Annual Report
High Yield Fund
May 31, 1996
T. Rowe Price
REPORT HIGHLIGHTS
o In sharp contrast to the weak performance of high-grade bonds from the
start of the year through May 31, high-yield bonds provided attractive
returns.
o Reflecting their sensitivity to economic trends, high-yield bonds
reacted favorably to the sharp jump in economic growth.
o Your fund provided solid returns for the 6- and 12-month periods ended
May 31 but lagged its peer group average due to its more defensive
strategy.
o Since we expect the economy to maintain its momentum in the coming
months, we have assumed a somewhat less defensive posture.
o The balance of the year should continue to provide a favorable
environment for high-yield bonds, but we would remind shareholders that
a slowdown in growth could quickly alter this outlook.
Fellow Shareholders
The 12 months ended May 31 offered a textbook illustration of the differences
between high-yield and high-grade bond dynamics. When the economy slowed and
interest rates fell in the second half of 1995, high-grade bonds outperformed
lower-quality bonds. But when the economy picked up and rates rose as 1996
progressed, the reverse was true, and high-yield bonds led the fixed income
market.
MARKET ENVIRONMENT
The months following the start of 1996 were a mirror image of the preceding
six months. In the second half of 1995, the economy looked weak, progress in
federal deficit reduction seemed likely, the Federal Reserve was
accommodative, and interest rates declined across the board. As frequently
happens in such an environment, investors favored high-quality bonds because
of their significant price appreciation when rates fall and their minimal risk
of default.
In 1996, everything changed. The economy strengthened, with real GDP rising
2.3% in the first quarter versus only .5% in the fourth quarter of 1995;
payroll employment rose sharply (220,000 per month during the first five
months of 1996); and inflation increased, led by oil and grain prices. These
were favorable developments for issuers of lower-quality bonds because
stronger growth could be expected to bolster corporate cash flows and because
rising inflation has the effect of easing the burden of debt service. Thus,
high-yield bonds returned to favor as investors sought lower-duration
securities (those less price-sensitive to interest rate changes) and
opportunities for appreciation in a rising rate environment.
Chart 1 - total return bar chart
Within the high-yield market, trends also reversed after the start of the
year. Whereas in 1995 BB-rated bonds - the highest tier of the junk bond
market - strongly outperformed lower-rated issues because of their greater
interest rate sensitivity, the opposite was true after the turn of the year
for the same reason. Issues rated B and lower posted the best year-to-date
returns, as shown in the chart on page 1. Results of speculative CCC-rated
bonds were especially striking.
PERFORMANCE AND STRATEGY REVIEW
Your fund's 4.45% return for the six months ended May 31 was generated by
income, as a two cent drop in share price was offset by an equal rise in
income from $0.36 to $0.38 per share. Total return for the 12-month period was
a solid 9.06%. Results for both periods trailed those of the average
high-yield fund largely because our overall posture was more defensive at a
time of improving high-yield market conditions.
PERFORMANCE COMPARISON
Periods Ended 5/31/96 6 Months 12 Months
High Yield Fund 4.45% 9.06%
Lipper High Yield Funds Average 6.13 11.39
Our strategy had a conservative tilt during much of the fund's fiscal year.
Specifically, we had sought to protect principal by maintaining a higher
credit quality profile in the face of an apparently weakening economy. While
this emphasis proved beneficial in 1995, it was a disadvantage when growth
picked up and market conditions changed so radically in 1996. Because of their
significant interest rate sensitivity, our positions in BB-rated bonds and
holdings of zero coupon bonds hurt the fund when interest rates rose. By the
same token, our focus on noncyclical "defensive" industries, led by a
significant commitment to the media sector, was prudent in view of the
economy's slow progress last year but meant that the fund did not benefit
fully from the subsequent strength in cyclical issues.
Since we expect the economy to remain healthy over the coming months, we have
positioned the portfolio somewhat less defensively without moving into more
speculative companies. Specifically, we have been increasing our exposure to
B-rated bonds and reducing higher-rated issues, thus decreasing the fund's
interest rate sensitivity. Holdings of zeros were also trimmed.
Chart 2 - Quality diversification pie chart
In addition, we added investments in some cyclical industries, particularly
consumer products and textiles, which should continue to do well if the
economy maintains its momentum and, in some cases, represent interesting value
situations. The remaining sector change worth noting was a greater commitment
to gaming, particularly higher-quality companies in Las Vegas and Atlantic
City, to take advantage of that industry's consolidation trend.
OUTLOOK
If the economy continues to perform well, which we expect, the environment
should be favorable for high-yield bonds and the default rate should remain
low. Although the Federal Reserve may tighten monetary policy during the
coming months to slow growth a bit and head off higher inflation, we believe
the economy is healthy enough to forestall a rise in unemployment.
chart 3 - Yield spreads chart
Therefore, we do not see the economy as the principal source of risk for
high-yield investors at present, but rather the possibility of some
backtracking of gains forged in recent months, particularly by lower-quality
issues. One of the most striking results of recent trends was a narrowing of
yield spreads on high-yield bonds versus Treasuries. Historically, when
spreads on lower-rated bonds drop below long-term averages, investor
enthusiasm for these issues diminishes. Lower demand causes spreads to widen
until yields seem sufficient reward for the additional risk.
Our aim is to provide a solid exposure to the high-yield market for investors
seeking the particular characteristics of these bonds. While we actively
manage the portfolio to take advantage of favorable developments and to
cushion the effects of potentially unfavorable ones, shareholders should
remain aware of the risks of investing in lower-quality bonds, especially
their vulnerability to recession.
We appreciate your investing with T. Rowe Price.
Respectfully submitted,
Mark J. Vaselkiv
Chairman of the Investment Advisory Committee
June 20, 1996
Mark Vaselkiv has been appointed Chairman of the High Yield Fund's Investment
Advisory Committee, succeeding Catherine H. Bray. Mr. Vaselkiv joined T. Rowe
Price in the high-yield bond department in 1988. He has been a member of the
fund's Investment Advisory Committee since that time and has also managed
separate high-yield bond portfolios.
T. Rowe Price High Yield Fund
PORTFOLIO HIGHLIGHTS
KEY STATISTICS
11/30/95 5/31/96
_____________________________________________________________________________
Price Per Share $ 8.15 $ 8.13
Dividends Per Share
For 6 months 0.36 0.38
For 12 months 0.74 0.74
Dividend Yield *
For 6 months 8.98% 9.21%
For 12 months 9.63 9.38
Weighted Average Maturity (years) 8.4 8.5
Weighted Average Effective Duration (years) 4.6 4.3
Weighted Average Quality ** BB- B+
* Dividends earned and reinvested for the periods indicated are annualized
and divided by the average daily net asset values per share for the same
period.
** Based on T. Rowe Price research.
T. Rowe Price High Yield Fund
PORTFOLIO HIGHLIGHTS
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
5/31/96
_____________________________________________________________________________
Dr Pepper Bottling Holdings 1.83%
Agricultural Minerals and Chemicals 1.74
Trump Atlantic City Associates 1.72
Arcadian Partners 1.50
Gulf Canada Resources Ltd. 1.44
Heritage Media 1.32
President Casinos 1.30
CF Cable TV 1.30
First Nationwide Holdings 1.30
Coinmach 1.27
GNF 1.24
Doane Products 1.24
SD Warren 1.24
Schuller International Group 1.23
Communications & Power Industries 1.22
K & F Industries 1.22
Container Corporation of America 1.22
Rowan Companies 1.21
International Semi-Tech 1.20
Herff Jones 1.20
Loehmann's 1.18
Wright Medical Technology 1.18
Dan River 1.18
Jordan Industries 1.17
Six Flags Theme Parks 1.16
_____________________________________________________________________________
Total 32.81%
T. Rowe Price High Yield Fund
PORTFOLIO HIGHLIGHTS
SECTOR DIVERSIFICATION
Percent of Percent of
Net Assets Net Assets
11/30/95 5/31/96
_____________________________________________________________________________
Energy 8% 9%
Gaming 7 9
Cable Operators 9 9
Telecommunications 7 8
Broadcasting 6 6
Miscellaneous Consumer Products 1 6
Aerospace and Defense 4 5
Short-Term 4 4
Specialty Chemicals 5 4
Health Care 5 4
Paper and Paper Products 6 3
Service 4 3
Container 4 3
Retail 3 2
Supermarkets 3 2
Textiles and Apparel 1 2
Building Products 4 2
Conglomerates 2 2
Beverages 2 2
Entertainment and Leisure - 2
Savings and Loan - 2
All Other 12 9
Other Assets Less Liabilities 3 2
_____________________________________________________________________________
Total 100% 100%
T. Rowe Price High Yield Fund
PERFORMANCE COMPARISON
This chart shows the value of a hypothetical $10,000 investment in the fund
over the past 10 fiscal year periods or since inception (for funds lacking
10-year records). The result is compared with a broad-based average or index.
The index return does not reflect expenses, which have been deducted from the
fund's return.
Chart 4 - SEC chart
AVERAGE ANNUAL COMPOUND TOTAL RETURN
This table shows how the fund would have performed each year if its actual (or
cumulative) returns for the periods shown had been earned at a constant rate.
Periods Ended 5/31/96 1 Year 3 Years 5 Years 10 Years
_____________________________________________________________________________
High Yield Fund 9.06% 6.12% 11.47% 8.29%
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original
purchase.
T. Rowe Price High Yield Fund
FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
Year 3 Months# Year
Ended Ended Ended
5/31/96 5/31/95 5/31/94 2/28/94 2/28/93 2/29/92
_____________________________________________________________________________
NET ASSET VALUE
Beginning of
period $ 8.16 $ 8.37 $ 9.15 $ 8.58 $ 8.23 $ 7.13
Investment activities
Net invest-
ment income 0.73 0.75 0.18 0.81 0.82 0.88
Net realized and
unrealized
gain (loss) (0.02) (0.20) (0.78) 0.57 0.35 1.10
Total from
investment
activities 0.71 0.55 (0.60) 1.38 1.17 1.98
Distributions
Net investment
income (0.74) (0.76) (0.18) (0.81) (0.82) (0.88)
NET ASSET VALUE
End of period $ 8.13 $ 8.16 $ 8.37 $ 9.15 $ 8.58 $ 8.23
Ratios/Supplemental Data
Total return 9.06% 7.09% (6.52)% 16.59% 14.96% 29.15%
Ratio of expenses
to average
net assets 0.85% 0.88% 0.85%! 0.85% 0.89% 0.97%
Ratio of net
investment
income to average
net assets 8.89% 9.27% 8.37%! 8.99% 9.85% 11.22%
Portfolio
turnover
rate 100.1% 74.2% 62.5%! 107.0% 104.4% 58.9%
Net assets,
end of period
(in millions) $ 1,229 $ 1,208 $ 1,241 $ 1,624 $ 1,404 $ 1,108
! Annualized.
# The fund's fiscal year-end was changed to May 31.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price High Yield Fund
May 31, 1996
STATEMENT OF NET ASSETS Par/Shares Value
In thousands
CORPORATE BONDS AND NOTES 87.7%
Aerospace and Defense 5.4%
BE Aerospace, Sr. Sub. Notes,
9.875%, 2/1/06 $ 12,000 $ 11,790
Communications & Power Industries,
Sr. Sub. Notes,
12.00%, 8/1/05 14,355 15,037
K & F Industries
Sr. Secured Notes, 11.875%, 12/1/03 12,650 13,662
Sr. Sub. Deb., 13.75%, 8/1/01 1,286 1,334
Tracor, Sr. Sub. Notes, 10.875%, 8/15/01 12,000 12,480
UNC, Sr. Sub. Notes, (144a), 11.00%, 6/1/06 12,000 12,120
_____________________________________________________________________________
66,423
Beverages 1.2%
Dr Pepper Bottling Holdings, Sr. Disc. Notes, STEP,
Zero Coupon, 2/15/98;
11.625%, 2/15/98-2/15/03 17,850 15,173
_____________________________________________________________________________
15,173
Broadcasting 6.1%
American Radio Systems, Sr. Sub. Notes,
9.00%, 2/1/06 3,500 3,308
Argyle Television, Sr. Sub. Notes,
9.75%, 11/1/05 7,000 6,755
Benedek Broadcasting, Sr. Notes, 11.875%, 3/1/05 12,900 13,867
Chancellor Broadcasting, Sr. Sub. Notes,
9.375%, 10/1/04 12,000 11,220
Heritage Media, Sr. Sub. Notes, 11.00%, 10/1/02 15,300 16,256
Sinclair Broadcasting, Sr. Sub. Notes,
10.00%, 9/30/05 12,000 11,610
Spectra Vision, Sr. Sub. Notes,
12.65%, 12/1/02 * 28,272 2,969
Young Broadcasting, Gtd. Sr. Sub. Notes,
11.75%, 11/15/04 8,500 9,052
_____________________________________________________________________________
75,037
Building Products 1.9%
Overhead Door, Sr. Notes, 12.25%, 2/1/00 8,625 8,733
Schuller International Group, Sr. Notes,
10.875%, 12/15/04 14,000 15,120
_____________________________________________________________________________
23,853
Cable Operators 8.5%
CF Cable TV, Sr. Secured 2nd Priority Notes,
11.625%, 2/15/05 14,700 15,986
CS Wireless Systems, Units,
(Each unit consists of 4 $1,000 par
Sr. Disc. Notes, (144a), STEP, Zero Coupon,
3/1/01; 11.375%, 3/1/01-3/1/06, and 1.1 shs.
of common stock) 17,500 8,969
Diamond Cable Communications, Sr. Disc. Notes, STEP,
Zero Coupon, 12/15/00;
11.75%, 12/15/00-12/15/05 $ 10,750 $ 6,477
Echostar Satellite Broadcasting,
Sr. Secured Disc. Notes, (144a), STEP,
Zero Coupon, 3/15/00;
13.125%, 3/15/00-3/15/04 12,000 7,980
Fundy Cable, Sr. Secured 2nd Priority Notes,
11.00%, 11/15/05 6,000 6,060
Galaxy Telecom, Sr. Sub. Notes, 12.375%, 10/1/05 12,000 12,660
Rogers Cablesystems, Sr. Secured 2nd Priority Notes,
10.00%, 3/15/05 10,000 10,025
Rogers Communications, Sr. Notes,
9.125%, 1/15/06 8,000 7,540
Videotron Group, Sr. Notes, 10.625%, 2/15/05 12,100 12,765
Videotron Holdings, Sr. Disc. Notes, STEP,
Zero Coupon, 8/15/00;
11.00%, 8/15/00-8/15/05 5,000 3,350
Wireless One, Units,
(Each unit consists of a $1,000 par Sr. Note,
13.00%, 10/15/03, and 3 warrants) 12,330 13,101
_____________________________________________________________________________
104,913
Conglomerates 1.9%
Interlake, Sr. Sub. Deb., 12.125%, 3/1/02 8,900 8,811
Jordan Industries, Sr. Notes, 10.375%, 8/1/03 15,250 14,335
_____________________________________________________________________________
23,146
Container 2.7%
Portola Packaging, Sr. Notes, 10.75%, 10/1/05 12,000 12,300
Riverwood International, Sr. Notes,
10.25%, 4/1/06 9,000 9,000
Silgan, Sr. Sub. Notes, 11.75%, 6/15/02 10,875 11,310
_____________________________________________________________________________
32,610
Electric Utilities 0.6%
El Paso Electric
1st Mtg. Notes, 8.90%, 2/1/06 2,210 2,204
1st Mtg. Bonds, 9.40%, 5/1/11 5,600 5,628
_____________________________________________________________________________
7,832
Electronic Components 1.1%
Exide Electronics Group, Units,
(Each unit consists of a $1,000 par Sr. Sub.
Note, (144a), 11.50%, 3/15/06,
and 1 warrant) $ 12,000 $ 12,870
_____________________________________________________________________________
12,870
Energy 8.7%
Coda Energy, Sr. Sub. Notes, (144a),
10.50%, 4/1/06 9,000 9,000
Dual Drilling, Sr. Sub. Notes, 9.875%, 1/15/04 9,725 10,211
Falcon Drilling, Sr. Notes, 8.875%, 3/15/03 7,675 7,483
Ferrellgas Partners, Sr. Notes, (144a),
9.375%, 6/15/06 6,250 6,094
Gulf Canada Resources Ltd., Sr. Sub. Deb.,
9.625%, 7/1/05 17,600 17,688
Maxus Energy, Notes, 9.375%, 11/1/03 12,000 11,610
Petroleum Heat and Power, Sub. Deb.,
12.25%, 2/1/05 8,734 9,651
Plains Resources, Sr. Sub. Notes, (144a),
10.25%, 3/15/06 11,100 11,266
Rowan Companies, Sr. Notes, 11.875%, 12/1/01 13,750 14,850
Tesoro Petroleum, Sub. Deb., 12.75%, 3/15/01 6,500 6,630
Tuboscope Vetco International, Sr. Sub. Notes,
10.75%, 4/15/03 1,920 1,985
_____________________________________________________________________________
106,468
Entertainment and Leisure 1.6%
Six Flags Theme Parks, Sr. Sub. Disc. Notes, STEP,
Zero Coupon, 6/15/98;
12.25%, 6/15/98-6/15/05 16,575 14,255
United Artists Theatre Circuit, PTC, (144a),
9.30%, 7/1/15 5,800 5,220
_____________________________________________________________________________
19,475
Food and Tobacco 1.0%
MAFCO, Sr. Sub. Notes, 11.875%, 11/15/02 12,000 12,660
_____________________________________________________________________________
12,660
Gaming 8.7%
Bally's Park Place, 1st Mtg. Notes,
9.25%, 3/15/04 10,500 10,579
Capitol Queen & Casino, 1st Mtg. Notes,
12.00%, 11/15/00 *! 3,400 2,380
GNF, 1st Mtg. Notes, 10.625%, 4/1/03 15,000 15,263
Grand Casinos, 1st Mtg. Notes, 10.125%, 12/1/03 11,920 12,218
Majestic Star Casino, Sr. Notes, (144a),
12.75%, 5/15/03 4,800 5,040
President Casinos, Sr. Notes, 13.00%, 9/15/01 18,000 15,840
Rio Hotel & Casino, Sr. Sub. Notes,
10.625%, 7/15/05 10,250 10,788
Stratosphere, 1st Mtg. Notes, 14.25%, 5/15/02 11,500 14,001
Trump Atlantic City Associates, 1st Mtg. Notes,
11.25%, 5/1/06 $ 21,000 $ 21,157
_____________________________________________________________________________
107,266
Health Care 3.6%
Dade International, Sr. Sub. Notes, (144a),
11.125%, 5/1/06 5,750 5,922
Mariner Health Group, Sr. Sub. Notes, (144a),
9.50%, 4/1/06 6,250 6,062
Owens & Minor, Sr. Sub. Notes, 10.875%, 6/1/06 12,500 12,719
Regency Health Services, Sr. Sub. Notes,
9.875%, 10/15/02 5,400 5,225
Wright Medical Technology, Sr. Secured Notes,
10.75%, 7/1/00 14,100 14,065
_____________________________________________________________________________
43,993
Lodging 1.3%
Courtyard By Marriott II, Sr. Secured Notes,
10.75%, 2/1/08 12,500 12,313
Hammons (J.Q.) Hotels, 1st Mtg. Notes,
8.875%, 2/15/04 4,200 4,011
_____________________________________________________________________________
16,324
Manufacturing 0.8%
American Standard, Sr. Sub. Disc. Deb., STEP,
Zero Coupon, 6/1/98;
10.50%, 6/1/98-6/1/05 11,000 9,460
_____________________________________________________________________________
9,460
Miscellaneous Consumer Products 5.9%
American Safety Razor, Sr. Notes, 9.875%, 8/1/05 12,000 12,180
Coleman Holdings, Sr. Secured Disc. Notes,
Zero Coupon, 5/27/98 1,400 1,176
Doane Products, Sr. Notes, 10.625%, 3/1/06 15,000 15,225
Herff Jones, Sr. Sub. Notes, 11.00%, 8/15/05 14,025 14,726
International Semi-Tech, Sr. Disc. Notes, STEP,
Zero Coupon, 8/15/00;
11.50%, 8/15/00-8/15/03 25,200 14,742
Revlon Worldwide, Sr. Secured Disc. Notes,
Zero Coupon, 3/15/98 17,100 14,022
_____________________________________________________________________________
72,071
Paper and Paper Products 3.1%
Container Corporation of America, Sr. Notes,
11.25%, 5/1/04 14,550 14,987
Repap Wisconsin, Sr. Secured 2nd Priority Notes,
9.875%, 5/1/06 9,125 8,030
SD Warren, Sr. Sub. Notes, 12.00%, 12/15/04 14,500 15,225
_____________________________________________________________________________
38,242
Retail 2.1%
Barry's Jewelers, Sr. Secured Notes,
11.00%, 12/22/00 $ 2,850 $ 2,608
Hills Stores, Sr. Notes, 12.50%, 7/1/03 12,300 12,546
Loehmann's, Sr. Notes, 11.875%, 5/15/03 10,375 10,686
Merry Go Round Enterprises, 5.50%, 7/3/97 *! 10,594 -
_____________________________________________________________________________
25,840
Savings and Loan 1.8%
B.F. Saul REIT, Sr. Secured Notes,
11.625%, 4/1/02 8,000 8,240
First Federal Financial, Notes, 11.75%, 10/1/04 2,200 2,200
First Nationwide Holdings, Sr. Sub. Notes, (144a),
9.125%, 1/15/03 12,500 12,156
_____________________________________________________________________________
22,596
Service 2.7%
Coinmach, Sr. Notes, 11.75%, 11/15/05 15,000 15,600
Host Marriott Travel Plazas, Sr. Notes,
9.50%, 5/15/05 9,000 8,707
Protection One Alarm, Gtd. Sr. Disc. Notes, STEP,
Zero Coupon, 6/30/98;
13.625%, 6/30/98-6/30/05 10,500 9,004
_____________________________________________________________________________
33,311
Specialty Chemicals 4.0%
Agricultural Minerals and Chemicals, Sr. Notes,
10.75%, 9/30/03 20,000 21,400
Arcadian Partners, Sr. Notes, 10.75%, 5/1/05 17,000 18,445
IMC Global, Sr. Deb., 9.45%, 12/15/11 8,645 8,818
_____________________________________________________________________________
48,663
Supermarkets 2.3%
Brunos, Sr. Sub. Notes, 10.50%, 8/1/05 6,000 5,910
Pathmark Stores, Sr. Sub. Notes, 9.625%, 5/1/03 14,205 13,459
Penn Traffic, Sr. Notes, 8.625%, 12/15/03 10,000 8,675
_____________________________________________________________________________
28,044
Telecommunications 7.7%
Call-Net Enterprises, Sr. Disc. Notes, STEP,
Zero Coupon, 12/1/99;
13.25%, 12/1/99-12/1/04 12,700 9,366
Clearnet Communications, Units,
(Each unit consists of 10 $1,000 par Sr. Disc.
Notes, STEP, Zero Coupon, 12/15/00; 14.75%,
12/15/00-12/15/05, and 33 warrants) 22,250 14,073
Intercel, Units,
(Each unit consists of 10 $1,000 par
Sr. Disc. Notes, STEP, Zero Coupon, 2/1/01;
12.00%, 2/1/01-2/1/06, and 32 warrants) $ 20,000 $ 12,200
Intermedia Communications of Florida, Sr. Notes,
13.50%, 6/1/05 1,950 2,184
MFS Communications, Sr. Disc. Notes, STEP,
Zero Coupon, 1/15/01;
8.875%, 1/15/01-1/15/06 10,500 6,431
Nextlink Communications, Sr. Notes,
12.50%, 4/15/06 5,000 5,075
Page America Group, PIK, 15.00%, 12/31/96 ! 9,200 7,694
Paging Network, Sr. Sub. Notes, 10.125%, 8/1/07 12,000 12,315
PriCellular Wireless, Sr. Sub. Disc. Notes, STEP,
Zero Coupon, 10/1/98;
12.25%, 10/1/98-10/1/03 16,000 12,560
Pronet, Sr. Sub. Notes, 11.875%, 6/15/05 12,000 12,720
_____________________________________________________________________________
94,618
Textiles and Apparel 2.1%
Dan River, Sr. Sub. Notes, 10.125%, 12/15/03 14,975 14,451
Dominion Textile USA, Gtd. Sr. Notes,
9.25%, 4/1/06 6,000 5,917
Plaid Clothing Group, Sr. Sub. Notes,
11.00%, 8/1/03 * 8,650 649
Synthetic Industries, Sr. Sub. Deb.,
12.75%, 12/1/02 4,850 5,141
_____________________________________________________________________________
26,158
Transportation 0.9%
Sea Containers Ltd., Sr. Sub. Deb.,
12.50%, 12/1/04 10,193 11,136
_____________________________________________________________________________
11,136
_____________________________________________________________________________
Total Corporate Bonds and Notes (Cost $1,106,393) 1,078,182
EQUITY AND CONVERTIBLE SECURITIES 4.7%
Automobiles and Related 1.0%
Borg-Warner, Common Stock ! 200 7,925
Exide, Common Stock 135 3,173
Motor Wheel, Common Stock, Class A *! 1 750
_____________________________________________________________________________
11,848
Beverages 0.6%
Dr Pepper Bottling Holdings
Common Stock, Class A *! 958 5,388
Common Stock, Class A *! $ 346 $ 1,946
_____________________________________________________________________________
7,334
Cable Operators 0.0%
Peachtree Cable Associates Ltd., Common Stock *! 10 170
Wireless One, Warrants * 37 259
_____________________________________________________________________________
429
Electric Utilities 0.2%
El Paso Electric, Pfd. Stock, PIK, Series A 25 2,550
_____________________________________________________________________________
2,550
Electronic Components 0.4%
Berg Electronics Holdings, Common Stock *! 180 4,656
_____________________________________________________________________________
4,656
Food Processing 0.0%
Rymer Foods, Common Stock * 401 326
_____________________________________________________________________________
326
Gaming 0.2%
Becker Gaming, Warrants *! 425 106
Hollywood Casino, Common Stock, Class A * 538 2,658
President Casinos
Warrants, (144a) *! 214 161
Warrants, (144a) *! 147 -
_____________________________________________________________________________
2,925
Health Care 0.1%
Wright Medical Technology, Warrants *! 38 495
_____________________________________________________________________________
495
Miscellaneous Consumer Durables 0.4%
Kelley Oil & Gas, Exch. Conv. Pfd. Stock 214 4,438
_____________________________________________________________________________
4,438
Paper and Paper Products 0.2%
Repap Enterprises, Common Stock * 690 2,706
_____________________________________________________________________________
2,706
Retail 0.3%
Lamonts Apparel, Common Stock * 250 -
Loehmann's
New Common Stock *!# 82 1,872
New Common Stock, Class B *# 72 1,648
Pfd. Stock, PIK, Series A # 636 357
_____________________________________________________________________________
3,877
Savings and Loan 0.3%
First Nationwide Bank Federal Savings,
Conv. Pfd. Stock $ 34 $ 3,773
_____________________________________________________________________________
3,773
Service 0.5%
Efficient Market Services, Conv. Pfd. Stock *!# 364 4,745
Protection One, Common Stock * 80 1,342
_____________________________________________________________________________
6,087
Telecommunications 0.5%
American Communications Services, Warrants * 12 1,320
Intermedia Communications of Florida, Warrants * 2 88
Mobile Telecommunication Technologies,
Conv. Pfd. Stock, (144a) 152 3,648
Page America Group
Common Stock *!# 557 396
Conv. Pfd. Stock, Series I *!# 20 840
Warrants *!# 711 -
_____________________________________________________________________________
6,292
_____________________________________________________________________________
Total Equity and Convertible Securities (Cost $46,498) 57,736
ASSET-BACKED SECURITIES 1.0%
Airplane Pass Through Trust, 10.875%, 3/15/19 11,900 12,376
_____________________________________________________________________________
Total Asset-Backed Securities (Cost $11,982) 12,376
COMMERCIAL PAPER 4.4%
Bell Atlantic Financial Services,
5.29%, 6/5-6/10/96 7,007 7,001
Countrywide Funding, 5.30%, 6/20/96 10,000 9,971
Investments in Commercial Paper through a joint account,
5.41%, 6/3/96 3,546 3,546
Mobil Australia Finance, 4(2), 5.29%, 6/28/96 3,933 3,917
Reed Elsevier, 4(2), 5.28%, 6/21/96 20,000 19,940
Sandoz, 5.28%, 6/10/96 4,000 3,995
Travelers Aetna Property Casualty, 5.29%, 6/3/96 5,000 5,000
_____________________________________________________________________________
Total Commercial Paper (Cost $53,370) 53,370
Total Investments in Securities
97.8% of Net Assets (Cost $1,218,243) $1,201,664
Other Assets Less Liabilities 27,460
NET ASSETS $1,229,124
Net Assets Consist of:
Accumulated net investment income - net of distributions $ 911
Accumulated net realized gain/loss - net of distributions (220,005)
Net unrealized gain (loss) (16,579)
Paid-in-capital applicable to 151,090,993 shares of
$0.01 par value capital stock outstanding;
1,000,000,000 shares authorized 1,464,797
NET ASSETS $1,229,124
NET ASSET VALUE PER SHARE $ 8.13
* Non-income producing
! Private Placement
# Security valued by the Fund's Board of Directors
Securities contain some restrictions as to public resale-total of
such securities at year-end amounts to 2.0% of net assets.
PIK Payment-in-Kind
PTC Pass-through Certificate
REIT Real Estate Investment Trust
STEP Stepped Coupon Bond
4(2) Commercial Paper sold within terms of a private placement memorandum,
exempt from registration under section 4.2 of the Securities Act of
1933, as amended, and may be sold only to dealers in that program or
other "accredited investors."
144a Security was purchased pursuant to Rule 144a under the Securities Act
of 1933 and may not be resold subject to that rule except to
qualified institutional buyers - total of such securities at year-end
amounts to 8.7% of net assets.
T. Rowe Price High Yield Fund
STATEMENT OF OPERATIONS
In thousands
Year
Ended
5/31/96
_____________________________________________________________________________
Investment Income
Interest and dividend income $ 118,515
Expenses
Investment management 7,752
Shareholder servicing 2,094
Custody and accounting 269
Prospectus and shareholder reports 88
Legal and audit 50
Registration 45
Directors 15
Miscellaneous 23
Total expenses 10,336
Net investment income 108,179
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities (9,370)
Change in net unrealized gain or
loss on securities 6,407
Net realized and unrealized gain (loss) (2,963)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 105,216
The accompanying notes are an integral part of these financial statements.
T. Rowe Price High Yield Fund
STATEMENT OF CHANGES IN NET ASSETS
In thousands
Year Year
Ended Ended
5/31/96 5/31/95
_____________________________________________________________________________
Increase (Decrease) in Net Assets
Operations
Net investment income $ 108,179 $ 106,297
Net realized gain (loss) (9,370) (81,130)
Change in net unrealized gain or loss 6,407 50,037
Increase (decrease) in net assets
from operations 105,216 75,204
Distributions to shareholders
Net investment income (109,829) (107,724)
Capital share transactions*
Shares sold 244,157 254,210
Distributions reinvested 88,814 82,742
Shares redeemed (307,884) (337,573)
Redemption fees received 175 336
Increase (decrease) in net assets
from capital share transactions 25,262 (285)
Net Assets
Increase (decrease) during period 20,649 (32,805)
Beginning of period 1,208,475 1,241,280
End of period $ 1,229,124 $1,208,475
*Share information
Shares sold 29,890 31,611
Distributions reinvested 10,876 10,308
Shares redeemed (37,691) (42,148)
Increase (decrease) in shares outstanding 3,075 (229)
The accompanying notes are an integral part of these financial statements.
T. Rowe Price High Yield Fund
May 31, 1996
NOTES TO FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies
T. Rowe Price High Yield 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 December 31, 1984.
Valuation Debt securities are generally traded in the over-the-counter
market. Investments in securities originally issued with maturities of one
year or more are stated at fair value as furnished by dealers who make markets
in such securities or by an independent pricing service, which considers yield
or price of bonds of comparable quality, coupon, maturity, and type, as well
as prices quoted by dealers who make markets in such securities. Securities
with original maturities of less than one year are stated at fair value, which
is determined by using a matrix system that establishes a value for each
security based on money market yields. Equity securities listed or regularly
traded on a securities exchange are valued at the last quoted sales price at
the time the valuations are made. Listed securities that are not traded on a
particular day and securities that are regularly traded in the
over-the-counter market are valued at the mean of the latest bid and asked
prices.
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 on high-yield debt securities, other than PIK
and STEP bonds, are recognized upon disposition of the security as gain or
loss for both financial reporting and tax purposes. Market discounts are
recognized upon disposition of the security as gain or loss for financial
reporting purposes and as ordinary income for tax purposes. Original issue
discounts, and all premiums and discounts on PIK and STEP bonds, are amortized
for both financial reporting and 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. Dividend income and 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.
Noninvestment-Grade Debt Securities At May 31, 1996, the fund held
investments in noninvestment-grade debt securities, commonly referred to as
"high-yield" or "junk" bonds. A real or perceived economic downturn or higher
interest rates could adversely affect the liquidity or value, or both, of such
securities because such events could lessen the ability of issuers to make
principal and interest payments.
Commercial Paper Joint Account The fund, and other affiliated funds, may
transfer uninvested cash into a commercial paper joint account, the daily
aggregate balance of which is invested in high-grade commercial paper. All
securities purchased by the joint account satisfy the fund's criteria as to
quality, yield, and liquidity.
Other Purchases and sales of portfolio securities, other than short-term
securities, aggregated $1,175,284,000 and $1,143,023,000, respectively, for
the year ended May 31, 1996.
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 $220,279,000, of which $83,409,000 expires
in 1998, $40,437,000 in 1999, and $96,433,000 thereafter through 2004.
The fund intends to retain gains realized in future periods that may be offset
by available capital loss carryforwards.
At May 31, 1996, the aggregate cost of investments for federal income tax and
financial reporting purposes was $1,218,243,000, and net unrealized loss
aggregated $16,579,000, of which $51,673,000 related to appreciated
investments and $68,252,000 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 $653,000 was payable at May 31, 1996. The fee is computed daily
and paid monthly, and consists of an individual fund fee equal to 0.30% 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 0.305% for assets in excess of $50
billion. At May 31, 1996, and for the year then ended, the effective annual
group fee rate was 0.33% and 0.34%, respectively. The fund pays a pro rata
share of the group fee based on the ratio of its net assets to those of the
group.
In addition, the fund has entered into agreements with the manager and two
wholly owned subsidiaries of the manager, pursuant to which the fund receives
certain other services. The manager computes the daily share price and
maintains the financial records of the fund. T. Rowe Price Services, Inc.
(TRPS) is the fund's transfer and dividend disbursing agent and provides
shareholder and administrative services to the fund. T. Rowe Price Retirement
Plan Services, Inc., provides subaccounting and recordkeeping services for
certain retirement accounts invested in the fund. Additionally, the fund is
one of several T. Rowe Price mutual funds (the underlying funds) in which the
T. Rowe Price Spectrum Income Fund (Spectrum) invests. In accordance with an
agreement among Spectrum, the underlying funds, the manager, and TRPS,
expenses from the operation of Spectrum are borne by the underlying funds
based on each underlying fund's proportionate share of assets owned by
Spectrum. The fund incurred expenses pursuant to these related party
agreements totaling approximately $2,037,000 for the year ended May 31, 1996,
of which $167,000 was payable at period-end.
T. Rowe Price High Yield Fund
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of T. Rowe Price High Yield 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 High Yield Fund, Inc. (the "Fund") at May 31, 1996, 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, 1996 by
correspondence with the custodian and brokers and, where appropriate, the
application of alternative auditing procedures for unsettled security
transactions, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
June 19, 1996
T. ROWE PRICE SHAREHOLDER SERVICES
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety
of information and services - at no extra cost.
Knowledgeable Service Representatives
By Phone 1-800-225-5132 Available Monday through Friday from 8 a.m. to 10
p.m. and weekends from 8:30 a.m. to 5 p.m.
In Person Available in T. Rowe Price Investor Centers.
Account Services
Checking Available on most fixed income funds.
Automatic Investing From your bank account or paycheck.
Automatic Withdrawal Scheduled, automatic redemptions.
Distribution Options Reinvest all, some, or none of your distributions.
Automated 24-Hour Services Including Tele*Access(registered trademark) and T.
Rowe Price OnLine.
Discount Brokerage
Individual Investments Stocks, bonds, options, precious metals, and other
securities; potentially large savings on commissions.
Investment Information
Combined Statement An overview of your T. Rowe Price accounts.
Shareholder Reports Fund managers' reviews of their strategies and results.
The T. Rowe Price Report A 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, Personal
Strategy Planner, Retirees Financial Guide, and Retirement Planning Kit.
For yield, price, last transaction,and current balance, 24 hours, 7 days a
week, call:
1-800-638-2587 toll free
For assistance with your existing fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
T. Rowe Price
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 High Yield
Fund(registered trademark).
T. Rowe Price Investment Services, Inc., Distributor RPRTHYF 5/31/96
Chart 1 - bar chart showing returns by quality sector from December 31, 1995
through May 31, 1996.
Chart 2 - Quality Diversification pie chart showing the fund's percentage
credit quality breakdown as a percent of net assets on May 31, 1996: AAA, AA,
BBB (reserves) 7%; BB 20%; B 67%, CCC and below 1%; not rated (equities and
convertibles) 5%.
Chart 3 - a 2-line chart showing spreads between yields on CCC and B issues
versus Treasuries for 12 months ended May 31, 1996.
Chart 4 - SEC Graph - A line chart showing the value of a hypothetical $10,000
investment in the High Yield Fund over the past 10 fiscal years compared with
a broad-based index over the same period.
