<PAGE>
Annual Report
Short-Term
Bond Fund
------------
May 31, 1997
------------
[LOGO OF T. ROWE PRICE
APPEARS HERE]
<PAGE>
Report Highlights
-----------------------------------------------------------------------------
. The bond market was generally tepid over the last six months as the economy
showed surprising strength but inflation remained subdued.
. Due to generally rising interest rates, the Short-Term Bond Fund returned a
modest 1.89% over the last six months, slightly lagging the average for
similar funds. The fund returned a solid 6.28% for the fiscal year, virtually
in line with the peer group.
. Given the prospect for higher short-term rates, we maintained a defensive
stance. The portfolio was concentrated in high-quality corporate and
mortgage-backed securities.
. We cannot rule out further tightening by the Federal Reserve in coming
months, but expect economic growth to be moderate and inflation to remain
under control.
<PAGE>
Fellow Shareholders
The bond market was lackluster over the last six months as the economy developed
considerable momentum. Seeking to preempt a rise in inflation, the Federal
Reserve raised the key federal funds target in March for the first time in two
years. Interest rates rose through most of the first half, although they
retreated toward the end of the period when no clear evidence of accelerating
inflation emerged.
MARKET ENVIRONMENT
The economy grew at a vigorous annualized rate of 5.8% in the first
quarter of 1997, roughly double its average pace during the current six-
year expansion. Consumers kept the cash registers ringing for such items
as automobiles, major appliances, and furniture. With jobs being created
at a rapid clip, the civilian unemployment rate dropped to 4.8% in May,
its lowest level in more than two decades. After repeated warnings that
it could not wait forever for the economy to slow on its own, the
Federal Reserve lifted the federal funds target by a quarter-point in
March to 5.5%.
- --------------------
Interest Rate Levels
- --------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Five-Year Two-Year Federal Funds
Treasury Note Treasury Note Target Rate
<S> <C> <C> <C>
05/31/96 6.55 6.18 5.25
08/31/96 6.60 6.24 5.25
11/30/96 5.90 5.66 5.25
02/28/97 6.31 6.07 5.25
05/31/97 6.60 6.29 5.50
</TABLE>
The Fed's objective was to avoid a repetition of the late 1980s, when
labor markets became extremely tight, leading to rising wage inflation.
The longer the central bank can keep inflation around its trend rate so
far this decade, about 3%, the longer the economic expansion is expected
to last. As shown in the chart, interest rates generally rose over the
last six months, with a spike upward after the Fed tightening. However,
rates subsequently fell back after it became clear that inflation was
not accelerating. In particular, the employment cost index, arguably the
best measure of total compensation because it includes both wages and
benefits, continued to rise at an acceptable level of just under 3%.
1
<PAGE>
Nevertheless, the Fed feared that the explosive strength in demand would
eventually result in accelerating inflation and consequently tapped on the
brakes to slow the economy. In this environment, bonds generally produced modest
returns.
PERFORMANCE AND STRATEGY REVIEW
The fund slightly lagged its competitor funds over the last six months, posting
a modest return as income was partially offset by a $0.05 decline in share
price. Over the 12 months ended May 31, the fund produced a solid return,
essentially in line with its peer group, as shown in the table.
- ----------------------
Performance Comparison
- ----------------------
<TABLE>
<CAPTION>
Periods Ended 5/31/97 6 Months 12 Months
- --------------------------------------------------------
<S> <C> <C>
Short-Term Bond Fund 1.89% 6.28%
........................................................
Lipper Short Investment-Grade
Debt Funds Average 2.05 6.31
........................................................
</TABLE>
At the time of our last report to you in November, we had moved the fund's
effective duration to 1.8 years, a somewhat defensive stance given the sharp
drop in interest rates at that time. (Duration is a more accurate measure than
maturity of a fund's price sensitivity to changes in interest rates. Shortening
duration cushions declines in the fund's share price when interest rates rise.)
This move proved advantageous as interest rates generally rose over the last six
months. Given the continued risk of tightening by the Fed, we maintained this
defensive stance, with a duration of 1.9 years as of May 31.
We continued to rely on sizable allocations in corporate and mortgage-backed
securities, which, together with cash equivalents and asset-backed securities,
account for more than 85% of fund assets. (See table following this letter.) We
trimmed mortgages after a first-quarter rally decreased their yield advantage
compared with Treasury issues. Nevertheless, they still represented 28% of fund
assets, an overweighting compared with our Lipper peer group.
Most of our remaining assets were spread among a wide selection of high-quality
corporate issues. Economic fundamentals continue to be in excellent shape, and
there are few clouds on the horizon to threaten corporate earnings and financial
strength.
Overall, our corporate exposure (excluding cash equivalents) represented 55% of
assets on May 31. We increased corporate bonds in almost every sector, notably
in banking, industrials, and consumer
2
<PAGE>
products after issues became available at attractive prices. Conversely, we
trimmed our position in asset-backed securities after strong performance boosted
their prices to less attractive levels. We will continue to maintain our
emphasis on corporates as long as prospects for the economy remain good.
- -----------------------
Quality Diversification
- -----------------------
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
AAA 48%
AA 7%
A 24%
BBB 20%
BB and Below 1%
</TABLE>
Edgar description: A pie chart showing diversification of assets by credit
quality as of 5/31/97.
The fund continued to maintain a high level of credit quality, with nearly 80%
of assets invested in issues rated A or higher. At this juncture, given the
probability of higher short-term rates, we are reluctant to add to our positions
in lower-quality issues, which currently offer below-average incremental return
for the additional credit risk.
OUTLOOK
Some additional tightening of monetary policy remains a possibility this year as
the Federal Reserve tries to dampen the economy's blistering pace. Credit
markets may again be roiled by a higher federal funds rate, and other market
interest rates may also inch upward.
However, with the economic expansion now in its seventh year, the prospects look
good for a return to moderate growth with inflation remaining under control.
Bonds should do well in this environment.
Respectfully submitted,
/s/ Edward A. Wiese
Edward A. Wiese
President and Chairman of the Investment Advisory Committee
June 17, 1997
3
<PAGE>
T. Rowe Price Short-Term Bond Fund
- --------------------------------------------------------------------------------
- --------------------
Portfolio Highlights
- --------------------
<TABLE>
<CAPTION>
KEY STATISTICS
11/30/96 5/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
Price Per Share $4.70 $4.65
................................................................................
Dividends Per Share
................................................................................
For 6 months 0.14 0.14
............................................................................
For 12 months 0.28 0.27
............................................................................
Dividend Yield *
................................................................................
For 6 months 5.99% 5.98%
............................................................................
For 12 months 6.09 6.07
............................................................................
Weighted Average Maturity (years) 2.4 2.4
................................................................................
Weighted Average Effective Duration (years) 1.8 1.9
................................................................................
Weighted Average Quality ** AA AA
................................................................................
</TABLE>
* 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.
4
<PAGE>
T. Rowe Price Short-Term Bond Fund
- --------------------------------------------------------------------------------
- --------------------
Portfolio Highlights
- --------------------
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION
Percent of Percent of
Net Assets Net Assets
11/30/96 5/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
Mortgage-Backed Securities 31% 28%
................................................................................
Banking 6 10
................................................................................
U.S. Treasury Obligations 14 9
................................................................................
Utilities 8 8
................................................................................
Industrial 4 7
................................................................................
Transportation 4 5
................................................................................
Finance and Credit 5 5
................................................................................
Asset-Backed Securities 7 5
................................................................................
Cash Equivalents 8 4
................................................................................
Retail 2 4
................................................................................
Consumer Products 1 3
................................................................................
Insurance 1 3
................................................................................
Media and Communications 3 3
................................................................................
U.S. Government Agency Obligations 3 3
................................................................................
All Other 3 2
................................................................................
Other Assets Less Liabilities -- 1
- --------------------------------------------------------------------------------
Total 100% 100%
</TABLE>
5
<PAGE>
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.
[LINE GRAPH APPEARS HERE]
SHORT-TERM BOND FUND
- --------------------
<TABLE>
<CAPTION>
Lehman 1-3 Year Government/ Short-Term
Corporate Bond Index Bond Fund
--------------------------- ----------
<S> <C> <C>
5/87 $10,000 $10,000
5/88 10,773 10,702
5/89 11,637 11,460
5/90 12,720 12,362
5/91 14,122 13,555
5/92 15,495 14,813
5/93 16,572 15,910
5/94 16,919 16,126
5/95 18,183 16,675
5/96 19,154 17,439
5/97 20,430 18,534
</TABLE>
- ------------------------------------
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.
<TABLE>
<CAPTION>
Periods Ended 5/31/97 1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-Term Bond Fund 6.28% 4.75% 4.58% 6.36%
..............................................................................
</TABLE>
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
6
<PAGE>
T. Rowe Price Short-Term Bond Fund
- --------------------------------------------------------------------------------
- --------------------
Financial Highlights For a share outstanding throughout each period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year 3 Months++ Year
Ended Ended Ended
5/31/97 5/31/96 5/31/95 5/31/94 2/28/94 2/28/93
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 4.64 $ 4.72 $ 4.85 $ 5.00 $ 5.09 $ 5.05
....................................................................
Investment activities
Net investment income 0.27 0.29 0.29 0.07 0.31 0.33
Net realized and
unrealized gain (loss) 0.01 (0.08) (0.13) (0.15) (0.09) 0.04
....................................................................
Total from
investment activities 0.28 0.21 0.16 (0.08) 0.22 0.37
....................................................................
Distributions
Net investment income (0.26) (0.28) (0.29) (0.07) (0.28) (0.33)
Tax return of capital (0.01) (0.01) -- -- (0.03) --
....................................................................
Total distributions (0.27) (0.29) (0.29) (0.07) (0.31) (0.33)
....................................................................
NET ASSET VALUE
End of period $ 4.65 $ 4.64 $ 4.72 $ 4.85 $ 5.00 $ 5.09
--------------------------------------------------------------------
Ratios/Supplemental Data
Total return 6.28% 4.58% 3.41% (1.65)% 4.36% 7.63%
.................................................................................................
Ratio of expenses to
average net assets 0.74% 0.72% 0.79% 0.79%+ 0.74% 0.76%
.................................................................................................
Ratio of net investment
income to average
net assets 5.91% 6.15% 6.09% 5.56%+ 6.00% 6.59%
.................................................................................................
Portfolio turnover rate 103.9% 118.7% 136.9% 222.8%+ 90.8% 68.4%
.................................................................................................
Net assets, end of period
(in thousands) $373,284 $429,498 $493,726 $601,924 $668,066 $556,330
.................................................................................................
</TABLE>
+ Annualized.
++ The fund's fiscal year-end was changed to May 31.
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
T. Rowe Price Short-Term Bond Fund
- --------------------------------------------------------------------------------
May 31, 1997
Statement of Net Assets
- -----------------------
<TABLE>
<CAPTION>
Par Value
In thousands
<S> <C> <C>
CORPORATE BONDS AND NOTES 50.0%
Banking 9.8%
Banco Latinoamericano, (144a), 6.97%, 10/16/00 $ 4,650 $ 4,640
..........................................................................................
Chase Manhattan, Sub. Notes, 8.00%, 4/15/02 4,050 4,051
..........................................................................................
First National Bank of Commerce, Sr. Notes, 6.50%, 1/14/00 4,450 4,430
..........................................................................................
Firstar, Sub. Notes, 7.15%, 9/1/00 2,700 2,714
..........................................................................................
Keycorp Institutional Capital, (144a), 6.625%, 6/1/99 4,500 4,539
..........................................................................................
MBNA, Sr. Notes, 7.49%, 9/14/99 4,300 4,374
..........................................................................................
Mercantile Bankshares, Sr. Notes, (144a), 6.13%, 7/15/98+ 3,500 3,490
..........................................................................................
Morgan Guaranty Trust, Sub. Notes, 7.375%, 2/1/02 4,000 4,072
..........................................................................................
National City Capital Trust, Gtd. Notes, (144a), 6.75%, 6/1/99 4,400 4,412
..........................................................................................
36,722
..........
Consumer Products 3.4%
Grand Metropolitan Investment, Gtd. Notes, 6.50%, 9/15/99 4,450 4,447
..........................................................................................
Philip Morris, 7.25%, 9/15/01 4,300 4,311
..........................................................................................
RJR Nabisco, 8.625%, 12/1/02 3,630 3,703
..........................................................................................
12,461
..........
Finance and Credit 4.8%
Ciesco, MTN, (144a), 7.38%, 4/19/00+ 3,750 3,810
..........................................................................................
Countrywide Funding, MTN, 6.02%, 3/25/98 5,000 4,991
..........................................................................................
General Electric Capital, MTN, 8.10%, 1/26/99 5,000 5,147
..........................................................................................
Heller Financial, 7.875%, 11/1/99 3,780 3,876
..........................................................................................
17,824
..........
Industrials 6.9%
Black & Decker, 6.325%, 12/20/01 6,850 6,985
..........................................................................................
Cyprus Minerals, Deb., 10.125%, 4/1/02 3,600 4,036
..........................................................................................
General Motors Acceptance Corporation, MTN
6.625%, 4/24/00 4,400 4,386
..........................................................................................
IBM, 6.375%, 6/15/00 5,000 4,965
..........................................................................................
Lockheed Martin, Gtd. Notes, 6.55%, 5/15/99 4,500 4,497
..........................................................................................
Westinghouse Credit, MTN, 9.04%, 6/1/98 1,000 1,017
..........................................................................................
25,886
..........
</TABLE>
8
<PAGE>
T. Rowe Price Short-Term Bond Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
- -------------------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Insurance 3.1%
American Annuity Group Capital Trust, (144a), 7.25%, 9/25/01 $ 3,615 $ 3,619
...........................................................................................
Chubb, Deb., 8.75%, 11/15/99 3,338 3,437
...........................................................................................
USF&G, 7.00%, 5/15/98 4,600 4,633
...........................................................................................
11,689
..........
Investment Dealers 1.2%
Lehman Brothers, MTN, 6.75%, 5/24/99 4,450 4,458
...........................................................................................
4,458
..........
Media and Communications 2.8%
Lucent Technologies, 6.90%, 7/15/01 4,675 4,694
...........................................................................................
NWCG Holdings, Sr. Disc. Notes, Zero Coupon, 6/15/99 4,550 3,953
...........................................................................................
Tele-Communications, Sr. Notes, 9.25%, 4/15/02 1,800 1,918
...........................................................................................
10,565
..........
Petroleum 1.5%
Occidental Petroleum, MTN, 5.85%, 11/9/98 2,975 2,950
...........................................................................................
PDV America, Sr. Notes, 7.25%, 8/1/98 2,700 2,711
...........................................................................................
5,661
..........
Retail 3.6%
Dayton Hudson, 9.40%, 2/15/01 4,725 5,077
...........................................................................................
Rite Aid, 6.70%, 12/15/01 3,575 3,530
...........................................................................................
Sears Roebuck & Company, MTN, 8.23%, 5/4/99 4,800 4,946
...........................................................................................
13,553
..........
Transportation 5.2%
Burlington Northern, 7.40%, 5/15/99 2,775 2,821
...........................................................................................
Chilbar Shipping, 6.98%, 7/15/01 2,432 2,444
...........................................................................................
Delta Air Lines, ETC, 9.60%, 5/26 - 6/1/00 2,960 3,151
...........................................................................................
Federal Express, 6.25%, 4/15/98 4,250 4,252
...........................................................................................
Qantas Airways Ltd., Sr. Notes, (144a), 7.50%, 6/30/03 2,275 2,310
...........................................................................................
Union Pacific, 7.00%, 6/15/00 4,500 4,502
...........................................................................................
19,480
..........
Utilities 7.7%
Commonwealth Edison, 1st Mtg. Bonds, 6.25%, 2/1/98 1,550 1,550
...........................................................................................
Consumers Energy, 1st Ref. Mtg. Bonds, 6.875%, 5/1/98 3,250 3,251
...........................................................................................
Midamerican Energy, Sr. Notes, 6.50%, 12/15/01 4,450 4,373
...........................................................................................
Orange and Rockland Utilities, Deb., 6.14%, 3/1/00 4,500 4,429
...........................................................................................
Pacific Gas and Electric, 1st Mtg. Bonds, 8.75%, 1/1/01 4,500 4,768
...........................................................................................
</TABLE>
9
<PAGE>
T. Rowe Price Short-Term Bond Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
- -------------------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Potomac Capital
MTN
6.38%, 10/6/97 $ 1,500 $ 1,500
......................................................................................
6.61%, 3/16/98 1,000 1,001
...........................................................................................
Progress Capital Holdings, Gtd. Notes, (144a), 6.88%, 8/1/01 4,400 4,361
...........................................................................................
System Energy Resources, 1st Mtg. Notes, 7.625%, 4/1/99 3,250 3,296
...........................................................................................
28,529
...........
Total Corporate Bonds and Notes (Cost $186,931) 186,828
...........
ASSET-BACKED SECURITIES 4.6%
Auto-Backed 0.1%
USAA Auto Loan Grantor Trust, 5.00%, 11/15/99 415 414
...........................................................................................
414
...........
Credit Card-Backed 2.6%
American Express Master Trust, 7.15%, 8/15/99 4,750 4,802
...........................................................................................
MBNA Master Credit Card Trust, 5.838%, 3/15/01 5,000 5,006
...........................................................................................
9,808
...........
Home Equity Loans-Backed 1.3%
Access Financial Mortgage Loan Trust, 6.90%, 5/18/11 4,450 4,452
...........................................................................................
U.S. Home Equity Loan, 8.50%, 4/15/21 162 162
...........................................................................................
4,614
............
Receivables-Backed 0.6%
Harley Davidson Eaglemark, (144a), 6.35%, 10/15/02 2,225 2,214
...........................................................................................
2,214
............
Total Asset-Backed Securities (Cost $17,179) 17,050
............
U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 28.0%
U.S. Government Agency Asset-Backed 0.9%
Federal Home Loan Mortgage, REMIC, 6.92%, 1/25/12 3,440 3,443
...........................................................................................
3,443
............
U.S. Government Agency Obligations 25.5%
Federal Home Loan Mortgage
6.50%, 12/1/99 9,833 9,836
......................................................................................
9.00%, 7/1/01 - 7/1/02 1,400 1,446
......................................................................................
9.50%, 8/1/01 - 9/1/02 823 859
......................................................................................
10.00%, 1/1/01 - 10/1/05 521 550
......................................................................................
</TABLE>
10
<PAGE>
T. Rowe Price Short-Term Bond Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
- ---------------------------------------------------------------------------------
In thousands
Federal Home Loan Mortgage
<S> <C> <C>
11.00%, 8/1/00 - 2/1/01 $ 403 $ 430
............................................................................
5 year balloon
5.00%, 5/1 - 6/1/99 4,290 4,214
............................................................................
6.00%, 4/1/99 10,566 10,523
............................................................................
7.50%, 1/1/98 - 5/1/00 6,975 7,035
............................................................................
7 year balloon
7.00%, 6/1 - 11/1/99 7,061 7,100
............................................................................
9.50%, 8/1/97 55 55
............................................................................
REMIC
7.00%, 3/15/08 6,144 6,159
............................................................................
7.50%, 1/15/21 1,432 1,451
............................................................................
9.00%, 5/15/19 3,138 3,344
.................................................................................
Federal National Mortgage Assn.
5.50%, 11/1/05 99 96
............................................................................
7.00%, 1/1/00 - 4/1/09 13,510 13,511
............................................................................
11.00%, 10/1/00 - 1/1/01 194 204
............................................................................
7 year balloon
9.00%, 8/1/97 - 7/1/98 1,912 1,930
............................................................................
9.50%, 6/1/97 - 1/1/98 115 116
............................................................................
REMIC
6.50%, 5/25/04 7,250 7,243
............................................................................
7.50%, 8/25 - 11/25/05 12,770 12,863
............................................................................
TBA, 9.00%, 5/1/05 5,891 6,134
.................................................................................
95,099
-----------
U.S. Government Guaranteed Obligations 1.6%
Government National Mortgage Assn.
I
8.50%, 2/15/05 - 3/15/06 708 731
............................................................................
10.50%, 11/15/15 236 262
............................................................................
13.00%, 11/15/12 - 4/15/15 85 100
............................................................................
GPM, I
9.50%, 8/15 - 10/15/09 110 119
............................................................................
11.00%, 8/15/10 60 66
............................................................................
11.25%, 6/15/13 - 1/15/16 606 673
............................................................................
11.75%, 7/15/13 - 11/15/15 2,013 2,262
............................................................................
13.00%, 9/15/11 8 9
............................................................................
GPM, II, 11.00%, 9/20/13 - 4/20/14 12 13
.................................................................................
</TABLE>
11
<PAGE>
T. Rowe Price Short-Term Bond Fund
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
- ---------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Government National Mortgage Assn.
Midget, I
9.00%, 7/15/01 - 2/15/06 $ 798 $ 836
............................................................................
9.50%, 5/15/01 - 4/15/05 218 228
............................................................................
10.00%, 4/15/98 - 10/15/04 601 635
............................................................................
11.50%, 5/15/00 12 13
.................................................................................
5,947
...........
Total U.S. Government Mortgage-Backed Securities (Cost $104,556) 104,489
...........
U.S. GOVERNMENT OBLIGATIONS 11.7%
U.S. Government Agency Obligations 2.5%
Federal Home Loan Mortgage, Deb., 6.725%, 8/15/00 5,250 5,229
.................................................................................
Federal National Mortgage Assn., Deb., 6.15%, 12/14/01 4,300 4,186
.................................................................................
9,415
...........
U.S. Treasury Obligations 9.2%
U.S. Treasury Notes
5.25%, 12/31/97 4,425 4,416
............................................................................
6.125%, 8/31/98 25,000 25,039
............................................................................
6.375%, 4/30/99 5,000 5,016
.................................................................................
34,471
...........
Total U.S. Government Obligations (Cost $ 43,869) 43,886
...........
NON-U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 0.4%
Great Western Bank, ARM, 5.87%, 11/25/26 1,284 1,242
.................................................................................
Salomon Mortgage Security VII, CMO, 7.249%, 11/25/20 151 148
.................................................................................
Total Non-U.S. Government Mortgage-Backed Securities (Cost $ 1,439) 1,390
...........
CERTIFICATES OF DEPOSIT 2.7%
Norddeutsche Landesbank (London), 5.65%, 6/30/97 10,000 10,001
.................................................................................
Total Certificates of Deposit (Cost $ 10,000) 10,001
..........
COMMERCIAL PAPER 1.4%
Investments in Commercial Paper through a Joint Account
5.60 - 5.69%, 6/2/97 5,265 5,265
.................................................................................
Total Commercial Paper (Cost $ 5,265) 5,265
...........
</TABLE>
12
<PAGE>
T. Rowe Price Short-Term Bond Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
- ----------------------------------------------------------------------------------
In thousands
<S> <C>
Total Investments in Securities
98.8% of Net Assets (Cost $369,239) $ 368,909
Other Assets Less Liabilities 4,375
...........
NET ASSETS $ 373,284
-----------
Net Assets Consist of:
Accumulated net investment income - net of distributions $ (1,873)
Accumulated net realized gain/loss - net of distributions (36,724)
Net unrealized gain (loss) (330)
Paid-in-capital applicable to 80,315,088 shares of $0.01 par
value capital stock outstanding; 1,000,000,000 shares authorized 412,211
...........
NET ASSETS $ 373,284
-----------
NET ASSET VALUE PER SHARE $ 4.65
-----------
</TABLE>
+ Private Placement
ARM Adjustable Rate Mortgage
CMO Collateralized Mortgage Obligation
ETC Equipment Trust Certificate
GPM Graduated Payment Mortgage
MTN Medium Term Note
REMIC Real Estate Mortgage Investment Conduit
TBA To be announced security purchased on a forward commitment basis; the
aggregate liability for securities purchased under such agreements
totaled $6,188,000 at 5/31/97.
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
8.1% of net assets.
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
T. Rowe Price Short-Term Bond Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------
Statement of Operations
- ------------------------------------------------------------------
In thousands
Year
Ended
5/31/97
<S> <C>
Investment Income
Interest income $27,828
..........
Expenses
Investment management 1,795
Shareholder servicing 936
Custody and accounting 202
Registration 56
Prospectus and shareholder reports 53
Legal and audit 24
Directors 9
Miscellaneous 8
..........
Total expenses 3,083
..........
Net investment income 24,745
..........
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities (2,019)
Change in net unrealized gain or loss on securities 2,935
..........
Net realized and unrealized gain (loss) 916
..........
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $25,661
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
T. Rowe Price Short-Term Bond Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------
In thousands
Year
Ended
5/31/97 5/31/96
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations
Net investment income $ 24,745 $ 29,537
Net realized gain (loss) (2,019) (1,431)
Change in net unrealized gain or loss 2,935 (6,222)
........................
Increase (decrease) in net assets from operations 25,661 21,884
........................
Distributions to shareholders
Net investment income (24,117) (29,148)
Tax return of capital (628) (504)
........................
Decrease in net assets from distributions (24,745) (29,652)
........................
Capital share transactions*
Shares sold 132,508 176,621
Distributions reinvested 21,719 26,328
Shares redeemed (211,357) (259,409)
........................
Increase (decrease) in net assets from capital
share transactions (57,130) (56,460)
........................
Net Assets
Increase (decrease) during period (56,214) (64,228)
Beginning of period 429,498 493,726
........................
End of period $ 373,284 $ 429,498
------------------------
*Share information
Shares sold 28,457 37,389
Distributions reinvested 4,666 5,582
Shares redeemed (45,418) (54,882)
........................
Increase (decrease) in shares outstanding (12,295) (11,911)
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
T. Rowe Price Short-Term Bond Fund
- --------------------------------------------------------------------------------
May 31, 1997
- -----------------------------
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
16
<PAGE>
T. Rowe Price Short-Term Bond Fund
- --------------------------------------------------------------------------------
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 The fund lends its securities to approved brokers to
earn additional income and takes cash and U.S. Treasury securities as
collateral to secure the loans. Collateral is maintained at not less than
100% of the value of loaned securities. At May 31, 1997, the value of
securities on loan was $2,424,000. 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 $181,065,000 and $200,930,000,
respectively, for the year ended May 31, 1997. Purchases and sales of U.S.
government securities aggregated $215,161,000 and $239,455,000,
respectively, for the year ended May 31, 1997.
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 $36,396,000, of which $373,000 expires
in 1998, $52,000 in 2000, and $35,971,000 thereafter through 2005. 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, 1997. The results
of operations and net assets were not affected by the reclassifications.
17
<PAGE>
T. Rowe Price Short-Term Bond Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
<S> <C>
Undistributed net investment income $ (340,000)
Undistributed net realized gain 3,734,000
Paid-in-capital (3,394,000)
</TABLE>
At May 31, 1997, the aggregate cost of investments for federal income tax
and financial reporting purposes was $369,239,000, and net unrealized loss
aggregated $330,000, of which $1,239,000 related to appreciated investments
and $1,569,000 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 $137,000 was payable at May 31, 1997. 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 0.30% for assets in
excess of $80 billion. At May 31, 1997, and for the year 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 $901,000
for the year ended May 31, 1997, of which $75,000 was payable at period-
end.
18
<PAGE>
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, 1997,
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, 1997 by correspondence with
the custodian and brokers and, where appropriate, the application of
alternative auditing procedures for unsettled security transactions,
provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
June 18, 1997
19
<PAGE>
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.
Account Services
Checking Available on most fixed income funds ($500 minimum).
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.
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, Diversifying
Overseas: A Guide to International Investing, Personal Strategy Planner,
Retirees Financial Guide, and Retirement Planning Kit.
*A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
20
<PAGE>
T. Rowe Price Mutual Funds
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
STOCK FUNDS BOND FUNDS
....................... ............................. ...........................
Domestic Domestic Taxable International/Global
Balanced Corporate Income Global Government Bond
Blue Chip Growth GNMA Emerging Markets Bond
Capital Appreciation High Yield International Bond
Capital Opportunity New Income
Dividend Growth Short-Term Bond MONEY MARKET FUNDS
Equity Income Short-Term U.S. Government ..........................
Equity Index Spectrum Income Taxable
Financial Services Summit GNMA Prime Reserve
Growth & Income Summit Limited-Term Bond Summit Cash Reserves
Growth Stock U.S. Treasury Intermediate U.S. Treasury Money
Health Sciences U.S. Treasury Long-Term
Mid-Cap Growth Tax-Free
Mid-Cap Value Domestic Tax-Free California Tax-Free Money
New America Growth California Tax-Free Bond New York Tax-Free Money
New Era Florida Insured Summit Municipal
New Horizons* Intermediate Tax-Free Money Market
Science & Technology Georgia Tax-Free Bond Tax-Exempt Money
Small-Cap Stock** Maryland Short-Term
Small-Cap Value* Tax-Free Bond BLENDED ASSET FUNDS
Spectrum Growth Maryland Tax-Free Bond ..........................
Value New Jersey Tax-Free Bond Personal Strategy Income
New York Tax-Free Bond Personal Strategy Balanced
International/Global Summit Municipal Income Personal Strategy Growth
Emerging Markets Stock Summit Municipal Intermediate
European Stock Tax-Free High Yield T. ROWE PRICE NO-LOAD
Global Stock Tax-Free Income VARIABLE ANNUITY
International Discovery Tax-Free Insured ..........................
International Stock Intermediate Bond Equity Income Portfolio
Japan Tax-Free Short-Intermediate International Stock Portfolio
Latin America Virginia Short-Term Limited-Term Bond Portfolio
New Asia Tax-Free Bond Mid-Cap Growth Portfolio
Spectrum International Virginia Tax-Free Bond New America Growth Portfolio
Personal Strategy Balanced Portfolio
Prime Reserve Portfolio
</TABLE>
* Closed to new investors.
**Formerly the OTC Fund.
Please call for a prospectus. Read it carefully before you invest or send money.
The T. Rowe Price No-Load Variable Annuity [#V6021] is issued by Security
Benefit Life Insurance Company. In New York, it [#FSB201(11-96)] is issued by
First Security Benefit Life Insurance Company of New York, White Plains, NY.
T. Rowe Price refers to the underlying portfolios' investment managers and the
distributors, T. Rowe Price Investment Services, Inc.; T. Rowe Price Insurance
Agency, Inc.; and T. Rowe Price Insurance Agency of Texas, Inc. The Security
Benefit Group of Companies and the T. Rowe Price companies are not affiliated.
The variable annuity may not be available in all states. The contract has
limitations. Call a representative for costs and complete details of the
coverage.
21
<PAGE>
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
410-625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
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
[LOGO OF T. ROWE PRICE APPEARS HERE]
T. Rowe Price Investment Services, Inc., Distributor. F55-050 5/31/97
