Annual Report
Short-Term
Bond Fund
May 31, 1997
T. Rowe Price
Report Highlights
o The bond market was generally tepid over the last six
months as the economy showed surprising strength but
inflation remained subdued.
o 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.
o 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.
o 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.
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%.
Chart 1 - Interest Rate Levels line chart
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%.
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
Periods Ended 5/31/97 6 Months 12 Months
_______________________________________________________
Short-Term Bond Fund 1.89% 6.28%
Lipper Short Investment-Grade
Debt Funds Average 2.05 6.31
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 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.
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.
Chart 2 - Quality Diversification Pie chart
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,
Edward A. Wiese
President and Chairman of the Investment Advisory Committee
June 17, 1997
T. Rowe Price Short-Term Bond Fund
Portfolio Highlights
Key statistics
11/30/96 5/31/97
__________________________________________________________
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
* 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
11/30/96 5/31/97
__________________________________________________________
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%
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 - SEC chart
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 5/31/97 1 Year 3 Years 5 Years 10 Years
___________________________________________________________
Short-Term Bond Fund 6.28% 4.75% 4.58% 6.36%
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
For a share outstanding throughout each period
Financial Highlights
For a share outstanding throughout each period
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
NET ASSET VALUE
Begin-
ning
of
period $ 4.64 $ 4.72 $ 4.85 $ 5.00 $ 5.09 $ 5.05
Invest-
ment
activi-
ties
Net
invest-
ment
income 0.27 0.29 0.29 0.07 0.31 0.33
Net
real-
ized and
unreal-
ized
gain
(loss) 0.01 (0.08) (0.13) (0.15) (0.09) 0.04
Total
from
investment
activi-
ties 0.28 0.21 0.16 (0.08) 0.22 0.37
Distri-
butions
Net
invest-
ment
income (0.26) (0.28) (0.29) (0.07) (0.28) (0.33)
Tax
return
of
capital (0.01) (0.01) - - (0.03) -
Total
distri-
butions (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 thou-
sands)$373,284 $429,498 $493,726$601,924 $668,066 $556,330
! 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, 1997
Statement of Net Assets
Par Value
In thousands
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
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
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
Federal Home Loan Mortgage
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
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
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
___________
! 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.
T. Rowe Price Short-Term Bond Fund
Statement of Operations
In thousands
Year
Ended
5/31/97
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
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
Ended
5/31/97 5/31/96
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)
The accompanying notes are an integral part of these financial
statements.
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 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.
Undistributed net investment income $ (340,000)
Undistributed net realized gain 3,734,000
Paid-in-capital (3,394,000)
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.
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
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(registered
trademark) 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.
T. Rowe Price 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*
Science & Technology
Small-Cap Stock**
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
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
Money Market Funds
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 FUNDS
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
Mid-Cap Growth Portfolio
New America Growth Portfolio
Personal Strategy Balanced Portfolio
Prime Reserve Portfolio
* 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.
*A division of T. Rowe Price Investment Services, Inc. Member
NASD/SIPC.
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(registered trademark):
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(registered trademark).
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.
F55-050 5/31/97
Chart 1 - Interest Rate Levels 3-line chart showing interest
rates on the 5-year Treasury note, 2-year Treasury note, and
federal funds target from 5/31/96 to 5/31/97
Chart 2 - Quality Diversification pie chart showing
diversification of assets by credit quality as of 5/31/97.
Chart 3 - SEC chart showing the cumulative growth of $10,000
invested in the Short-Term Bond Fund over the past 10 years (or
from inception for funds lacking 10-year histories) compared
with $10,000 invested in a broad-based index or average over the
same period.
