's momentum seems to be carrying over into
early 1994, though the arctic cold snap east of the Rockies and the earthquake
in Los Angeles tended to depress some measures of business activity early in
the year.
Perceived weakness in the economy through the autumn of 1993 and the Federal
Reserve's aggressively easy monetary policy encouraged a substantial decline
in note and bond yields. Between the end of February 1993 and mid-October, the
yield on the Treasury's benchmark 30-year bond dropped more than one full
percentage point, reaching a low of 5.78%. As it became increasingly apparent
that the economy was entering a phase of stronger growth, interest rates began
to rise. The movement toward higher rates was accelerated by the Fed's
dramatic announcement of a tightening in early February. As a result, short-
and intermediate-term interest rates ended the fiscal year 30 to 75 basis
points higher than they began it, though long-term Treasury bond yields were
still a bit lower.
INVESTMENT STRATEGY AND PERFORMANCE
Throughout most of the Fund's fiscal year, we maintained a weighted average
effective duration which varied from a low of 1.9 years to a high of 2.4
years. We use duration rather than maturity in managing your investments
because duration provides us with a more accurate indication of the
portfolio's sensitivity to interest rate changes, and, therefore, to its price
and income level. Generally speaking, this range is what we consider a neutral
posture, indicating that we do not expect interest rates, or note and bond
prices, to move up or down sharply. An aggressive posture would be closer to a
three-year level, but we felt the risk of rising rates was significant enough
to keep us from extending that far.
Interest Rate Levels Chart
[A line graph compares the yields of the 5-Year Treasury Bond, the 2-Year AA
Finance Note, and the 2-Year Treasury Note from 2/28/93 to 2/28/94.]
While the duration was kept in a neutral zone, we did make some sector
changes in keeping with our goal of providing you with the highest level of
income consistent with minimum fluctuation in principal value and liquidity.
To accomplish this, we looked for alternatives to the commercial paper in
which the cash reserves were invested. Our forecast at the time did not call
for any sharp change in rates, so we increased our position in inverse
floating rate collateralized mortgage obligations (CMOs) early in the quarter.
Yields on these securities are attractive when short-term rates are stable
or falling and decline when short rates rise. This position was subsequently
cut back. In addition, we initiated a 2% position in fixed-rate, interest-only
CMOs, which benefit the Fund in a stable to rising rate environment. These
securities have performed well in the last two months of rising interest
rates.
<PAGE>
We also invested in two notes structured to benefit from the higher interest
rates offered in foreign countries. These "hybrid instruments" are fully
hedged back to the U.S. dollar in order to eliminate currency risk and have a
floor on the extent to which principal value can decline. These instruments
give us an efficient and convenient way to maintain your income level.
Mortgage-backed securities (including the CMOs mentioned earlier) remain the
core sector holding in the portfolio at 38% of assets, because they provide
the highest yields available in the investment-grade arena. While this sector
suffered from the effects of prepayments when rates were declining, in a
rising rate environment these holdings should outperform both corporate and
Treasury notes and bonds.
Our income-oriented strategy did benefit performance over the 12 months
ended February 28, as dividends more than offset the decline in the Fund's
principal value and produced a return which was well ahead of bank money
market deposit accounts and money market mutual funds. As shown below, the
Fund also compared favorably with the Lipper Average of comparable funds,
although the return lagged for the quarter.
Performance Comparison
Periods Ended 2/28/94
3 Months 12 Months
-----------------------------
Short-Term Bond Fund 0.22% 4.36%
Lipper Short Investment-
Grade Debt Funds Average 0.43 3.95
- ------------------------------------------------------------------
OUTLOOK
Fed Chairman Alan Greenspan has made clear his intention to raise short-term
interest rates from what he termed "abnormally low" levels in order to contain
inflation as the economy approaches full utilization of labor and capital over
the next year or two. As the Fed implements its new policy, as it has done in
February and March, short-term interest rates will climb. Inflation currently
does not look threatening, and if the Fed's strategy works, bond investors
should be reassured by the attempt to contain inflation. However, commodity
prices are moving up, labor markets could start visibly tightening later this
year or early next, and the global economy is strengthening, so the bond
market's nervousness is understandable. On balance, we look for a modest
upward trend in bond yields from current levels, but the path may be choppy,
perhaps even turbulent, as inflation expectations wax and wane.
In this potentially volatile environment, we will continue to maintain a
somewhat defensive posture. We have sharply reduced our inverse floating rate
CMO position since quarter-end and are replacing these securities with
variable rate notes which should keep pace with the overall rise in short-term
rates. The holdings of high-quality European bonds should have a favorable
effect on performance going forward, as interest rates in these Western
European countries are expected to resume their declines as central banks try
to encourage a pickup in economic growth. If we are correct, the Fund will
benefit from the higher yields on these securities as well as from price
appreciation.
Respectfully submitted,
s/Veena A. Kutler
Veena A. Kutler
President
March 25, 1994
Duration as a Guide to Interest Rate Risk
Starting with this report, we've added a new measure to the statistical tables
that more accurately defines a fund's interest rate sensitivity. Unlike
maturity, which merely indicates when the bond repays principal, "duration"
incorporates the cash flows of all interest and principal payments over the
life of the bond to reflect the recovery of your original investment. Future
payments are discounted to reflect their present value. These payments are
then multiplied by the number of years over which they will be received to
produce a value that is expressed in years, i.e., the duration. Effective
duration is an even better measure of a bond's sensitivity to interest rate
changes because it takes into account call features and sinking fund payments
which may shorten a bond's life.
You can multiply the duration by the potential change in interest rates to
estimate the change in principal value. For example, a bond or bond fund with
a duration of five years would rise or fall roughly 5% in price if rates fell
or rose by one percentage point.
<PAGE>
STATISTICAL HIGHLIGHTS
T. ROWE PRICE SHORT-TERM BOND FUND / FEBRUARY 28, 1994
Key Statistics
Dividend Yield* Periods Ended 2/28/94
- --------------------------------------------------- --------------------------
3 Months 5.73%
12 Months 6.23
Dividend Per Share
- ---------------------------------------------------
3 Months $0.07
12 Months 0.31
Change in Per-Share Value
- ---------------------------------------------------
3 Months (From $5.06 to $5.00) $-0.06
12 Months (From $5.10 to $5.00) -0.10
Weighted Average Quality** 1.8
Weighted Average Maturity 2.5 yrs.
Weighted Average Effective Duration 2.3 yrs.
- ------------------------------------------------------------------------------
*Dividends earned and reinvested for the periods indicated are annualized and
divided by the average daily net asset values per share for the same period.
**On a T. Rowe Price scale of 1 to 10, with Grade 1 representing highest
quality.
Income return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
Sector Diversification
Percent of Net Assets
2/28/93 11/30/93 2/28/94
- -----------------------------------------------------------------------------
U.S. Government 11% 14% 15%
Obligations
Cash Reserves
Commercial Paper 5 10 0
Mortgage-Backed Securities 34 35 38
Corporate Bonds
Banking & Finance 17 17 17
Structured Finance 17 10 10
Industrial 10 10 9
Hybrid Securities 1 0 5
Utilities 4 3 3
U.S. Dollar Denominated
Foreign Securities 2 2 1
Non U.S. Dollar
Denominated Foreign
Securities 3 1 1
Other Assets Less
Liabilities -4 -2 1
- -----------------------------------------------------------------------------
<PAGE>
Short-Term Bond Fund Performance Comparison
[A line graph compares the 2/28/94 value of a hypothetical $10,000 investment
made in the Short-Term Bond Fund at its inception (3/2/84) and a similar
investment made concurrently in the Lehman 1-3 Year Gov't/Corp. Index. At
2/28/94, the Fund investment would have been worth $22271 and the Lehman Index
investment would have been worth $23927.]
Calendar-Year Performance
Periods Ended December 31, 1993
Since
1 Year 5 Years* Inception (3/2/84)*
----------- ----------- -----------------------
6.62% 8.25% 8.49%
- ------------------------------------------------
* Average Annual Compound Total Return
Income return and principal value represent past performance
and will vary. Shares may be worth more or less at redemption than at original
purchase.
Fiscal-Year Performance
Periods Ended February 28, 1994
Since
1 Year 5 Years* Inception*
----------- ----------- ----------------
4.36% 8.12% 8.34%
- -----------------------------------------
* Average Annual Compound Total Return
<PAGE>
INVESTMENT RECORD
T. ROWE PRICE SHORT-TERM BOND FUND
The table below shows the investment record of one share of the T. Rowe Price
Short-Term Bond Fund, purchased at the original offering price of $5.00. Over
this time, interest rates have been volatile. The results shown should not be
considered a representation of the dividend income or capital gain or loss
which may be realized from an investment made in the Fund today.
- ------------------------------------------------------------------------------
With
Dividends
and
Fiscal Net Capital With Capital
Year Asset Income Gain Dividends Gains Total
Ended Value Dividends Distributions/2/ Reinvested Reinvested Return
- ---------- ------- --------- ---------------- ----------- ----------- --------
2/28/85/1/ $4.97 $0.53 - $5.53 $5.53 $10.58
1986 5.17 0.47 - 6.30 6.30 14.00
1987 5.21 0.40 - 6.86 6.86 8.78
1988 5.08 0.39 - 7.22 7.22 5.36
1989 4.88 0.41 - 7.54 7.54 4.31
1990 4.91 0.42 - 8.25 8.25 9.42
1991 4.94 0.39 $0.03 8.98 9.04 9.61
1992 5.05 0.35 - 9.85 9.91 9.70
1993 5.09 0.33 - 10.60 10.67 7.63
1994 5.00 0.31 - 11.06 11.14 4.36
- ------------------------------------------------------------------------------
TOTAL $4.00 $0.03
- ------------------------------------------------------------------------------
/1/From inception 3/2/84 to 2/28/85.
/2/Includes short-term capital gain of $0.03 on 12/31/90.
<PAGE>
<TABLE>
STATEMENT OF NET ASSETS (AMOUNTS IN THOUSANDS)
T. ROWE PRICE SHORT-TERM BOND FUND/FEBRUARY 28, 1994
Corporate Bonds & Notes --29.8%
<CAPTION>
Face Amount Value
-------------- -----------
<S> <C> <C>
BANKING & FINANCE - 17.6%
American General Finance, Sr. Notes, 9.25%, 7/1/94.................... $ 4,000 $ 4,066
AVCO Financial Services, Sr. Notes, 7.50%, 11/15/96................... 5,000 5,260
Beneficial, MTN, 9.20%, 3/15/94....................................... 1,000 1,001
9.875%, 5/12/94..................................................... 2,000 2,021
Branch Banking & Trust Company, MTN, 4.75%, 5/15/96................... 5,000 4,955
Citicorp, MTN, 5.70%, 2/12/96......................................... 5,000 5,056
CoreStates Capital, MTN, 8.10%, 4/25/94............................... 5,000 5,029
Countrywide Funding, MTN, 6.92%, 6/1/95............................... 4,000 4,116
Dean Witter Discover, Notes, 6.25%, 3/15/00........................... 5,000 4,982
First Chicago, MTN, 9.00%, 6/6/96..................................... 5,000 5,392
Goldman Sachs Group, L.P., Sr. Notes, (144a), 6.375%, 6/15/00......... 5,000 4,975
6.875%, 9/15/99..................................................... 5,000 5,158
Heller Financial, Sr. Notes, 5.625%, 3/15/00.......................... 6,000 5,793
Hutton, E.F. Group, Notes, 8.875%, 5/1/96............................. 4,250 4,515
KeyCorp, MTN, 8.98%, 6/11/96.......................................... 4,000 4,301
Mellon Financial, Gtd. Notes, 5.375%, 8/1/95.......................... 5,000 5,037
Mercantile Bankshares, Sr. Notes, 6.13%, 7/15/98 (Private Placement).. 3,500 3,546
Morgan Stanley Group, Notes, 8.875%, 4/1/96........................... 2,000 2,142
Sr. Notes, 9.25%, 3/1/98............................................ 3,000 3,333
NCNB, Notes, 8.50%, 11/1/96........................................... 5,000 5,368
PaineWebber Group, Sr. Notes, 6.25%, 6/15/98.......................... 5,000 4,975
Salomon Inc., Step Up, MTN, 5.26%, 2/10/99............................ 4,000 4,010
Smith Barney Shearson, Sr. Notes, 5.375%, 6/1/96...................... 10,000 9,996
Suntrust Banks, Notes, 8.375%, 3/1/96................................. 3,000 3,174
Wells Fargo & Company, MTN, 8.35%, 11/1/96............................ 4,200 4,498
World Savings & Loan Assn., MTN, 4.875%, 3/1/96....................... 5,000 4,984
117,683
INDUSTRIALS - 9.8%
Coca-Cola Enterprises, Notes, 8.35%, 6/20/95.......................... 3,000 3,137
Dayton Hudson, MTN, 8.94%, 6/30/94.................................... 5,000 5,078
Ford Capital, Eurobond, 9.125%, 4/8/96................................ 5,000 5,369
Ford Motor Credit, MTN, 9.70%, 6/2/95................................. 1,000 1,061
General Electric Capital, MTN, 8.65%, 8/2/94.......................... 800 815
General Motors Acceptance Corp., MTN, 4.85%, 8/11/94.................. 5,000 5,010
6.40%, 5/2/94....................................................... 3,270 3,281
GPA Leasing USA, Sub. I, Equip. Trust Certs., 9.125%, 12/2/96......... 3,870 3,638
Grand Metropolitan Investment, Sr. Notes, 8.125%, 8/15/96............. 4,000 4,249
IBM, Notes, 9.00%, 5/1/98............................................. 5,000 5,215
Northern Telecom, Notes, 8.25%, 6/13/96............................... 5,000 5,299
Phillip Morris Companies, MTN, 8.50%, 3/13/96......................... 5,000 5,307
Sears Roebuck & Company, MTN, 8.00%, 10/21/96......................... 1,500 1,577
8.58%, 7/24/95.................................................... 2,500 2,672
9.19%, 3/7/95..................................................... 600 647
Notes, 8.55%, 8/1/96................................................ 1,500 1,602
Sony Capital, MTN, 6.97%, 6/30/97..................................... 4,500 4,666
Toyota Motor Credit, Eurobond, 7.25%, 12/13/96........................ 5,000 5,382
Whirlpool, MTN, 8.09%, 3/11/94........................................ 1,100 1,100
65,105
UTILITIES - 2.4%
Florida Power, MTN, 8.40%, 8/1/96..................................... 550 588
GTE, Deb., 8.85%, 3/1/98.............................................. 5,220 5,737
ITT, Notes, 8.85%, 6/20/94............................................ 1,000 1,013
Nynex Credit, MTN, (144a), 6.20%, 4/15/94............................. 3,000 3,007
6.40%, 7/15/94...................................................... 2,000 2,016
Southern New England Telecommunications, MTN, 7.65%, 9/5/95........... 4,000 4,169
16,530
- -------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (COST - $195,203) 199,318
U.S. Government Mortgage-Backed Securities - 37.7%
U.S. GOVERNMENT GUARANTEED OBLIGATIONS - 6.4%
Government National Mortgage Assn., I, 7.50%, 6/15 - 10/15/16......... 3,147 3,274
8.50%, 2/15/05 - 3/15/06.......................................... 1,482 1,588
10.50%, 11/15/15.................................................. 903 1,014
11.00%, 7/15/13................................................... 436 497
11.50%, 10/15/10 - 3/15/15........................................ 452 520
12.00%, 1/15/13 - 4/15/15......................................... 317 368
12.50%, 7/15/10 - 5/15/14......................................... 412 481
13.00%, 11/15/12 - 4/15/15........................................ 197 234
ARM, II, 4.00%, 11/20 - 12/20/23.................................... 7,048 6,881
4.75%, 3/20/22.................................................... 983 995
4.875%, 7/20/21................................................... 1,241 1,249
5.00%, 4/20/22.................................................... 1,490 1,503
5.50%, 10/20/21................................................... 11,350 11,533
Graduated Payment Mortgage, I, 9.50%, 8/15 - 10/15/09............... 140 147
11.00%, 8/15/10............................................... 124 137
11.25%, 6/15/13 - 1/15/16..................................... 1,730 1,920
11.75%, 7/15/13 - 12/15/15.................................... 5,301 5,947
13.00%, 9/15/11............................................... 25 29
II, 11.00%, 9/20/13 - 4/20/14..................................... 158 172
11.25%, 8/20/13 - 12/20/15.................................... 204 225
Midget, I, 9.00%, 7/15/01 - 2/15/06................................. 1,861 1,998
9.50%, 5/15/01 - 4/15/05.......................................... 403 434
10.00%, 4/15/98 - 10/15/04........................................ 1,260 1,369
11.50%, 4/15 - 5/15/00............................................ 182 200
42,715
U.S. GOVERNMENT AGENCY OBLIGATIONS - 17.5%
Federal Home Loan Mortgage, 5.25%, 7/1/97............................. 155 153
6.00%, 10/15/17 - 10/15/20........................................ 6,828 6,783
7.00%, 7/15/06 - 7/15/21.......................................... 22,705 22,680
7.50%, 1/15/19.................................................... 8,000 8,169
9.00%, 7/1/01 - 7/1/02............................................ 2,988 3,150
9.50%, 8/1/01 - 9/1/02............................................ 2,755 2,904
10.00%, 1/1/01 - 10/1/05.......................................... $1,428 $1,507
11.00%, 8/1/00 - 2/1/01........................................... 1,448 1,535
5 year balloon, 9.50%, 8/1 - 11/1/95................................ 491 509
7 year balloon, 9.50%, 4/1 - 8/1/97................................. 165 173
ARM, 5.208%, 3/1/19................................................. 2,240 2,272
5.21%, 8/1/15..................................................... 90 93
5.248%, 12/1/18................................................... 927 938
5.25%, 12/1/17.................................................... 724 734
5.375%, 10/1/17 - 1/1/20.......................................... 2,209 2,284
5.473%, 1/1/20.................................................... 1,083 1,099
5.50%, 4/1/18..................................................... 1,230 1,280
5.519%, 6/1/21.................................................... 626 640
5.666%, 9/1/19.................................................... 1,648 1,718
5.75%, 5/1/18..................................................... 879 898
6.504%, 5/1/19.................................................... 238 244
CMO, 6.50%, 1/25/23................................................. 22,086 21,872
Federal National Mortgage Assn., 5.50%, 8/1/97 - 11/1/05.............. 426 399
6.00%, 9/1/10..................................................... 2,741 2,741
9.00%, 3/1/97 - 7/1/98............................................ 4,054 4,245
9.50%, 5/1/97 - 1/1/98............................................ 526 553
10.00%, 6/1/97.................................................... 346 364
11.00%, 10/1/00 - 4/1/04.......................................... 540 582
ARM, 5.068%, 1/1/19................................................. 371 378
5.088%, 3/1/18.................................................... 1,868 1,892
5.13%, 7/1/17..................................................... 724 734
5.15%, 9/1/19..................................................... 2,530 2,604
5.20%, 8/1/17..................................................... 940 954
5.25%, 9/1 - 10/1/18.............................................. 291 296
5.255%, 5/1/19.................................................... 1,050 1,076
5.375%, 3/1 - 9/1/17.............................................. 304 306
5.48%, 10/1/21.................................................... 800 805
5.66%, 11/1/19.................................................... 2,351 2,406
6.139%, 9/1/18.................................................... 469 486
CMO, 7.00%, 9/25/18................................................. 4,000 4,050
7.50%, 5/25/18-8/25/21............................................ 10,482 10,603
117,109
U.S. GOVERNMENT AGENCY-BACKED - 1.2%
Collateralized Mortgage Obligation, 9.10%, 10/25/09................... 2,471 2,529
ML Trust XXXIII, CMO, 8.05%, 8/1/18................................... 4,817 4,998
Morgan Stanley Mortgage Trust, CMO, 9.10%, 4/20/18.................... 305 306
7,833
INVERSE FLOATING RATE CMO'S - 8.8%
Collateralized Mortgage Obligation, 17.00%, 3/20/18................... 1,717 1,837
Federal Home Loan Mortgage, 6.578%, 11/15/97.......................... 3,700 3,656
9.948%, 1/15/00................................................... 23,763 24,417
10.931%, 5/15/08.................................................. 1,024 985
13.163%, 3/15/97.................................................. 2,112 2,255
15.557%, 5/15/99.................................................. 2,558 2,734
Federal National Mortgage Assn., 9.948%, 2/25/00...................... 19,815 20,360
13.814%, 5/25/99.................................................. 2,417 2,511
58,755
STRIPPED MORTGAGE SECURITIES** - 3.8%
Federal Home Loan Mortgage, CMO, Interest Only, 4.713%, 4/15/23....... 48,100 5,562
6.00%, 12/15/08................................................... 4,973 1,434
6.50%, 8/15/13.................................................... 17,260 3,323
Inverse Floating Rate, CMO, Interest Only, 0.50%, 8/15/16........... 68,962 603
5.038%, 5/15/22................................................... 25,887 2,686
6.163%, 1/15/18................................................... 26,245 1,804
Federal National Mortgage Assn., CMO, Interest Only, 6.50%, 8/25/13... 36,986 7,166
Principal Only, Zero Coupon, 2/15/17................................ 3,276 3,137
25,715
- -------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES (COST - $250,705) 252,127
Asset-Backed Securities - 10.3%
AUTO LOANS-BACKED - 0.7%
Ford Credit Grantor Trust, 8.75%, 10/15/95............................ 914 923
7.80%, 2/15/96...................................................... 211 214
General Motors Acceptance Grantor Trust, 7.90%, 1/15/96............... 86 86
Meridian Grantor Trust, 7.95%, 2/15/96................................ 107 108
Olympic Automobile Receivable Trust, 4.95%, 10/15/99.................. 2,241 2,219
U.S. Automobile Receivables Trust, 8.15%, 1/16/96..................... 744 744
World Omni Grantor Trust, 7.95%, 7/15/96 (Private Placement).......... 563 566
4,860
CREDIT CARD receivables-BACKED - 1.1%
Chase Credit Card Trust, 8.45%, 11/15/97.............................. 230 235
Dover Credit Card Trust, 8.25%, 4/15/97............................... 353 357
MBNA Credit Card Trust, 8.75%, 10/31/95............................... 1,250 1,254
Sears Credit Account Trust, 9.35%, 10/15/97........................... 5,000 5,316
7,162
FOREIGN GOVERNMENT-BACKED - 1.7%
AP Investment II, Collateral Note, (144a), 7.125%, 10/4/94............ 2,250 2,250
MAS Capital Cayman Limited, (144a), Zero Coupon, 4/15/95.............. 10,000 9,300
11,550
HOME EQUITY LOANS-BACKED - 0.3%
SPNB Home Equity Loan, 7.85%, 5/15/98................................. 144 147
U.S. Home Equity Loan, 8.50%, 4/15/21................................. 1,509 1,555
1,702
TRADE RECEIVABLES-BACKED - 0.9%
John Deere Owner Trust, 3.675%, 9/29/99............................... 3,241 3,233
Unisys Receivables, 5.05%, 11/15/96................................... 2,500 2,506
5,739
WHOLE LOANS-BACKED - 5.6%
Great Western Bank, ARM, 5.15%, 11/25/26.............................. 2,372 2,367
Guardian Savings & Loan, MPC, ARM, 6.829%, 12/25/19................... 4,357 4,226
6.841%, 12/25/19.................................................... 3,415 3,313
7.172%, 10/25/19.................................................... 631 612
Homeowners Federal Savings & Loan, MPC, ARM, 5.414%, 12/1/17.......... 1,918 1,950
Mercury Savings Trust, ARM, 6.171%, 10/25/18.......................... 1,376 1,383
Prudential Home Mortgage Securities, 7.20%, 11/25/22.................. 8,220 8,199
Resolution Trust Corp., MPC, 5.235%, 11/15/20......................... 3,135 3,124
5.937%, 1/25/22..................................................... 1,986 1,907
Ryland Mortgage Securities, ARM, 5.518%, 10/1/20...................... 3,680 3,719
Salomon Mortgage Security VII, CMO, 8.731%, 11/25/20.................. 402 402
Sears Mortgage Securities, CMO, 5.297%, 8/29/21....................... 6,391 6,357
37,559
- -------------------------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES (COST - $68,835) 68,572
U.S. Government Obligations/Agencies - 14.7%
U.S. GOVERNMENT AGENCY OBLIGATIONS - 0.8%
Federal Home Loan Bank, Step Up Note, 6.40%, 3/1/99................... 5,000 5,000
U.S. GOVERNMENT OBLIGATIONS - 13.9%
U.S. Treasury Notes, 4.25%, 12/31/95.................................. 36,915 36,673
4.625%, 2/15/96..................................................... 33,800 33,758
5.50%, 2/15/95...................................................... 18,900 19,142
6.125%, 12/31/96.................................................... 3,500 3,610
93,183
- -------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS/AGENCIES (COST - $98,850) 98,183
Hybrid Instruments - 4.7%
Barclays Bank, Basket Notes, 5.00%, 1/16/96; principal repayment value
is indexed to average swap rate of four European currencies;
includes put option at 80% of par................................... 14,500 13,843
International Bank for Reconstruction, Zero Coupon, 8/7/97; floating
coupon rate determined by exchange rate spread between two
European currencies................................................. 4,600 3,818
Salomon Inc., Basket Note, 5.00%, 2/1/96; principal repayment value is
indexed to average swap rate of three European currencies;
includes put option at 80% of par................................... 14,750 13,847
- -------------------------------------------------------------------------------------------------
TOTAL HYBRID INSTRUMENTS (COST - $32,967) 31,508
U.S. $ Denominated Foreign Securities1 - 1.1%
Asian Development Bank, Eurobonds, 8.00%, 12/10/96.................... 2,000 2,100
Province of Ontario, Sr. Notes, 8.25%, 4/8/96......................... 5,000 5,303
- -------------------------------------------------------------------------------------------------
TOTAL U.S. $ DENOMINATED FOREIGN SECURITIES (COST - $6,982) 7,403
Non-U.S. $ Denominated Foreign Securities/2/ - 0.8%
Mexican Cetes Treasury Bills, 11.99%, 6/9/94.......................... MXN 3,288 1,007
13.20%, 9/15/94..................................................... 14,271 4,244
- -------------------------------------------------------------------------------------------------
TOTAL NON-U.S. $ DENOMINATED FOREIGN SECURITIES (COST - $5,186) 5,251
Commercial Paper - 0.0%
Harvard University, 3.45%, 3/1/94 (Cost - $9)......................... $ 9 9
- -------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES - 99.1% (COST - $658,737)............. 662,371
- -------------------------------------------------------------------------------------------------
Other Assets Less Liabilities - 0.9% ................................. 5,695
-----------
NET ASSETS CONSISTING OF:
Accumulated realized gains/losses - net of distributions.............. (11,928)
Unrealized appreciation of investments................................ 3,634
Paid-in-capital applicable to 133,551,716 shares of $0.01 par value
capital stock outstanding; 1,000,000,000 shares authorized.......... 676,360
--------------
NET ASSETS - 100.0%................................................... $668,066
-----------
-----------
NET ASSET VALUE PER SHARE............................................. $5.00
-----------
-----------
- -------------------------------------------------------------------------------------------------
<FN>
/1/ Marketable securities (payable in U.S. dollars) issued or guaranteed by a foreign government
or community.
/2/ Denominated in foreign currency.
** - For Interest Only securities, face amount represents notional principal, on which the
Fund receives interest.
ARM - Adjustable Rate Mortgages
CMO - Collateralized Mortgage Obligation
MPC - Mortgage Pass-Through Certificates
MTN - Medium Term Notes
144a - Security was purchased pursuant to Rule 144a under the Securities Act of 1933 and may
not be resold subject to that rule except to qualified institutional buyers.
(MXN) - Mexican peso denominated
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of Operations
T. Rowe Price Short-Term Bond Fund / Year Ended February 28, 1994
Amounts in Thousands
-----------------------
INVESTMENT INCOME
Interest income...................................... $43,323
Expenses
Investment management fees......................... $2,873
Shareholder servicing fees & expenses.............. 1,420
Custodian and accounting fees & expenses........... 271
Registration fees & expenses....................... 104
Prospectus & shareholder reports................... 47
Legal & auditing fees.............................. 35
Directors' fees & expenses......................... 15
Miscellaneous...................................... 17
-----------
Total expenses..................................... 4,782
-----------
Net investment income................................ 38,541
REALIZED AND UNREALIZED Loss ON INVESTMENTS
Net realized loss
Securities......................................... (4,158)
Currencies and forward currency exchange contracts. (10)
-----------
Net realized loss.................................. (4,168)
Change in unrealized appreciation or depreciation.... (7,588)
-----------
Net loss on investments.............................. (11,756)
-----------
INCREASE IN NET ASSETS FROM OPERATIONS............... $26,785
-----------
-----------
- -----------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of Changes in Net Assets
T. Rowe Price Short-Term Bond Fund
Year Ended Year Ended
Feb. 28, Feb. 28,
1994 1993
------------ ------------
Amounts in Thousands
-------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income......................... $38,541 $31,042
Net realized loss on investments.............. (4,168) (2,167)
Change in unrealized appreciation or
depreciation of investments................. (7,588) 5,370
------------ ------------
Increase in net assets from operations........ 26,785 34,245
------------ ------------
Distributions to shareholders
Net investment income......................... (34,238) (31,053)
Tax return of capital......................... (4,489) --
------------ ------------
Decrease in net assets from distributions to
shareholders................................ (38,727) (31,053)
------------ ------------
Capital share transactions
Sold 90,418 and 82,708 shares................. 459,507 419,725
Distributions reinvested of 7,089 and 4,859
shares...................................... 35,993 24,593
Redeemed 73,263 and 56,936 shares............. (371,822) (288,160)
------------ ------------
Increase in net assets from capital share
transactions................................ 123,678 156,158
------------ ------------
Total increase.................................. 111,736 159,350
NET ASSETS
Beginning of year............................. 556,330 396,980
------------ ------------
End of year................................... $668,066 $556,330
------------ ------------
------------ ------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
Notes to Financial Statements
T. Rowe Price Short-Term Bond Fund / February 28, 1994
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Short-Term Bond Fund (the Fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end management
investment company.
A) Security valuation - Debt securities are generally traded in the
over-the-counter market. Investments in securities with remaining maturities
of one year or more are stated at fair value as furnished by dealers who make
markets in such securities or by an independent pricing service, which
considers yield or price of bonds of comparable quality, coupon, maturity, and
type, as well as prices quoted by dealers who make markets in such securities.
Securities with remaining maturities less than one year are stated at fair
value which is determined by using a matrix system that establishes a value
for each security based on money market yields.
For purposes of determining the Fund's net asset value per share, all assets
and liabilities initially expressed in foreign currencies are converted into
U.S. dollars at the mean of the bid and offer prices of such currencies
against U.S. dollars quoted by 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
the Fund, as authorized by the Board of Directors.
B) Currency translation - Foreign currency amounts are translated into U.S.
dollars at prevailing exchange rates as follows: assets and liabilities at the
rate of exchange at the end of the respective period, purchases and sales of
securities and income and expenses at the rate of exchange prevailing on the
dates of such transactions.
C) Premiums and Discounts - Except for Mortgage-Backed securities, premiums
and discounts on debt securities are amortized for both financial and tax
reporting purposes.
D) Other - Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on an identified cost basis. Distributions to shareholders are
recorded by the Fund on the ex-dividend date. Income and capital gain
distributions are determined in accordance with federal income tax regulations
which may differ from generally accepted accounting principles.
E) Accounting Change - Effective as of the beginning of the year, the Fund
adopted a recently issued accounting standard related to shareholder
distributions. This change resulted in a reclassification to paid-in-capital
of permanent differences between tax and financial reporting of net investment
income and net realized gains/losses. The cumulative effect of this change as
of February 28, 1993, decreased Accumulated net investment income - net of
distributions by $2,582,000, increased Accumulated net realized gains/losses -
net of distributions by $3,443,000 and decreased Paid-in-capital by $861,000.
The results of operations, shareholder distributions and net assets were not
affected by this change.
NOTE 2 - FINANCIAL INSTRUMENTS
As a part of its investment program, the Fund loans its portfolio securities
to brokers. The nature and risk of these loans and the reasons for using them
are set forth more fully in the Fund's Prospectus and Statement of Additional
Information. Although risk is mitigated by obtaining collateral, the Fund
could experience a delay in recovering its securities and possibly incur a
capital loss if the borrower fails to return them. At February 28, 1994, the
market value of securities on loan to brokers was $2,773,000 for which the
Fund was fully collateralized by cash and U.S. Treasury securities.
<PAGE>
Purchases and sales of portfolio securities, other than short-term and U.S.
Government securities, aggregated $120,168,000 and $98,975,000, respectively,
for the year ended February 28, 1994. Purchases and sales of U.S. Government
securities aggregated $580,284,000 and $461,296,000, respectively.
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the Fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income. The Fund has unused realized capital loss carryforwards
for federal income tax purposes of $11,394,000 at February 28, 1994, which
expire in 1996 through 2002.
At February 28, 1994, the aggregate cost of investments for federal income
tax and financial reporting purposes was $658,736,000 and net unrealized
appreciation aggregated $3,634,000, of which $9,359,000 related to appreciated
investments and $5,725,000 to depreciated investments.
NOTE 4 - RELATED PARTY TRANSACTIONS
The investment management agreement between the Fund and T. Rowe Price
Associates, Inc. (the Manager) provides for an annual investment management
fee, computed daily and paid monthly, consisting of an Individual Fund Fee
equal to 0.10% of average daily net assets and a Group Fee. The Group Fee is
based on the combined assets of certain mutual funds sponsored by the Manager
or Rowe Price-Fleming International, Inc. (the Group). The Group Fee rate
ranges from 0.48% for the first $1 billion of assets to 0.31% for assets in
excess of $34 billion. The effective annual Group Fee rate at February 28,
1994, was 0.34%, and for the year then ended was 0.35%. The Fund pays a pro
rata portion of the Group Fee based on the ratio of the Fund's net assets to
those of the Group.
T. Rowe Price Services, Inc. (TRPS) and Retirement Plan Services, Inc. (RPS)
are wholly owned subsidiaries of the Manager. TRPS provides transfer and
dividend disbursing agent functions and shareholder services for all accounts.
RPS provides subaccounting and recordkeeping services for certain retirement
accounts invested in the Fund. The Manager, under a separate agreement,
calculates the daily share price and maintains the financial records of the
Fund. The Fund is one of several T. Rowe Price mutual funds (the Underlying
Funds) in which the T. Rowe Price Spectrum Income Fund (Spectrum) invests. In
accordance with an Agreement between Spectrum, the Underlying Funds, the
Manager and TRPS, expenses from the operation of Spectrum are borne by the
Underlying Funds based on each Underlying Fund's proportionate share of assets
owned by Spectrum. For the year ended February 28, 1994, the Fund incurred
fees totalling approximately $1,314,000 for these services provided by related
parties. At February 28, 1994, investment management and service fees payable
were $375,000.
<PAGE>
<TABLE>
<CAPTION>
For a share outstanding throughout each year ended
-----------------------------------------------------------
Feb. 28, Feb. 28, Feb. 29, Feb. 28, Feb. 28,
1994 1993 1992 1991 1990
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR......... $5.09 $5.05 $4.94 $4.91 $4.88
------- ------- ------- ------- -------
Investment Activities
Net investment income.................... 0.31 0.33 0.35 0.39 0.42
Net realized and unrealized gain (loss).. (0.09) 0.04 0.11 0.06 0.03
------- ------- ------- ------- -------
Total from Investment Activities........... 0.22 0.37 0.46 0.45 0.45
------- ------- ------- ------- -------
Distributions
Net investment income..................... (0.28) (0.33) (0.35) (0.39) (0.42)
Net realized gain........................ - - - (0.03) -
Tax return of capital.................... (0.03) - - - -
------- ------- ------- ------- -------
Total Distributions........................ (0.31) (0.33) (0.35) (0.42) (0.42)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR............... $5.00 $5.09 $5.05 $4.94 $4.91
------- ------- ------- ------- -------
------- ------- ------- ------- -------
- -------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Total Return............................... 4.36% 7.63% 9.70% 9.61% 9.42%
Ratio of Expenses to Average Net Assets.... 0.74% 0.76% 0.88% 0.93% 0.95%
Ratio of Net Investment Income to
Average Net Assets....................... 6.00% 6.59% 7.07% 7.90% 8.43%
Portfolio Turnover Rate.................... 90.8% 68.4% 380.7% 980.4% 161.1%
Net Assets, End of Year (in thousands)..... $668,066 $556,330 $396,980 $218,634 $209,711
Number of Shareholder Accounts,
End of Year.............................. 26,000 23,000 19,000 13,000 14,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Directors of
T. Rowe Price Short-Term Bond Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the selected per
share data and information (which appears under the heading "Financial
Highlights") present fairly, in all material respects, the financial position
of T. Rowe Price Short-Term Bond Fund, Inc. at February 28, 1994, the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended and the selected per share data
and information for each of the five years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements and selected per share data and information (hereafter referred to
as "financial statements") are the responsibility of the Fund's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at February 28, 1994 by correspondence with
custodians and brokers and, where appropriate, the application of alternative
auditing procedures for unsettled security transactions, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE
Baltimore, Maryland
March 17, 1994
<PAGE>
Officers and Directors
George J. Collins, Chairman Christy M. DePietro, Vice President
Veena A. Kutler, President Henry H. Hopkins, Vice President
Robert P. Black, Director James M. McDonald, Vice President
Calvin W. Burnett, Director Robert M. Rubino, Vice President
Anthony W. Deering, Director Charles P. Smith, Vice President
F. Pierce Linaweaver, Director Edward A. Wiese, Vice President
James S. Riepe, Vice President/Director Lenora V. Hornung, Secretary
John Sagan, Director Carmen F. Deyesu, Treasurer
John G. Schreiber, Director David S. Middleton, Controller
Robert P. Campbell, Vice President
T. Rowe Price No-Load Mutual Funds
STABILITY
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
California Tax-Free Money
New York Tax-Free Money
Summit Municipal Money Market
Tax-Exempt Money
CONSERVATIVE INCOME
Adjustable Rate U.S. Government
Short-Term Bond
Short-Term Global Income
Summit Limited-Term Bond
U.S. Treasury Intermediate
Florida Insured Intermediate Tax-Free
Maryland Short-Term Tax-Free Bond
Summit Municipal Intermediate
Tax-Free Insured Intermediate Bond
Tax-Free Short-Intermediate
INCOME
Global Government Bond
GNMA
New Income
Spectrum Income
Summit GNMA
U.S. Treasury Long-Term
California Tax-Free Bond
Georgia Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Virginia Tax-Free Bond
Tax-Free Income
AGGRESSIVE INCOME
High Yield
International Bond
Tax-Free High Yield
CONSERVATIVE GROWTH
Balanced
Capital Appreciation
Dividend Growth
Equity Income
Growth & Income
Spectrum Growth
GROWTH
Blue Chip Stock
European Stock
Growth Stock
International Stock
Japan
Mid-Cap Growth
New Era
Small-Cap Value
AGGRESSIVE GROWTH
International Discovery
Latin America
New America Growth
New Asia
New Horizons
OTC
Science & Technology
Call if you want to know about any T. Rowe Price Fund. We'll send you a
prospectus with more complete information, including management fees and other
expenses. Read it carefully before you invest or send money.
<PAGE>
SHAREHOLDER SERVICES
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 and services - at no extra cost.
TELEPHONE SERVICES
ACCESS YOUR ACCOUNT 24 HOURS A DAY BY CALLING 1-800-638-2587.
Tele*Access[registered trademark] - Gives you your account balance, date and
amount of your last transaction, latest dividend payment, and fund prices and
yields.
TransactionLine[registered trademark] - Lets you purchase, exchange, or
redeem shares anytime.
SHAREHOLDER SERVICE REPRESENTATIVES ARE AVAILABLE FROM 8:00 A.M. TO 10:00
P.M., MONDAY-FRIDAY, AND SATURDAY FROM 9:00 A.M. TO 5:00 P.M., E.T. CALL
1-800-225-5132.
Shareholder Service Center - Call to exchange shares or move money between
your bank and fund accounts.
ACCOUNT SERVICES
Checking - Write checks for $500 or more on any money market, bond, or
tax-free fund account.
Automatic Investing - Build your account over time by investing directly
from your bank account or paycheck. A low, $50 minimum makes it easy to get
started.
Automatic Withdrawal - If you need money from your fund account on a regular
basis, you can establish scheduled, automatic redemptions.
Dividend and Capital Gains Payment Options - Reinvest all or some of your
distributions or take them in cash . We give you maximum flexibility and
convenience.
INVESTMENT INFORMATION
Combined Statement - A comprehensive overview of your T. Rowe Price
accounts. The summary page gives your earnings by tax category, provides total
portfolio value, and lists your investments by type - stock, bond, and money
market. Detail pages itemize account transactions by fund.
Quarterly Shareholder Reports - Portfolio managers review the performance of
the funds in plain language and discuss T. Rowe Price's economic outlook.
The T. Rowe Price Report - A quarterly newsletter with relevant articles on
market trends, personal financial planning, and T. Rowe Price's economic
perspective.
Insights - A library of information that includes reports on mutual fund tax
issues, investment strategies, and financial markets.
Detailed Investment Guides - Our widely acclaimed Asset Mix Worksheet,
College Planning Kit, Retirees Financial Guide, Retirement Planning Kit (also
available on disk for PC use) and Guide to Risk-Adjusted Performance can help
you determine and reach your investment goals.
DISCOUNT BROKERAGE
Trade stocks, bonds, options, and precious metals at substantial savings over
full-cost brokers.
Tele*Trade - Call this automated phone service after business hours to place
your orders.
Fax*Trade - Buy and sell by simply faxing your order.
Tele*Quote - Provides 24-hour access to stock and option quotes.
Money Fund Sweep Feature - Buy and sell securities and have your "sweep"
account automatically debited or credited. Dividend and interest payments are
credited daily.
If you have questions or would like to add a service to your account, please
call our Shareholder Service Center.
