- --------------------------------------------------------------------------------
T. Rowe Price
- --------------------------------------------------------------------------------
Semiannual Report
Short-Term Bond Fund
- --------------------------------------------------------------------------------
November 30, 1998
- --------------------------------------------------------------------------------
REPORT HIGHLIGHTS
Short-Term Bond Fund
* Global economic woes heightened investor interest in low-risk
investments and prompted the Federal Reserve to lower interest rates
three times over the last three months.
* Your fund finished both the 6- and 12-month periods with solid returns
that outpaced its peer group, and also kept dividends stable.
* A modestly long duration and a preference for good-quality bonds
contributed to the fund's performance.
* We chose a more defensive sector allocation strategy during the
period, but purchased some BBB bonds we felt offered good value.
* We expect slower economic growth and possibly lower interest rates in
the coming year.
================================================================================
<PAGE>
FELLOW SHAREHOLDERS
The investment environment was turbulent for the six months ended November
30, 1998, and the domestic economy showed wear after absorbing a year's worth of
crises in Southeast Asia and Russia. Especially in 1998's third quarter, these
trends heightened investors' preference for relatively low-risk investments,
such as short-term instruments and Treasuries. Your fund's returns were moderate
in this environment but exceeded those of its peer group average by a
respectable margin.
MARKET ENVIRONMENT
Over the past 12 months, global events overshadowed domestic eco nomic and
financial market developments. The lingering effects of last year's Southeast
Asia collapse were evident in weakening corporate earnings reports and a growing
external trade deficit, while the financial crisis in Russia this past August
heightened investor discomfort with higher-risk investments. Economists, as well
as the Federal Reserve, noted a worrisome trend toward global deflation. These
concerns culminated in the third quarter, leading to poor worldwide market
liquidity, a global credit crunch, and sharp losses for stocks and higher-risk
bonds. Even though U.S. gross domestic product (GDP) growth was steady and
inflation remained low, market volatility in the U.S. increased, and investors
became highly risk averse.
[Interest Rate Levels chart shown here]
The Federal Reserve responded to the troubled atmosphere by reducing
short-term interest rates a total of 75 basis points (three-quarters of one
percent) during the last three months. The moves eased the credit crunch while
improving consumer and investor confidence at home. They also helped restore
stability to the bond and stock markets, paving the way for a November rebound
among the higher-risk instruments that were hurt earlier in the autumn.
================================================================================
<PAGE>
PREPARING FOR THE YEAR 2000
---------------------------
The Year 2000 draws closer every day, and it holds
special meaning beyond the arrival of a new millennium.
The issue for investors is that many computer programs
throughout the world use two digits instead of four to
identify the year and may assume the next century
starts with 1900. If these programs are not modified,
they will not be able to correctly handle the century
change when the year changes from "99" to "00" on
January 1, 2000, and they will no longer be able to
perform necessary functions. The Year 2000 issue
affects all companies and organizations.
T. Rowe Price has been taking steps to assure that
its computer systems and processes are capable of
functioning in the Year 2000. Detailed plans for
remediation efforts have been developed and are
currently being executed.
OUR PLAN OF ACTION
------------------
We began to address these issues several years ago
by requiring that all new systems process and store
four-digit years. We will complete all reprogramming
efforts for the major application systems, including
business applications required to service our customers
and processing infrastructure necessary to ensure the
integrity of customer data and investments, by December
31, 1998, leaving a full 12 months for system testing.
Because we exchange data electronically with customers
and vendors, we are working with them to assess the
adequacy of their own compliance efforts. Our goal is
to ensure the continuation of the same level of service
to all our mutual fund shareholders and clients after
December 31, 1999.
We are asking all vendors and companies we do
business with for a Year 2000 compliance status, with
the expectation that some organizations will not be
able to modify their interface files prior to December
31, 1999. Our goal is to identify any noncompliant
files so that we can implement alternative solutions.
In addition, we are scheduling tests for critical
vendors and companies that claim Year 2000 compliance
to ensure that time-related data and calculations
function properly as we move into the next century.
<PAGE>
SMOOTH TRANSITION PLANNED
-------------------------
We believe our programs and initiatives will
provide a smooth transition into the next millennium.
We are assessing all systems providing products or
services to our retail mutual fund shareholders,
retirement plan sponsors, and participants, and we are
taking steps to modify them where necessary for the
Year 2000. Our plan provides time to develop solutions
for all noncompliant systems and data files from
customers or vendors.
The Securities Industry Association (SIA) is
coordinating Year 2000 testing to assure that
securities markets, clearing corporations,
depositories, and third party service providers can
send, receive, and process files and transactions
accurately. In late July 1998, the SIA completed a beta
test of Year 2000 readiness. The test was considered
successful in terms of transactions completed and will
serve as the basis for the SIA's industry-wide
approach. During October 1998, T. Rowe Price completed
its beta test of Year 2000 readiness with the SIA and
is ready for the industry-wide test that is scheduled
for March and April 1999.
For a more detailed discussion of our Year 2000
effort, as well as continuing updates on our progress,
please check our Web site (www.troweprice.com).
================================================================================
Treasuries were the chief beneficiaries of the trends toward lower rates
and higher investor demand for safety. Robust demand pushed prices up and yields
down on short- and intermediate-term Treasuries. In fact, as noted in the
Interest Rate Levels chart, yields on five- and two-year Treasuries plummeted
well below the federal funds target rate. Corporate bonds did less well,
although shorter-term, higher-quality issues provided relatively attractive
performance. Falling rates were more problematic for mortgage-backed bonds,
which struggle when home mortgage prepayments increase.
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON
----------------------
Periods Ended 11/30/98 6 Months 12 Months
Short-Term Bond Fund 3.21% 6.65%
-------------------- ----- -----
Lipper Short Investment-
Grade Debt Funds Average 2.94 6.00
------------------------ ---- ----
- --------------------------------------------------------------------------------
<PAGE>
PERFORMANCE AND STRATEGY REVIEW
Your fund finished the six-month semiannual period with a relatively strong
return of 3.21%, ahead of the 2.94% gain for the Lipper Short Investment-Grade
Debt Funds Average. That showing contributed to a 6.65% total return for the
past 12 months, again besting the peer group's 6% return. Six-month dividends
per share remained unchanged from the prior six-month period, although in an
environment of falling interest rates, 12-month dividends slipped one penny from
the prior period. A strategy that emphasized higher-yielding bonds and longer
maturities contributed to the superior performance.
Portfolio duration was maintained at about 2.2 years, slightly longer than
the Lipper average. (Duration is a measure of price sensitivity to changes in
interest rates. A fund having a duration of two years will have a 2%
appreciation or decline in price in response to a one-percentage-point fall or
rise, respectively, in interest rates.) This strategy helped the fund post good
results despite a heavy concentration (53% of assets at period end) in corporate
bonds, which did not perform as well as Treasuries when rates fell and investors
rushed to relatively safe investments. We helped to protect the fund during the
volatile September period by maintaining a high average credit quality of AA.
Toward the end of the period, after the market's harsh sell-off of lower-quality
instruments, we selectively added some BBB bonds in defensive sectors. These
issues had attractive yields, and we felt they had been oversold. This activity,
combined with upgrades of our BB holdings, raised the fund's BBB weighting from
17% on May 31 to 21% at the end of November.
[Pie Chart Showing BBB 21%; AA 40%; A 26%; AA 13%]
Within the corporate segment of the portfolio, industry allocations changed
to reflect our concern over the health of corporate profits. We began to move
out of cyclical issues, which are strongly influenced by economic activity, into
more defensive sectors, where profits tend to be more stable. Specifically,
exposure to banking and finance issues was reduced from 15% six months ago to
10% at November 30, and energy holdings were reduced from 5% of assets to 1%
over the same period. The proceeds were used to increase our positions in
non-cyclical industrial bonds from 8% to 13% and consumer products and services
bonds from 7% to 10%. Some of the companies whose bonds we purchased included
Rite Aid and Safeway -- retailers we think will do well even if the economy
weakens.
When it became clear that interest rates were heading lower, we also
trimmed the portfolio's exposure to mortgage-backed bonds. These issues tend to
underperform when interest rates fall because their prepayment risk increases.
(Prepayments occur when homeowners refinance their high-rate mortgages, causing
premium-priced mortgage-backed bonds to be cashed out at par. In that case, the
premium and a typically high yield are lost.) We correspondingly increased
holdings of asset-backed securities, whose cash flows are more predictable and
less sensitive to falling rates.
<PAGE>
OUTLOOK
While there was some negative news and much concern about the state of the
U.S. economy during the period, there was little convincing evidence that a
recession is at hand. Indeed, we expect 1999 to be marked by slower GDP growth
- -- perhaps below 2% -- but not a recession. This slowing will place some
pressure on corporate profits, but the overall economic climate should remain
generally favorable for business. The Fed is also likely to remain accommodative
given the current low rate of inflation and the high level of economic
uncertainty. Accordingly, we expect to maintain a slightly long duration
compared with our Lipper peer group. We will probably keep the portfolio's
corporate bond weighting in the 50% to 55% range, emphasizing higher-quality
bonds in less economically sensitive sectors, and increase holdings in
mortgage-backed securities in light of their recent attractive prices. Both of
these sectors should help this generally high-quality portfolio to maintain a
slight yield advantage. Overall, we expect a positive environment for bonds, in
which returns will mainly reflect income, although some price appreciation is
possible.
Respectfully submitted,
Edward A. Wiese
[signature]
President and Chairman of the Investment Advisory Committee
December 17, 1998
<PAGE>
PORTFOLIO HIGHLIGHTS
- --------------------
Key statistics
5/31/98 11/30/98
------- --------
Price Per Share ........................... $4.69 $4.71
Dividends Per Share
For 6 months ............................ 0.13 0.13
For 12 months ........................... 0.27 0.26
Dividend Yield *
For 6 months ............................ 5.79% 5.53%
For 12 months ........................... 5.97 5.74
30-Day Standardized Yield ................. 5.52 5.38
Weighted Average Maturity (years) ......... 2.7 2.7
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 average daily net asset values per share
for the same period.
** Based on T. Rowe Price research.
================================================================================
<PAGE>
PORTFOLIO HIGHLIGHTS
- --------------------
SECTOR Diversification
Percent of Percent of
Net Assets Net Assets
5/31/98 11/30/98
---------- ----------
Corporate Bonds and Notes 51% 53%
Industrial 8 13
Utilities 10 11
Banking and Finance 15 11
Consumer Products and Services 7 10
Transportation 3 4
All Other 8 4
Asset-Backed Securities 8 11
Mortgage-Backed Securities 23 21
U.S. Government Obligations 11 7
U.S. Treasuries 3 -
Government Agency Obligations 8 7
Money Market Funds * 7 7
Other Assets Less Liabilities - 1
Total 100% 100%
* See note at end of financial statements.
================================================================================
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 Short-term Bond Fund Shown here]
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 11/30/98 1 Year 3 Years 5 Years 10 Years
- ---------------------- ------ ------- ------- --------
Short-Term Bond Fund 6.65% 5.61% 4.56% 6.40%
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original purchase.
================================================================================
<PAGE>
FINANCIAL HIGHLIGHTS
Unaudited
For a share outstanding throughout each period
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
6 Months Year 3 Months++ Year
Ended Ended Ended Ended
11/30/98 5/31/98 5/31/97 5/31/96 5/31/95 5/31/94 2/28/94
-------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE
Beginning of period ..... $4.69 $4.65 $4.64 $4.72 $4.85 $ 5.00 $ 5.09
Investment activities
Net investment income ... 0.13 0.27 0.27 0.29 0.29 0.07 0.31
Net realized and
unrealized gain (loss) .. 0.02 0.04 0.01 (0.08) (0.13) (0.15) (0.09)
Total from
investment activities ... 0.15 0.31 0.28 0.21 0.16 (0.08) 0.22
Distributions
Net investment income ... (0.13) (0.27) (0.26) (0.28) (0.29) (0.07) (0.28)
Tax return of capital ... - - (0.01) (0.01) - - (0.03)
Total distributions ..... (0.13) (0.27) (0.27) (0.29) (0.29) (0.07) (0.31)
NET ASSET VALUE
End of period ........... $4.71 $4.69 $4.65 $4.64 $4.72 $4.85 $5.00
Ratios/Supplemental Data
Total returns *.......... 3.21% 6.87% 6.28% 4.58% 3.41% (1.65)% 4.36%
Ratio of expenses to
average net assets ...... 0.72%+ 0.72% 0.74% 0.72% 0.79% 0.79%+ 0.74%
Ratio of net investment
income to average
net assets .............. 5.48%+ 5.82% 5.91% 6.15% 6.09% 5.56%+ 6.00%
Portfolio turnover rate . 67.8%+ 73.0% 103.9% 118.7% 136.9% 222.8%+ 90.8%
Net assets, end of period
(in thousands) .......... $356,946 $331,955 $373,284 $429,498 $493,726 $601,924 $668,066
</TABLE>
* 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.
+ Annualized
++ The fund's fiscal year-end was changed to May 31.
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
T. ROWE PRICE SHORT-TERM BOND FUND
- ----------------------------------
Unaudited November 30, 1998
Statement of Net Assets
Par/Shares Value
--------------------
In thousands
CORPORATE=BONDS=AND=NOTES==52.7%=======
Banking and Finance 10.7%
Banco Generale, (144a), 7.70%, 8/1/02 ................... $4,450 $4,255
Ciesco, MTN, (144a), 7.38%, 4/19/00 + ................... 3,750 3,778
General Electric Capital, MTN, 6.15%, 11/5/01 ........... 4,150 4,253
Goldman Sachs Group, MTN, (144a), 6.25%, 2/1/03 ......... 3,000 3,073
International Lease Finance, MTN, 6.69%, 4/3/00 ......... 5,000 5,085
MBNA, Sub. Notes, 7.25%, 9/15/02 ........................ 2,650 2,728
Mercantile Safe Deposit & Trust, 6.53%, 7/3/00 .......... 4,200 4,228
Morgan Guaranty Trust, Sub. Notes, 7.375%, 2/1/02 ....... 4,000 4,203
Paine Webber Group, 7.875%, 2/15/03 ..................... 3,000 3,173
Salomon Smith Barney Holdings, 7.30%, 5/15/02 ........... 3,250 3,406
38,182
Consumer Products and Services 10.2%
Amvescap, Sr. Notes, (144a), 6.375%, 5/15/03 ............ 4,250 4,313
Beckman Instruments, Sr. Notes, (144a),
7.10%, 3/4/03 ........................................... 4,000 4,016
Grand Metropolitan Investment, Zero Coupon, 1/6/04 ...... 5,500 4,158
Nabisco, 6.00%, 2/15/01 ................................. 3,500 3,454
Pepsico, MTN, 5.75%, 1/2/03 ............................. 3,700 3,776
Philip Morris, 7.25%, 9/15/01 ........................... 4,300 4,468
Rite Aid, 6.70%, 12/15/01 ............................... 4,000 4,080
Safeway, 5.75%, 11/15/00 ................................ 4,000 3,990
Sony, 6.125%, 3/4/03 .................................... 4,025 4,144
36,399
Energy and Petroleum 1.3%
PDV America, Sr. Notes, 7.875%, 8/1/03 .................. 4,800 4,686
4,686
<PAGE>
Industrials 12.8%
Allied-Signal, 5.75%, 3/15/01 ........................... 3,350 3,328
General Motors Acceptance Corp., MTN,
6.625%, 4/24/00 ......................................... 4,400 4,474
Ingersoll Rand
6.34%, 12/3/01 .......................................... 1,000 1,020
Sr. Notes, 6.255%, 2/15/01 .............................. 2,700 2,736
Lockheed, 6.75%, 3/15/03 ................................ 4,300 4,496
McDonnell Douglas Finance, MTN, 6.39%, 1/15/02 .......... 2,000 2,027
Parker Hannifin, MTN, 5.65%, 9/15/03 .................... 4,000 4,050
Praxair, 6.15%, 4/15/03 ................................. 3,350 3,351
Raytheon, 5.70%, 11/1/03 ................................ 4,000 4,042
Service Corporation International, 7.375%, 4/15/04 ...... $4,000 $4,240
Toyota Motor Credit, 5.625%, 11/13/03 ................... 4,000 3,995
USA Waste Services, Sr. Notes, 6.50%, 12/15/02 .......... 4,300 4,367
Waste Management, 6.625%, 7/15/02 ....................... 3,350 3,424
45,550
Media and Communications 2.9%
NWCG Holdings, Sr. Disc. Notes, Zero Coupon, 6/15/99 .... 4,550 4,389
Sprint Capital, 5.70%, 11/15/03 ......................... 2,800 2,829
Worldcom, Sr. Notes, 6.25%, 8/15/03 ..................... 3,100 3,171
10,389
Transportation 3.6%
Chilbar Shipping, 6.98%, 7/15/01 ........................ 1,477 1,528
Delta Air Lines, ETC, 9.60%, 5/26 - 6/1/00 .............. 2,960 3,112
ERAC USA Finance, (144a), 6.375%, 5/15/03 ............... 4,000 4,056
Norfolk Southern, 6.95%, 5/1/02 ......................... 4,000 4,164
12,860
Utilities 11.2%
CE Electric UK Funding, Sr. Notes, (144a),
6.853%, 12/30/04 ........................................ 4,000 4,125
Midamerican Energy, Sr. Notes, 6.50%, 12/15/01 .......... 4,450 4,577
National Rural Utilities, 5.00%, 10/1/02 ................ 4,000 3,965
Niagara Mohawk Power, 7.375%, 8/1/03 .................... 2,000 2,094
Orange and Rockland Utilities, Deb., 6.14%, 3/1/00 ...... 4,500 4,541
Pacific Gas and Electric, 1st Mtg. Bonds,
8.75%, 1/1/01 ........................................... 4,500 4,783
Progress Capital Holdings, MTN, (144a),
6.88%, 8/1/01 ........................................... 4,400 4,494
Public Service Electric & Gas, Mtg. Bonds,
8.875%, 6/1/03 .......................................... 4,350 4,899
Texas NM Power, 1st Mtg. Notes, 9.25%, 9/15/00 .......... 1,750 1,839
United Illuminating, 6.25%, 12/15/02 .................... 2,150 2,167
Williams Cos, 6.125%, 2/15/02 ........................... 2,500 2,495
39,979
Total Corporate Bonds and Notes (Cost $186,525) 188,045
<PAGE>
ASSET-BACKED=SECURITIES==10.6%=========
Advanta Mortgage Loan Trust, Interest Only,
5.00%, 12/25/00 ** ...................................... 18,000 1,693
Banc One Auto Grantor Trust, 6.27%, 11/20/03 ............ 2,183 2,206
California Infrastructure
6.25%, 6/25/04 .......................................... 2,175 2,232
6.28%, 9/25/05 .......................................... 1,900 1,965
Fingerhut Master Trust, 6.07%, 2/15/05 .................. 3,300 3,363
Harley Davidson Eaglemark
5.94%, 2/15/04 .......................................... $750 $753
(144a), 6.35%, 10/15/02 ................................. 2,021 2,031
IMC Home Equity Loan Trust, 6.36%, 8/20/22 .............. 3,300 3,305
MBNA Master Credit Card Trust, VR, 5.84%, 3/15/01 ....... 4,167 4,165
NPF VI, 6.22%, 6/1/02 ................................... 3,300 3,294
Neiman Marcus Credit Master Trust, 7.60%, 6/15/03 ....... 4,000 4,115
Newcourt Equipment, 5.393%, 5/20/04 ..................... 5,000 4,985
Sears Credit Account Master Trust, 5.25%, 10/16/08 ...... 4,000 3,909
Total Asset-Backed Securities (Cost $37,897)............. 38,016
U.S.=GOVERNMENT=MORTGAGE-BACKED========
SECURITIES==21.1%======================
U.S. Government Agency Asset-Backed 2.1%
Federal Home Loan Mortgage, CMO,
6.40%, 1/15/08 .......................................... 4,000 4,056
6.92%, 1/25/12 .......................................... 3,440 3,448
7,504
U.S. Government Agency Obligations 18.0%
Federal Home Loan Mortgage
6.00%, 1/15/08 - 5/15/16 ................................ 14,600 14,535
9.00%, 7/1/01 - 7/1/02 .................................. 745 764
9.50%, 8/1/01 - 9/1/02 .................................. 392 404
10.00%, 1/1/01 - 10/1/05 ................................ 303 316
11.00%, 8/1/00 - 2/1/01 ................................. 157 160
5 year balloon
5.00%, 5/1 - 6/1/99 ..................................... 2,191 2,191
6.00%, 4/1/99 ........................................... 4,812 4,814
7 year balloon
6.50%, 12/1/99 .......................................... 5,477 5,503
7.00%, 7/1/99 ........................................... 716 719
<PAGE>
REMIC
6.00%, 8/15/06 .......................................... 12,488 12,484
7.50%, 1/15/21 .......................................... 171 171
Federal National Mortgage Assn ..........................
5.50%, 11/1/05 .......................................... 56 55
7.00%, 4/1/09 ........................................... 8,482 8,676
Federal National Mortgage Assn ..........................
9.00%, 5/1/05 ........................................... $3,293 $3,403
11.00%, 10/1/00 - 1/1/01 ................................ 73 74
7 year balloon, 7.00%, 1/1/00 ........................... 1,240 1,250
REMIC
7.50%, 8/25/05 .......................................... 3,008 3,013
9.00%, 1/25/08 .......................................... 5,362 5,831
64,363
U.S. Government Guaranteed Obligations 1.0%
Government National Mortgage Assn.
I
8.50%, 2/15/05 - 3/15/06 ................................ 420 441
10.50%, 11/15/15 ........................................ 126 141
GPM, I
8.50%, 1/15/06 .......................................... 59 62
9.50%, 8/15 - 10/15/09 .................................. 8 9
11.00%, 8/15/10 ......................................... 56 63
11.25%, 6/15/13 - 1/15/16 ............................... 353 397
11.75%, 7/15/13 - 10/15/15 .............................. 1,296 1,479
13.00%, 9/15/11 ......................................... 7 9
GPM, II, 11.00%, 9/20/13 - 4/20/14 ...................... 10 11
Midget, I
9.00%, 7/15/01 - 2/15/06 ................................ 401 415
9.50%, 5/15/01 - 4/15/05 ................................ 128 132
10.00%, 6/15/01 - 10/15/04 .............................. 345 362
11.50%, 5/15/00 ......................................... 6 6
3,527
Total U.S. Government Mortgage-Backed Securities (Cost $75,161) 75,394
U.S.=GOVERNMENT=OBLIGATIONS==7.4%======
U.S. Government Agency Obligations 7.4%
Federal National Mortgage Assn.,
6.15%, 12/14/01 ......................................... 4,300 4,302
6.375%, 1/16/02 ......................................... 10,000 10,379
U.S. Department Housing & Urban Development, 6.02%, 8/1/99 11,730 11,800
Total U.S. Government Obligations (Cost $26,454) ........ 26,481
<PAGE>
NON-U.S.=GOVERNMENT=MORTGAGE-BACKED====
SECURITIES==0.3%=======================
Great Western Bank, ARM, 5.96%, 7/25/17 ................. $ 953 $944
Total Non-U.S. Government Mortgage-Backed Securities (Cost $953) 944
MONEY=MARKET=FUNDS==6.7%===============
Reserve Investment Fund, 5.34% # ........................ 23,931 23,931
Total Money Market Funds (Cost $23,931) ................. 23,931
=Total=Investments=in=Securities============
98.8% of Net Assets (Cost $350,921) $ 352,811
Other Assets Less Liabilities 4,135
NET ASSETS $ 356,946
Net Assets Consist of:
Accumulated net investment income - net of distributions $ (1,507)
Accumulated net realized gain/loss - net of distributions (33,947)
Net unrealized gain (loss) 1,890
Paid-in-capital applicable to 75,811,281 shares of $0.01 par
value capital stock outstanding; 1,000,000,000 shares authorized 390,510
===================
NET ASSETS $ 356,946
NET ASSET VALUE PER SHARE $ 4.71
================================================================================
+ Private Placement
** For Interest Only securities, amount represents notional
principal on which the fund receives interest
# 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 8.30% of net assets.
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
Statement of Operations
Unaudited
In thousands
6 Months
Ended
11/30/98
--------
Investment Income
Interest income .................................................. $10,568
Expenses
Investment management ............................................ 720
Shareholder servicing ............................................ 360
Custody and accounting ........................................... 78
Prospectus and shareholder reports ............................... 31
Registration ..................................................... 16
Legal and audit .................................................. 7
Proxy and annual meeting ......................................... 5
Directors ........................................................ 3
Miscellaneous .................................................... 2
Total expenses ................................................... 1,222
Net investment income ............................................ 9,346
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities ........................... 816
Change in net unrealized gain or loss on securities .............. 449
Net realized and unrealized gain (loss) .......................... 1,265
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS ........................................... $10,611
================================================================================
<PAGE>
Statement of Changes in Net Assets
Unaudited
In thousands
6 Months Year
Ended Ended
11/30/98 5/31/98
--------------------
Increase (Decrease) in Net Assets
Operations
Net investment income ................................ $9,346 $20,302
Net realized gain (loss) ............................. 816 1,531
Change in net unrealized gain or loss ................ 449 1,771
Increase (decrease) in net assets from operations .... 10,611 23,604
Distributions to shareholders
Net investment income ................................ (9,320) (20,328)
Capital share transactions *
Shares sold .......................................... 81,081 95,006
Distributions reinvested ............................. 8,236 17,835
Shares redeemed ...................................... (65,617) (157,446)
Increase (decrease) in net assets from capital
share transactions ................................... 23,700 (44,605)
Net Assets
Increase (decrease) during period .................... 24,991 (41,329)
Beginning of period .................................. 331,955 373,284
End of period ........................................ $356,946 $331,955
*Share information
Shares sold .......................................... 17,226 20,291
Distributions reinvested ............................. 1,748 3,809
Shares redeemed ...................................... (13,945) (33,633)
Increase (decrease) in shares outstanding ............ 5,029 (9,533)
================================================================================
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Unaudited November 30, 1998
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.
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 MBSacquired on or before
June 8, 1997, are recognized upon disposition or principal repayments as
ordinary income. For MBSacquired 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.
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 receives cash and U.S. government securities as
collateral against the loans. Cash collateral received is invested in a money
market pooled account by the fund's lending agent. Collateral is maintained over
the life of the loan in an amount not less than 100% of the value of loaned
securities. Although 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. At November 30, 1998, the value of
securities on loan was $2,508,000; aggregate collateral consisted of $2,554,000
in the securities lending collateral pool.
Other Purchases and sales of portfolio securities, other than short-term
and U.S. government securities, aggregated $68,355,000 and $35,339,000,
respectively, for the six months ended November 30, 1998. Purchases and sales of
U.S. government securities aggregated $59,608,000 and $71,170,000, respectively,
for the six months ended November 30, 1998.
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. As of May 31, 1998, the fund had capital loss
carryforwards for federal income tax purposes of $34,922,000, of which $964,000
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.
At November 30, 1998, the cost of investments for federal income tax
purposes was substantially the same as for financial reporting and totaled
$350,921,000. Net unrealized gain aggregated $1,890,000, of which $3,113,000
related to appreciated investments and $1,223,000 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 $123,000 was payable at November 30, 1998. 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, 1998, 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.
<PAGE>
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 $353,000 for the six months
ended November 30, 1998, of which $61,000 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. Spectrum Income Fund held
approximately 7% of the outstanding shares of the Short-Term Bond Fund at
November 30, 1998. For the six months ended November 30, 1998, the fund was
allocated $11,000 of Spectrum expenses, all 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, 1998, totaled
$802,000 and are reflected as interest income in the accompanying Statement of
Operations.
================================================================================
<PAGE>
ANNUAL MEETING RESULTS
The Short-Term Bond Fund held an annual meeting on October 15, 1998, to
elect directors of the fund and to ratify the Board of Directors' selection of
PricewaterhouseCoopers L.L.P. as the fund's independent accountants.
The results of voting were as follows (by number of shares):
For nominees to the Board of Directors for the Short-Term Bond Fund:
Calvin W. Burnett
In favor: 40,575,781.365
Withheld: 701,736.981
Anthony W. Deering
In favor: 40,696,311.910
Withheld: 581,206.436
F. Pierce Linaweaver
In favor: 40,569,057.814
Withheld: 708,460.532
William T. Reynolds
In favor: 40,723,646.233
Withheld: 553,872.113
James S. Riepe
In favor: 40,707,408.282
Withheld: 570,110.064
John G. Schreiber
In favor: 40,729,242.662
Withheld: 548,275.684
M. David Testa
In favor: 40,671,306.157
Withheld: 606,212.189
For PricewaterhouseCoopers L.L.P.
as independent accountants:
In favor: 40,573,071.576
Withheld: 201,804.994
Abstained: 502,641.776
================================================================================
<PAGE>
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
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 11/30/98
