Annual Report
Short-Term Bond Fund
May 31, 1996
T. Rowe Price
REPORT HIGHLIGHTS
o Bond prices tumbled in 1996 due to surprisingly strong economic growth
and inflation concerns, leading to negative returns for many bond funds
over the last six months.
o The Short-Term Bond Fund provided a small gain over the last six months
but lagged its peer group for the 6- and 12-month periods ended May 31.
o We reduced the fund's exposure to rising interest rates by trimming our
Treasury holdings in favor of mortgages and cyclicals, particularly
utilities. Our exposure to corporate bonds remained high at over half of
net assets.
o Higher bond yields may reduce immediate pressure on the Fed to raise
interest rates. Although a Fed tightening may push money market rates
higher later this year, we expect longer-term rates to be more stable
and are positioning the portfolio for that environment.
Fellow Shareholders
The powerful bond market rally of 1995 ran out of steam this year due to
surprisingly strong economic growth and renewed concerns about inflation.
Rising interest rates drove bond prices lower, resulting in negative returns
for many bond funds over the last six months. Your fund provided a small gain.
MARKET ENVIRONMENT
Proving once again the capricious nature of Wall Street, bond market
psychology changed almost in the blink of an eye. In December and January,
bond prices continued to rise modestly on the expectation of moderate economic
growth, subdued inflation, and progress toward a balanced budget. With the
economic expansion turning five years old and graying at the temples, some
concerns about a recession surfaced. Inflation remained moderate, prompting
the Federal Reserve to trim the federal funds target by 50 basis points to
5.25%, and the market awaited further easing to prod the sluggish economy.
(One hundred basis points equal one percentage point.) By February, the
two-year Treasury note yield had dipped by 45 basis points to 4.9%.
As the year progressed, however, it became clear that the economy was stronger
than originally thought, growing at a robust 2.3% in the first calendar
quarter. Payroll employment rose by a healthy 220,000 a month during the first
five months of 1996. Inflation picked up due to higher oil and grain prices.
Consumer prices have risen at an annualized rate of 4% so far in 1996.
Chart 1 - Interest Rate Levels
As a result, the bond market reversed course from an expectation of further
easing by the Federal Reserve to one of renewed tightening. By May 31, the
two- and five-year Treasury note yields had risen to 6.2% and 6.6%,
respectively - their highest levels in more than a year, as shown in the
chart.
PERFORMANCE AND STRATEGY REVIEW
As your fund's fiscal year got under way last June, we increased the fund's
price sensitivity to interest rate movements by lengthening its duration.
(Duration is a measure of a bond fund's price sensitivity to interest rate
changes. A longer duration enhances a fund's price appreciation if interest
rates fall but leads to steeper price declines if rates rise.) This strategy
proved beneficial as interest rates generally declined and bond prices rose
last year, helping the fund outperform the average for similar funds in the
first half of its fiscal year.
On November 30, duration stood at 2.2 years, slightly longer than our peer
group. We shortened duration modestly when the bond market soured in 1996,
reducing it to 2.0 years by the end of May, still slightly longer than the
peer group. Fund performance lagged the peer group for both the 6- and
12-month periods ended May 31 due to its slightly longer duration as interest
rates rose sharply in recent months.
PERFORMANCE COMPARISON
Periods Ended 5/31/96 6 Months 12 Months
Short-Term Bond Fund 0.49% 4.58%
Lipper Short Investment-Grade
Debt Funds Average 1.24 4.92
Our strategy of late has been focused on reducing the fund's sensitivity to
interest rates. We trimmed our Treasury and U.S. government agency position to
15% of net assets, redeploying the proceeds into mortgage-backed securities,
which are less vulnerable to falling interest rates and offer higher levels of
income. Mortgages now represent 25% of assets. We also rotated our corporate
securities, reducing our exposure to rate-sensitive sectors such as banking,
finance, and investment dealers in favor of cyclical sectors such as
transportation and utilities. Despite improving fundamentals of specific
issuers, concerns over the restructuring of the utility industry resulted in
depressed valuations in this sector. We took advantage of the relative value
by tripling our exposure to utilities to 9% of assets.
In our last report to you, we mentioned our concern about potentially lower
corporate earnings in some industries. So far in 1996, no significant earnings
disappointments have emerged, and the economy has remained strong.
Consequently, we maintained our exposure to corporate securities (including
asset-backed issues) at more than half of net assets. We continued to maintain
high overall credit quality, with more than 80% of assets invested in
securities rated A or better, as shown in the pie chart.
Chart 2 - Quality Diversification
OUTLOOK
The economy has solid momentum, and the pace of first quarter growth suggests
that it will grow at substantially above its long-term rate in the second
quarter. Although late in the cycle, the expansion could well continue for
another few years. Against this backdrop, there is no immediate urgency for
the Fed to move toward a restrictive mode, since the fixed income markets have
already responded with higher rates. Higher bond yields during the past five
months may already reflect much of the news about growth and inflation.
Although a Fed tightening may nudge money market rates higher later this year,
we expect longer-term rates to be more stable in coming months and are
positioning the portfolio to benefit from that environment. Thank you for your
continued confidence in T. Rowe Price.
Respectfully submitted,
Edward A. Wiese
President and
Chairman of the Investment Advisory Committee
June 20, 1996
T. Rowe Price Short-Term Bond Fund
PORTFOLIO HIGHLIGHTS
KEY STATISTICS
11/30/95 5/31/96
_____________________________________________________________________________
Price Per Share $ 4.76 $ 4.64
Dividends Per Share
For 6 months 0.15 0.14
For 12 months 0.30 0.29
Dividend Yield *
For 6 months 6.37% 6.16%
For 12 months 6.55 6.35
Weighted Average Maturity (years) 2.9 2.5
Weighted Average Effective
Duration (years) 2.2 2.0
Weighted Average Quality ** AA AA
* 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.
** Based on T. Rowe Price research.
T. Rowe Price Short-Term Bond Fund
PORTFOLIO HIGHLIGHTS
SECTOR DIVERSIFICATION
Percent of Percent of
Net Assets Net Assets
11/30/95 5/31/96
_____________________________________________________________________________
U.S. Government Obligations
Treasuries 14% 9%
Agencies 5 6
Mortgage-Backed Securities
U.S. Government 22 25
Corporates
Industrials 9 9
Utilities 3 9
Finance and Credit 9 8
Media and Communications 4 5
Banking 9 5
Consumer Products 4 3
Transportation - 2
Investment Dealers 5 2
Petroleum 1 1
Retail 1 1
Consumer Services 1 1
Asset-Backed Securities 8 6
Commercial Paper 3 6
U.S. Dollar-Denominated Foreign Securities - 1
Bank Notes - 1
Other Assets Less Liabilities 2 -
_____________________________________________________________________________
Total 100% 100%
T. Rowe Price Short-Term Bond Fund
PERFORMANCE COMPARISON
This chart shows the value of a hypothetical $10,000 investment in the fund
over the past 10 fiscal year periods or since inception (for funds lacking
10-year records). The result is compared with a broad-based average or index.
The index return does not reflect expenses, which have been deducted from the
fund's return.
Chart 3 - Short-Term Bond Fund
AVERAGE ANNUAL COMPOUND TOTAL RETURN
This table shows how the fund would have performed each year if its actual (or
cumulative) returns for the periods shown had been earned at a constant rate.
Periods Ended 5/31/96 1 Year 3 Years 5 Years 10 Years
_____________________________________________________________________________
Short-Term Bond Fund 4.58% 3.11% 5.17% 6.31%
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original
purchase.
T. Rowe Price Short-Term Bond Fund
FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
Year 3 Months# Year
Ended Ended Ended
5/31/96 5/31/95 5/31/94 2/28/94 2/28/93 2/29/92
_____________________________________________________________________________
NET ASSET VALUE
Beginning of
period $ 4.72 $ 4.85 $ 5.00 $ 5.09 $ 5.05 $ 4.94
Investment activities
Net invest-
ment income 0.29 0.29 0.07 0.31 0.33 0.35
Net realized and
unrealized
gain (loss) (0.08) (0.13) (0.15) (0.09) 0.04 0.11
Total from
investment
activities 0.21 0.16 (0.08) 0.22 0.37 0.46
Distributions
Net invest-
ment income (0.28) (0.29) (0.07) (0.28) (0.33) (0.35)
Tax return
of capital (0.01) - - (0.03) - -
Total
distributions (0.29) (0.29) (0.07) (0.31) (0.33) (0.35)
NET ASSET VALUE
End of period $ 4.64 $ 4.72 $ 4.85 $ 5.00 $ 5.09 $ 5.05
Ratios/Supplemental Data
Total return 4.58% 3.41% (1.65)% 4.36% 7.63% 9.70%
Ratio of expenses
to average
net assets 0.72% 0.79% 0.79%! 0.74% 0.76% 0.88%
Ratio of net
investment
income to average
net assets 6.15% 6.09% 5.56%! 6.00% 6.59% 7.07%
Portfolio
turnover
rate 118.7% 136.9% 222.8%! 90.8% 68.4% 380.7%
Net assets,
end of
period (in
thousands) $ 429,498 $ 493,726 $ 601,924 $ 668,066 $ 556,330 $ 396,980
! Annualized.
# The fund's fiscal year-end was changed to May 31.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term Bond Fund
May 31, 1996
STATEMENT OF NET ASSETS Par Value
In thousands
CORPORATE BONDS AND NOTES 45.5%
Banking 4.7%
Banponce Financial, MTN, 7.73%, 8/15/97 $ 2,000 $ 2,031
Chase Manhattan, Sub. Notes, 8.00%, 4/15/02 4,050 4,094
Credit Foncier France, 8.00%, 2/23/98 4,400 4,486
Firstar, Sub. Notes, 7.15%, 9/1/00 2,700 2,707
Mercantile Bankshares, (144a), 6.13%, 7/15/98! 3,500 3,438
Old Kent Bank & Trust, CD, 7.20%, 10/14/97 3,500 3,534
_____________________________________________________________________________
20,290
Consumer Products 2.9%
General Mills, MTN, 7.16%, 10/3/97 3,000 3,031
Joseph E. Seagram & Sons, Gtd. Notes,
9.75%, 6/15/00 4,550 4,561
Pepsico, MTN, 6.80%, 5/15/00 4,775 4,747
_____________________________________________________________________________
12,339
Consumer Services 1.1%
Columbia HCA Healthcare
Notes
6.41%, 6/15/00 2,550 2,482
6.50%, 3/15/99 2,000 1,984
_____________________________________________________________________________
4,466
Finance and Credit 7.5%
American Express, Deb., 8.75%, 6/15/96 1,000 999
American General Finance, Sr. Notes,
5.80%, 4/1/97 2,000 1,996
Ciesco L.P., MTN, (144a), 7.38%, 4/19/00! 3,750 3,798
Countrywide Funding, MTN, 6.02%, 3/25/98 5,000 4,945
Finova Capital, MTN, 6.38%, 4/15/99 4,700 4,641
General Electric Capital, MTN, 8.10%, 1/26/99 5,000 5,189
GPA Leasing USA Sub I, Equip. Trust Certs., (144a),
9.125%, 12/2/96 3,749 3,729
Providian, MTN, 6.92%, 5/16/00 2,700 2,688
Prudential Insurance Company of America, Notes, (144a),
6.875%, 4/15/03! 4,400 4,227
_____________________________________________________________________________
32,212
Industrials 9.2%
American Brands, MTN, 8.87%, 3/16/98 4,700 4,885
Boise Cascade, Deb., 9.85%, 6/15/02 4,600 5,109
Cyprus Minerals, Deb., 10.125%, 4/1/02 5,000 5,624
Ford Motor Credit, MTN, 8.21%, 3/16/99 $ 4,450 $ 4,608
General Motors Acceptance Corporation, MTN,
6.125%, 4/23/98 4,400 4,369
IBM, Notes, 6.375%, 6/15/00 5,000 4,907
Lockheed Martin, Notes, 6.55%, 5/15/99 4,500 4,476
Methanex, Notes, 7.40%, 8/15/02 4,750 4,672
Westinghouse Credit, MTN, 9.04%, 6/1/98 1,000 1,008
_____________________________________________________________________________
39,658
Investment Dealers 2.0%
Merrill Lynch, Notes, 7.05%, 4/15/03 4,400 4,257
Salomon, MTN, 5.90%, 2/9/98 4,475 4,403
_____________________________________________________________________________
8,660
Media and Communications 4.9%
Cox Communications, Notes, 6.375%, 6/15/00 5,000 4,877
News America Holdings, Sr. Notes, 7.50%, 3/1/00 4,750 4,799
Tele-Communications, Sr. Notes, 9.25%, 4/15/02 3,000 3,147
Time Warner, Notes, 7.95%, 2/1/00 3,750 3,817
Walt Disney, Sr. Notes, 6.375%, 3/30/01 4,450 4,339
_____________________________________________________________________________
20,979
Petroleum 1.4%
Occidental Petroleum, MTN, 5.85%, 11/9/98 2,975 2,908
Union Texas Petroleum, Sr. Notes,
8.25%, 11/15/99 3,000 3,064
_____________________________________________________________________________
5,972
Retail 1.2%
Sears Roebuck & Company, MTN, 8.23%, 5/4/99 4,800 4,975
_____________________________________________________________________________
4,975
Transportation 2.0%
Burlington Northern, Notes, 7.40%, 5/15/99 2,775 2,798
Federal Express, 6.25%, 4/15/98 1,500 1,484
Union Pacific, Notes, 7.00%, 6/15/00 4,500 4,465
_____________________________________________________________________________
8,747
Utilities 8.6%
Commonwealth Edison
1st Mtg. Bonds, 6.25%, 2/1/98 1,550 1,526
1st Mtg. Notes, 9.375%, 2/15/00 3,110 3,314
Consumers Power, 1st Mtg. Bonds, 6.875%, 5/1/98 3,250 3,263
Detroit Edison, MTN, 6.27%, 3/15/00 4,500 4,368
Florida Power, MTN, 8.40%, 8/1/96 550 552
Long Island Lighting, Gen. and Ref. Bonds,
8.75%, 2/15/97 $ 3,760 $ 3,816
Orange and Rockland Utilities, Deb.,
6.14%, 3/1/00 4,500 4,353
Pacific Gas and Electric, 1st Mtg. Bonds,
8.75%, 1/1/01 4,500 4,782
Potomac Capital
MTN
6.38%, 10/6/97 1,500 1,493
6.61%, 3/16/98 1,000 999
Public Service Company of Colorado, 1st Mtg. Bonds,
5.875%, 7/1/97 1,000 993
System Energy Resources, 1st Mtg. Notes,
7.625%, 4/1/99 3,250 3,261
U.S. West Capital Funding, MTN, 6.50%, 11/11/02 4,500 4,292
_____________________________________________________________________________
37,012
_____________________________________________________________________________
Total Corporate Bonds and Notes (Cost $197,644) 195,310
ASSET-BACKED SECURITIES 6.0%
Auto-Backed 0.3%
USAA Auto Loan Grantor Trust, 5.00%, 11/15/99 1,212 1,206
_____________________________________________________________________________
1,206
Credit Card-Backed 5.4%
American Express Master Trust, 7.15%, 8/15/99 4,750 4,801
Banc One Credit Card Master Trust,
7.80%, 12/15/00 4,500 4,624
First Deposit Master Trust, 6.05%, 8/15/02 4,500 4,462
MBNA Master Credit Card Trust, 5.59%, 3/15/01 5,000 5,003
Signet Credit Card Master Trust, 5.20%, 2/15/02 4,500 4,366
_____________________________________________________________________________
23,256
Home Equity Loans-Backed 0.1%
SPNB Home Equity Loan, 7.85%, 5/15/98 28 28
U.S. Home Equity Loan, 8.50%, 4/15/21 449 454
_____________________________________________________________________________
482
Receivables-Backed 0.2%
Case Equipment Loan Trust, 7.60%, 12/15/97 1,060 1,064
_____________________________________________________________________________
1,064
____________________________________________________________________________
Total Asset-Backed Securities (Cost $26,482) 26,008
U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 24.7%
U.S. Government Agency Obligations 21.1%
Federal Home Loan Mortgage
5.25%, 7/1/97 $ 7 $ 7
7.50%, 1/1/97 - 5/1/00 8,907 8,947
9.00%, 7/1/01 - 7/1/02 1,740 1,797
9.50%, 8/1/01 - 9/1/02 1,125 1,177
10.00%, 1/1/01 - 10/1/05 712 746
11.00%, 8/1/00 - 2/1/01 585 616
5 year balloon, 6.00%, 4/1/99 12,894 12,578
7 year balloon, 9.50%, 4/1 - 8/1/97 96 100
REMIC
5.65%, 9/15/04 5,000 4,869
7.50%, 2/15/06 13,550 13,732
8.25%, 7/15/12 9,000 9,202
Federal National Mortgage Assn.
5.50%, 8/1/97 - 11/1/05 147 141
7.00%, 4/1/09 13,210 13,016
9.00%, 3/1/97 - 7/1/98 2,164 2,208
9.50%, 5/1/97 - 1/1/98 232 238
11.00%, 10/1/00 - 1/1/01 269 284
REMIC
5.40%, 3/25/04 11,000 10,711
Accrual Bond, 7.50%, 8/25/05 10,263 10,247
_____________________________________________________________________________
90,616
U.S. Government Guaranteed Obligations 3.6%
Government National Mortgage Assn.
I
8.50%, 2/15/05 - 3/15/06 770 804
10.50%, 11/15/15 334 367
13.00%, 11/15/12 - 4/15/15 120 140
GPM, I
8.50%, 1/15/06 105 109
9.50%, 8/15 - 10/15/09 119 127
11.00%, 8/15/10 62 69
11.25%, 6/15/13 - 1/15/16 842 943
11.75%, 7/15/13 - 11/15/15 $ 2,685 $ 3,096
13.00%, 9/15/11 16 19
GPM, II
11.00%, 9/20/13 - 4/20/14 45 50
11.25%, 8/20/13 - 12/20/15 127 142
Midget, I
9.00%, 7/15/01 - 2/15/06 1,096 1,149
9.50%, 5/15/01 - 4/15/05 263 280
10.00%, 4/15/98 - 10/15/04 828 876
11.50%, 4/15 - 5/15/00 26 27
REMIC, 6.25%, 8/16/11 7,500 7,488
_____________________________________________________________________________
15,686
_____________________________________________________________________________
Total U.S. Government Mortgage-Backed Securities
(Cost $106,782) 106,302
U.S. GOVERNMENT OBLIGATIONS 15.4%
U.S. Government Agency Obligations 5.9%
Federal Home Loan Mortgage
Deb.
6.725%, 8/15/00 5,250 5,197
7.75%, 1/27/97 10,000 10,125
7.86%, 1/21/97 10,000 10,128
_____________________________________________________________________________
25,450
U.S. Treasury Obligations 9.5%
U.S. Treasury Notes
5.25%, 12/31/97 4,425 4,367
5.875%, 8/15/98 5,500 5,452
7.875%, 7/15/96 5,000 5,015
8.875%, 11/15/97 25,000 25,949
_____________________________________________________________________________
40,783
_____________________________________________________________________________
Total U.S. Government Obligations (Cost $66,155) 66,233
NON-U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 0.4%
Great Western Bank, ARM, 6.02%, 7/25/17 1,444 1,387
Salomon Mortgage Security VII, CMO,
7.27%, 11/25/20 183 171
_____________________________________________________________________________
Total Non-U.S. Government Mortgage-Backed
Securities (Cost $1,632) 1,558
U.S. $ DENOMINATED FOREIGN
SECURITIES1 0.5%
Asian Development Bank, Eurobonds,
8.00%, 12/10/96 $ 2,000 $ 2,017
_____________________________________________________________________________
Total U.S. $ Denominated Foreign Securities
(Cost $1,998) 2,017
COMMERCIAL PAPER 6.4%
A. H. Robins, 4(2), 5.30%, 6/25/96 3,500 3,487
Ciba-Geigy, 5.29%, 6/24/96 5,000 4,983
Investments in Commercial Paper through
a joint account,
5.41%, 6/3/96 2,230 2,230
Kellogg Company, 5.28%, 6/6/96 5,080 5,076
Unilever Capital, 4(2), 5.28%, 6/3/96 1,697 1,697
Vermont American, 4(2), 5.29%, 6/13/96 10,000 9,982
_____________________________________________________________________________
Total Commercial Paper (Cost $27,455) 27,455
BANK NOTES 1.2%
Wachovia Bank of North Carolina, N. A.,
5.32%, 6/12/96 5,000 5,000
_____________________________________________________________________________
Total Bank Notes (Cost $5,000) 5,000
Total Investments in Securities
100.1% of Net Assets (Cost $433,148) $ 429,883
Other Assets Less Liabilities (385)
NET ASSETS $ 429,498
Net Assets Consist of:
Accumulated net investment income - net of distributions $ (2,161)
Accumulated net realized gain/loss - net of distributions (38,439)
Net unrealized gain (loss) (3,265)
Paid-in-capital applicable to 92,610,070 shares of
$0.01 par value capital stock outstanding;
1,000,000,000 shares authorized 473,363
NET ASSETS $ 429,498
NET ASSET VALUE PER SHARE $ 4.64
! Private Placement
1 Marketable securities (payable in U.S. dollars) issued or guaranteed
by a foreign government or community.
ARM Adjustable Rate Mortgage
CD Certificate of Deposit
CMO Collateralized Mortgage Obligation
GPM Graduated Payment Mortgage
MTN Medium Term Note
REMIC Real Estate Mortgage Investment Conduit
Accrual
Bond Accrued interest is not paid in cash, but is added to remaining
principal.
4(2) Commercial Paper sold within terms of a private placement memorandum,
exempt from registration under section 4.2 of the Securities Act of
1933, as amended, and may be sold only to dealers in that program or
other "accredited investors."
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 - total of such securities at year-end
amounts to 3.5% of net assets.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term Bond Fund
STATEMENT OF OPERATIONS
In thousands
Year
Ended
5/31/96
_____________________________________________________________________________
Investment Income
Interest income $ 33,010
Expenses
Investment management 2,099
Shareholder servicing 1,033
Custody and accounting 214
Prospectus and shareholder reports 42
Registration 35
Legal and audit 31
Directors 9
Miscellaneous 10
Total expenses 3,473
Net investment income 29,537
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities (1,431)
Change in net unrealized gain or loss on securities (6,222)
Net realized and unrealized gain (loss) (7,653)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 21,884
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term Bond Fund
STATEMENT OF CHANGES IN NET ASSETS
In thousands
Year Year
Ended Ended
5/31/96 5/31/95
_____________________________________________________________________________
Increase (Decrease) in Net Assets
Operations
Net investment income $ 29,537 $ 31,347
Net realized gain (loss) (1,431) (28,960)
Change in net unrealized gain or loss (6,222) 15,247
Increase (decrease) in net assets
from operations 21,884 17,634
Distributions to shareholders
Net investment income (29,148) (31,157)
Tax return of capital (504) -
Decrease in net assets from distributions (29,652) (31,157)
Capital share transactions*
Shares sold 176,621 253,582
Distributions reinvested 26,328 26,870
Shares redeemed (259,409) (375,127)
Increase (decrease) in net assets
from capital share transactions (56,460) (94,675)
Net Assets
Increase (decrease) during period (64,228) (108,198)
Beginning of period 493,726 601,924
End of period $ 429,498 $ 493,726
*Share information
Shares sold 37,389 54,123
Distributions reinvested 5,582 5,684
Shares redeemed (54,882) (79,508)
Increase (decrease) in shares outstanding (11,911) (19,701)
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term Bond Fund
May 31, 1996
NOTES TO FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies
T. Rowe Price Short Term Bond Fund, Inc., (the fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end management
investment company and commenced operations on March 2, 1984.
Valuation Debt securities are generally traded in the over-the-counter
market. Investments in securities originally issued with 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 original 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.
Premiums and Discounts Premiums and discounts on debt securities, other than
mortgage-backed securities, are amortized for both financial reporting and tax
purposes. Premiums and discounts on mortgage-backed securities are recognized
upon principal repayment as gain or loss for financial reporting purposes and
as ordinary income for tax purposes.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on the identified cost basis. Distributions to shareholders are
recorded by the fund on the ex-dividend date. Income and capital gain
distributions are determined in accordance with federal income tax regulations
and may differ from those determined in accordance with generally accepted
accounting principles.
Note 2 - Investment Transactions
Consistent with its investment objective, the fund engages in the following
practices to manage exposure to certain risks or enhance performance. The
investment objective, policies, program, and risk factors of the fund are
described more fully in the fund's prospectus and Statement of Additional
Information.
Commercial Paper Joint Account The fund, and other affiliated funds, may
transfer uninvested cash into a commercial paper joint account, the daily
aggregate balance of which is invested in high-grade commercial paper. All
securities purchased by the joint account satisfy the fund's criteria as to
quality, yield, and liquidity.
Securities Lending To earn additional income, the fund lends its securities
to approved brokers. At May 31, 1996, the market value of securities on loan
was $1,580,000, which was fully collateralized with 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.
Other Purchases and sales of portfolio securities, other than short-term and
U.S. government securities, aggregated $258,524,000 and $324,194,000,
respectively, for the year ended May 31, 1996. Purchases and sales of U.S.
government securities aggregated $280,994,000 and $280,131,000, respectively,
for the year ended May 31, 1996.
Note 3 - Federal Income Taxes
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income. The fund has unused realized capital loss carryforwards
for federal income tax purposes of $37,433,000, of which $3,395,000 expires in
1997, $373,000 in 1998, and $33,665,000 thereafter through 2004. The fund
intends to retain gains realized in future periods 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, the following
reclassifications were made during the year ended May 31, 1996. The results
of operations and net assets were not affected by the reclassifications.
Undistributed net investment income $(2,861,000)
Undistributed net realized gain 8,254,000
Paid-in-capital (5,393,000)
At May 31, 1996, the aggregate cost of investments for federal income tax and
financial reporting purposes was $433,148,000, and net unrealized loss
aggregated $3,265,000, of which $1,741,000 related to appreciated investments
and $5,006,000 to depreciated investments.
Note 4 - Related Party Transactions
The investment management agreement between the fund and T. Rowe Price
Associates, Inc. (the manager) provides for an annual investment management
fee, of which $159,000 was payable at May 31, 1996. 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 0.305% for assets in excess of $50
billion. At May 31, 1996, and for the year then ended, the effective annual
group fee rate was 0.33 and 0.34%, respectively. 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 $1,018,000 for the year ended May 31, 1996,
of which $97,000 was payable at period-end.
T. Rowe Price Short-Term Bond Fund
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders 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 financial
highlights present fairly, in all material respects, the financial position of
T. Rowe Price Short-Term Bond Fund, Inc. (the "Fund") at May 31, 1996, and the
results of its operations, the changes in its net assets, and the financial
highlights for each of the fiscal periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (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 May 31, 1996 by
correspondence with custodians and, where appropriate, the application of
alternative auditing procedures for unsettled security transactions, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
June 19, 1996
T. ROWE PRICE 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.
Knowledgeable Service Representatives
By Phone 1-800-225-5132 Available Monday through Friday from 8 a.m. to 10
p.m. and weekends from 8:30 a.m. to 5 p.m.
In Person Available in T. Rowe Price Investor Centers.
Account Services
Checking Available on most fixed income funds.
Automatic Investing From your bank account or paycheck.
Automatic Withdrawal Scheduled, automatic redemptions.
Distribution Options Reinvest all, some, or none of your distributions.
Automated 24-Hour Services Including Tele*Access(registered trademark) and T.
Rowe Price OnLine.
Discount Brokerage
Individual Investments Stocks, bonds, options, precious metals, and other
securities; potentially large savings on commissions.
Investment Information
Combined Statement An overview of your T. Rowe Price accounts.
Shareholder Reports Fund managers' reviews of their strategies and results.
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, and Retirement Planning Kit.
For yield, price, last transaction, and current balance, 24 hours, 7 days a
week, call:
1-800-638-2587 toll free
For assistance with your existing fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
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(registered trademark).
Invest With Confidence(registered trademark)
T. Rowe Price
T. Rowe Price Investment Services, Inc., Distributor RPRTSTB 5/31/96
Chart 1 - Interest Rate Levels - A 3-line chart showing interest rate levels
on the 2-year T-note, the 5-year T-note, and the Federal Funds Rate from
5/31/95 to 5/31/96.
Chart 2 - Quality Diversification - A pie chart showing diversification of
assets by credit quality on 5/31/96.
Chart 3 - Short-Term Bond Fund - A line chart showing the cumulative growth of
$10,000 invested in the Short-Term Bond Fund over the past 10 years compared
with $10,000 invested in a broad-based index over the same period.
