- --------------------------------------------------------------------------------
T. Rowe Price
- --------------------------------------------------------------------------------
Semiannual Report
Short-Term Bond Fund
- --------------------------------------------------------------------------------
May 31, 1999
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REPORT HIGHLIGHTS
================================================================================
SHORT-TERM BOND FUND
- --------------------
* Interest rates rose sharply and bond prices fell in the past six months in
response to strong economic growth and inflation concerns.
* Dividends more than offset a share price decline to provide a positive
six-month total return. The 12-month return was solid.
* We trimmed positions in some corporate holdings after good performance, and
reallocated the assets to higher-quality bonds.
* Corporate securities composed almost half of net assets; overall credit
quality remained high at AA.
* We are optimistic that economic growth will moderate and ease the pressure
on inflation and interest rates.
================================================================================
FELLOW SHAREHOLDERS
================================================================================
After declining in the first half of the period, short- and
intermediate-term interest rates moved upward during the past six months, driven
by investor concerns over potentially inflationary economic growth. The
difficult environment limited total returns among short-term bond investments.
Your fund's six-month return was positive but modest; income was unchanged.
<PAGE>
================================================================================
MARKET ENVIRONMENT
================================================================================
The Federal Reserve lowered the federal funds target rate from 5.50% to
4.75% in three 25-basis-point moves between late September and mid-November of
last year (100 basis points equal one percentage point). The decision to ease
monetary conditions was primarily driven by concerns about international
problems. Russia had defaulted on its debt, investors sold off lower-quality
securities, and a very large hedge fund had to be bailed out. In addition, the
markets for emerging bonds and stocks experienced a virtual meltdown.
[Interest Rate Levels chart showing interest rates for five-year Treasury
notes, two-year Treasury notes, and the Federal Funds Target Rate 5/31/98
through 5/31/99.]
The rate cuts added liquidity to the global system and, by the early spring
of this year, international financial markets had largely regained their footing
- -- so much so, in fact, that investors refocused their attention on the domestic
economic situation. Despite international turmoil, the U.S. economy continued to
be stronger than expected. GDP growth was 4.2% over the last quarter of 1998 and
the first of 1999. Jobless claims remained low, and consumer sentiment and
spending were strong. The U.S. manufacturing sector showed signs that it has
recovered from the Asia crisis of late 1997. And while domestic inflation
remained largely subdued, commodity prices crept up and tight labor markets put
upward pressure on inflation. The circumstances suggested to many investors that
the Fed might reverse course and raise rates.
In May the market learned that the Fed had adopted a bias toward higher
short-term rates at its March Federal Open Market Committee meeting. By the end
of May, it seemed likely that the Fed would act sooner rather than later,
perhaps at its late June meeting, and rates rose in anticipation. Two-to
five-year Treasuries, in particular, were affected by the change in sentiment.
<PAGE>
The federal budget surplus continued to affect the short-term fixed income
markets. The Treasury is expected to pay down outstanding debt by $105 billion
during the first half of 1999. While indicative of a strong economy, public debt
reduction significantly depletes the supply of available investments in the
marketplace. With demand holding steady, declining availability puts downward
pressure on yields.
Another important trend during the period was the revived popularity of
corporate and mortgage-backed securities. The spread to Treasuries for these
issues (that is, the difference in their yields) tightened from the wide levels
of late 1998. This suggested that investors felt renewed confidence in the
global economy and were no longer demanding a historically high "risk premium"
to invest in securities that carry slightly more credit risk than Treasuries. As
liquidity returned to the marketplace, corporate bonds and mortgage-backed
securities outperformed Treasuries by respectable margins.
================================================================================
PERFORMANCE AND STRATEGY REVIEW
================================================================================
Performance Comparison
----------------------
Periods Ended 5/31/99 6 Months 12 Months
--------------------- -------- ---------
Short-Term Bond Fund 0.99% 4.23%
Lipper Short Investment-
Grade Debt Funds Average 1.41 4.35
================================================================================
Rising interest rates caused the fund's share price to drop from $4.71 to
$4.63 during the six-month period. Steady dividend income associated with a
concentration in corporate and mortgage-backed securities more than offset this
share price decline and helped the fund post a positive total return of 0.99%
for the period. Twelve-month returns were respectable, again aided by dividend
income, but still were constrained by the bond market's recent weakness and
modestly trailed the Lipper benchmark.
<PAGE>
The fund's relative performance was primarily the result of its duration
posture. (Duration is a measure of price sensitivity to changes in interest
rates. A fund having a duration of two years will have a 2% rise or decline in
price in response to a one-percentage-point fall or rise, respectively, in
interest rates.) Because the U.S. economy has consistently produced relatively
low interest rates and stable inflation, we have for more than a year kept
duration at approximately 2.2 years, which is two or three tenths of a year
longer than the average peer fund. The higher yields available on bonds of this
maturity have benefited performance considerably. When rates rise, however, as
they did during the past six months, a longer duration can be a competitive
disadvantage within our peer group.
In general, we prefer to maintain a consistent duration rather than try to
aggressively "time" interest rate movements. While it seems certain that the Fed
is going to raise the federal funds target rate soon, we think the damage in the
bond market is mostly done, as real rates have already factored in a one-quarter
percentage point hike. In fact, we think there is a good chance that U.S. growth
will slow in coming months, reducing the pressures on inflation and interest
rates (see the Outlook section).
[Quality Diversification shown here. Pie chart with following segments -
AAA 37%. AA 17%. A 23%. BBB 23%. Based on net assets as of 5/31/99.]
The superior returns of corporate bonds over the past six months benefited
the portfolio's substantial position in the sector. Good performance, however,
often means yields become less attractive as prices rise. In response to this
shift in the market, we trimmed the allocation to corporate bonds and notes from
53% on November 30, 1998, to 47%. These reductions were primarily in sectors
that had recovered most dramatically from last year's weakness -- banking and
finance securities and the industrial sector. We used proceeds from some of the
sales to increase investment in AAA rated asset-backed securities, which often
have higher yields that are comparable to lower-rated corporate securities. The
shift helped keep the fund's average credit quality at a solid AA.
<PAGE>
================================================================================
OUTLOOK
================================================================================
In general, we are taking a conservative view toward credit quality as we
wait to put the economic uncertainties of this year and the technical
uncertainties of the year 2000 behind us. As mentioned, we are optimistic that
the U.S. economic expansion will slow modestly rather than boil over. The
sluggishness of numerous overseas economies in Asia, Europe, and elsewhere
should provide enough drag to keep the lid on inflationary pressures at home.
Accordingly, we feel it is appropriate to trim our corporate holdings (which
would likely not respond well to moderating growth) and to maintain a slightly
above-average duration. Should growth begin to exceed our expectations or
inflation reemerge, we would consider reducing the fund's duration as well.
The fund's long-term aim is to provide a higher income than a money market
fund with minimal volatility. We expect to continue to meet that goal.
Respectfully submitted,
/s/
Edward A. Wiese
President and Chairman of the Investment Advisory Committee
June 21, 1999
================================================================================
<PAGE>
T. Rowe Price Short-Term Bond Fund
- ----------------------------------
PORTFOLIO HIGHLIGHTS
- --------------------
KEY STATISTICS
- --------------
11/30/98 5/31/99
-------- -------
Price Per Share $4.71 $4.63
Dividends Per Share
For 6 months 0.13 0.13
For 12 months 0.26 0.26
Dividend Yield *
For 6 months 5.53% 5.53%
For 12 months 5.74 5.65
30-Day Standardized Yield 5.38 5.54
Weighted Average Maturity (years) 2.7 2.6
Weighted Average Effective Duration (years) 2.2 2.2
Weighted Average Quality ** AA AA
- --------------------------------------------------------------------------------
* Dividends earned and reinvested for the periods indicated are annualized
and divided by the fund's net asset value per share at the end of the
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
11/30/98 5/31/99
-------- -------
Corporate Bonds and Notes 53% 47%
Utilities 11 11
Consumer Products and Services 10 10
Banking and Finance 11 9
Industrials 13 9
Media and Communications 3 4
Transportation 4 3
All Other 1 1
Asset-Backed Securities 11 15
Mortgage-Backed Securities 21 20
U.S. Government Obligations 7 9
U.S. Treasuries - 2
Government Agency Obligations 7 7
Money Market Funds * 7 11
Other Assets Less Liabilities 1 -2
Total 100% 100%
* See note at end of financial statements.
================================================================================
<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.
[SEC Chart shown]
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 5/31/99 1 Year 3 Years 5 Years 10 Years
Short-Term Bond Fund 4.23% 5.79% 5.07% 6.06%
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
- ----------------------------------
For a share outstanding throughout each period
FINANCIAL HIGHLIGHTS
- --------------------
Year
Ended
5/31/99 5/31/98 5/31/97 5/31/96 5/31/95
NET ASSET VALUE
Beginning of period $ 4.69 $ 4.65 $ 4.64 $ 4.72 $ 4.85
- -------------------------------------------------------------------------------
Investment activities
Net investment income 0.26 0.27 0.27 0.29 0.29
Net realized and
unrealized gain (loss) (0.06) 0.04 0.01 (0.08) (0.13)
- -------------------------------------------------------------------------------
Total from
investment activities 0.20 0.31 0.28 0.21 0.16
- -------------------------------------------------------------------------------
Distributions
Net investment income (0.26) (0.27) (0.26) (0.28) (0.29)
Tax return of capital - - (0.01) (0.01) -
- -------------------------------------------------------------------------------
Total distributions (0.26) (0.27) (0.27) (0.29) (0.29)
- -------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 4.63 $ 4.69 $ 4.65 $ 4.64 $ 4.72
Ratios/Supplemental=Data
Total return * 4.23% 6.87% 6.28% 4.58% 3.41%
- -------------------------------------------------------------------------------
Ratio of total expenses to
average net assets 0.73% 0.72% 0.74% 0.72% 0.79%
- -------------------------------------------------------------------------------
Ratio of net investment
income to average
net assets 5.44% 5.82% 5.91% 6.15% 6.09%
<PAGE>
- -------------------------------------------------------------------------------
Portfolio turnover rate 51.6% 73.0% 103.9% 118.7% 136.9%
- -------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $324,098 $ 331,955 $373,284 $ 429,498 $493,726
- -------------------------------------------------------------------------------
* Total return reflects the rate that an investor would have earned on an
investment in the fund during each period, assuming reinvestment of all
distributions.
The accompanying notes are an integral part of these financial statements.
================================================================================
T. Rowe Price Short-Term Bond Fund
- ----------------------------------
May 31, 1999
Statement of Net Assets
Par/Shares Value
---------- -----
In thousands
CORPORATE BONDS AND NOTES 47.6%
Banking and Finance 8.9%
Banco Generale, Sr. Sub. Notes, (144a), 7.70%, 8/1/02 $ 4,450 $ 4,161
- -------------------------------------------------------------------------------
General Electric Capital, MTN, 6.15%, 11/5/01 4,150 4,166
- -------------------------------------------------------------------------------
Goldman Sachs Group, MTN, (144a), 6.25%, 2/1/03 3,000 2,968
- -------------------------------------------------------------------------------
MBNA, Sub. Notes, 7.25%, 9/15/02 2,650 2,683
- -------------------------------------------------------------------------------
Mercantile Safe Deposit & Trust, 6.53%, 7/3/00 4,200 4,259
- -------------------------------------------------------------------------------
Morgan Guaranty Trust, Sub. Notes, 7.375%, 2/1/02 4,000 4,102
- -------------------------------------------------------------------------------
<PAGE>
Paine Webber Group, 7.875%, 2/15/03 3,000 3,103
- -------------------------------------------------------------------------------
Salomon, 7.30%, 5/15/02 3,250 3,329
- -------------------------------------------------------------------------------
28,771
- -------------------------------------------------------------------------------
Consumer Products and Services 9.8%
Amvescap, Sr. Notes, (144a), 6.375%, 5/15/03 4,250 4,163
- -------------------------------------------------------------------------------
Beckman Instruments, Sr. Notes, 7.10%, 3/4/03 4,000 3,916
- -------------------------------------------------------------------------------
Grand Metropolitan Investment, Zero Coupon, 1/6/04 5,500 4,081
- -------------------------------------------------------------------------------
Nabisco, 6.00%, 2/15/01 3,500 3,465
- -------------------------------------------------------------------------------
Pepsico, MTN, 5.75%, 1/2/03 3,700 3,653
- -------------------------------------------------------------------------------
Philip Morris, 7.25%, 9/15/01 4,300 4,374
- -------------------------------------------------------------------------------
Safeway, 5.75%, 11/15/00 4,000 3,981
- -------------------------------------------------------------------------------
Sony, 6.125%, 3/4/03 4,025 3,974
- -------------------------------------------------------------------------------
31,607
- -------------------------------------------------------------------------------
Energy 1.4%
PDV America, Sr. Notes, 7.875%, 8/1/03 2,400 2,248
- -------------------------------------------------------------------------------
YPF Sociedad Anonima, 7.25%, 3/15/03 2,400 2,330
- -------------------------------------------------------------------------------
4,578
- -------------------------------------------------------------------------------
Industrials 9.1%
Allied Signal, 5.75%, 3/15/01 3,350 3,305
<PAGE>
- -------------------------------------------------------------------------------
Delphi Auto Systems, 6.125%, 5/1/04 1,150 1,120
- -------------------------------------------------------------------------------
Lockheed, 6.75%, 3/15/03 4,300 4,320
- -------------------------------------------------------------------------------
McDonnell Douglas Finance, Sr. Notes, 6.39%, 1/15/02 2,000 1,993
- -------------------------------------------------------------------------------
Praxair, 6.15%, 4/15/03 3,350 3,284
- -------------------------------------------------------------------------------
Raytheon, 5.70%, 11/1/03 4,000 3,884
- -------------------------------------------------------------------------------
Toyota Motor Credit, 5.625%, 11/13/03 4,000 3,909
- -------------------------------------------------------------------------------
USA Waste Services, Sr. Notes, 6.50%, 12/15/02 4,300 4,301
- -------------------------------------------------------------------------------
Waste Management, 6.625%, 7/15/02 3,350 3,366
- -------------------------------------------------------------------------------
29,482
- -------------------------------------------------------------------------------
Media and Communications 4.4%
NWCG Holdings, Sr. Disc. Notes, Zero Coupon, 6/15/99 $ 4,550 $ 4,540
- -------------------------------------------------------------------------------
Seagram, 6.40%, 12/15/03 4,000 3,921
- -------------------------------------------------------------------------------
Sprint Capital, 5.70%, 11/15/03 2,800 2,702
- -------------------------------------------------------------------------------
Worldcom, Sr. Notes, 6.25%, 8/15/03 3,100 3,064
- -------------------------------------------------------------------------------
14,227
- -------------------------------------------------------------------------------
Transportation 3.4%
Delta Air Lines
9.60%, 6/1/00 1,260 1,299
- -------------------------------------------------------------------------------
<PAGE>
ETC, 9.60%, 5/26/00 1,700 1,753
- -------------------------------------------------------------------------------
ERAC USA Finance, (144a), 6.375%, 5/15/03 4,000 3,918
- -------------------------------------------------------------------------------
Norfolk Southern, 6.95%, 5/1/02 4,000 4,062
- -------------------------------------------------------------------------------
11,032
- -------------------------------------------------------------------------------
Utilities 10.6%
CE Electric UK Funding, Sr. Notes, (144a), 6.853%, 12/30/04 4,000 3,986
- -------------------------------------------------------------------------------
Midamerican Energy, Sr. Notes, 6.50%, 12/15/01 4,450 4,435
- -------------------------------------------------------------------------------
National Rural Utilities, 5.00%, 10/1/02 4,000 3,859
- -------------------------------------------------------------------------------
Niagara Mohawk Power, 7.375%, 8/1/03 2,000 2,064
- -------------------------------------------------------------------------------
Pacific Gas & Electric, 1st Mtg. Bonds, 8.75%, 1/1/01 4,500 4,683
- -------------------------------------------------------------------------------
Progress Capital Holdings, MTN, (144a), 6.88%, 8/1/01 4,400 4,448
- -------------------------------------------------------------------------------
Public Service Electric & Gas, Mtg. Bonds, 8.875%, 6/1/03 4,350 4,645
- -------------------------------------------------------------------------------
Texas NM Power, 1st Mtg.Bonds, 9.25%, 9/15/00 1,750 1,808
- -------------------------------------------------------------------------------
United Illuminating, 6.25%, 12/15/02 2,150 2,111
- -------------------------------------------------------------------------------
Williams, 6.125%, 2/15/02 2,500 2,456
- -------------------------------------------------------------------------------
34,495
- -------------------------------------------------------------------------------
Total Corporate Bonds and Notes (Cost $156,224) 54,192
- -------------------------------------------------------------------------------
<PAGE>
ASSET-BACKED=SECURITIES==14.8%=================================================
Advanta Mortgage Loan Trust, Interest Only
5.00%, 12/25/00 ** 18,000 1,254
- -------------------------------------------------------------------------------
Banc One Auto Grantor Trust, 6.27%, 11/20/03 1,604 1,617
- -------------------------------------------------------------------------------
California Infrastructure
6.25%, 6/25/04 2,175 2,185
- -------------------------------------------------------------------------------
6.28%, 9/25/05 1,900 1,907
- -------------------------------------------------------------------------------
Ciesco, MTN, (144a), Zero Coupon, 4/19/00+ 3,750 3,758
- -------------------------------------------------------------------------------
Comed Transitional Funding Trust, 5.44%, 3/25/07 4,000 3,855
- -------------------------------------------------------------------------------
Fingerhut Master Trust, 6.07%, 2/15/05 3,300 3,308
- -------------------------------------------------------------------------------
First Security Auto Owner Trust, 6.20%, 10/15/06 $ 3,500 $ 3,493
- -------------------------------------------------------------------------------
Great Western Bank, ARM, 5.61%, 7/25/17 881 870
- -------------------------------------------------------------------------------
Harley Davidson Eaglemark
5.94%, 2/15/04 750 744
- -------------------------------------------------------------------------------
6.35%, 10/15/02 1,408 1,412
- -------------------------------------------------------------------------------
IMC Home Equity Loan Trust, Zero Coupon, 8/20/22 3,300 3,230
- -------------------------------------------------------------------------------
MBNA Master Credit Card Trust, VR, 5.025%, 6/17/99 1,667 1,667
- -------------------------------------------------------------------------------
Neiman Marcus Credit Master Trust, 7.60%, 6/15/03 4,000 4,075
- -------------------------------------------------------------------------------
<PAGE>
Newcourt Equipment Trust, 5.393%, 5/20/04 5,000 4,925
- -------------------------------------------------------------------------------
NPF Receivables Trust, (144a), 6.22%, 6/1/02 3,300 3,313
- -------------------------------------------------------------------------------
Peco Energy Transport Trust, 5.63%, 3/1/05 2,650 2,604
- -------------------------------------------------------------------------------
Sears Credit Account Master Trust, 5.25%, 10/16/08 4,000 3,844
- -------------------------------------------------------------------------------
Total Asset-Backed Securities (Cost $48,609) 48,061
- -------------------------------------------------------------------------------
U.S.=GOVERNMENT=MORTGAGE-BACKED================================================
SECURITIES==17.5%==============================================================
U.S. Government Agency Obligations 16.6%
Federal Home Loan Mortgage
6.00%, 8/15/06 - 5/15/16 24,405 24,343
- -------------------------------------------------------------------------------
6.40%, 1/15/08 4,000 3,984
- -------------------------------------------------------------------------------
6.92%, 1/25/12 2,395 2,398
- -------------------------------------------------------------------------------
9.00%, 2/1 - 7/1/02 514 525
- -------------------------------------------------------------------------------
9.50%, 8/1/01 - 9/1/02 306 313
- -------------------------------------------------------------------------------
10.00%, 1/1/01 - 10/1/05 231 240
- -------------------------------------------------------------------------------
11.00%, 8/1/00 - 2/1/01 85 86
- -------------------------------------------------------------------------------
5 year balloon, 5.00%, 6/1/99 5 5
- -------------------------------------------------------------------------------
7 year balloon
<PAGE>
6.50%, 12/1/99 3,694 3,698
- -------------------------------------------------------------------------------
7.00%, 7/1/99 105 105
- -------------------------------------------------------------------------------
Federal National Mortgage Assn.
5.50%, 11/1/05 46 44
- -------------------------------------------------------------------------------
7.00%, 4/1/09 7,227 7,337
- -------------------------------------------------------------------------------
9.00%, 5/1/05 - 1/25/08 8,047 8,300
- -------------------------------------------------------------------------------
11.00%, 10/1 - 12/1/00 38 39
- -------------------------------------------------------------------------------
7 year balloon, 7.00%, 1/1/00 1,078 1,082
- -------------------------------------------------------------------------------
REMIC, 7.50%, 8/25/05 1,320 1,322
- -------------------------------------------------------------------------------
53,821
- -------------------------------------------------------------------------------
U.S. Government Guaranteed Obligations 0.9%
Government National Mortgage Assn.
I
8.50%, 2/15/05 - 3/15/06 $ 334 $ 348
- -------------------------------------------------------------------------------
10.50%, 11/15/15 113 125
- -------------------------------------------------------------------------------
GPM, I
9.50%, 8/15 - 10/15/09 7 8
- -------------------------------------------------------------------------------
11.00%, 8/15/10 55 62
- -------------------------------------------------------------------------------
11.25%, 7/15/13 - 1/15/16 296 335
- -------------------------------------------------------------------------------
11.75%, 7/15/13 - 10/15/15 1,036 1,186
<PAGE>
- -------------------------------------------------------------------------------
13.00%, 9/15/11 7 8
- -------------------------------------------------------------------------------
GPM, II, 11.00%, 9/20/13 - 4/20/14 10 11
- -------------------------------------------------------------------------------
Midget, I
9.00%, 7/15/01 - 2/15/06 306 318
- -------------------------------------------------------------------------------
9.50%, 5/15/01 - 4/15/05 95 99
- -------------------------------------------------------------------------------
10.00%, 6/15/01 - 10/15/04 303 318
- -------------------------------------------------------------------------------
11.50%, 5/15/00 4 4
- -------------------------------------------------------------------------------
2,822
- -------------------------------------------------------------------------------
Total U.S. Government Mortgage-Backed Securities (Cost $56,970) 56,643
U.S.=GOVERNMENT=OBLIGATIONS/
AGENCIES 8.9%
U.S. Government Agency Obligations 7.1%
Chilbar Shipping, 6.98%, 7/15/01 1,246 1,272
- ----------------------------------------------------------------------------
Federal National Mortgage Assn.
Global Bond, 6.375%, 1/16/02 10,000 10,127
- ----------------------------------------------------------------------------
U.S. Department Housing & Urban Development,
6.02%, 8/1/99 11,730 11,646
- ----------------------------------------------------------------------------
23,045
- ----------------------------------------------------------------------------
U.S. Treasury Obligations 1.8%
U.S. Treasury Inflation-Indexed Notes, 3.625%, 7/15/02 1,051 1,050
<PAGE>
- ----------------------------------------------------------------------------
U.S. Treasury Notes, 4.25%, 11/15/03 5,000 4,729
- ----------------------------------------------------------------------------
5,779
- ----------------------------------------------------------------------------
Total U.S. Government Obligations/Agencies (Cost $29,339) 28,824
NON-U.S.=GOVERNMENT=MORTGAGE-
BACKED=SECURITIES 2.2%
LB Commercial Conduit Mortgage Trust, 6.41%, 10/15/30 3,800 3,791
- -------------------------------------------------------------------------------
Prudential Securities, 6.074%, 1/15/08 $ 3,467 $ 3,378
- -------------------------------------------------------------------------------
Total Non-U.S. Government Mortgage-Backed Securities
(Cost $7,268) 7,169
MONEY=MARKET=FUNDS==11.4%======================================================
Reserve Investment Fund, 4.96% # 37,110 37,110
- -------------------------------------------------------------------------------
Total Money Market Funds (Cost $37,110) 37,110
=Total=Investments=in=Securities===============================================
102.4% of Net Assets (Cost $335,520) $ 331,999
Other Assets Less Liabilities (7,901
NET ASSETS $ 324,098
Net Assets Consist of:
Accumulated net investment income - net of distributions $ (1,377
Accumulated net realized gain/loss - net of distributions (33,888
Net unrealized gain (loss) (3,521
<PAGE>
Paid-in-capital applicable to 69,996,322 shares of $0.01 par
value capital stock outstanding; 1,000,000,000 shares authorized 362,884
NET ASSETS $ 324,098
NET ASSET VALUE PER SHARE $ 4.63
- --------------------------------------------------------------------------------
+ Private Placement
** For interest only securities, amount represents national principal on
which the fund receives interest
# Seven day yield
ARM Adjustable Rate Mortgage
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 9.5% of net assets.
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
T. Rowe Price Short-Term Bond Fund
- ----------------------------------
Statement of Operations
In thousands
Year
Ended
5/31/99
==Investment=Income===============================================
Interest income $ 20,822
- ------------------------------------------------------------------
Expenses
Investment management 1,423
Shareholder servicing 727
Custody and accounting 170
Prospectus and shareholder reports 71
Registration 29
Legal and audit 15
Proxy and annual meeting 15
Directors 7
Miscellaneous 3
- ------------------------------------------------------------------
Total expenses 2,460
Expenses paid indirectly (7)
- ------------------------------------------------------------------
Net expenses 2,453
- ------------------------------------------------------------------
Net investment income 18,369
Realized=and=Unrealized=Gain=(Loss)
Net realized gain (loss) on securites 691
Change in net unrealized gain or loss on securites (4,962)
==================================================================
Net realized and unrealized gain (loss) (4,271)
- ------------------------------------------------------------------
INCREASE (DECREASE) IN NET
==================================================================
ASSETS FROM OPERATIONS $ 14,098
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
T. Rowe Price Short-Term Bond Fund
- ----------------------------------
Statement of Changes in Net Assets
In thousands
Year
Ended
5/31/99 5/31/98
Increase=(Decrease)=in=Net=Assets=============================================
Operations
Net investment income $ 18,369 $ 20,302
Net realized gain (loss) 691 1,531
Change in net unrealized gain or loss (4,962) 1,771
- ------------------------------------------------------------------------------
Increase (decrease) in net assets from operations 14,098 23,604
- ------------------------------------------------------------------------------
Distributions to shareholders
Net investment income (18,343) (20,328)
- ------------------------------------------------------------------------------
Capital share transactions *
Shares sold 158,317 95,006
Distributions reinvested 16,193 17,835
Shares redeemed (178,122) (157,446)
- ------------------------------------------------------------------------------
Increase (decrease) in net assets from capital
share transactions (3,612) (44,605)
Net=Assets====================================================================
Increase (decrease) during period (7,857) (41,329)
Beginning of period 331,955 373,284
End of period $ 324,098 $ 331,955
==============================================================================
*Share information
Shares sold 33,727 20,291
Distributions reinvested 3,451 3,809
Shares redeemed (37,964) (33,633)
- ------------------------------------------------------------------------------
Increase (decrease) in shares outstanding (786) (9,533)
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
T. Rowe Price Short-Term Bond Fund
- ----------------------------------
May 31, 1999
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 with original 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.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation.
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.
<PAGE>
Premiums and Discounts Premiums and discounts on debt securities, other
than mortgage-backed securities (MBS), are amortized for both financial
reporting and tax purposes. Premiums and discounts on all MBS are recognized
upon disposition or principal repayment as gain or loss for financial reporting
purposes. For tax purposes, premiums and discounts on MBS acquired on or before
June 8, 1997, are recognized upon disposition or principal repayment as ordinary
income. For MBS acquired after June 8, 1997, premiums are recognized as gain or
loss; discounts are recognized as gain or loss, except to the extent of accrued
market discount.
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. Expenses paid indirectly reflect credits earned on daily,
uninvested cash balances at the custodian, used to reduce the fund's custody
charges.
================================================================================
NOTE 2 - INVESTMENT TRANSACTIONS
================================================================================
Purchases and sales of portfolio securities, other than short-term and U.S.
government securities, aggregated $93,217,000 and $70,323,000, respectively, for
the year ended May 31, 1999. Purchases and sales of U.S. government securities
aggregated $65,534,000 and $94,939,000, respectively, for the year ended May 31,
1999.
================================================================================
NOTE 3 - FEDERAL INCOME TAXES
================================================================================
<PAGE>
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 utilized capital loss carryforwards of $868,000 in
fiscal 1999. As of May 31, 1999, the fund has capital loss carryforwards for
federal income tax purposes of $34,054,000, of which $96,000 expires in 2001,
$4,515,000 in 2002, and $29,443,000 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, 1999. The results of
operations and net assets were not affected by the increases/(decreases) to
these accounts.
================================================================================
Undistributed net investment income $ 130,000
Undistributed net realized gain 184,000
Paid-in-capital (314,000)
================================================================================
At May 31, 1999, the cost of investments for federal income tax purposes
was substantially the same as for financial reporting and totaled $335,520,000.
Net unrealized loss aggregated $3,521,000 at period-end, of which $721,000
related to appreciated investments and $4,242,000 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 $117,000 was payable at May 31, 1999. 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
<PAGE>
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, 1999, and for the year 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 $714,000 for the year ended May
31, 1999, of which $69,000 was payable at period-end.
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. No shares of the fund were held
by Spectrum at May 31, 1999. For the year then ended, the fund was allocated
$21,000 of Spectrum expenses, $5,000 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 year ended May 31, 1999, totaled $1,557,000
and are reflected as interest income in the accompanying Statement of
Operations.
================================================================================
<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, 1999, 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, 1999 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
June 17, 1999
================================================================================
<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 the
T. Rowe Price Web site on the Internet. Address:
www.troweprice.com
BROKERAGE SERVICES*
-------------------
Individual Investments Stocks, bonds, options, precious metals,
and other securities at a savings over full-service commission
rates.**
<PAGE>
INVESTMENT INFORMATION
----------------------
Combined Statement Overview of all your accounts with T. Rowe Price.
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.
================================================================================
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
<PAGE>
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 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
appropriate to the fund or
funds covered in this report.
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
4200 West Cypress St.
10th Floor
Tampa, FL 33607
4410 ArrowsWest Drive
Colorado Springs, CO 80907
Warner Center Plaza 5
Mezzanine Level 21800 Oxnard
Street, Suite 270 Woodland
Hills, CA 91367
(OPENS MID-JUNE)
T. Rowe Price Investment Services, Inc., Distributor. F55-050 5/31/99
