______________________
ANNUAL REPORT
______________________
SHORT-TERM BOND FUND
______________________
FOR YIELD, PRICE, LAST TRANSACTION,
AND CURRENT BALANCE, 24 HOURS,
7 DAYS A WEEK, CALL:
1-800-638-2587 toll free
625-7676 Baltimore area
______________________
FOR ASSISTANCE WITH YOUR EXISTING
FUND ACCOUNT, CALL:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
______________________
T. ROWE PRICE
100 East Pratt Street
Baltimore, Maryland 21202
______________________
This report is authorized for distribution only to shareholders and to
others who have received a copy of the prospectus of the T. Rowe Price
Short-Term Bond Fund [Registration Mark.]
<PAGE>
- --------------------------------------------------------------------------------
Fellow Shareholders
- --------------------------------------------------------------------------------
MARKET ENVIRONMENT
What a difference a year makes. In 1994, the economy picked up steam,
fueling a sharp rise in interest rates as the Federal Reserve applied the
brakes. After growing at a robust 5.1% annualized rate in last year's fourth
quarter, the economy lost strength, slowing to a 2.7% rate of growth in the
first quarter of 1995.
Recent signs point to the possibility of an even steeper slide. Employment
declined in April and May, inventories of unsold new homes and automobiles rose
to uncomfortable levels, and residential construction and manufacturing
declined. Economic growth in the second calendar quarter will likely end up well
below the long-term trend of 2% to 2.5%. It appears as if the much desired soft
landing has hit some bumps.
The softening economy curbed inflation fears, driving interest rates
steadily downward in the three months ended May 31 and sparking a sustained
rally in the bond markets. Yields on 2- to 10-year Treasury notes dropped during
the quarter, with the 5-year Treasury note yield nosediving nearly 200 basis
points to 6.08%. Yields on Treasuries of two years or less dipped below 6% as
speculation persisted that the Fed would cut the federal funds target sometime
this year. The net result of these movements was a flattening of the Treasury
yield curve, which means the difference between yields on all maturities, and
particularly between short and intermediate maturities, narrowed sharply from
last year's levels.
PERFORMANCE AND STRATEGY REVIEW
For most of the year, we maintained a conservative maturity posture to try
to protect principal during the Fed's extended tightening. Since our goal is to
provide shareholders with a high level of income while minimizing price
fluctuations, we manage this fund conservatively with respect to interest rate
and credit risk.
From May to November 1994, as the Fed raised key interest rates, we lowered
the fund's weighted average duration from two years to as low as 1.6 years to
hasten the rollover of our holdings into higher-yielding securities. We raised
duration to 1.76 years in the latest quarter in response to declining rates. For
most of the year, however, we kept duration generally sho rter than our peer
group average. The shorter a fund's duration, the less sensitive its price to
changes in interest rates. While shorter durations protect the share price
during periods of rising rates, they restrain price appreciation when rates are
dropping.
<PAGE>
Consequently, when short and intermediate yields fell in the last quarter
as the economy softened, your fund did not benefit as much as funds that held
issues with longer durations. This defensive posture, coupled with
underperformance related to strategies discussed in previous reports, caused
your fund to lag its peer group average for both the quarter and the year ended
May 31, as shown in the table below.
- --------------------------------------------------------------------------------
Periods Ended 5/31/95
3 Months 12 Months
---------------------
Short-Term Bond Fund 2.50% 3.41%
Lipper Short Investment-
Grade Debt Funds Average 3.38 6.69
- --------------------------------------------------------------------------------
During the year, we made several moves to position the portfolio for
changes in the economy and interest rates. We reduced mortgage-backed securities
in favor of Treasuries, which provide more stable cash flows in the face of
volatile rates.
Treasuries now represent 22% of net assets, up from 6% a year ago. To
offset the small loss of yield from trimming mortgage-backed securities, we
increased our holdings of BBB-rated securities, which offer more attractive
yields than the highest-rated securities but expose the fund to additional
credit risk. We chose a select group of BBB-rated instruments that were
identified by our credit analysts as having less risk or better prospects than
other BBB-rated issues. These securities now represent 18% of the portfolio, up
from 3% a year ago.
In the latest quarter, we pared our holdings of adjustable rate mortgage
securities (ARMs), which have performed well recently because their coupons have
not yet reset to reflect declining interest rates. ARMs are likely to
underperform later this year as declining rates catch up to them.
OUTLOOK
Given the uncertain timing of Fed action on interest rates, we intend to
keep a generally defensive posture by maintaining a relatively short average
duration. While we remain optimistic on the economy and corporate credit
quality, the recent slowdown is a cause of some concern, and we will likely
lower the fund's proportion of BBB-rated securities by year's end. The overall
credit quality of the portfolio remains high, with half of net assets invested
in securities rated the highest by an established rating agency and T. Rowe
Price's credit analysts.
<PAGE>
With the economy slowing and inflation holding around 3.5% on an annualized
basis, we would not rule out a Fed cut sometime this year. However, we think the
economy could grow sufficiently on its own, compelling the Fed to stand pat.
Fundamentally, the economy remains strong and, in our view, stands little chance
of slipping into a recession.
Respectfully submitted,
[signature]
Edward A. Wiese
President and Chairman of the
Investment Advisory Committee
June 21, 1995
- --------------------------------------------------------------------------------
Key Statistics
- --------------------------------------------------------------------------------
Periods Ended
Dividend Yield* 5/31/95
- --------------------------- ---------------
3 Months 6.46%
12 Months 6.25
Dividend Per Share
- ---------------------------
3 Months $0.08
12 Months 0.29
Change in Price Per Share
- ---------------------------
3 Months (From $4.68 to $4.72) $0.04
12 Months (From $4.85 to $4.72) -0.13
- ---------------------------
Weighted Average Maturity 2.19 years
Weighted Average Effective Duration 1.76 years
* 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.
<PAGE>
- --------------------------------------------------------------------------------
Sector Diversification*
- --------------------------------------------------------------------------------
Percent of Net Assets
5/31/94 2/28/955/31/95
------- --------------
U.S. Government
Obligations 6% 22% 22%
U.S. Government Mortgage-
Backed Securities 32 17 15
U.S. Government
Agency Obligations -- 2 4
Banking and Finance 20 22 24
Industrial 7 17 18
Asset-Backed 17 8 7
Utilities 3 4 4
Commercial Paper 7 5 3
* Sectors representing at least 2% of net assets on 5/31/95.
- --------------------------------------------------------------------------------
Quality Diversification
- --------------------------------------------------------------------------------
Percent of Net Assets
TRPA Quality Rating* 5/31/94 2/28/95 5/31/95
- ----------------------- ------- ------- -------
1 48% 49% 50%
2 17 8 8
3 31 24 23
4 3 18 18
Below 4 1 1 1
Weighted Average 1.9 2.1 2.1
* On a scale of 1 to 10, with Grade 1 representing highest quality.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Compound Total Return
- --------------------------------------------------------------------------------
Periods Ended May 31, 1995
1 Year 5 Years 10 Years
- ------- ------- -------------
3.41% 6.17% 6.91%
Note: For the above periods ended 3/31/95, the fund's returns were 0.71%, 6.09%,
and 7.12%, respectively. Income return and principal value represent past
performance and will vary. Shares may be worth more or less at redemption than
at original purchase.
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------
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.
<S> <C> <C> <C> <C> <C> <C>
Capital With With Dividends
Fiscal Net Asset Income Gain Dividends and Capital Total
Year Ended Value Dividends Distributions2 Reinvested Gains Reinvested 2 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
5/31/94 3 4.85 0.07 -- 10.88 10.95 -1.65
1995 4.72 0.29 -- 11.25 11.33 3.41
Total $4.36 $0.03
<FN>
1 From inception 3/2/84 to 2/28/85.
2 Includes short-term capital gain of $0.03 on 12/31/90.
3 Fiscal year-end changed from February 28 to May 31; figures are for three
months from 3/1/94 to 5/31/94.
</FN>
</TABLE>
================================================================================
<TABLE>
<PAGE>
Statement of Net Assets
T. Rowe Price Short-Term Bond Fund / May 31, 1995
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
Corporate Bonds & Notes -- 46.5%
===============================================================================
<S> <C> <C>
Amount Value
----- --------
Banking & Finance -- 24.0%
Advanta, MTN, 7.21%, 12/1/97 .................................................................... $ 3,000 $ 3,031
American Express, 8.75%, 6/15/96 ................................................................ 1,000 1,024
American General Finance, 5.80%, 4/1/97 ......................................................... 2,000 1,983
Aristar, Sr. Notes, 6.25%, 7/15/96 .............................................................. 3,000 2,996
AVCO Financial Services, Sr. Notes, 7.50%, 11/15/96 ............................................. 5,000 5,082
Banponce Financial, MTN, 7.73%, 8/15/97 ......................................................... 2,000 2,044
Branch Banking & Trust, MTN, 4.75%, 5/15/96 ..................................................... 5,000 4,930
Cigna, Notes, 8.00%, 9/1/96 ..................................................................... 3,250 3,305
Citicorp, 6.1875%, 5/29/98 ...................................................................... 5,000 4,967
Comdisco, 7.25%, 4/15/98 ........................................................................ 5,000 5,099
Countrywide Funding, MTN, 6.02%, 3/25/98 ........................................................ 5,000 4,936
First Chicago, MTN, 9.00%, 6/6/96 ............................................................... 5,000 5,130
First USA Bank, 6.91%, 9/16/96 .................................................................. 3,000 3,027
Fleet Financial Group, 7.25%, 10/15/97 .......................................................... 3,000 3,058
General Electric Capital, MTN, 8.10%, 1/26/99 ................................................... 5,000 5,274
Greyhound Financial, 8.00%, 1/15/97 ............................................................. 3,000 3,071
Hutton, E.F. Group, Notes, 8.875%, 5/1/96 ....................................................... 4,250 4,325
KeyCorp, MTN, 8.98%, 6/11/96 .................................................................... 4,000 4,103
Mellon Financial, 6.50%, 12/1/97 ................................................................ 5,000 5,020
Mercantile Bankshares, Sr. Notes, 6.13%, 7/15/98 (Private Placement) ............................ 3,500 3,412
Morgan Stanley Group, Sr. Notes, 8.00%, 10/15/96 ................................................ 5,000 5,100
Old Kent Bank & Trust, 7.20%, 10/14/97 .......................................................... 3,500 3,553
Providian, MTN, 6.92%, 5/16/00 .................................................................. 2,700 2,731
Salomon, 7.75%, 5/15/00 ......................................................................... 4,670 4,739
Shearson Lehman Holdings, MTN, 5.25%, 1/2/96 .................................................... 5,000 4,957
Smith Barney Holdings, 7.00%, 5/15/00 ........................................................... 5,000 5,045
Suntrust Banks, Notes, 8.375%, 3/1/96 ........................................................... 3,000 3,040
Tenneco Credit, Sr. Notes, 10.125%, 12/1/97 ..................................................... 3,975 4,293
Wells Fargo & Company, MTN, 8.35%, 11/1/96 ...................................................... 4,200 4,320
World Savings & Loan Assn., MTN, 4.875%, 3/1/96 ................................................. 5,000 4,961
118,556
Industrials -- 18.2%
Case Equipment Loan Trust, 7.60%, 12/15/97 ................................................ 4,120 4,169
Chrysler Financial, MTN, 6.62%, 4/29/97 ................................................... 2,000 2,005
Columbia HCA, 6.50%, 3/15/99 .............................................................. 2,000 1,990
6.75%, 7/1/00 ........................................................................... 2,550 2,547
CSX, 9.50%, 11/15/95 ...................................................................... 1,700 1,723
Dow Capital, Deb., 8.25%, 2/15/96 ......................................................... 4,150 4,201
Ford Capital, Eurobond, 9.125%, 4/8/96 .................................................... 5,000 5,110
<PAGE>
Amount Value
----- --------
General Motors Acceptance, MTN, 7.125%, 8/18/97 ........................................... 5,000 5,067
GPA Leasing USA, Sub. I, Equip. Trust Certs., 9.125%, 12/2/96 ............................. 3,807 3,566
IBM, 6.375%, 6/15/00 ...................................................................... 5,000 4,981
KMart, MTN, 8.71%, 4/7/97 ................................................................. 3,000 3,118
Lockheed, MTN, 4.875%, 2/15/96 ............................................................ 1,000 990
Lyondell Petrochemical, Sr. Notes, 9.95%, 6/1/96 .......................................... 1,975 2,032
Macmillan Bloedel, Notes, 9.00%, 3/5/96 ................................................... 2,000 2,035
McDermott International, Sr. Notes, 10.25%, 6/1/95 ........................................ 3,250 3,250
McDonnell Douglas, 8.625%, 4/1/97 ......................................................... 3,000 3,112
Mitchell Energy & Development, Notes, 5.10%, 2/15/97 ...................................... 3,000 2,928
Northern Telecom, Notes, 8.25%, 6/13/96 ................................................... 5,000 5,098
Occidental Petroleum, MTN, 5.85%, 11/9/98 ................................................. 2,975 2,894
Pepsico, MTN, 6.80%, 5/15/00 .............................................................. 4,775 4,846
Phillip Morris Companies, MTN, 8.50%, 3/13/96 ............................................. 5,000 5,084
Sears Roebuck & Company, MTN, 8.00%, 10/21/96 ............................................. 1,500 1,529
8.58%, 7/24/95 ........................................................................ 2,500 2,508
Notes, 8.55%, 8/1/96 .................................................................... 1,500 1,535
Sony Capital, MTN, 6.97%, 6/30/97 ......................................................... 4,500 4,536
Tele-Communications, MTN, 5.28%, 8/26/96 .................................................. 3,000 2,955
Toyota Motor Credit, MTN, 6.80%, 4/15/98 .................................................. 2,670 2,716
Westinghouse Credit, MTN, 9.04%, 6/1/98 ................................................... 1,000 1,046
9.13%, 8/1/95 ........................................................................... 2,000 2,006
89,577
Utilities -- 4.3%
Commonwealth Edison, 6.25%, 2/1/98 ........................................................ 1,550 1,529
Consumers Power, 1st Mtg. Bonds, 5.875%, 7/1/96 ........................................... 2,750 2,722
Florida Power, MTN, 8.40%, 8/1/96 ......................................................... 550 563
General Telephone Company of Indiana, 4.70%, 8/1/95 ....................................... 4,000 3,990
Grand Metropolitan Investment, Sr. Notes, 8.125%, 8/15/96 ................................. 5,000 5,102
Long Island Lighting, 1st Mtg. Bonds, 5.50%, 4/1/97 ....................................... 1,975 1,923
National Rural Utilities Cooperative Finance, 9.50%, 5/15/97 .............................. 2,000 2,113
Potomac Capital, MTN, 6.38%, 10/6/97 ...................................................... 1,500 1,480
6.61%, 3/16/98 .......................................................................... 1,000 986
Public Service Company of Colorado, 5.875%, 7/1/97 ........................................ 1,000 985
21,393
------
TOTAL CORPORATE BONDS & NOTES (COST $227,057) ............................................. 229,526
- --------------------------------------------------------------------------------
U.S. Government Mortgage-Backed Securities -- 15.3%
================================================================================
U.S. Government Guaranteed Obligations -- 7.4%
Government National Mortgage Assn., I, 8.50%, 2/15/05 - 3/15/06 ............................ 1,119 1,179
10.50%, 11/15/15 ....................................................................... 417 457
11.00%, 11/15/19 ....................................................................... 16,858 18,664
13.00%, 11/15/12 - 4/15/15 ............................................................. 147 167
GPM, I, 9.50%, 8/15 - 10/15/09 ........................................................... 128 135
11.00%, 8/15/10 ...................................................................... 121 133
<PAGE>
Amount Value
----- --------
11.25%, 6/15/13 - 1/15/16 ............................................................ 1,086 1,191
11.75%, 7/15/13 - 11/15/15 ........................................................... 3,598 3,974
13.00%, 9/15/11 ...................................................................... 17 18
II, 11.00%, 9/20/13 - 4/20/14 .......................................................... 79 86
11.25%, 8/20/13 - 12/20/15 ........................................................... 129 141
Midget, I, 9.00%, 7/15/01 - 2/15/06 ...................................................... 1,362 1,427
9.50%, 5/15/01 - 4/15/05 ............................................................. 329 346
10.00%, 4/15/98 - 10/15/04 ........................................................... 1,016 1,070
11.50%, 4/15 - 5/15/00 ............................................................... 103 110
REMIC, 6.25%, 8/16/11 .................................................................... 7,500 7,453
36,551
U.S. Government Agency Obligations -- 7.9%
Federal Home Loan Mortgage, 5.25%, 7/1/97 .................................................. $ 22 $ 21
6.00%, 10/15/20 ........................................................................ 2,200 2,059
7.00%, 7/15/21 ......................................................................... 2,700 2,676
7.50%, 1/1/97 - 5/1/00 ................................................................. 11,025 11,236
9.00%, 7/1/01 - 7/1/02 ................................................................. 2,199 2,280
9.50%, 8/1/01 - 9/1/02 ................................................................. 1,675 1,745
10.00%, 1/1/01 - 10/1/05 ............................................................... 953 994
11.00%, 8/1/00 - 2/1/01 ................................................................ 811 854
5 year balloon, 9.50%, 8/1 - 11/1/95 ..................................................... 399 410
7 year balloon, 9.50%, 4/1 - 8/1/97 ...................................................... 109 113
ARM, 5.125%, 5/1/18 ...................................................................... 686 663
CMO, 8.25%, 7/15/12 ...................................................................... 9,000 9,349
Federal National Mortgage Assn., 5.50%, 8/1/97 - 11/1/05 ................................... 228 223
9.00%, 1/1 - 7/1/98 .................................................................... 2,262 2,328
9.50%, 12/1/97 - 1/1/98 ................................................................ 86 90
11.00%, 10/1/00 - 1/1/01 ............................................................... 362 385
ARM, 5.375%, 3/1/17 ...................................................................... 155 150
5.625%, 9/1/17 ......................................................................... 97 95
6.00%, 9/1 - 10/1/18 ................................................................... 251 253
6.17%, 8/1/17 .......................................................................... 711 717
6.25%, 7/1/17 .......................................................................... 539 544
9.00%, 3/1 - 9/1/97 .................................................................... 356 366
9.50%, 5/1 - 10/1/97 ................................................................... 198 203
11.00%, 4/1/04 ......................................................................... 276 294
REMIC, 7.50%, 8/25/21 .................................................................... 726 738
38,786
-------
TOTAL U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES (COST $ 74,990) 75,337
- --------------------------------------------------------------------------------
U.S. Government Obligations -- 25.9%
================================================================================
U.S. Government guaranteed Obligations -- 21.8%
U.S. Treasury Notes, 7.75%, 1/31/00 ....................................................... 20,000 21,344
7.875%, 7/15/96 ......................................................................... 35,000 35,744
9.375%, 4/15/96 ......................................................................... 49,000 50,408
107,496
U.S. Government Agency Obligations -- 4.1%
<PAGE>
Amount Value
----- --------
Federal Home Loan Mortgage, Deb., 7.75%, 1/27/97 .......................................... 10,000 10,081
7.86%, 1/21/97 .......................................................................... 10,000 10,285
20,366
---------
TOTAL U.S. GOVERNMENT OBLIGATIONS (COST $ 126,018) ........................................ 127,862
- --------------------------------------------------------------------------------
Asset-Backed Securities -- 7.2%
================================================================================
Auto-Backed -- 2.2%
Ford Credit Auto Loan Master Trust, 5.625%, 10/15/97 ...................................... 5,000 4,989
UCFC Loan Trust, 6.575%, 12/25/24 ......................................................... 3,253 3,245
USAA Auto Loan Grantor Trust, 5.00%, 11/15/99 ............................................. 2,660 2,627
10,861
Credit Card-Backed -- 3.1%
MBNA Master Credit Card Trust, 6.2125%, 3/15/01 ........................................... $ 5,000 $ 4,984
Sears Credit Account Trust, 9.35%, 10/15/97 ............................................... 5,000 5,036
Standard Credit Card Master Trust I, 7.85%, 2/7/02 ........................................ 5,000 5,277
15,297
Home Equity Loans-Backed -- 0.2%
SPNB Home Equity Loan, 7.85%, 5/15/98 ..................................................... 6263
U.S. Home Equity Loan, 8.50%, 4/15/21 ..................................................... 803 815
878
Receivables-Backed -- 0.6%
John Deere Owner Trust, 6.55%, 9/29/99 .................................................... 647 647
Unisys Receivables, 5.05%, 11/15/96 ....................................................... 2,500 2,483
3,130
Whole Loans-Backed -- 1.1%
Great Western Bank, ARM, 5.97%, 7/25/17 ................................................... 1,701 1,644
Guardian Savings & Loan, MPC, ARM, 6.885%, 12/25/19 ....................................... 3,051 2,197
7.193%, 12/25/19 ........................................................................ 2,478 1,536
Salomon Mortgage Security VII, CMO, 8.067%, 11/25/20 ...................................... 186 173
5,550
---------
TOTAL ASSET-BACKED SECURITIES (COST $ 37,470) 35,716
- --------------------------------------------------------------------------------
U.S. $ Denominated Foreign Securities1 -- 0.4%
================================================================================
Asian Development Bank, Eurobonds, 8.00%, 12/10/96 (Cost $1,993) ......................... 2,000 2,044
- --------------------------------------------------------------------------------
Commercial Paper -- 2.6%
================================================================================
Ciba-Geigy, 5.97%, 6/6/95 ................................................................. 1,730 1,728
President & Fellows Harvard College, 6.15%, 6/1/95 ........................................ 5,806 5,805
UBS Finance (Delaware), 6.15%, 6/1/95 ..................................................... 5,438 5,437
---------
TOTAL COMMERCIAL PAPER (COST $ 12,970) .................................................... 12,970
TOTAL INVESTMENTS IN SECURITIES -- 97.9% OF NET ASSETS (COST $480,498) .................... 483,455
OTHER ASSETS LESS LIABILITIES ............................................................. 10,271
----------
NET ASSETS CONSIST OF: .................................................................... Value
----------
Accumulated net investment income - net of distributions .................................. 311
Accumulated net realized gain/loss - net of distributions ................................. (45,262)
Net unrealized gain (loss) ................................................................ 2,957
Paid-in-capital applicable to 104,521,408 shares of $0.01 par value capital
stock outstanding; 1,000,000,000 shares authorized ...................................... 535,720
----------
NET ASSETS ................................................................................ $ 493,726
NET ASSET VALUE PER SHARE ................................................................. $ 4.72
<PAGE>
<FN>
1 Marketable securities (payable in U.S. dollars)
issued or guaranteed by a foreign government or community.
ARM - Adjustable Rate Mortgages
CMO - Collateralized Mortgage Obligation
GPM - Graduated Payment Mortgage
MPC - Mortgage Pass-Through Certificates
MTN - Medium Term Notes
REMIC - Real Estate Mortgage Investment Conduit
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
Statement of Operations
T. Rowe Price Short-Term Bond Fund / Year Ended May 31, 1995
(IN THOUSANDS)
INVESTMENT INCOME
Interest income ................................................ $ 35,441
--------
Expenses
Investment management ........................................ 2,280
Shareholder servicing ........................................ 1,367
Custody and accounting ....................................... 244
Prospectus and shareholder reports ........................... 60
Registration ................................................. 53
Legal and audit .............................................. 32
Proxy and annual meeting ..................................... 31
Directors .................................................... 13
Miscellaneous ................................................ 14
--------
Total expenses ............................................... 4,094
--------
Net investment income .......................................... 31,347
--------
REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on:
Securities ................................................... (28,959)
Foreign currency transactions ................................ (1)
--------
Net realized gain (loss) ..................................... (28,960)
--------
Change in net unrealized gain or loss on securities ............ 15,247
--------
Net realized and unrealized gain (loss) ........................ (13,713)
--------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS .............. $ 17,634
--------
--------
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
Statement of Changes in Net Assets
T. Rowe Price Short-Term Bond Fund
(IN THOUSANDS)
<S> <C> <C> <C>
Three
Year Ended Months Ended Year Ended
May 31, 1995 May 31, 1994 Feb. 28, 1994
------------- ------------- ------------
INCREASE (DECREASE) IN NET ASSETS FROM
Operations
Net investment income ........................... $ 31,347 $ 8,844 $ 38,541
Net realized gain (loss) ........................ (28,960) (4,543) (4,168)
Change in net unrealized gain or loss ........... 15,247 (15,924) (7,588)
--------- --------- ---------
Increase (decrease) in net assets from operations 17,634 (11,623) 26,785
--------- --------- ---------
Distributions to shareholders
Net investment income ......................... (31,157) (8,723) (34,238)
Tax return of capital ......................... -- -- (4,489)
--------- --------- ---------
Decrease in net assets from distributions ..... (31,157) (8,723) (38,727)
--------- --------- ---------
Capital share transactions*
Shares sold ................................... 253,582 63,603 459,507
Distributions reinvested ...................... 26,870 7,356 35,993
Shares redeemed ............................... (375,127) (116,755) (371,822)
--------- --------- ---------
Increase (decrease) in net assets from capital
share transactions ........................ (94,675) (45,796) 123,678
---------- ---------- ----------
Increase (decrease) in net assets .............. (108,198) (66,142) 111,736
NET ASSETS
Beginning of period ............................ 601,924 668,066 556,330
---------- ---------- ----------
End of period .................................. $ 493,726 $ 601,924 $ 668,066
========== ========== ==========
*Share information
Shares sold .................................. 54,123 12,926 90,418
Distributions reinvested ..................... 5,684 1,505 7,089
Shares redeemed .............................. (79,508) (23,760) (73,263)
---------- ---------- ----------
Increase (decrease) in shares outstanding .... (19,701) (9,329) 24,244
========== ========== ==========
<FN>
The fund's fiscal year-end was changed to May 31.
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
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Notes to Financial Statements
T. Rowe Price Short-Term Bond Fund / May 31, 1995
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NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
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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) 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 of 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.
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) Premiums and Discounts -
Except for mortgage-backed securities, premiums and discounts on debt securities
are amortized for both financial and tax reporting purposes. In accordance with
federal income tax regulations, market discounts and premiums on mortgage-backed
securities are included in the gain or loss recorded upon principal repayment of
the security for financial reporting purposes and ordinary income for tax
purposes. C) 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
and may differ from those determined in accordance with generally accepted
accounting principles.
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NOTE 2 - INVESTMENT TRANSACTIONS
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Consistent with its investment objective, the fund engages in the following
practices to manage exposure to certain risks and enhance performance. The
investment objective, policies, program, risk factors, and following practices
of the fund are described more fully in the fund's Prospectus and Statement of
Additional Information. A) Securities Lending - To earn additional income, the
fund lends its securities to approved brokers. At May 31, 1995, the market value
of securities on loan was $1,069,000, for which the fund was fully
collateralized by cash. Although the risk is mitigated by the collateral, the
fund could experience a delay in recovering its securities and a possible loss
of income or value if the borrower fails to return them. B) Other - Purchases
and sales of portfolio securities, other than short-term and U.S. Government
securities, aggregated $196,150,000 and $239,785,000, respectively, for the year
ended May 31, 1995. Purchases and sales of U.S. Government securities aggregated
$489,714,000 and $506,269,000, respectively, for the year ended May 31, 1995.
<PAGE>
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NOTE 3 - FEDERAL INCOME TAXES
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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 $32,555,000, $5,393,000 of which expire in 1996,
$3,395,000 in 1997, and $23,767,000 thereafter through 2003. The fund intends to
retain gains realized in future years that may be offset by available capital
loss carryforwards.
In order for the fund's capital accounts and distributions to shareholders
to reflect the tax character of certain transactions, $169,000 of undistributed
net realized gains was reclassified as a decrease to paid-in-capital during the
year ended May 31, 1995. The results of operations and net assets were not
affected by the reclassifications.
At May 31, 1995, the aggregate cost of investments for federal income tax
and financial reporting purposes was $480,498,000 and net unrealized gain
aggregated $2,957,000, of which $6,179,000 related to appreciated investments
and $3,222,000 to depreciated investments.
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NOTE 4 - RELATED PARTY TRANSACTIONS
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The investment management agreement between the fund and T. Rowe Price
Associates, Inc. (the Manager) provides for an annual investment management fee,
of which $180,000 was payable at May 31, 1995. The fee is computed daily and
paid monthly, and consists 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. At May
31, 1995, and for the year then ended, the effective annual Group Fee rate was
0.34%. The fund pays a pro rata share of the Group Fee based on the ratio of its
net assets to those of the Group.
In addition, the fund has entered into agreements with the Manager and two
wholly owned subsidiaries of the Manager, pursuant to which the fund receives
certain other services. The Manager computes the daily share price and maintains
the financial records of the fund. T. Rowe Price Services, Inc. (TRPS) is the
fund's transfer and dividend disbursing agent and provides shareholder and
administrative services to the fund. T. Rowe Price Retirement Plan Services,
Inc. provides subaccounting and recordkeeping services for certain retirement
accounts invested in the fund. Additionally, 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 among 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. The fund incurred expenses
pursuant to these related party agreements totaling approximately $1,301,000 for
the year ended May 31, 1995, of which $138,000 was payable at year-end.
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<TABLE>
<PAGE>
Financial Highlights
T. Rowe Price Short-Term Bond Fund
For a share outstanding throughout each period
----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Three
Months Year ended
Year ended ended
May 31, May 31, Feb. 28, Feb. 28, Feb. 29, Feb. 28,
1995 1994 1994 1993 1992 1991
-------- -------- --------- ---------- -------- --------
NET ASSET VALUE, BEGINNING OF PERIOD .... $ 4.85 $ 5.00 $ 5.09 $ 5.05 $ 4.94 $ 4.91
--------- ------ ------ ------ ------ ------
Investment Activities
Net investment income ................. 0.29 0.07 0.31 0.33 0.35 0.39
Net realized and unrealized gain (loss) (0.13) (0.15) (0.09) 0.04 0.11 0.06
--------- ------ ------ ------ ------ ------
Total from Investment Activities ...... 0.16 (0.08) 0.22 0.37 0.46 0.45
--------- ------ ------ ------ ------ ------
Distributions
Net investment income ................. (0.29) (0.07) (0.28) (0.33) (0.35) (0.39)
Net realized gain ..................... -- -- -- -- -- (0.03)
Tax return of capital ................. -- -- (0.03) -- -- --
--------- ------ ------ ------ ------ ------
Total Distributions ................... (0.29) (0.07) (0.31) (0.33) (0.35) (0.42)
--------- ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD .......... $ 4.72 $ 4.85 $ 5.00 $ 5.09 $ 5.05 $ 4.94
--------- ------ ------ ------ ------ ------
--------- ------ ------ ------ ------ ------
RATIOS/SUPPLEMENTAL DATA
Total Return ............................ 3.41% (1.65)% 4.36% 7.63% 9.70% 9.61%
Ratio of Expenses to Average Net Assets . 0.79% 0.79% 0.74% 0.76% 0.88% 0.93%
Ratio of Net Investment Income
to Average Net Assets ............... 6.09% 5.56% 6.00% 6.59% 7.07% 7.90%
Portfolio Turnover Rate ................. 136.9% 222.8% 90.8% 68.4% 380.7% 980.4%
Net Assets, End of Period (in thousands) $ 493,726 $601,924 $668,066 $556,330 $ 396,980 $ 218,634
<FN>
Annualized.
The fund's fiscal year-end was changed to May 31.
</FN>
</TABLE>
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Report of Independent Accountants
To the Board of Directors and Shareholders of the
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 the T. Rowe
Price Short-Term Bond Fund, Inc. at May 31, 1995, and the results of its
operations, the changes in its net assets and the selected per share data and
information for each of the fiscal periods presented, 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
audit, which included confirmation of securities at May 31, 1995 by
correspondence with custodians and brokers and, where appropriate, the
application of alternative auditing procedures for unsettled security
transactions, provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
June 19, 1995
