<PAGE>
Annual Report
HIGH YIELD
FUND
------------
MAY 31, 1997
------------
[LOGO OF T. ROWE PRICE APPEARS HERE]
T. ROWE PRICE
<PAGE>
REPORT HIGHLIGHTS
-----------------------------------------------------------------------------
. Surging economic growth and exuberant demand supported high-yield bonds,
which continued to outperform high-quality issues.
. The High Yield Fund's returns of 6.07% and 13.49% for the 6- and 12-month
periods, respectively, exceeded the average return of its competitor funds
for both periods and the benchmark index for the year.
. There were no major changes to the portfolio, although we took profits in the
energy sector.
. The fund remains focused on B-rated bonds, with a broad diversification among
industry sectors.
. Apart from valuations and tight yield spreads, we see no major impediments
that would slow the bull market for high-yield bonds but remind investors
that this fund invests in a high-risk arena.
<PAGE>
Fellow Shareholders
The stars were aligned for the high-yield bond market during the past six
months. Virtually all the principal influences on this market were positive if
not exuberant, especially the U.S. economy and the market's own fundamentals.
The rise in interest rates that dampened returns on high-quality bonds was not a
problem for the credit-sensitive, high-yield market. As a result, high-yield
bonds significantly outperformed high-quality bonds for both the six months and
year ended May 31.
MARKET ENVIRONMENT
Many of the same factors that drove stocks higher fueled the rise in
high-yield (junk) bond prices. Topping this list were the continued
and largely unexpected strength in corporate earnings and the
economy's 5.8% annualized growth rate in the first quarter--roughly
double the trend rate since the current upturn began in 1991. In an
attempt to cool this pace and preempt a rise in inflation, the Federal
Reserve raised the federal funds rate (from 5.25% to 5.5%) for the
first time since 1995, and interest rates rose across the yield curve.
While the Fed's move sent shock waves through all financial markets,
stocks and high-yield bonds, which typically are driven by economic
growth and corporate earnings expectations, recovered quickly and
forged ahead. High-quality bonds took longer to turn around, and their
returns were lackluster.
The chart highlights the performance difference between investment-
grade and noninvestment-grade bonds over the past year. Bonds rated
BBB, the lowest tier of the investment-grade category, lagged far
behind those rated BB and B, the highest tiers of the noninvestment-
grade category.
- ----------------------
CORPORATE BOND RETURNS
- ----------------------------------------------------------
Total Return for the Periods Ended 5/31/97
[BAR CHART APPEARS HERE]
<TABLE>
<CAPTION>
6 Months 12 Months
<S> <C> <C>
BBB 0.83% 9.7%
BB 4.17 13.27
B 5.85 14.63
</TABLE>
1
<PAGE>
High-yield bonds also benefited from extremely strong demand relative to
the supply of issues. Cash flow into retail high-yield mutual funds was
heavy; the number of institutional investors allocating assets to this
market sector continued to rise; and structured securities called
collateralized bond obligations (CBOs) absorbed billions of dollars worth
of high-yield bonds. On the supply side, new issues appeared at a steady
clip, particularly from smaller companies. Nevertheless, many potential
high-yield bond issuers have elected to refinance existing bonds through a
growing number of attractive alternatives--commercial banks, for example,
are returning to this arena--and this has constrained the opportunities for
high-yield bond investors.
PERFORMANCE AND STRATEGY REVIEW
Your fund provided solid returns for both the 6- and 12-month periods, with
capital appreciation augmenting income in both cases. Performance exceeded
the average return of the fund's peer group in each period, as shown in the
table. The fund also outstripped the First Boston index for its fiscal year
but lagged the index in recent months when issues in the lower tiers of the
junk bond universe scored the greatest gains.
- ----------------------
PERFORMANCE COMPARISON
- -------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 5/31/97 6 Months 12 Months
- -------------------------------------------------------
<S> <C> <C>
High Yield Fund 6.07% 13.49%
.......................................................
First Boston High Yield Index 6.47 13.38
.......................................................
Lipper High Current Yield
Funds Average 5.47 13.13
.......................................................
</TABLE>
We continued our even-keel approach to managing the fund, attempting to
balance the advantages of higher yields and appreciation opportunities
against additional risk. Toward this end, we maintained a strong focus on
B-rated issues, as you can see in the chart on page 3, with 74% of net
assets now in this category, up from 72% six months ago. As noted in
previous reports, we like the pickup in yield these bonds provide without
undue exposure to interest rate and credit risk. As always, we draw heavily
on our in-house research expertise to help us assess each issue's risk and
reward potential.
Allocations remain widely diversified among industry sectors to limit
potential problems from any single area. The only change of note during the
six-month period was a reduction in the strongly performing
2
<PAGE>
- -----------------------
QUALITY DIVERSIFICATION
- -------------------------------------------------
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
CCC 2%
CC and Below 1%
Nonrated (Convertibles and Equities) 5%
AAA, AA, A, BBB 7%
BB 11%
B 74%
</TABLE>
energy area from 8% to 4% of net assets, reflecting profit-taking in these
investments. Our financial services positions continued to be rewarding,
including companies such as First Nationwide, Chevy Chase Bank, and Ocwen,
and we increased exposure a bit to 5%. As of May 31, no sector accounted
for more than 7.5% of net assets, and our five largest holdings (shown in
Portfolio Highlights) represented five different industries.
OUTLOOK
Six months ago we sounded a note of caution in looking over the high-yield
landscape. While we anticipated solid returns if the economy continued to
grow, we worried about the high valuations in our market--a concern shared
by many investors about stocks--and also about a possible rise in defaults
in the wake of the large number of new offerings. So far, the default rate
has been declining, and if the year-to-date trend continues, 1997 could
have the lowest default rate in three years. The high-yield market has
hardly missed a beat, principally because of the economy's amazing
momentum. We said last winter we would be happy to be surprised on the
upside, and we are happy.
We see nothing on the immediate horizon that might bring this bull market
to a halt. Unless the Fed makes a serious miscalculation, we would expect a
continuation of moderate inflation and a return to moderate growth--a good
environment for all debt securities. Closer to home, we believe the high-
yield market may be more resilient than in the past, when it was less
diverse and problems with one or two high-profile issuers could have a
large impact. At the same time, we know that today's narrow yield spreads
among bonds of different credit quality will eventually correct and that
defaults will rise when and if the economy slows significantly.
3
<PAGE>
Particularly when we are enjoying a period of sustained high returns, we
like to remind shareholders that this fund's high yield is accompanied by
higher risk, so it is not appropriate for short-term investment goals. We
would emphasize equally that our near-term outlook is positive, and we
would expect high-yield bonds to remain rewarding over the long term.
Respectfully submitted,
/s/ Mark J. Vaselkiv
Mark J. Vaselkiv
Chairman of the Investment Advisory Committee
June 20, 1997
- --------------------
PORTFOLIO HIGHLIGHTS
- --------------------------------------------------------------------------------
KEY STATISTICS
<TABLE>
<CAPTION>
11/30/96 5/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
Price Per Share $8.31 $8.43
................................................................................
Dividends Per Share
................................................................................
For 6 months 0.38 0.37
...........................................................................
For 12 months 0.75 0.75
...........................................................................
Dividend Yield *
................................................................................
For 6 months 9.33% 9.16%
...........................................................................
For 12 months 9.56 9.50
...........................................................................
Weighted Average Maturity (years) 8.6 8.7
................................................................................
Weighted Average Effective Duration (years) 3.8 3.9
................................................................................
Weighted Average Quality ** B+ B+
................................................................................
</TABLE>
* 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.
4
<PAGE>
T. Rowe Price High Yield Fund
- --------------------------------------------------------------------------------
- --------------------
Portfolio Highlights
- --------------------------------------------------------------------------------
TWENTY-FIVE LARGEST HOLDINGS
<TABLE>
<CAPTION>
Percent of
Net Assets
5/31/97
- --------------------------------------------------------------------------------
<S> <C>
Dr Pepper Bottling 2.0%
................................................................................
Allied Waste Industries 1.5
................................................................................
K & F Industries 1.5
................................................................................
Keebler 1.4
................................................................................
Rogers Cablesystems 1.4
- --------------------------------------------------------------------------------
Ocwen 1.3
................................................................................
Container Corporation of America 1.3
................................................................................
Agricultural Minerals and Chemicals 1.2
................................................................................
Chancellor Radio Broadcasting 1.2
................................................................................
CFCable TV 1.2
- --------------------------------------------------------------------------------
Communications & Power Industries 1.2
................................................................................
Coinmach 1.2
................................................................................
SD Warren 1.2
................................................................................
Foamex 1.1
................................................................................
Doane Products 1.1
- --------------------------------------------------------------------------------
Six Flags Theme Parks 1.1
................................................................................
Herff Jones 1.1
................................................................................
Benedek Broadcasting 1.0
................................................................................
MAFCO 1.0
................................................................................
Revlon 1.0
- --------------------------------------------------------------------------------
Pricellular Wireless 1.0
................................................................................
Sterling Chemicals 1.0
................................................................................
Shoppers Food Warehouse 1.0
................................................................................
Courtyard by Marriott II 1.0
................................................................................
Maxxam Group Holdings 1.0
- --------------------------------------------------------------------------------
Total 30.0%
</TABLE>
5
<PAGE>
T. Rowe Price High Yield Fund
- --------------------------------------------------------------------------------
- --------------------
Portfolio Highlights
- --------------------------------------------------------------------------------
SECTOR DIVERSIFICATION
<TABLE>
<CAPTION>
Percent of Percent of
Net Assets Net Assets
11/30/96 5/31/97
- --------------------------------------------------------------------------------
<S> <C> <C>
Cable Operators 8% 7%
................................................................................
Telecommunications 8 7
................................................................................
Consumer Products 6 6
................................................................................
Service 5 6
................................................................................
Financial 4 5
................................................................................
Aerospace and Defense 5 5
................................................................................
Broadcasting 4 4
................................................................................
Building Products 2 4
................................................................................
Energy 8 4
................................................................................
Paper and Paper Products 4 4
................................................................................
Manufacturing 4 3
................................................................................
Entertainment and Leisure 2 3
................................................................................
Beverages 2 3
................................................................................
Gaming 5 3
................................................................................
Food and Tobacco 3 3
................................................................................
Short-Term 4 3
................................................................................
Textiles and Apparel 3 3
................................................................................
Health Care 3 2
................................................................................
Container 4 2
................................................................................
Specialty Chemicals 1 2
................................................................................
Electronic Components 1 2
................................................................................
Transportation 1 2
................................................................................
Lodging 1 2
................................................................................
Supermarkets 2 2
................................................................................
All Other 9 10
................................................................................
Other Assets Less Liabilities 1 3
- --------------------------------------------------------------------------------
Total 100% 100%
</TABLE>
6
<PAGE>
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.
HIGH YIELD FUND
- --------------------------------------------------------------------------------
As of 5/31/97
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
First Boston High
Date High Yield Fund Yield Index
<S> <C> <C>
5/87 10,000 10,000
5/88 10,756 11,114
5/89 11,969 12,271
5/90 11,165 11,838
5/91 11,919 13,768
5/92 14,543 17,510
5/93 17,160 20,315
5/94 17,561 21,725
5/95 18,805 24,118
5/96 20,509 26,638
5/97 23,276 30,202
</TABLE>
- ------------------------------------
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.
<TABLE>
<CAPTION>
Periods Ended 5/31/97 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High Yield Fund 13.49% 9.85% 9.86% 8.82%
................................................................................
</TABLE>
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
7
<PAGE>
T. Rowe Price High Yield Fund
- --------------------------------------------------------------------------------
- --------------------
FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year 3 Months++ Year
Ended Ended Ended
5/31/97 5/31/96 5/31/95 5/31/94 2/28/94 2/28/93
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 8.13 $ 8.16 $ 8.37 $ 9.15 $ 8.58 $ 8.23
.................................................................
Investment activities
Net investment income 0.75 0.73 0.75 0.18 0.81 0.82
Net realized and
unrealized gain (loss) 0.30 (0.02) (0.20) (0.78) 0.57 0.35
.................................................................
Total from
investment activities 1.05 0.71 0.55 (0.60) 1.38 1.17
.................................................................
Distributions
Net investment income (0.75) (0.74) (0.76) (0.18) (0.81) (0.82)
.................................................................
NET ASSET VALUE
End of period $ 8.43 $ 8.13 $ 8.16 $ 8.37 $ 9.15 $ 8.58
------------------------------------------------------------------
Ratios/Supplemental Data
Total return 13.49% 9.06% 7.09% (6.52)% 16.59% 14.96%
...............................................................................................
Ratio of expenses to
average net assets 0.84% 0.85% 0.88% 0.85%+ 0.85% 0.89%
...............................................................................................
Ratio of net investment
income to average
net assets 9.15% 8.89% 9.27% 8.37%+ 8.99% 9.85%
...............................................................................................
Portfolio turnover rate 111.3% 100.1% 74.2% 62.5%+ 107.0% 104.4%
...............................................................................................
Net assets, end of period
(in millions) $ 1,401 $ 1,229 $ 1,208 $ 1,241 $ 1,624 $1,404
...............................................................................................
</TABLE>
+ Annualized.
++ The fund's fiscal year-end was changed to May 31.
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
T. Rowe Price High Yield Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
May 31, 1997
- -----------------------
Statement of Net Assets Par/Shares Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
CORPORATE BONDS AND NOTES 87.5%
Advertising 0.3%
Universal Outdoor, Sr. Sub. Notes, 9.75%, 10/15/06 $ 4,500 $ 4,646
................................................................................
4,646
........
Aerospace and Defense 5.3%
BE Aerospace, Sr. Sub. Notes, 9.875%, 2/1/06 6,000 6,240
................................................................................
Communications & Power Industries, Sr. Sub Notes
12.00%, 8/1/05 15,000 16,462
................................................................................
Dyncorp, Sr. Sub. Notes, (144a), 9.50%, 3/1/07 10,625 10,625
................................................................................
K & F Industries
Sr. Secured Notes, 11.875%, 12/1/03 8,855 9,386
.............................................................................
Sr. Sub. Notes, 10.375%, 9/1/04 11,475 12,078
................................................................................
L-3 Communications, Sr. Sub. Notes, (144a)
10.375%, 5/1/07 9,300 9,788
................................................................................
Tracor, Sr. Sub. Notes, (144a), 8.50%, 3/1/07 9,650 9,650
................................................................................
74,229
........
Automobiles and Related 1.3%
Chief Auto Parts, Sr. Notes, 10.50%, 5/15/05 6,000 6,060
................................................................................
Harvard Industries, Sr. Notes, 12.00%, 7/15/04 * 4,500 1,575
................................................................................
Speedy Muffler King, Sr. Notes, 10.875%, 10/1/06 1,625 1,710
................................................................................
Venture Holdings Trust, Sr. Sub. Notes, 9.75%, 4/1/04 6,000 5,820
................................................................................
Walbro, Sr. Notes, 9.875%, 7/15/05 2,700 2,795
................................................................................
17,960
........
Beverages 2.6%
Dr Pepper Bottling Holdings, Sr. Disc. Notes, STEP, 2/15/03 18,050 17,847
................................................................................
Texas Bottling Group, Sr. Sub. Notes, 9.00%, 11/15/03 8,000 8,200
................................................................................
TLC Beatrice International Holdings, Sr. Secured Notes
11.50%, 10/1/05 9,710 10,802
................................................................................
36,849
........
Broadcasting 3.0%
Argyle Television, Sr. Sub. Notes, 9.75%, 11/1/05 3,000 3,098
................................................................................
Benedek Broadcasting, Sr. Notes, 11.875%, 3/1/05 12,900 14,319
................................................................................
Chancellor Radio Broadcasting, Sr. Sub. Notes
9.375%, 10/1/04 12,000 12,180
................................................................................
Jacor, Sr. Sub. Notes, 10.125%, 6/15/06 8,500 9,010
................................................................................
TV Azteca, Gtd. Sr. Notes, (144a), 10.50%, 2/15/07 3,750 3,848
................................................................................
42,455
........
</TABLE>
9
<PAGE>
T. Rowe Price High Yield Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par/Shares Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Building Products 4.2%
American Builders & Contractors Supply
Sr. Sub. Notes, (144a), 10.625%, 5/15/07 $ 9,600 $ 9,888
................................................................................
Associated Materials, Sr. Sub. Notes, 11.50%, 8/15/03 6,250 6,609
................................................................................
Building Material Corporation of America
Sr. Disc. Notes, STEP, 7/1/04 8,500 7,639
................................................................................
Foamex
Sr. Sub. Deb., 11.875%, 10/1/04 12,000 12,945
............................................................................
Sr. Sub. Notes, (144a), 9.875%, 6/15/07 3,000 3,053
............................................................................
Maxxam Group Holdings
Sr. Notes, 11.25%, 8/1/03 4,500 4,669
............................................................................
Sr. Secured Notes, 12.00%, 8/1/03 8,500 8,755
............................................................................
Reliant Building Products, Sr. Sub. Notes, (144a)
10.875%, 5/1/04 4,750 4,869
................................................................................
58,427
.........
Cable Operators 7.4%
CF Cable TV, Sr. Secured 2nd Priority Notes, 11.625%, 2/15/05 14,700 16,758
................................................................................
Comcast, Sr. Sub. Deb., 9.375%, 5/15/05 2,000 2,070
................................................................................
Comcast UK Cable, Sr. Sub. Deb., STEP, 11/15/07 12,550 9,318
................................................................................
Diamond Cable Communications
Sr. Disc. Notes, STEP, 12/15/05 4,250 2,879
................................................................................
Frontiervision Operating Partners, Sr. Sub. Notes
11.00%, 10/15/06 11,400 11,799
................................................................................
Fundy Cable, Sr. Secured 2nd Priority Notes
11.00%, 11/15/05 12,000 12,810
................................................................................
Galaxy Telecom, Sr. Sub. Notes, 12.375%, 10/1/05 12,000 12,660
................................................................................
Marcus Cable Operating, Gtd. Sr. Disc. Notes, STEP, 8/1/04 11,750 10,105
................................................................................
Rogers Cablesystems
Sr. Secured 2nd Priority Notes, 10.00%, 3/15/05 10,000 10,725
............................................................................
Sr. Secured Notes, 9.625%, 8/1/02 8,000 8,300
................................................................................
TeleWest PLC
Sr. Deb., 9.625%, 10/1/06 2,275 2,321
............................................................................
Sr. Disc. Deb., STEP, 10/1/07 5,000 3,475
................................................................................
103,220
........
Conglomerates 1.3%
ICF Kaiser International, Sr. Notes, 13.00%, 12/31/03 5,275 5,592
................................................................................
Jordan Industries, Sr. Notes, 10.375%, 8/1/03 12,000 12,030
................................................................................
17,622
........
</TABLE>
10
<PAGE>
T. Rowe Price High Yield Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par/Shares Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Consumer Products 6.2%
American Safety Razor, Sr. Notes, 9.875%, 8/1/05 $ 12,000 $ 12,540
................................................................................
Chattem, Sr. Sub. Notes, 12.75%, 6/15/04 8,650 9,493
................................................................................
Coleman Escrow, Sr. Secured 2nd Priority Notes
Zero Coupon, 5/15/01 2,000 1,210
................................................................................
Doane Products, Sr. Notes, 10.625%, 3/1/06 15,000 15,975
................................................................................
Herff Jones, Sr. Sub. Notes, 11.00%, 8/15/05 14,025 15,007
................................................................................
PM Holdings, Sub. Disc. Notes, STEP, 9/1/05 14,500 11,165
................................................................................
Revlon Consumer Products, Sr. Sub. Notes, 10.50%, 2/15/03 10,000 10,575
................................................................................
Revlon Worldwide, Sr. Secured Disc. Notes
Zero Coupon, 3/15/01 5,000 3,369
................................................................................
Windy Hill Pet Food, Sr. Sub. Notes, (144a), 9.75%, 5/15/07 8,000 8,080
................................................................................
87,414
........
Container 2.2%
Bway, Sr. Sub. Notes, (144a), 10.25%, 4/15/07 7,000 7,385
................................................................................
Owens-Illinois, Sr. Sub. Notes, 10.50%, 6/15/02 475 500
................................................................................
Plastic Containers, Sr. Secured Notes, (144a)
10.00%, 12/15/06 12,000 12,480
................................................................................
Silgan, Sr. Sub. Notes, 11.75%, 6/15/02 10,000 10,550
................................................................................
30,915
........
Electronic Components 2.1%
Celestica International, Gtd. Sr. Sub. Notes
10.50%, 12/31/06 11,975 12,873
................................................................................
Dictaphone, Sr. Sub. Notes, 11.75%, 8/1/05 2,000 1,880
................................................................................
Fairchild Semiconductor
Sr. Sub. Notes, (144a), 10.125%, 3/15/07 6,000 6,390
................................................................................
Sub. Notes, PIK, (144a), 11.74%, 3/14/08 6,000 5,609
................................................................................
Therma-Wave, Sr. Notes, (144a), 10.625%, 5/15/04 2,500 2,619
................................................................................
29,371
........
Energy 3.7%
Dual Drilling, Sr. Sub. Notes, 9.875%, 1/15/04 5,000 5,337
................................................................................
Energy Corporation of America, Sr. Sub. Notes, (144a)
9.50%, 5/15/07 11,675 11,675
................................................................................
Flores & Rucks, Sr. Sub. Notes, 9.75%, 10/1/06 6,850 7,192
................................................................................
Kelley Oil & Gas, Sr. Sub. Notes, 10.375%, 10/15/06 12,450 12,886
................................................................................
Mesa Operating, Sr. Sub. Disc. Notes, STEP, 7/1/06 5,750 4,313
................................................................................
Plains Resources, Sr. Sub. Notes, 10.25%, 3/15/06 9,785 10,372
................................................................................
51,775
........
</TABLE>
11
<PAGE>
T. Rowe Price High Yield Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par/Shares Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Entertainment and Leisure 3.4%
AMC Entertainment, Sr. Sub. Notes, (144a)
9.50%, 3/15/09 $ 11,300 $ 11,484
................................................................................
Plitt Theatres, Sr. Sub. Notes, 10.875%, 6/15/04 10,000 10,400
................................................................................
Six Flags Theme Parks, Sr. Sub. Disc. Notes, STEP, 6/15/05 15,000 15,300
................................................................................
United Artists Theatre Circuit, PTC, 9.30%, 7/1/15 10,618 10,246
................................................................................
47,430
........
Financial 3.8%
BankUnited Capital, Trust Pfd. Securities, (144a)
10.25%, 12/31/26 5,750 5,635
................................................................................
BF Saul REIT, Sr. Secured Notes, 11.625%, 4/1/02 12,000 12,780
................................................................................
First Federal Financial, 11.75%, 10/1/04 2,200 2,395
................................................................................
First Nationwide Holdings, Sr. Sub. Notes, 10.625%, 10/1/03 8,000 8,720
................................................................................
Leasing Solutions, Conv. Sub. Notes, 6.875%, 10/1/03 4,000 3,265
................................................................................
Mego Mortgage, Sr. Sub. Notes, 12.50%, 12/1/01 4,000 3,940
................................................................................
ML Capital Trust, Gtd. Notes, (144a), 9.875%, 3/1/27 3,650 3,604
................................................................................
Ocwen Financial, Sr. Notes, 11.875%, 10/1/03 11,800 12,656
................................................................................
52,995
........
Food and Tobacco 3.0%
Keebler, Sr. Sub. Notes, 10.75%, 7/1/06 18,000 19,935
................................................................................
MAFCO, Sr. Sub. Notes, 11.875%, 11/15/02 13,000 14,040
................................................................................
MBW Foods, Sr. Sub. Notes, (144a), 9.875%, 2/15/07 6,600 6,666
................................................................................
PMI Acquisition, Sr. Sub. Notes, 10.25%, 9/1/03 1,750 1,838
................................................................................
42,479
........
Gaming 3.0%
Capitol Queen & Casino, 1st Mtg. Notes
12.00%, 11/15/00 *+ 3,400 1,020
................................................................................
Eldorado Resorts, Sr. Sub. Notes, 10.50%, 8/15/06 3,750 3,994
................................................................................
Grand Casinos, 1st Mtg. Notes, 10.125%, 12/1/03 8,000 8,300
................................................................................
Harrahs Jazz, 1st Mtg. Notes, 14.25%, 11/15/01 * 3,000 1,425
................................................................................
Majestic Star Casino, Sr. Secured Notes, 12.75%, 5/15/03 4,750 5,154
................................................................................
Rio Hotel & Casino, Sr. Sub. Notes, 10.625%, 7/15/05 11,970 12,748
................................................................................
Trump Atlantic City Associates, 1st Mtg. Notes
11.25%, 5/1/06 9,915 9,716
................................................................................
42,357
........
</TABLE>
12
<PAGE>
T. Rowe Price High Yield Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par/Shares Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Health Care 2.5%
Imed, Sr. Sub. Notes, (144a), 9.75%, 12/1/06 $ 4,000 $ 4,060
................................................................................
Owens & Minor, Sr. Sub. Notes, 10.875%, 6/1/06 9,500 10,343
................................................................................
Quest Diagnostic, Gtd. Sr. Sub. Notes, 10.75%, 12/15/06 10,000 10,650
................................................................................
Regency Health Services, Sub. Notes, 12.25%, 7/15/03 8,500 9,350
................................................................................
34,403
........
Lodging 1.7%
Courtyard by Marriott II, Sr. Secured Notes, 10.75%, 2/1/08 12,500 13,437
................................................................................
Prime Hospitality, Sr. Sub. Notes, 9.75%, 4/1/07 4,975 5,124
................................................................................
Red Roof Inns, Sr. Notes, 9.625%, 12/15/03 4,850 5,008
................................................................................
23,569
........
Manufacturing 3.4%
Hawk, Sr. Notes, 10.25%, 12/1/03 6,450 6,627
................................................................................
HCC Industries, Sr. Sub. Notes, (144a), 10.75%, 5/15/07 7,750 8,089
................................................................................
IMO Industries, Sr. Sub. Notes, 11.75%, 5/1/06 10,000 10,125
................................................................................
International Knife & Saw, Sr. Sub. Notes, 11.375%, 11/15/06 5,875 6,213
................................................................................
Mettler Toledo, Gtd. Sr. Sub. Notes, 9.75%, 10/1/06 6,625 6,956
................................................................................
Tokheim, Sr. Sub. Notes, 11.50%, 8/1/06 8,400 9,030
................................................................................
47,040
........
Metals and Mining 1.1%
Echo Bay Mines, Jr. Sub. Deb., 11.00%, 4/1/27 7,300 7,410
................................................................................
Haynes International, Sr. Notes, 11.625%, 9/1/04 8,000 8,600
................................................................................
16,010
........
Paper and Paper Products 3.6%
Container Corporation of America
Sr. Notes
9.75%, 4/1/03 1,775 1,859
...........................................................................
11.25%, 5/1/04 14,550 15,787
...........................................................................
Gaylord Container, Sr. Sub. Deb., 12.75%, 5/15/05 11,100 12,155
................................................................................
Pen-Tab Industries, Sr. Sub. Notes, (144a), 10.875%, 2/1/07 5,000 5,063
................................................................................
SD Warren, Sr. Sub. Notes, 12.00%, 12/15/04 14,500 16,167
................................................................................
51,031
........
Printing and Publishing 0.7%
Sun Media, Sr. Sub. Notes, (144a), 9.50%, 2/15 - 5/15/07 9,300 9,288
................................................................................
9,288
........
</TABLE>
13
<PAGE>
T. Rowe Price High Yield Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par/Shares Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Retail 1.2%
Cole National Group
Sr. Notes, 11.25%, 10/1/01 $ 1,306 $ 1,430
..............................................................................
Sr. Sub. Notes, 9.875%, 12/31/06 4,000 4,180
..............................................................................
Merry Go Round Enterprises, 5.50%, 7/3/98 *+# 10,594 --
................................................................................
Safelite Glass, Sr. Sub. Notes, (144a), 9.875%, 12/15/06 10,000 10,588
................................................................................
16,198
...........
Service 5.4%
Allied Waste Industries
Sr. Disc. Notes, STEP, 6/1/07 17,000 10,285
................................................................................
Sr. Sub. Notes, (144a), 10.25%, 12/1/06 10,625 11,342
................................................................................
Coinmach, Sr. Notes, 11.75%, 11/15/05 14,825 16,382
................................................................................
Host Marriott Travel Plazas, Sr. Notes, 9.50%, 5/15/05 9,000 9,405
................................................................................
Intertek Finance, Sr. Sub. Notes, 10.25%, 11/1/06 9,005 9,365
................................................................................
Loomis, Fargo & Co., Sr. Sub. Notes, (144a), 10.00%,
1/15/04 8,400 8,673
................................................................................
Protection One Alarm, Gtd. Sr. Disc. Notes, STEP, 6/30/05 10,500 10,605
................................................................................
76,057
...........
Specialty Chemicals 2.2%
Agricultural Minerals and Chemicals, Sr. Notes
10.75%, 9/30/03 16,200 17,334
................................................................................
Sterling Chemicals
Sr. Secured Disc. Notes, STEP, 8/15/08 9,800 6,407
..............................................................................
Sr. Sub. Notes, 11.25%, 4/1/07 6,700 7,135
..............................................................................
30,876
...........
Supermarkets 1.6%
Pathmark Stores, Sr. Sub. Notes, 9.625%, 5/1/03 10,055 9,577
................................................................................
Shoppers Food Warehouse, Sr. Notes, (144a)
10.00%, 2/6/00 13,500 13,534
................................................................................
23,111
...........
Telecommunications 6.8%
Brooks Fiber Properties, Sr. Notes, 10.00%, 6/1/07 4,500 4,551
................................................................................
Call-Net Enterprises, Sr. Disc. Notes, STEP, 12/1/04 6,700 5,737
................................................................................
Clearnet Communications, Sr. Disc. Notes, STEP, 12/15/05 5,250 3,412
................................................................................
</TABLE>
14
<PAGE>
T. Rowe Price High Yield Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par/Shares Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Colt Telecom, Units
(Each Unit consists of a $1,000 par Sr. Disc. Note,
STEP, 12/15/06, and 1 Warrant) $ 12,300 $ 7,749
................................................................................
Globalstar, Units
(Each Unit consists of a $1,000 par Sr. Note, (144a),
11.375%, 2/15/04, and 1 Warrant) 6,650 6,733
................................................................................
Intercel, Sr. Disc. Notes, STEP, 2/1/06 10,000 6,100
................................................................................
Intermedia Communications of Florida
Sr. Disc. Notes, STEP, 5/15/06 7,150 4,933
..............................................................................
Sr. Notes, 13.50%, 6/1/05 1,950 2,204
..............................................................................
Nextel Communications, Sr. Disc. Notes, STEP, 8/15/04 7,850 5,966
................................................................................
Nextlink Communications, Sr. Notes, 12.50%, 4/15/06 5,000 5,281
................................................................................
Page America Group, PIK, 15.00%, 6/30/98 *+ 9,800 8,081
................................................................................
Pricellular Wireless, Sr. Notes, 10.75%, 11/1/04 13,000 13,650
................................................................................
RSL Communications, Units
(Each Unit consists of a $1,000 par Sr. Note, (144a),
12.25%, 11/15/06, and 1 Warrant) 3,000 3,060
................................................................................
Sprint Spectrum, Sr. Notes, 11.00%, 8/15/06 4,800 5,304
................................................................................
Teleport Communications Group
Sr. Disc. Notes, STEP, 7/1/07 16,850 11,837
................................................................................
94,598
...........
Textiles and Apparel 2.5%
Dan River, Sr. Sub. Notes, 10.125%, 12/15/03 12,000 12,540
................................................................................
Glenoit, Sr. Sub. Notes, (144a), 11.00%, 4/15/07 2,850 2,950
................................................................................
Pillowtex, Gtd. Sr. Sub. Notes, 10.00%, 11/15/06 5,625 5,934
................................................................................
Plaid Clothing Group, Sr. Sub. Notes, 11.00%, 8/1/03 * 8,650 606
................................................................................
Synthetic Industries, Sr. Sub. Notes, (144a), 9.25%,
2/15/07 8,615 8,852
................................................................................
Tultex, Sr. Notes, (144a), 9.625%, 4/15/07 4,125 4,357
................................................................................
35,239
...........
Transportation 2.0%
Clark Material Handling, Sr. Notes, 10.75%, 11/15/06 7,000 7,403
................................................................................
Greyhound Lines, Sr. Notes, (144a), 11.50%, 4/15/07 4,000 4,260
................................................................................
Sea Containers Ltd., Sr. Sub. Deb., 12.50%, 12/1/04 5,438 6,036
................................................................................
TravelCenters of America, Sr. Sub. Notes, (144a)
10.25%, 4/1/07 10,750 10,965
................................................................................
28,664
...........
Total Corporate Bonds and Notes (Cost $1,201,848) 1,226,228
...........
</TABLE>
15
<PAGE>
T. Rowe Price High Yield Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par/Shares Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
EQUITY AND CONVERTIBLE SECURITIES 5.0%
Automobiles and Related 0.1%
Hayes Wheels International
Common Stock * $ 44 $ 947
..............................................................................
Warrants, 7/1/03 * 18 61
................................................................................
1,008
.......
Beverages 0.8%
Dr Pepper Bottling, Common Stock, (Class A) *+# 547 10,522
................................................................................
10,522
.......
Broadcasting 1.1%
American Radio Systems, Exch. Pfd. Stock, (144a) 74 7,867
................................................................................
Chancellor Radio Broadcasting, Exch. Pfd. Stock, (144a) 48 5,130
................................................................................
Spanish Broadcasting System
Sr. Exch. Pfd. Stock 3 2,670
..............................................................................
Warrants, 6/30/99 * 3 333
................................................................................
16,000
........
Building and Real Estate 0.2%
Prime Retail, Common Stock 250 3,172
................................................................................
3,172
........
Cable Operators 0.0%
Peachtree Cable Associates Ltd., Common Stock *+# 10 170
................................................................................
US West Media, Common Stock * 7 131
................................................................................
Wireless One, Warrants, 10/19/00 * 19 5
................................................................................
306
........
Conglomerates 0.0%
ICF Kaiser International, Warrants, 12/31/99 * 37 37
................................................................................
37
........
Electric Utilities 0.2%
El Paso Electric, 11.40%, PIK Pfd. Stock 29 3,140
................................................................................
3,140
........
Financial 1.7%
California Federal Bank, Pfd. Stock 34 3,854
................................................................................
Chevy Chase Preferred Capital, Non-Cum. Exch. Pfd. Stock 124 6,222
................................................................................
Criimi Mae
Common Stock 75 1,228
.............................................................................
Cum. Conv. Pfd. Stock 145 5,401
................................................................................
Fidelity Federal Bank, Exch. Pfd. Stock 50 1,363
................................................................................
Ocwen Asset Investment, Common Stock * 300 5,513
................................................................................
23,581
........
</TABLE>
16
<PAGE>
T. Rowe Price High Yield Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par/Shares Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Gaming 0.0%
Becker Gaming, Warrants, 11/15/00 *+# $ 425 $ 106
................................................................................
Hollywood Casino, Common Stock, (Class A) * 93 327
................................................................................
President Casinos, Warrants, (144a), 9/30/99 *+# 214 53
................................................................................
486
.........
Health Care 0.0%
Wright Medical Technology, Warrants, 6/30/03 *+# 38 457
................................................................................
457
.........
Manufacturing 0.1%
Tokheim, Common Stock * 100 987
................................................................................
987
.........
Retail 0.0%
Lamonts Apparel, Common Stock * 250 --
................................................................................
--
.........
Service 0.4%
Efficient Market Services, Conv. Pfd. Stock *+++# 364 4,091
................................................................................
Protection One, Common Stock * 80 997
................................................................................
5,088
.........
Telecommunications 0.4%
American Communications Services, Warrants, 11/1/05 * 12 360
................................................................................
Clearnet Communications, Warrants, 9/15/05 * 57 313
................................................................................
Intercel, Warrants, 2/1/06 * 64 384
................................................................................
Intermedia Communications, Exch. Pfd. Stock, (144a) 40 4,108
................................................................................
Intermedia Communications of Florida, Warrants, 6/1/00 * 2 54
................................................................................
Page America Group
................................................................................
Common Stock *+++# 1,109 17
................................................................................
Conv. Pfd. Stock, (Series I) *+++# 20 249
................................................................................
Warrants *+++# 711 --
................................................................................
US West Communications, Common Stock 6 211
................................................................................
5,696
.........
Total Equity and Convertible Securities (Cost $63,272) 70,480
.........
ASSET-BACKED SECURITIES 1.0%
Airlines 1.0%
Airplane Pass Through Trust, 10.875%, 3/15/19 11,955 13,330
................................................................................
Total Asset-Backed Securities (Cost $12,040) 13,330
.........
</TABLE>
17
<PAGE>
T. Rowe Price High Yield Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par/Shares Value
- ------------------------------------------------------------------------------------------
In thousands
<S> <C> <C>
COMMERCIAL PAPER 3.2%
Archer Daniels Midland, 5.55%, 6/17/97 $ 10,000 $ 9,938
..................................................................................
Internationale Nederland, 5.58%, 6/16/97 10,000 9,975
..................................................................................
National Australia Funding, 5.52%, 6/5/97 10,000 9,992
..................................................................................
Transamerica Financial Group, 5.57%, 6/16/97 9,000 8,977
..................................................................................
Investments in Commercial Paper through a Joint Account
5.60% - 5.69%, 6/2/97 5,512 5,512
..................................................................................
Total Commercial Paper (Cost $ 44,436) 44,394
............
Total Investments in Securities
96.7% of Net Assets (Cost $1,321,596) $ 1,354,432
............
Other Assets Less Liabilities 46,887
............
NET ASSETS $ 1,401,319
------------
Net Assets Consist of:
Accumulated net investment income - net of distributions $ 1,462
Accumulated net realized gain/loss - net of distributions (224,197)
Net unrealized gain (loss) 32,836
Paid-in-capital applicable to 166,258,675 shares of
$0.01 par
value capital stock outstanding; 1,000,000,000 shares authorized 1,591,218
............
NET ASSETS $ 1,401,319
------------
NET ASSET VALUE PER SHARE $ 8.43
------------
</TABLE>
* 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 1.1% of net assets.
PIK Payment-in-Kind
PTC Pass-through Certificate
REIT Real Estate Investment Trust
STEP Stepped Coupon Bond
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
18.7% of net assets.
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
T. Rowe Price High Yield Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Statement of Operations
- --------------------------------------------------------------------------------
In thousands
Year
Ended
5/31/97
<S> <C>
Investment Income
Interest and dividend income $ 130,539
...........
Expenses
Investment management 8,206
Shareholder servicing 2,244
Custody and accounting 222
Prospectus and shareholder reports 131
Registration 61
Legal and audit 53
Directors 16
Miscellaneous 40
...........
Total expenses 10,973
...........
Net investment income 119,566
...........
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities (4,443)
Written options 251
...........
Net realized gain (loss) (4,192)
Change in net unrealized gain or loss on securities 49,415
...........
Net realized and unrealized gain (loss) 45,223
...........
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 164,789
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
T. Rowe Price High Yield Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands
Year
Ended
5/31/97 5/31/96
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations
Net investment income $ 119,566 $ 108,179
Net realized gain (loss) (4,192) (9,370)
Change in net unrealized gain or loss 49,415 6,407
........................
Increase (decrease) in net assets from operations 164,789 105,216
........................
Distributions to shareholders
Net investment income (119,015) (109,829)
........................
Capital share transactions *
Shares sold 273,226 244,157
Distributions reinvested 95,950 88,814
Shares redeemed (242,907) (307,884)
Redemption fees received 152 175
........................
Increase (decrease) in net assets from capital
share transactions 126,421 25,262
........................
Net Assets
Increase (decrease) during period 172,195 20,649
Beginning of period 1,229,124 1,208,475
........................
End of period $1,401,319 $1,229,124
------------------------
* Share information
Shares sold 33,021 29,890
Distributions reinvested 11,597 10,876
Shares redeemed (29,450) (37,691)
........................
Increase (decrease) in shares outstanding 15,168 3,075
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
T. Rowe Price High Yield Fund
- --------------------------------------------------------------------------------
May 31, 1997
- -----------------------------
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 on the day the valuations are made. A
security which is listed or traded on more than one exchange is valued at
the quotation on the exchange determined to be the primary market for such
security. Listed securities not traded on a particular day and securities
regularly traded in the over-the-counter market are valued at the mean of
the latest bid and asked prices. Other equity securities are valued at a
price within the limits of the latest bid and asked prices deemed by the
Board of Directors, or by persons delegated by the Board, best to reflect
fair value.
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.
21
<PAGE>
T. Rowe Price High Yield Fund
- --------------------------------------------------------------------------------
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, 1997, 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.
Options Call and put options give the holder the right to purchase or sell,
respectively, a security at a specified price on a certain date. Risks
arise from possible illiquidity of the options market and from movements in
security values. Transactions in options written and related premiums
received during the year ended May 31, 1997, were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Number of
Contracts Premiums
<S> <C> <C>
Outstanding at beginning of period - $ -
Written 2,000 251,000
Closed (2,000) (251,000)
Outstanding at end of period - $ -
--------------------------------
</TABLE>
22
<PAGE>
T. Rowe Price High Yield Fund
- --------------------------------------------------------------------------------
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
and U.S. government securities, aggregated $1,472,880,000 and
$1,367,149,000, respectively, for the year ended May 31, 1997. Purchases
and sales of U.S. government securities aggregated $9,670,000 and
$9,437,000, respectively, for the year ended May 31, 1997.
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income. The fund has unused realized capital loss carryforwards
for federal income tax purposes of $231,406,000, of which $83,409,000
expires in 1998, $40,436,000 in 1999, and $107,561,000 thereafter through
2005. The fund intends to retain gains realized in future periods that may
be offset by available capital loss carryforwards.
At May 31, 1997, the aggregate cost of investments for federal income tax
and financial reporting purposes was $1,321,596,000, and net unrealized
gain aggregated $32,836,000, of which $63,540,000 related to appreciated
investments and $30,704,000 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 $733,000 was payable at May 31, 1997. The fee is computed
daily and paid monthly, and consists of an individual fund fee equal to
0.30% 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 0.30% for assets in
excess of $80 billion. At May 31, 1997, and for the year then ended, the
effective annual group fee rate was 0.33%. The fund pays a pro-rata share
of the group fee based on the ratio of its net assets to those of the
group.
23
<PAGE>
T. Rowe Price High Yield Fund
- --------------------------------------------------------------------------------
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
$2,108,000 for the year ended May 31, 1997, of which $160,000 was payable
at period-end.
24
<PAGE>
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, 1997, and
the results of its operations, the changes in its net assets and the
financial highlights for each of the fiscal periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at May 31, 1997 by correspondence with
the custodian and, where appropriate, the application of alternative
auditing procedures for unsettled security transactions, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
June 18, 1997
25
<PAGE>
For yield, price, last transaction, Investor Centers:
current balance, or to conduct 101 East Lombard St.
transactions, 24 hours, 7 days Baltimore, MD 21202
a week, call Tele*Access (R):
1-800-638-2587 toll free T. Rowe Price
Financial Center
For assistance 10090 Red Run Blvd.
with your existing Owings Mills, MD 21117
fund account, call:
Shareholder Service Center Farragut Square
1-800-225-5132 toll free 900 17th Street, N.W.
410-625-6500 Baltimore area Washington, D.C. 20006
To open a Discount Brokerage ARCO Tower
account or obtain information, 31st Floor
call: 1-800-638-5660 toll free 515 South Flower St.
Los Angeles, CA 90071
Internet address:
www.troweprice.com 4200 West Cypress St.
10th Floor
T. Rowe Price Associates Tampa, FL 33607
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.
[LOGO OF T. ROWE PRICE APPEARS HERE]
T. Rowe Price Investment Services, Inc., Distributor. F57-050 5/31/97
