<PAGE>
- --------------------------------------------------------------------------------
T. Rowe Price
- --------------------------------------------------------------------------------
SemiAnnual Report
New Income Fund
- --------------------------------------------------------------------------------
November 30, 1996
- --------------------------------------------------------------------------------
Report Highlights
================================================================================
* The bond market bounced back over the last six months as the economy slowed
and inflation fears subsided.
* The Short-Term Bond Fund posted a solid 4.31% gain for the six-month
period, slightly ahead of its peer group. However, the 12-month return was
a modest 4.82% due to the difficult environment earlier in the year.
* Afterinterest rates dropped in the fall, we turned slightly defensive by
shortening duration. We also improved credit quality by reducing some
lower-quality corporate holdings in favor of mortgage securities.
* Economic growth and inflation should remain moderate in coming months, and
the Federal Reserve appears unlikely to raise short-term interest rates in
the near future.
- --------------------------------------------------------------------------------
Fellow Shareholders
================================================================================
After taking its lumps in the first half of 1996, the bond market rebounded over
the last six months. The economy slowed and inflation fears subsided, allowing
interest rates to settle into a narrow range after their sharp ascent earlier in
the year. Your fund produced a solid gain.
- --------------------------------------------------------------------------------
MARKET ENVIRONMENT
================================================================================
When we last wrote to you in May, things did not look good for the bond market.
The economy appeared to be gaining momentum and consumer prices were on the
rise, leading to fears that inflation was making a comeback. Indeed, the economy
grew at a robust 4.7% annualized rate in the second quarter. The financial
markets widely anticipated that the Federal Reserve would raise the key federal
funds target to curb accelerating growth. The bond market responded with higher
yields, with the two-year Treasury note yield rising to 6.2% in August, as shown
in the chart.
<PAGE>
[A 3-line chart showing interest rate levels on the 5-year Treasury note, 2-year
Treasury note, and Federal Funds Target Rate from 11/30/95 through 11/30/96.]
Instead, the Fed chose to stay the course, keeping the fed funds target at
5.25%, where it has been since January. That strategy proved correct, as the
economy slowed to a more moderate 2% growth pace in the third quarter and
inflation fears subsided. In the fall, and especially after the presidential
election in early November, the bond market rallied on confirmation of slower
growth, subdued inflation, and continuation of the status quo in Washington with
a Democratic White House and a Republican-controlled Congress. The two-year
Treasury yield dropped back to 5.7% by the end of November and bond prices rose.
Over the last 12 months, despite fluctuating in a wide range, intermediate
interest rates finished only slightly higher. Therefore, bond returns came
mostly from income rather than price appreciation. Higher-yielding corporate and
mortgage-backed bonds performed best in this environment.
- --------------------------------------------------------------------------------
PERFORMANCE AND STRATEGY REVIEW
================================================================================
With interest rates settling into a relatively narrow range over the last six
months, we concentrated on maintaining a slightly above-average yield and kept
the fund's duration between 1.8 and 2.0 years. By November 30, we moved toward
the low end of this range, taking a somewhat defensive stance after the drop in
interest rates this fall. (Duration is a measure of a bond fund's price
sensitivity to interest rate changes. A shorter duration means the fund's share
price falls less if interest rates rise.)
As part of our strategy to add incremental yield, we continued to hold a
significant portion of fund assets in high-quality corporate bonds and
mortgage-backed securities because they provided higher levels of income. This
strategy proved beneficial as both sectors outperformed Treasuries over the full
year, although mortgages lagged behind Treasuries in price appreciation during
the most recent six-month period.
- --------------------------------------------------------------------------------
Performance Comparison
================================================================================
Periods Ended 11/30/96 6 Months 12 Months
- --------------------------------------------------------------------------------
Short-Term Bond Fund 4.31% 4.82%
Lipper Short Investment-Grade
Debt Funds Average 4.17 5.44
================================================================================
<PAGE>
Your fund posted a solid return over the last six months, slightly ahead of the
peer group average due mostly to the extra income generated by our corporate and
mortgage securities. However, results for the 12 months ended November 30 were
lackluster and trailed the peer group because of our longer duration earlier in
the year when the bond market soured.
In the past few months, we increased our mortgage position to nearly one-third
of net assets and reduced our corporate bond holdings (including asset-backed
securities) to just under 50%. Our mortgage holdings are concentrated in
securities with relatively stable cash flows in changing rate environments,
namely short-duration, 15-year pass-throughs; collateralized mortgage
obligations (CMOs); and securities with balloon payments. Therefore, these
securities tend to be less volatile than more traditional pass-through mortgage
issues and to perform somewhat differently from the overall mortgage market.
Our reductions in corporate holdings were primarily in lower-quality issues,
including many of our BBB-rated finance and industrial holdings as well as
lower-rated media and telecommunications bonds. This improvement in quality is
reflected in the pie chart, with AAA-rated government and corporate securities
now representing 54% of assets (up from 46% last May), single-A issues at 18%
(down from 24%), and BBB-rated securities at 13% (down from 16%).
[A pie chart showing credit quality diversification on 11/30/96.]
There were two reasons behind this drive to improve quality. First, the yield
advantage of lower-quality versus higher- quality bonds narrowed, making it
harder to justify taking on the additional credit risk. Second, the risk of
credit downgrades among investment-grade issuers increased somewhat with the
growing use of cash and debt (as opposed to equity) to finance merger activity
in recent weeks.
Overall, the fund continued to be well diversified among U.S. Treasuries,
corporate bonds, and mortgage-backed issues, as shown in the table following
this letter. Our position in utilities remained high at 8% because it was one of
the few sectors where valuations were still attractive.
- --------------------------------------------------------------------------------
OUTLOOK
================================================================================
The economy has settled into a moderate growth pattern, all but eliminating
concerns of a Fed tightening in the near term. Since growth in the fourth
calendar quarter will be pivotal in determining the direction of monetary
policy, the Fed has apparently adopted a wait-and-see approach.
<PAGE>
The bond market rallied in the wake of the presidential election, seemingly
heartened by the results. Indeed, as the century draws to a close, hopes run
high for meaningful progress toward a balanced budget, which apparently enjoys
bipartisan support in Washington.
In coming months, as the current economic expansion approaches its sixth
anniversary, bonds should at least earn their coupons as long as growth remains
moderate and inflation stays in check.
Respectfully submitted,
[signature]
Edward A. Wiese
President and Chairman of the Investment Advisory Committee
December 20, 1996
- --------------------------------------------------------------------------------
Portfolio Highlights
================================================================================
Key statistics
5/31/96 11/30/96
------- --------
Price Per Share $ 4.64 $ 4.70
Dividends Per Share
For 6 months 0.14 0.14
For 12 months 0.29 0.28
Dividend Yield *
For 6 months 6.16% 5.99%
For 12 months 6.35 6.09
Weighted Average Maturity (years) 2.5 2.4
Weighted Average Effective Duration (years) 2.0 1.8
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.
================================================================================
<PAGE>
Portfolio Highlights
================================================================================
SECTOR Diversification
Percent of Percent of
Net Assets Net Assets
5/31/96 11/30/96
---------- ----------
Mortgage-Backed Securities 25% 31%
U.S. Treasury Obligations 9 14
Utilities 9 8
Commercial Paper 6 8
Asset-Backed Securities 6 7
Banking 5 6
Finance and Credit 8 5
Transportation 2 4
Industrial 9 4
Media and Communications 5 3
Investment Dealers 2 3
Government Agency Obligations 6 3
Retail 1 2
All Other 7 2
Other Assets Less Liabilities -- --
Total 100% 100%
================================================================================
<PAGE>
- --------------------------------------------------------------------------------
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.
[SEC Graph shown here. Periods 11\86 thru 11\96. Short-Term Bond Fund $18,341
and Lehman 1-3 Year Government/Corporate Bond Index $20,206]
- --------------------------------------------------------------------------------
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 11/30/96 1 Year 3 Years 5 Years 10 Years
- ------------- -------- ------ ------- ------- --------
Short-Term Bond Fund 4.82% 3.60% 4.83% 6.25%
================================================================================
Investment return and principal value represent past performance and
will vary. Shares may be worth more or less at redemption than at original
purchase.
- --------------------------------------------------------------------------------
<PAGE>
Financial Highlights
================================================================================
Unaudited
For a share outstanding throughout each period
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
6 Months Year 3 Months++ Year
Ended Ended Ended Ended
11/30/96 5/31/96 5/31/95 5/31/94 2/28/94 2/28/93 2/29/92
-------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE
Beginning of period $ 4.64 $ 4.72 $ 4.85 $ 5.00 $ 5.09 $ 5.05 $ 4.94
Investment activities
Net investment income 0.14 0.29 0.29 0.07 0.31 0.33 0.35
Net realized and
unrealized gain (loss) 0.06 (0.08) (0.13) (0.15) (0.09) 0.04 0.11
Total from
investment activities 0.20 0.21 0.16 (0.08) 0.22 0.37 0.46
Distributions
Net investment income (0.14) (0.28) (0.29) (0.07) (0.28) (0.33) (0.35)
Tax return of capital -- (0.01) -- -- (0.03) -- --
Total distributions (0.14) (0.29) (0.29) (0.07) (0.31) (0.33) (0.35)
NET ASSET VALUE
End of period $ 4.70 $ 4.64 $ 4.72 $ 4.85 $ 5.00 $ 5.09 $ 5.05
Ratios/Supplemental Data
Total return 4.31% 4.58% 3.41% (1.65)% 4.36% 7.63% 9.70%
Ratio of expenses to
average net assets 0.74%+ 0.72% 0.79% 0.79%+ 0.74% 0.76% 0.88%
Ratio of net investment
income to average
net assets 5.91%+ 6.15% 6.09% 5.56%+ 6.00% 6.59% 7.07%
Portfolio turnover rate 120.3%+ 118.7% 136.9% 222.8%+ 90.8% 68.4% 380.7%
Net assets, end of period
(in thousands) $ 455,508 $ 429,498 $ 493,726 $ 601,924 $ 668,066 $ 556,330 $ 396,980
- --------------------------------------------------------------------------------
+ Annualized.
++ The fund's fiscal year-end was changed to May 31.
================================================================================
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Statement of Net Assets
================================================================================
Unaudited November 30, 1996
Par Value
--- -----
CORPORATE BONDS AND NOTES 38.0%
Banking 6.0%
Banco Latinoamericano, Notes, (144a), 6.97%, 10/16/00 ....... $4,650 $ 4,707
Chase Manhattan, Sub. Notes, 8.00%, 4/15/02 ................. 4,050 4,076
Credit Foncier France, Eurodollar, Notes, 8.00%, 2/23/98 .... 4,400 4,529
Firstar, Sub. Notes, 7.15%, 9/1/00 .......................... 2,700 2,740
MBNA, Sr. Notes, 7.49%, 9/14/99 ............................. 4,300 4,454
Mercantile Bankshares, Sr. Notes, (144a), 6.13%, 7/15/98+ ... 3,500 3,485
Old Kent Bank & Trust, CD, 7.20%, 10/14/97 .................. 3,500 3,542
27,533
Consumer Products 1.0%
Grand Metropolitan Investment, Gtd. Notes, 6.50%, 9/15/99 4,450 4,491
4,491
Finance and Credit 5.3%
Chubb, Deb., 8.75%, 11/15/99 ................................ 3,338 3,497
Ciesco, MTN, 7.38%, 4/19/00 ................................. 3,750 3,887
Countrywide Funding, MTN, 6.02%, 3/25/98 .................... 5,000 5,009
General Electric Capital, MTN, 8.10%, 1/26/99 ............... 5,000 5,239
Heller Financial, Notes, 7.875%, 11/1/99 .................... 3,780 3,940
Providian, MTN, 6.92%, 5/16/00 .............................. 2,700 2,760
24,332
Industrials 4.3%
Ford Motor Credit, MTN, 8.21%, 3/16/99 ...................... 4,450 4,654
General Motors Acceptance Corporation, MTN,
6.625%, 4/24/00 ..................................... 4,400 4,458
IBM, Notes, 6.375%, 6/15/00 ................................. 5,000 5,057
Lockheed Martin, Notes, 6.55%, 5/15/99 ...................... 4,500 4,554
Westinghouse Credit, MTN, 9.04%, 6/1/98 ..................... 1,000 1,022
19,745
Investment Dealers 3.4%
Bear Stearns, Notes, 7.625%, 9/15/99 ........................ 1,800 1,870
Lehman Brothers, MTN, 6.75%, 5/24/99 ........................ 4,450 4,494
Merrill Lynch, Notes, 7.05%, 4/15/03 ........................ 4,400 4,443
Salomon, MTN, 5.90%, 2/9/98 ................................. 4,675 4,675
15,482
Media and Communications 3.2%
<PAGE>
Lucent Technologies, Notes, 6.90%, 7/15/01 .................. 4,675 4,809
News America Holdings, Sr. Notes, 7.50%, 3/1/00 ............. 4,750 4,909
Tele Communications, Sr. Notes, 8.25%, 1/15/03 .............. 4,650 4,719
14,437
Petroleum 0.7%
Occidental Petroleum, MTN, 5.85%, 11/9/98 ................... 2,975 2,963
2,963
Retail 2.3%
Dayton Hudson, Notes, 9.40%, 2/15/01 ........................ 4,725 5,235
Sears Roebuck & Company, MTN, 8.23%, 5/4/99 ................. 4,800 5,037
10,272
Transportation 3.9%
Burlington Northern, Notes, 7.40%, 5/15/99 ................. 2,775 2,845
Chilbar Shipping, Notes, 6.98%, 7/15/01 .................... 2,655 2,725
Delta Air Lines, ETC, 9.60%, 5/26/00 - 6/1/00 .............. 2,960 3,205
Federal Express, Notes, 6.25%, 4/15/98 ..................... 4,250 4,256
Union Pacific, Notes, 7.00%, 6/15/00 ....................... 4,500 4,589
17,620
Utilities 7.9%
Commonwealth Edison
1st Mtg. Bonds
6.25%, 2/1/98 ...................................... 1,550 1,545
9.375%, 2/15/00 .................................... 3,110 3,363
Connecticut Light & Power, 1st Ref. Mtg. Bonds, 5.50%, 2/1/99 4,650 4,520
Consumers Power, 1st Mtg. Bonds, 6.875%, 5/1/98 ............ 3,250 3,263
Long Island Lighting, Gen. & Ref. Mtg., 8.75%, 2/15/97 ..... 3,760 3,779
Orange and Rockland Utilities, Deb., 6.14%, 3/1/00 ......... 4,500 4,481
Pacific Gas and Electric, 1st Mtg. Bonds, 8.75%, 1/1/01 .... 4,500 4,881
Potomac Capital
MTN
6.38%, 10/6/97 ..................................... 1,500 1,503
6.61%, 3/16/98 ..................................... 1,000 1,006
Progress Capital Holdings, Gtd. Notes, (144a), 6.88%, 8/1/01 4,400 4,494
System Energy Resources, 1st Mtg. Notes, 7.625%, 4/1/99 .... 3,250 3,335
36,170
Total Corporate Bonds and Notes (Cost $171,102) 173,045
ASSET-BACKED SECURITIES 6.9%
Auto-Backed 0.2%
USAA Auto Loan Grantor Trust, 5.00%, 11/15/99 ............ 737 735
735
<PAGE>
Credit Card-Backed 5.2%
American Express Master Trust, 7.15%, 8/15/99 ............ $4,750 $ 4,851
Discover Card Trust, 7.85%, 11/21/00 ..................... 4,500 4,643
First Deposit Master Trust, 6.05%, 8/15/02 ............... 4,500 4,520
MBNA Master Credit Card Trust, 5.53%, 3/15/01 ............ 5,000 5,005
Signet Credit Card Master Trust, 5.20%, 2/15/02 .......... 4,500 4,453
23,472
Home Equity Loans-Backed 1.0%
Access Financial Mortgage Loan Trust, 6.90%, 5/18/11 ..... 4,450 4,474
SPNB Home Equity Loan, 7.85%, 5/15/98 .................... 12 12
U.S. Home Equity Loan, 8.50%, 4/15/21 .................... 304 310
4,796
Receivables-Backed 0.5%
Case Equipment Loan Trust, 7.60%, 12/15/97 ............... 9 9
Harley Davidson Eaglemark, (144a), 6.35%, 10/15/02 ....... 2,225 2,239
2,248
Total Asset-Backed Securities (Cost $31,282) 31,251
U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 30.2%
U.S. Government Agency Obligations 28.7%
Federal Home Loan Mortgage
5.25%, 7/1/97 ........................................ 1 1
9.00%, 7/1/01 - 7/1/02 ............................... 1,591 1,648
9.50%, 8/1/01 - 9/1/02 ............................... 969 1,012
10.00%, 1/1/01 - 10/1/05 ............................. 610 642
11.00%, 8/1/00 - 2/1/01 .............................. 503 533
5 year balloon
5.00%, 5/1/99 - 6/1/99 ............................... 4,635 4,571
6.00%, 4/1/99 ........................................ 11,768 11,789
7.50%, 1/1/97 - 5/1/00 ............................... 7,981 8,122
7 year balloon
6.50%, 12/1/99 ....................................... 10,832 10,934
7.00%, 6/1/99 - 11/1/99 .............................. 7,709 7,855
9.50%, 4/1/97 - 8/1/97 ............................... 96 97
REMIC
6.00%, 2/15/03 ....................................... 7,000 7,015
6.75%, 10/15/03 ...................................... 10,000 10,125
7.50%, 2/15/06 ....................................... 13,550 13,817
Federal National Mortgage Assn.
5.50%, 11/1/05 ....................................... 109 107
7.00%, 4/1/09 ....................................... 12,359 12,536
11.00%, 10/1/00 - 1/1/01 ............................. 229 249
7 year balloon
9.00%, 3/1/97 - 7/1/98 ............................... 1,954 1,995
9.50%, 5/1/97 - 1/1/98 ............................... 187 190
<PAGE>
REMIC
5.40%, 3/25/04 ....................................... 11,000 10,927
6.25%, 8/25/06 ....................................... 5,000 5,008
6.50%, 5/25/04 ....................................... 7,250 7,318
7.50%, 8/25/05 - 11/25/05 ............................ 13,995 14,210
130,701
U.S. Government Guaranteed Obligations 1.5%
Government National Mortgage Assn.
I
8.50%, 2/15/05 - 3/15/06 ............................. 667 709
10.50%, 11/15/15 ..................................... 278 309
13.00%, 11/15/12 - 4/15/15 ........................... 109 130
GPM, I
8.50%, 1/15/06 ....................................... 96 102
9.50%, 8/15/09 - 10/15/09 ............................ 114 124
11.00%, 8/15/10 ...................................... 61 69
11.25%, 6/15/13 - 1/15/16 ............................ 645 735
11.75%, 7/15/13 - 11/15/15 ........................... 2,375 2,783
13.00%, 9/15/11 ...................................... 15 19
GPM, II
11.00%, 9/20/13 - 4/20/14 ............................ 13 15
11.25%, 12/20/15 ..................................... 53 61
Midget, I
9.00%, 7/15/01 - 2/15/06 ............................. 961 1,007
9.50%, 5/15/01 - 4/15/05 ............................. 237 252
10.00%, 4/15/98 - 10/15/04 ........................... 737 779
11.50%, 5/15/00 ...................................... 20 22
7,116
Total U.S. Government Mortgage-Backed Securities (Cost $136,551) 137,817
NON-U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 0.3%
Great Western Bank, ARM, 5.88%, 7/25/17 .................. 1,330 1,277
Salomon Mortgage Security VII, CMO, 7.25%, 11/25/20 ...... 152 142
Total Non-U.S. Government Mortgage-Backed Securities (Cost $1,486) 1,419
U.S. GOVERNMENT OBLIGATIONS 17.0%
U.S. Government Agency Obligations 3.3%
Federal Home Loan Mortgage
Deb.
6.725%, 8/15/00 .................................. 5,250 5,276
7.75%, 1/27/97 .................................. 10,000 10,034
15,310
U.S. Treasury Obligations 13.7%
U.S. Treasury Notes
5.25%, 12/31/97 .................................. 4,425 4,416
5.875%, 3/31/99 .................................. 8,000 8,042
6.125%, 8/31/98 .................................. 31,000 31,281
6.25%, 10/31/01 .................................. 5,000 5,085
6.375%, 5/15/99 .................................. 3,000 3,049
7.125%, 9/30/99 .................................. 10,000 10,372
62,245
<PAGE>
Total U.S. Government Obligations (Cost $76,865) 77,555
COMMERCIAL PAPER 7.8%
Cargill Financial Services, 4(2), 5.25%, 12/5/96 ......... 10,000 9,992
Great Lakes Chemical, 4(2), 5.30%, 12/20/96 .............. 3,400 3,390
Investments in Commercial Paper through a joint account,
5.70 - 5.90%, 12/2/96 ............................. 17,251 17,251
Walmart Stores, 5.35%, 12/2/96............................. 4,881 4,881
Total Commercial Paper (Cost $35,513) 35,514
Total Investments in Securities
100.2% of Net Assets (Cost $452,799) $ 456,601
Other Assets Less Liabilities (1,093)
NET ASSETS $ 455,508
=========
Net Assets Consist of:
Accumulated net investment income - net of distributions $ (2,161)
Accumulated net realized gain/loss - net of distributions (39,863)
Net unrealized gain (loss) 3,802
Paid-in-capital applicable to 96,971,632 shares of $0.01 par value
capital stock outstanding; 1,000,000,000 shares authorized 493,730
NET ASSETS $ 455,508
=========
NET ASSET VALUE PER SHARE $ 4.70
======
- --------------------------------------------------------------------------------
+ Private Placement
ARM Adjustable Rate Mortgage
CD Certificate of Deposit
CMO Collateralized Mortgage Obligation
ETC Equipment Trust Certificate
GPM Graduated Payment Mortgage
MTN Medium Term Note
REMIC Real Estate Mortgage Investment Conduit
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, andmay 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 3.3% of net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations
================================================================================
In thousands
Unaudited
6 Months
Ended
11/30/96
--------
Investment Income
Interest income $ ................................................. 14,420
Expenses
Investment management ............................................. 930
Shareholder servicing ............................................. 500
Custody and accounting ............................................ 105
Registration ...................................................... 30
Prospectus and shareholder reports ................................ 23
Legal and audit ................................................... 12
Directors ......................................................... 4
Miscellaneous ..................................................... 4
Total expenses .................................................... 1,608
=====
Net investment income ............................................. 12,812
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities ............................ (1,424)
Change in net unrealized gain or
loss on securities ................................................ 7,067
Net realized and unrealized gain (loss) ........................... 5,643
=====
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ................. $ 18,455
========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
Statement of Changes in Net Assets
================================================================================
In thousands
Unaudited
6 Months Year
Ended Ended
11/30/96 5/31/96
-------- -------
Increase (Decrease) in Net Assets
Operations
Net investment income ........................... $ 12,812 $ 29,537
Net realized gain (loss) ........................ (1,424) (1,431)
Change in net unrealized gain or loss ........... 7,067 (6,222)
Increase (decrease) in net assets from operations 18,455 21,884
Distributions to shareholders
Net investment income ........................... (12,812) (29,148)
Tax return of capital ........................... -- (504)
Decrease in net assets from distributions ....... (12,812) (29,652)
Capital share transactions *
Shares sold ..................................... 83,055 176,621
Distributions reinvested ........................ 11,209 26,328
Shares redeemed ................................. (73,897) (259,409)
Increase (decrease) in net assets from capital
share transactions .............................. 20,367 (56,460)
Net Assets
Increase (decrease) during period ................... 26,010 (64,228)
Beginning of period ................................. 429,498 493,726
End of period ....................................... $ 455,508 $ 429,498
*Share information
Shares sold ..................................... 17,835 37,389
Distributions reinvested ........................ 2,406 5,582
Shares redeemed ................................. (15,879) (54,882)
Increase (decrease) in shares outstanding ....... 4,362 (11,911)
================================================================================
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
================================================================================
Unaudited November 30, 1996
- --------------------------------------------------------------------------------
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.
<PAGE>
- --------------------------------------------------------------------------------
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 November 30, 1996, the market value of securities on loan
was $5,018,000, 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 $90,163,000 and $112,377,000,
respectively, for the six months ended November 30, 1996. Purchases and sales of
U.S. government securities aggregated $164,804,000 and $124,267,000,
respectively, for the six months ended November 30, 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.
At November 30, 1996, the aggregate cost of investments for federal income tax
and financial reporting purposes was $452,799,000, and net unrealized gain
aggregated $3,802,000, of which $4,665,000 related to appreciated investments
and $863,000 to depreciated investments.
<PAGE>
- --------------------------------------------------------------------------------
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 $160,000 was payable at November 30, 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
November 30, 1996, and for the six months then ended, the effective annual group
fee rate was 0.33%. 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 $466,000 for
the six months ended November 30, 1996, of which $113,000 was payable at
period-end.
- --------------------------------------------------------------------------------
T. Rowe Price Shareholder Services
================================================================================
Investment Services And Information
================================================================================
Knowledgeable Service Representatives
================================================================================
By Phone 1-800-225-5132 Available Monday through Friday from
8 a.m. to 10 p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET.
In Person Available in T. Rowe Price Investor Centers.
<PAGE>
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(R) and
T. Rowe Price OnLine.
Discount Brokerage*
================================================================================
Individual Investments Stocks, bonds, options, precious metals,
and other securities at a savings over regular commission rates.
Investment Information
================================================================================
Combined Statement Overview of your T. Rowe Price accounts.
Shareholder Reports Fund managers' reviews of their strategies and results.
The T. Rowe Price Report 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.
* A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
================================================================================
<PAGE>
Mutual Funds
- --------------------------------------------------------------------------------
Stock Funds
- -------------------------
Domestic
- -------------------------
Balanced
Blue Chip Growth
Capital Appreciation
Capital Opportunity
Dividend Growth
Equity Income
Equity Index
Financial Services
Growth & Income
Growth Stock
Health Sciences
Mid-Cap Growth
Mid-Cap Value
New America Growth
New Era New Horizons *
OTC
Science & Technology
Small-Cap Value *
Spectrum Growth
Value
International/Global
- -------------------------
Emerging Markets Stock
European Stock
Global Stock
International Discovery
International Stock
Japan
Latin America
New Asia
Spectrum International
================================================================================
<PAGE>
Bond Funds
- -----------------------------
Domestic Taxable
- -----------------------------
Corporate Income
GNMA
High Yield
New Income
Short-Term Bond
Short-Term U.S. Government
Spectrum Income
Summit GNMA
Summit Limited-Term Bond
U.S. Treasury Intermediate
U.S. Treasury Long-Term
Domestic Tax-free
- -----------------------------
California Tax-Free Bond
Florida Insured Intermediate Tax-Free
Georgia Tax-Free Bond
Maryland Short-Term Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Summit Municipal Intermediate
Tax-Free High Yield
Tax-Free Income
Tax-Free Insured Intermediate Bond
Tax-Free Short-Intermediate
Virginia Short-Term Tax-Free Bond
Virginia Tax-Free Bond
International/Global
- -----------------------------
Global Government Bond
Emerging Markets Bond
International Bond
================================================================================
<PAGE>
Money Market
- -----------------------------
Taxable
- -----------------------------
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
Tax-Free
- -----------------------------
California Tax-Free Money
New York Tax-Free Money
Summit Municipal Money Market
Tax-Exempt Money
Blended Asset
- -----------------------------
Personal Strategy Income
Personal Strategy Balanced
Personal Strategy Growth
T. Rowe Price No-Load Variable Annuity
- ----------------------------------------
Equity Income Portfolio
International Stock Portfolio
Limited-Term Bond Portfolio
New America Growth Portfolio
Personal Strategy Balanced Portfolio
*Closed to new investors.
================================================================================
For yield, price, last transaction,
current balance or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(R):
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
<PAGE>
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
http://www.troweprice.com
T. Rowe Price Associates
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(R).
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
T. Rowe Price Investment Services, Inc., Distributor
RPRTSTB 11/30/96
