- --------------------------------------------------------------------------------
T. Rowe Price
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Semiannual Report
Short-Term Bond Fund
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November 30, 1997
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REPORT HIGHLIGHTS
SHORT-TERM BOND FUND
* Bond yields declined on balance, as inflation remained subdued despite
strong economic growth.
* Short-Term Bond Fund's six-month returns were solid, about on a par with
those of its Lipper peer group.
* The fund's allocation to BBB rated bonds was generally beneficial, but an
Asian currency crisis caused some of these holdings to underperform in
October.
* The fund's sector diversification, credit quality, and duration strategies
remained largely unchanged.
* We believe the outlook for bonds is favorable if inflation remains subdued.
Fellow Shareholders
Reversing the pattern of the preceding six months, interest rates fell and
prices of short-term bonds rose during the six months ended November 30, 1997.
Inflation remained subdued despite strong economic growth, and currency turmoil
in the emerging markets increased demand for high-quality domestic bonds. In
this environment, the Short-Term Bond Fund performed well, in line with its
Lipper peer group.
<PAGE>
MARKET ENVIRONMENT
At the time of our last report six months ago, the possibility of rising
inflation was a significant concern to the bond market. A March 1997 interest
rate hike by the Fed, intended to curb economic growth, crowned a period of
rising rates, with yields on five-year Treasury bonds topping 6.6% in March and
April. In the six months ended November 30, however, the economy performed
well-gross domestic product continued to grow at a more than 3% annualized
rate-but inflation, unexpectedly, seemed to decelerate.
[Chart showing interest rates for the 5-year Treasury note, 2-year Treasury
note, and Federal Funds Target Rate 11/30/96 through 11/30/97.]
A bond rally in April, and a subsequent easing ofinflation fears, allowed
yields to fall (and prices to rise) on most fixed income instruments. A strong
dollar, which makes imports cheaper, helped keep inflation in check. In
addition, a currency crisis in Southeast Asia drove global investors to invest
more heavily in domestic bonds, especially U.S. Treasuries, largely because of
their high credit quality and U.S. dollar exposure. Long-term securities
benefited most from these trends, but short-term bonds also climbed on falling
interest rates and rising demand. Between May 31 and November 30, 1997, yields
on five-year Treasuries fell nearly 80 basis points (100 basis points equal one
percentage point).
The flight to quality in October caused Treasuries to outperform
mortgage-backed bonds (which suffer from increased prepayments when rates fall
sharply) and lower-quality issues over the past six months. However,
lower-quality bonds bounced back in November, recovering part of their
late-October losses. Investors have been willing to buy lower-quality,
higher-yielding bonds for most of this year in the belief that the strong
economy would lead to credit quality improvements.
================================================================================
Performance Comparison
- --------------------------------------------------------------------------------
Periods Ended 11/30/97 6 Months 12 Months
- --------------------------------------------------------------------------------
Short-Term Bond Fund 3.43% 5.38%
Lipper Short Investment-
Grade Debt Funds Average 3.41 5.51
================================================================================
PERFORMANCE AND STRATEGY REVIEW
The fund finished the six-month period with a 3.43% total return, in line
with the 3.41% gain for the Lipper Short Investment-Grade Debt Funds Average.
For the year ended November 30, the fund's return lagged the Lipper average by
13 basis points. However, it provided shareholders with a stable dividend
throughout the year.
<PAGE>
The currency crisis that began in Thailand in July and spread to other
Southeast Asian nations and around the globe in October had a strong effect on
fund returns for the six-month period. Prior to the crisis, the fund had built
up a performance advantage over its peers by emphasizing corporate and
mortgage-backed bonds in the portfolio, which have higher yields than comparable
government obligations. However, the Asian currency meltdowns and the ensuing
global stock market correction led investors to increase their holdings of
Treasuries while shying away from corporates. Lower-rated corporates, in
particular, underperformed Treasuries sufficiently to offset most of the fund's
yield advantage, despite their quick November rebound.
Generally, we did not significantly alter our investment plan and made few
changes in sector diversification or credit quality exposure. Over the long-term
investment horizon, we seek to outperform our peers by emphasizing
better-yielding corporate and mortgage-backed issues. Throughout the period, we
kept the fund's stake in corporate and asset-backed securities in a range around
55%, with concentrations in utility and banking bonds. We also maintained a
near-19% stake in BBB bonds, which are the lowest-rated (and highest-yielding)
investment-grade bonds. Nonetheless, the fund's overall average credit quality
was unchanged at AA (just below the top bond rating of AAA).
[Quality Diversification PieChart showing AAA 47%, AA 10%, A 23%, BBB 19%,
BB and Below 1%]
To take advantage of comparatively attractive yields given the overall
decline in interest rates, mortgage-backed securities were increased modestly
from 28% to 30% of fund assets after May 31, but remained in the 25% to 30%
range throughout the period. Our mortgage-backed holdings consisted primarily of
seasoned five- and seven-year balloon mortgages, conservatively structured CMOs,
and discount coupon 15-year pass-throughs. Compared with typical 30-year
pass-through securities, these holdings tend to have relatively stable cash
flows and less risk of principal prepayments as interest rates fall.
Although interest rates moved considerably during the period, the fund's
duration was maintained within a narrow range of 1.8 years to 1.9 years.
(Duration measures a fund's price sensitivity to interest rate changes. A longer
duration enhances a fund's price appreciation when rates fall, while a shorter
duration helps limit losses when rates rise.)
OUTLOOK
Despite the economy's strength, we believe the recent developments inAsia
and continued subdued inflation may obviate the need for any immediate action by
the Fed. Indeed, we do not expect any change in policy for the next quarter or
two, and although the Fed has maintained a bias toward higher short-term rates,
it is no longer a foregone conclusion that the Fed's next move will be a
tightening.
<PAGE>
Looking further ahead, we expect a continuation of good growth, although
perhaps a touch slower than the recent pace. Consumer spending on big ticket
items may decline, since many individuals are burdened with high debt and may be
worried about volatility in the stock markets. However, employment is strong and
consumer confidence is high, suggesting that growth could continue unabated. We
believe that the outlook for the fixed income market is favorable as long as
inflation remains subdued.
Respectfully submitted,
/s/
Edward A. Wiese
President and Chairman of the Investment Advisory Committee
December 19, 1997
T. Rowe Price Short-Term Bond Fund
================================================================================
Portfolio Highlights
================================================================================
Key statistics
5/31/97 11/30/97
- --------------------------------------------------------------------------------
Price Per Share ...................................... $4.65 $4.67
Dividends Per Share
For 6 months .................................... 0.14 0.14
For 12 months ................................... 0.27 0.27
Dividend Yield *
For 6 months .................................... 5.98% 5.99%
For 12 months ................................... 6.07 6.08
Weighted Average Maturity (years) .................... 2.4 2.3
Weighted Average Effective Duration (years) .......... 1.9 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.
================================================================================
<PAGE>
T. Rowe Price Short-Term Bond Fund
================================================================================
Portfolio Highlights
- --------------------------------------------------------------------------------
SECTOR Diversification
Percent of Percent of
Net Assets Net Assets
5/31/97 11/30/97
- --------------------------------------------------------------------------------
Corporate Bonds and Notes .......................... 50 50
Utilities ................................. 8% 10%
Banking ................................... 10 10
Finance and Credit ........................ 5 5
Media and Communications .................. 3 5
Transportation ............................ 5 4
All Other ................................. 19 16
Asset-Backed Securities ............................ 5 4
Mortgage-Backed Securities ......................... 28 30
U.S. Government Obligations ........................ 12 11
U.S. Treasuries ........................... 9 4
U.S. Agency Obligations ................... 3 7
Cash Equivalents ................................... 4 5
Domestic Negotiable CD .................... 3 --
Money Market Funds * ...................... 1 5
Other Assets Less Liabilities ...................... 1 --
- --------------------------------------------------------------------------------
Total .............................................. 100% 100%
* See note at end of financial statements.
================================================================================
<PAGE>
T. Rowe Price Short-Term Bond Fund
================================================================================
Performance Comparison
================================================================================
[Short-Term Bond Fund SEC graph shown here]
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.
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 11/30/97 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Short-Term Bond Fund 5.38% 6.11% 4.61% 6.35%
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>
T. Rowe Price Short-Term Bond Fund
================================================================================
Unaudited
<TABLE>
For a share outstanding throughout each period
====================================================================================================================================
Financial Highlights
<CAPTION>
6 Months Year 3 Months++ Year
Ended Ended Ended Ended
11/30/97 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> <C>
NET ASSET VALUE
Beginning of period ........ $ 4.65 $ 4.64 $ 4.72 $ 4.85 $ 5.00 $ 5.09 $ 5.05
Investment activities
Net investment income 0.14 0.27 0.29 0.29 0.07 0.31 0.33
Net realized and
unrealized gain (loss) 0.02 0.01 (0.08) (0.13) (0.15) (0.09) 0.04
Total from
investment activities 0.16 0.28 0.21 0.16 (0.08) 0.22 0.37
Distributions
Net investment income (0.14) (0.26) (0.28) (0.29) (0.07) (0.28) (0.33)
Tax return of capital -- (0.01) (0.01) -- -- (0.03) --
Total distributions .. (0.14) (0.27) (0.29) (0.29) (0.07) (0.31) (0.33)
NET ASSET VALUE
End of period .............. $ 4.67 $ 4.65 $ 4.64 $ 4.72 $ 4.85 $ 5.00 $ 5.09
Ratios/Supplemental Data
Total return ............... 3.43% 6.28% 4.58% 3.41% (1.65)% 4.36% 7.63%
Ratio of expenses to
average net assets ......... 0.72%+ 0.74% 0.72% 0.79% 0.79%+ 0.74% 0.76%
Ratio of net investment
income to average
net assets ................. 5.88%+ 5.91% 6.15% 6.09% 5.56%+ 6.00% 6.59%
Portfolio turnover rate .... 38.4% 103.9% 118.7% 136.9% 222.8%+ 90.8% 68.4%
Net assets, end of period
(in thousands) ............. $ 354,030 $ 373,284 $ 429,498 $ 493,726 $ 601,924 $ 668,066 $ 556,330
====================================================================================================================================
<FN>
+ Annualized.
++ The Fund's fiscal year end was change to May 31.
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Short-Term Bond Fund
================================================================================
Unaudited November 30, 1997
Statement of Net Assets Par Value
- --------------------------------------------------------------------------------
In thousands
CORPORATE BONDS AND NOTES 50.4%
Banking 9.9%
Banco Generale, (144a), 7.70%, 8/1/02 ....................... $ 4,450 $ 4,230
First National Bank of Commerce, Sr. Notes, 6.50%, 1/14/00 .. 4,450 4,462
Greenpoint Bank, 6.70%, 7/15/02 ............................. 2,700 2,703
Keycorp Institutional Capital, (144a), 6.625%, 6/1/99 ....... 4,500 4,534
MBNA, Sub. Notes, 7.25%, 9/15/02 ............................ 2,650 2,713
Mercantile Bankshares, Sr. Notes, (144a), 6.13%, 7/15/98 + .. 3,500 3,501
Mercantile Safe Deposit & Trust, 6.53%, 7/3/00 .............. 4,200 4,237
Morgan Guaranty Trust, Sub. Notes, 7.375%, 2/1/02 ........... 4,000 4,147
National City Capital Trust, Gtd. Notes, (144a), 6.75%, 6/1/99 4,400 4,425
34,952
Consumer Products 2.5%
Grand Metropolitan Investment, Gtd. Notes, 6.50%, 9/15/99 .... 4,450 4,471
Philip Morris, 7.25%, 9/15/01 ................................ 4,300 4,410
8,881
Energy 1.2%
MCN Financing, (144a), 6.305%, 6/1/98 4,275 4,278
4,278
Finance and Credit 4.8%
Ciesco, MTN, (144a), 7.38%, 4/19/00 + .................. 3,750 3,795
General Electric Capital, MTN, 6.15%, 11/5/01 .......... 4,150 4,128
Heller Financial, 7.875%, 11/1/99 ...................... 3,780 3,879
International Lease Finance, MTN, 6.69%, 4/3/00 ........ 5,000 5,065
16,867
Industrials 3.8%
General Motors Acceptance Corporation, MTN
6.625%, 4/24/00 ...................... 4,400 4,432
Ingersoll Rand
6.34%, 12/3/01 ....................... 1,000 1,000
Sr. Notes, 6.255%, 2/15/01 ................... 2,700 2,696
Lockheed Martin, Gtd. Notes, 6.55%, 5/15/99 .......... 4,500 4,518
Westinghouse Credit, MTN, 9.04%, 6/1/98 .............. 1,000 1,010
13,656
Insurance 3.0%
American Annuity Group Capital Trust, (144a), 7.25%, 9/25/01 3,615 3,670
Chubb, Deb., 8.75%, 11/15/99 ............................... 2,225 2,292
USF&G, 7.00%, 5/15/98 ...................................... $ 4,600 $ 4,618
10,580
<PAGE>
Investment Dealers 1.3%
Lehman Brothers, MTN, 6.75%, 5/24/99 4,450 4,489
4,489
Media and Communications 4.5%
Comcast Cable Communications, (144a), 8.125%, 5/1/04 ..... 4,500 4,806
NWCG Holdings, Sr. Disc. Notes, Zero Coupon, 6/15/99 ..... 4,550 4,130
TCI Communciations, 8.65%, 9/15/04 ....................... 4,500 4,900
Tele-Communications, Sr. Notes, 9.25%, 4/15/02 ........... 2,000 2,169
16,005
Petroleum 1.3%
PDV America
Sr. Notes
7.25%, 8/1/98 .................... 2,700 2,714
7.875%, 8/1/03 ................... 1,750 1,806
4,520
Retail 3.9%
Dayton Hudson, 9.40%, 2/15/01 4,725 5,111
Federated Department Stores, Sr. Notes, 8.50%, 6/15/03 ..... 3,500 3,792
Sears Roebuck & Company, MTN, 8.23%, 5/4/99 ................ 4,800 4,943
13,846
Transportation 4.0%
Chilbar Shipping, 6.98%, 7/15/01 ..................... 2,171 2,222
Delta Air Lines, ETC, 9.60%, 5/26 - 6/1/00 ........... 2,960 3,171
Federal Express, 6.25%, 4/15/98 ...................... 4,250 4,256
Union Pacific, 7.00%, 6/15/00 ........................ 4,500 4,572
14,221
Utilities 10.2%
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 3,253
Midamerican Energy, Sr. Notes, 6.50%, 12/15/01 ............ 4,450 4,478
Orange and Rockland Utilities, Deb., 6.14%, 3/1/00 ........ 4,500 4,485
Pacific Gas and Electric, 1st Mtg. Bonds, 8.75%, 1/1/01 ... 4,500 4,798
Potomac Capital, (144a), 6.80%, 9/12/01 ................... 2,500 2,495
Progress Capital Holdings, Gtd. Notes, (144a), 6.88%, 8/1/01 4,400 4,462
Public Service Electric & Gas, Mtg. Bonds, 8.875%, 6/1/03 . 4,350 4,814
System Energy Resources, 1st Mtg. Notes, 7.625%, 4/1/99 ... 4,015 4,078
Texas NM Power Company, 1st Mtg. Notes, 9.25%, 9/15/00 .... $ 1,750 $ 1,856
36,269
Total Corporate Bonds and Notes (Cost $177,935) ........... 178,564
ASSET-BACKED SECURITIES 4.4%
Auto-Backed 1.1%
Banc One Auto Grantor Trust, 6.27%, 11/20/03 ........... 3,611 3,620
USAA Auto Loan Grantor Trust, 5.00%, 11/15/99 .......... 193 193
3,813
<PAGE>
Credit Card-Backed 1.4%
MBNA Master Credit Card Trust, VR, 5.775%, 3/15/01 5,000 5,003
5,003
Home Equity Loans-Backed 1.3%
Access Financial Mortgage Loan Trust, 6.90%, 5/18/11 4,450 4,471
4,471
Receivables-Backed 0.6%
Harley Davidson Eaglemark, (144a), 6.35%, 10/15/02 ....... 2,225 2,236
2,236
Total Asset-Backed Securities (Cost $15,470) ............. 15,523
U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 29.2%
U.S. Government Agency Asset-Backed 1.0%
Federal Home Loan Mortgage, REMIC, 6.92%, 1/25/12 3,440 3,470
3,470
U.S. Government Agency Obligations 26.8%
Federal Home Loan Mortgage
9.00%, 7/1/01 - 7/1/02 ............. 1,217 1,262
9.50%, 8/1/01 - 9/1/02 ............. 695 728
10.00%, 1/1/01 - 10/1/05 ........... 440 465
11.00%, 8/1/00 - 2/1/01 ............ 333 356
5 year balloon
5.00%, 5/1 - 6/1/99 ................ 3,741 3,711
6.00%, 4/1/99 ...................... 9,369 9,350
7.50%, 1/1/98 - 5/1/00 ............. 5,630 5,709
7 year balloon
6.50%, 12/1/99 ..................... 8,717 8,752
7.00%, 6/1 - 11/1/99 ............... 6,308 6,344
Federal Home Loan Mortgage
REMIC
6.00%, 8/15/06 ..................... $14,000 $13,943
6.50%, 1/15/17 ..................... 4,363 4,380
7.00%, 3/15/08 ..................... 5,720 5,779
7.50%, 1/15/21 ..................... 1,148 1,160
9.00%, 5/15/19 ..................... 2,771 2,943
Federal National Mortgage Assn .....................
5.50%, 11/1/05 ..................... 82 80
7.00%, 4/1/09 ...................... 10,596 10,778
9.00%, 5/1/05 ...................... 5,045 5,170
11.00%, 10/1/00 - 1/1/01 ........... 144 150
7 year balloon
7.00%, 1/1/00 ...................... 1,774 1,787
9.00%, 1/1 - 7/1/98 ................ 1,139 1,143
9.50%, 12/1/97 - 1/1/98 ............ 21 21
REMIC, 7.50%, 8/25 - 11/25/05 .............. 10,870 11,017
95,028
<PAGE>
U.S. Government Guaranteed Obligations 1.4%
Government National Mortgage Assn
I
8.50%, 2/15/05 - 3/15/06 ..................... 639 665
10.50%, 11/15/15 ............................. 130 146
GPM, I
9.50%, 8/15 - 10/15/09 ....................... 55 60
11.00%, 8/15/10 .............................. 58 65
11.25%, 6/15/13 - 1/15/16 .................... 465 522
11.75%, 7/15/13 - 11/15/15 ................... 1,809 2,051
13.00%, 9/15/11 .............................. 8 9
GPM, II, 11.00%, 9/20/13 - 4/20/14 ................... 12 13
Midget, I
9.00%, 7/15/01 - 2/15/06 ..................... 627 655
9.50%, 5/15/01 - 4/15/05 ..................... 195 203
10.00%, 4/15/98 - 10/15/04 ................... 476 503
11.50%, 5/15/00 .............................. 10 11
4,903
Total U.S. Government Mortgage-Backed Securities (Cost $103,057) 103,401
U.S. GOVERNMENT OBLIGATIONS 10.9%
U.S. Government Agency Obligations 6.8%
Federal Home Loan Banks, 5.76%, 7/8/98 ................... $ 8,000 $ 7,999
Federal National Mortgage Assn., Deb., 6.15%, 12/14/01 ... 4,300 4,260
U.S. Department Housing & Urban Development
6.02%, 8/1/99 ............................ 11,730 11,739
23,998
U.S. Treasury Obligations 4.1%
U.S. Treasury Notes
6.125%, 8/31/98 .......................... 10,000 10,028
6.25%, 8/31/02 ........................... 4,500 4,574
14,602
Total U.S. Government Obligations (Cost $38,533) ......... 38,600
NON-U.S. GOVERNMENT MORTGAGE-
BACKED SECURITIES 0.4%
Great Western Bank, ARM, 5.87%, 7/25/17 ..................... 1,216 1,163
Salomon Mortgage Security VII, CMO, VR, 7.225%, 11/25/20 .... 63 63
Total Non-U.S. Government Mortgage-Backed
Securities (Cost $1,281) .................................... 1,226
Money Market Funds 4.8%
Reserve Investment Fund, 5.71% # ..................... 17,033 17,033
Total Money Market Funds (Cost $17,033) .............. 17,033
Total Investments in Securities
100.1% of Net Assets (Cost $353,309) ...................... $ 354,347
Other Assets Less Liabilities .............................. (317)
NET ASSETS ................................................. $ 354,030
<PAGE>
Net Assets Consist of:
Accumulated net investment income -
net of distributions ......................................... $ (1,943)
Accumulated net realized gain/loss -
net of distributions ......................................... (35,915)
Net unrealized gain (loss) ................................... 1,038
Paid-in-capital applicable to 75,740,585
shares of $0.01 par value capital stock
outstanding; 1,000,000,000 shares authorized ................. 390,850
NET ASSETS ................................................... $ 354,030
NET ASSET VALUE PER SHARE .................................... $ 4.67
+ Private Placement
# Seven-day yield
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
VR Variable Rate
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 period-end amounts to
12.0% of net assets.
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Short-Term Bond Fund
================================================================================
Unaudited
Statement of Operations
- --------------------------------------------------------------------------------
In thousands
6 Months
Ended
11/30/97
Investment Income
Interest income .................................................. $12,047
Expenses
Investment management ...................................... 775
Shareholder servicing ...................................... 380
Custody and accounting ..................................... 88
Prospectus and shareholder reports ......................... 38
Registration ............................................... 17
Legal and audit ............................................ 9
Directors .................................................. 5
Miscellaneous .............................................. 3
Total expenses ............................................. 1,315
Net investment income ............................................ 10,732
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities ........................... 809
Change in net unrealized gain or loss on securities .............. 1,368
Net realized and unrealized gain (loss) .......................... 2,177
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS ........................................... $12,909
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Short-Term Bond Fund
================================================================================
Unaudited
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands
6 Months Year
Ended Ended
11/30/97 5/31/97
Increase (Decrease) in Net Assets
Operations
Net investment income ................... $ 10,732 $ 24,745
Net realized gain (loss) ................ 809 (2,019)
Change in net unrealized gain or loss ... 1,368 2,935
Increase (decrease) in net assets
from operations ......................... 12,909 25,661
Distributions to shareholders
Net investment income ................... (10,802) (24,117)
Tax return of capital ................... -- (628)
Decrease in net assets from distributions (10,802) (24,745)
Capital share transactions *
Shares sold ............................. 41,267 132,508
Distributions reinvested ................ 9,488 21,719
Shares redeemed ......................... (72,116) (211,357)
Increase (decrease) in net assets
from capital
share transactions ...................... (21,361) (57,130)
Net Assets
Increase (decrease) during period ............. (19,254) (56,214)
Beginning of period ........................... 373,284 429,498
End of period ................................. $ 354,030 $ 373,284
*Share information
Shares sold ............................. 8,828 28,457
Distributions reinvested ................ 2,029 4,666
Shares redeemed ......................... (15,432) (45,418)
Increase (decrease) in shares outstanding (4,575) (12,295)
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Short-Term Bond Fund
================================================================================
Unaudited November 30, 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.
The accompanying financial statements are prepared in accordance with
generally accepted accounting principles for the investment company industry;
these principles may require the use of estimates by fund management.
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.
<PAGE>
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 November 30, 1997, the value of securities on loan was
$8,850,000. 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 $65,346,000 and $89,527,000,
respectively, for the six months ended November 30, 1997. Purchases and sales of
U.S. government securities aggregated $64,706,000 and $58,827,000, respectively,
for the six months ended November 30, 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.
At November 30, 1997, the aggregate cost of investments for federal
income tax and financial reporting purposes was $353,309,000, and net unrealized
gain aggregated $1,038,000, of which $1,881,000 related to appreciated
investments and $843,000 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 $124,000 was payable at November 30, 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
November 30, 1997, and for the six months then ended, the effective annual group
fee rate was 0.32%. 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. 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. The fund incurred expenses pursuant to these
related party agreements totaling approximately $344,000 for the six months
ended November 30, 1997, of which $69,000 was payable at period-end.
<PAGE>
Additionally, the fund is one of several T. Rowe Price-sponsored mutual
funds (underlying funds) in which the T. Rowe Price Spectrum Funds (Spectrum)
may invest. Spectrum does not invest in the underlying funds for the purpose of
exercising management or control. Expenses associated with the operation of
Spectrum are borne by each underlying fund to the extent of estimated savings to
it and in proportion to the average daily value of its shares owned by Spectrum,
pursuant to special servicing agreements between and among Spectrum, the
underlying funds, T. Rowe Price, and, in the case of T. Rowe Price Spectrum
International, Rowe Price-Fleming International. Spectrum Income Fund held
approximately 5.71% of the outstanding shares of the Short-Term Bond Fund at
November 30, 1997. For the six months then ended, the fund was allocated $37,000
of Spectrum expenses, $4,000 of which was payable at period-end.
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve Funds
are offered as cash management options only to mutual funds and other accounts
managed by T. Rowe Price and its affiliates and are not available to the public.
The Reserve Funds pay no investment management fees. Distributions from the
Reserve Funds to the fund for the six months ended November 30, 1997, totaled
$246,000 and are reflected as interest income in the accompanying Statement of
Operations.
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*AccessRegistration Mark
and T. Rowe Price OnLine.
<PAGE>
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.
<PAGE>
T. Rowe Price Mutual Funds
================================================================================
STOCK FUNDS
- --------------------------------------------------------------------------------
DOMESTIC
Blue Chip Growth
Capital Appreciation
Capital Opportunity
Diversified Small-Cap Growth
Dividend Growth
Equity Income
Equity Index
Financial Services
Growth & Income
Growth Stock
Health Sciences
Media & Telecommunications
Mid-Cap Growth
Mid-Cap Value
New America Growth
New Era
New Horizons*
Real Estate
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
<PAGE>
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
Emerging Markets Bond
Global Government 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
<PAGE>
BLENDED ASSET FUNDS
- --------------------------------------------------------------------------------
Balanced
Personal Strategy Balanced
Personal Strategy Growth
Personal Strategy Income
Tax-Efficient Balanced
<PAGE>
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.
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access [Registration Mark]:
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
<PAGE>
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 [Registration Mark].
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. F55-051 11/30/97
