<PAGE>
T. Rowe Price
TAX-FREE HIGH YIELD FUND
August 31, 1994
Sector Diversification
<TABLE>
<CAPTION>
Percent of Percent of
Net Assets Net Assets
------------ ------------
<S> <C> <C> <C>
Hospital Revenue 28% Lease Revenue 4%
Housing Finance Revenue 13 General Obligation-State 2
Nuclear Revenue 9 Dedicated Tax Revenue 2
Life Care/Nursing Home Revenue 9 Water & Sewer Revenue 2
Industrial & Pollution Electric Revenue 2
Control Revenue 6 Air & Sea Transportation
Solid Waste Revenue 6 Revenue 1
Pre-Refunded Bonds 5 Miscellaneous Revenue 1
Ground Transportation Revenue 4 Educational Revenue 1
General Obligation-Local 4 Other Assets Less Liabilities 1
</TABLE>
Statement of Net Assets / August 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Amounts in Thousands
----------------------------
Face Amount Value
----------- ---------
<S> <C> <C>
ALABAMA -- 2.6%
Baldwin County Eastern Shore Hosp. Auth., Thomas Hosp., 8.50%, 4/1/16....... $ 4,000 $ 4,405
Marshall County Health Care Auth., Guntersville Medical Center,
7.00%, 10/1/13...................................................... 2,100 2,113
10.25%, 10/1/13..................................................... 6,750 8,134
Mobile, Capital Improvement Warrants, GO, (MBIA Insured),
Zero Coupon, 2/15/18................................................ 1,030 222
Zero Coupon, 8/15/18................................................ 4,550 946
Zero Coupon, 2/15/19................................................ 905 181
Zero Coupon, 8/15/19................................................ 4,675 904
Zero Coupon, 2/15/20................................................ 770 144
Zero Coupon, 8/15/20................................................ 4,810 867
Mobile Airport Auth., 8.875%, 10/1/15 *..................................... 2,000 2,215
Shelby County, GO, (MBIA Insured), 7.40%, 8/1/07............................ 2,000 2,129
7.70%, 8/1/17....................................................... 1,000 1,066
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
T. Rowe Price Tax-Free High Yield Fund
Statement of Net Assets
<TABLE>
<CAPTION>
Amounts in Thousands
-----------------------------
Face Amount Value
----------- ---------
<S> <C> <C>
ARIZONA -- 0.7%
Scottsdale IDA, Westminster Village, 10.00%, 6/1/07......................... $ 1,285 $ 1,427
10.00%, 6/1/17.................................................. 750 833
Tempe IDA, Friendship Village of Tempe, 6.75%, 12/1/13...................... 4,000 3,870
- ----------------------------------------------------------------------------------------------------------------------------
ARKANSAS -- 0.6%
Independence County PCR, Mississippi Power & Light,
Floating Rate (Currently 7.625%), 7/1/12........................ 3,000 3,157
Union County Hosp., Union Medical Center, 8.00%, 10/1/00.................... 2,285 2,359
- ----------------------------------------------------------------------------------------------------------------------------
CALIFORNIA -- 5.2%
California HFFA, St. Francis Medical Center, 5.75%, 10/1/23................. 6,515 5,951
California Public Works Board, Univ. of California, 5.50%, 6/1/21........... 5,000 4,358
Fresno Joint Powers Fin. Auth., 6.55%, 9/2/12............................... 1,500 1,469
Inglewood Redev. Agency, Century Redev., 6.125%, 7/1/23..................... 3,440 3,136
Los Angeles County, Marina del Rey, COP, 6.50%, 7/1/08...................... 3,250 3,275
Oakland, COP, VRDN (Currently 3.40%)........................................ 1,000 1,000
San Joaquin Hills Transportation Corridor Agency, Toll Road,
Zero Coupon, 1/1/03............................................. 5,600 2,832
Zero Coupon, 1/1/10............................................. 13,100 3,549
Zero Coupon, 1/1/25............................................. 25,000 2,564
Zero Coupon, 1/1/28............................................. 15,000 885
7.00%, 1/1/30................................................... 5,000 5,007
6.75%, 1/1/32................................................... 10,000 9,682
Southern California Public Power Auth.,
Southern Transmission Project, 5.75%, 7/1/21.................... 3,000 2,773
- ----------------------------------------------------------------------------------------------------------------------------
COLORADO -- 3.2%
Boulder County, Longmont United Hosp., 8.20%, 12/1/20
(Pre-refunded 12/1/00+)......................................... 1,540 1,811
Boulder County IDR, Boulder Medical Center, 8.625%, 1/1/07 *................ 820 884
8.75%, 1/1/12 *................................................. 1,205 1,302
8.875%, 1/1/17 *................................................ 1,190 1,288
Colorado Housing Fin. Auth., 9.60%, 8/1/01 *................................ 800 847
8.65%, 8/1/03................................................... 1,005 1,024
9.00%, 8/1/03................................................... 985 1,015
9.40%, 8/1/03 *................................................. 860 886
8.70%, 11/1/04 *................................................ 1,630 1,656
Denver City & County, Sisters of Charity of Leavenworth
Health Services, 5.00%, 12/1/23................................. 4,000 3,263
Denver City & County Airport, 8.00%, 11/15/17 *............................ 5,640 5,610
7.50%, 11/15/23 *............................................... 4,675 4,514
El Paso County, School Dist. No. 20, GO, TAN, 6.35%, 12/15/06............... 3,000 3,090
Westminster, Special Assessment Bonds, 9.25%, 12/1/03....................... 1,475 1,488
- ----------------------------------------------------------------------------------------------------------------------------
DELAWARE -- 2.0%
Delaware Economic Dev. Auth., Delmarva Power & Light,
(FGIC Insured), 7.15%, 7/1/18................................... 2,500 2,722
Peninsula United Methodist Homes, 8.50%, 5/1/22..................... 2,500 2,696
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Amounts in Thousands
-----------------------------
Face Amount Value
----------- ---------
<S> <C> <C>
DELAWARE (cont'd)
Delaware HFA, Beebe Medical Center, 6.75%, 6/1/14........................... $ 3,975 $ 3,936
8.50%, 6/1/16 (Pre-refunded 6/1/00+)............................ 5,600 6,649
Wilmington Osteopathic Hosp. Assoc. of Delaware, Riverside Hosp.,
10.20%, 10/1/18 (Pre-refunded 10/1/98+)......................... 2,000 2,427
- ----------------------------------------------------------------------------------------------------------------------------
DISTRICT OF COLUMBIA -- 0.2%
District of Columbia, America Geophysical, 5.875%, 9/1/23................... 1,750 1,566
- ----------------------------------------------------------------------------------------------------------------------------
FLORIDA -- 3.8%
Brevard County Tourist Dev., Florida Marlins Spring Training Fac.,
6.875%, 3/1/13.................................................. 1,520 1,543
Broward County Resource Recovery, Broward Waste Energy, (L.P. North),
7.95%, 12/1/08.................................................. 4,970 5,450
S E S Broward (L.P. South), 7.95%, 12/1/08.......................... 5,055 5,544
Charlotte County IDR, Beverly Enterprises, 10.00%, 6/1/11................... 1,000 1,169
Collier County IDA, Beverly Enterprises, 10.75%, 3/1/03..................... 905 1,063
Dade County Water & Sewer Systems, (FGIC Insured),
VRDN (Currently 3.10%).......................................... 4,300 4,300
Escambia County IDR, Beverly Enterprises, 9.80%, 6/1/11..................... 485 557
Florida State, Board of Ed. (Public Ed. Capital Outlay), GO, 6.70%, 6/1/22.. 2,000 2,090
Hernando County IDR, Beverly Enterprises, 10.00%, 9/1/11.................... 1,000 1,165
Jacksonville IDR, Beverly Enterprises, 9.75%, 10/1/11....................... 1,000 1,139
Leon County IDR, Beverly Enterprises, 9.80%, 6/1/11......................... 485 558
Manatee County Housing Fin. Auth., Zero Coupon, 10/1/15..................... 13,535 1,489
Orange County HFA, RHA/Princeton Hosp., 9.00%, 7/1/21....................... 2,000 2,173
Orange County IDA, Beverly Enterprises, 9.25%, 8/1/10....................... 475 531
Santa Rosa County HFA, Gulf Breeze Hosp., 8.60%, 10/1/02.................... 1,000 1,102
St. Johns County IDA, Vicar's Landing, 6.75%, 2/15/12....................... 4,000 3,949
- ----------------------------------------------------------------------------------------------------------------------------
GEORGIA -- 2.8%
Fulco Hosp. Auth., Georgia Baptist Health Care System, 6.25%, 9/1/13........ 8,000 7,592
6.375%, 9/1/22.................................................. 5,000 4,601
Municipal Electric Auth. of Georgia, (AMBAC Insured), 6.00%, 1/1/22......... 6,000 5,850
Rockdale County Dev. Auth., Solid Waste Disposal, Visy Paper, Inc.,
7.50%, 1/1/26 *................................................. 7,000 6,949
- ----------------------------------------------------------------------------------------------------------------------------
IDAHO -- 1.7%
Gem County PCR, Boise Cascade, Floating Rate, 1/5/97 (Currently 5.115%)..... 500 500
Idaho, GO, TAN, 4.50%, 6/29/95.............................................. 6,000 6,020
Idaho Housing Agency, Single Family Mortgage, 6.75%, 7/1/23 *............... 2,350 2,377
7.80%, 1/1/23 *..................................................... 2,480 2,570
Idaho Student Loan Marketing Assoc., 6.70%, 10/1/07 *....................... 4,000 4,037
- ----------------------------------------------------------------------------------------------------------------------------
ILLINOIS -- 6.0%
Aurora, Dreyer Medical Clinic, 8.75%, 7/1/14................................ 4,485 5,060
Illinois Dev. Fin. Auth., Palos Community Hosp., VRDN (Currently 3.05%)..... 4,000 4,000
Illinois HFA, Community Hosp. of Ottawa, 6.85%, 8/15/24..................... 1,475 1,440
Covenant Retirement Community, 7.60%, 12/1/12....................... 2,665 2,737
</TABLE>
3
<PAGE>
T. Rowe Price Tax-Free High Yield Fund
Statement of Net Assets
<TABLE>
<CAPTION>
Amounts in Thousands
-----------------------------
Face Amount Value
----------- ---------
<S> <C> <C>
ILLINOIS (cont'd)
Illinois HFA (cont'd)
Glen Oak Medical Center, 9.50%, 11/15/15............................ $ 2,300 $ 2,662
7.00%, 11/15/19................................................. 2,500 2,488
Hinsdale Health System, 9.00%, 11/15/15............................. 4,930 5,600
Holy Cross Hosp., 6.75%, 3/1/24..................................... 4,000 3,910
Memorial Hosp., 7.25%, 5/1/22....................................... 9,500 9,643
Morris Hosp., 6.125%, 12/1/23....................................... 4,400 3,973
Northwestern Memorial Hosp., 6.00%, 8/15/24......................... 4,000 3,718
Wabash General Hosp. Dist. (Wabash General Hosp.), 11.35%, 9/1/05... 1,850 2,008
Metropolitan Pier & Exposition Auth., McCormick Place Expansion,
(MBIA Insured), 6.00%, 6/15/27.................................. 4,250 4,062
Southwestern Dev. Auth., Anderson Hosp., 7.00%, 8/15/22..................... 2,500 2,462
- ----------------------------------------------------------------------------------------------------------------------------
INDIANA -- 0.6%
Evansville Hosp. Auth., Daughters of Charity Health Systems
(St. Mary's Medical Center), 10.125%, 11/1/15................... 5,000 5,379
- ----------------------------------------------------------------------------------------------------------------------------
KENTUCKY -- 2.7%
Florence Housing Fac., Bluegrass RHF Housing, 9.50%, 7/1/17................. 1,965 2,052
Jefferson County, Louisville Gas and Electric, 7.45%, 6/15/15............... 4,250 4,612
Jefferson County HFA, Beverly Enterprises, 9.75%, 8/1/07.................... 900 1,032
Kenton County Airport, Delta Airlines, 7.50%, 2/1/12 *...................... 5,000 5,023
7.50%, 2/1/20 *................................................. 4,500 4,508
Kentucky Dev. Fin. Auth., Berea Hosp., 8.375%, 7/1/12....................... 2,860 2,997
St. Claire Medical Center, 7.125%, 9/1/21 (Pre-refunded 9/1/01+).... 3,600 4,068
- ----------------------------------------------------------------------------------------------------------------------------
LOUISIANA -- 2.5%
Louisiana Offshore Terminal Auth., LOOP, 7.60%, 9/1/10...................... 8,500 9,260
Louisiana PFA, IDR, Beverly Enterprises, 8.25%, 9/1/08...................... 1,465 1,558
St. James Place of Baton Rouge, 10.00%, 11/1/21..................... 4,500 5,129
Parish of St. Charles, Louisiana Power & Light, 8.00%, 12/1/14.............. 4,500 4,890
Plaquemines Parish IDB, AMAX Inc., 7.25%, 10/1/09........................... 1,280 1,280
- ----------------------------------------------------------------------------------------------------------------------------
MAINE -- 0.8%
Maine HHEFA, Waterville Osteopathic Hosp., 9.875%, 7/1/13
(Pre-refunded 7/1/97+).......................................... 4,370 5,055
Maine Turnpike Auth., (MBIA Insured), 6.00%, 7/1/18......................... 2,510 2,460
- ----------------------------------------------------------------------------------------------------------------------------
MARYLAND -- 3.5%
Baltimore County, Stella Maris, 7.50%, 3/1/21............................... 1,000 1,063
Berlin, Atlantic General Hosp., 8.375%, 6/1/22.............................. 1,980 2,112
Gaithersburg, First Mortgage Economic Dev. (Asbury Methodist Home),
7.85%, 1/1/20 (Pre-refunded 1/1/00+)............................ 2,000 2,294
Housing Opportunities Commission of Montgomery County,
7.50%, 7/1/17................................................... 700 723
Maryland Community Dev. Administration, 7.25%, 4/1/19....................... 2,500 2,583
6.80%, 4/1/24................................................... 5,000 5,082
Zero Coupon, 4/1/29 *........................................... 25,695 1,761
Maryland Dept. of Transportation, VRDN (Currently 3.25%).................... 1,700 1,700
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Amounts in Thousands
-----------------------------
Face Amount Value
----------- ---------
<S> <C> <C>
MARYLAND (cont'd)
Maryland HHEFA, Doctor's Community Hosp., 5.50%, 7/1/24..................... $ 3,200 $ 2,560
Union Hosp. of Cecil County, 6.70%, 7/1/22.......................... 2,725 2,684
Maryland Ind. Dev. Fin. Auth., Associated Catholic Charities, 9.00%, 1/1/10. 1,725 1,915
Economic Dev., American Association of Blood Banks, 7.25%, 8/1/13... 2,700 2,706
Georgetown Bakery Management Corp. Fac., 9.25%, 9/1/04 *........ 1,670 1,804
Maryland-National Capital Park & Planning Commission,
Little Bennett Golf Fac., 8.25%, 10/1/11........................ 2,380 2,675
- ----------------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS -- 2.8%
Commonwealth of Massachusetts, GO, 7.50%, 6/1/04............................ 2,750 3,206
Massachusetts Bay Transportation Auth., General Transportation System,
7.00%, 3/1/19................................................... 2,500 2,784
7.00%, 3/1/21................................................... 2,000 2,241
Massachusetts HEFA, New England Deaconess Hosp., 6.875%, 4/1/22............. 2,620 2,615
7.20%, 4/1/22....................................................... 3,535 3,608
Massachusetts Housing Fin. Agency, Capital Asset Pool, (MBIA Insured),
6.375%, 4/1/21.................................................. 2,000 1,973
Massachusetts Ind. Fin. Agency, Nevins Home, 7.875%, 7/1/23................. 5,515 5,498
New England Memorial Hosp., 8.875%, 7/1/13 (Pre-refunded 7/1/98+)... 2,795 3,212
- ----------------------------------------------------------------------------------------------------------------------------
MICHIGAN -- 4.5%
Economic Dev. Corp. of the Charter Township of Meridian, Burcham Hills
Retirement Center III, 9.625%, 7/1/19........................... 2,850 3,168
Economic Dev. Corp. of the County of Midland, Midland Cogeneration Project,
9.50%, 7/23/09 *................................................ 6,000 6,653
Michigan HDA, 6.50%, 12/1/17................................................ 4,000 4,006
7.75%, 12/1/19 *................................................ 1,175 1,227
Michigan Hosp. Fin. Auth., Bay Medical Center, 8.25%, 7/1/12................ 2,000 2,160
Daughters of Charity Health Systems (St. Mary's Hosp.), 10.00%,
11/1/15............................................................. 1,490 1,606
Detroit Medical Center, 5.50%, 8/15/23.............................. 3,000 2,580
Pontiac Osteopathic Hosp., 6.00%, 2/1/24............................ 8,500 7,342
Saratoga Community Hosp., 8.75%, 6/1/10............................. 2,800 3,012
Sisters of Mercy Health Corp., 7.50%, 2/15/18....................... 1,650 1,886
Michigan Strategic Fund, Genesse Power Company, 7.50%, 1/1/21 *............. 2,000 1,959
Monroe County PCR, Detroit Edison, 10.125%, 9/1/05 *........................ 920 1,001
Waterford Township Economic Dev., Canterbury Health Care, Inc.,
8.375%, 7/1/23.................................................. 4,000 4,165
- ----------------------------------------------------------------------------------------------------------------------------
MINNESOTA -- 0.3%
Minnesota Housing Fin. Agency, Single Family Mortgage, 6.70%, 1/1/18........ 2,000 2,061
9.00%, 8/1/18................................................... 1,000 1,062
- ----------------------------------------------------------------------------------------------------------------------------
MISSISSIPPI -- 2.7%
Adams County, Jefferson Davis Memorial Hosp., 8.00%, 10/1/16................ 3,805 4,096
Claiborne County PCR, Systems Energy Resources, 9.50%, 12/1/13.............. 2,000 2,277
9.875%, 12/1/14................................................. 11,000 12,729
Mississippi Home Corp., Single Family Mortgage,
(FGIC Insured), 9.25%, 3/1/12................................... 375 406
</TABLE>
5
<PAGE>
T. Rowe Price Tax-Free High Yield Fund
Statement of Net Assets
<TABLE>
<CAPTION>
Amounts in Thousands
-----------------------------
Face Amount Value
----------- ---------
<S> <C> <C>
MISSISSIPPI (cont'd)
Mississippi Hosp. Equipment & Fac. Auth., Magnolia Hosp., 7.375%, 10/1/21... $ 3,000 $ 2,906
Rush Memorial Foundation, 8.75%, 1/1/16............................. 2,000 2,235
- ----------------------------------------------------------------------------------------------------------------------------
MISSOURI -- 1.8%
Hannibal IDA, Hannibal Medical Center, 9.50%, 3/1/22........................ 4,000 4,724
Joplin IDA, Tri-State Osteopathic Hosp. Assoc., 8.25%, 12/15/14............. 2,500 2,712
Lees Summit IDA, John Knox Village, 7.125%, 8/15/12......................... 1,500 1,555
Missouri HEFA, Bethesda Health Group, 7.50%, 8/15/12........................ 1,250 1,265
Still Regional Medical Center, 7.70%, 2/1/13........................ 2,250 2,367
Ray County, Ray County Memorial Hosp., 9.625%, 11/15/13..................... 3,200 3,552
- ----------------------------------------------------------------------------------------------------------------------------
MONTANA -- 1.7%
Montana Board of Housing, (FHA Insured), 7.85%, 10/1/04..................... 890 902
9.20%, 10/1/01 *................................................ 695 723
8.50%, 10/1/02.................................................. 860 884
8.525%, 10/1/02................................................. 825 849
8.95%, 10/1/02 *................................................ 860 896
8.40%, 10/1/03 *................................................ 900 926
Montana Board of Investments, Yellowstone Energy
Limited Partnership, 7.00%, 12/31/19 *.......................... 10,000 9,722
- ----------------------------------------------------------------------------------------------------------------------------
NEBRASKA -- 1.0%
Hosp. Auth. No. 1 of Douglas County, Immanuel Medical Center,
(AMBAC Insured), 7.00%, 9/1/21.................................. 5,500 5,913
Nebraska Investment Fin. Auth., Single Family Mortgage, (GNMA Insured),
Residual Interest Bond / Inverse Floater, 3/15/22 (Currently
11.774%) *.......................................................... 900 965
9/10/30 (Currently 11.896%) *................................... 1,700 1,847
- ----------------------------------------------------------------------------------------------------------------------------
NEVADA -- 0.3%
Nevada Housing Division, Sub Lien, 9.375%, 10/1/00 *........................ 660 686
9.35%, 10/1/02 *................................................ 545 549
9.65%, 10/1/02 *................................................ 755 798
(FGIC Insured), 9.45%, 10/1/03 *.................................... 775 804
- ----------------------------------------------------------------------------------------------------------------------------
NEW HAMPSHIRE -- 0.8%
New Hampshire HHEFA, Catholic Medical Center, 8.25%, 7/1/13................. 2,000 2,151
New Hampshire Housing Fin. Auth., 8.625%, 7/1/13 *.......................... 1,995 2,115
6.95%, 1/1/26 *................................................. 3,000 3,041
- ----------------------------------------------------------------------------------------------------------------------------
NEW JERSEY -- 3.2%
Atlantic City Utilities Auth., Solid Waste Systems, 7.125%, 3/1/16.......... 2,200 2,226
New Jersey Economic Dev. Auth., Holt Hauling & Warehouse System,
10.25%, 9/15/14................................................. 500 554
9.75%, 12/15/16 *............................................... 1,000 1,114
Keswick Pines, 8.75%, 1/1/24........................................ 6,000 6,072
New Jersey HFFA, Raritan Bay Medical Center, 7.25%, 7/1/27.................. 6,500 6,356
Salem County Pollution Control Fin. Auth., (MBIA Insured), 6.25%, 6/1/31.... 12,500 12,498
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Amounts in Thousands
-----------------------------
Face Amount Value
----------- ---------
<S> <C> <C>
NEW YORK -- 6.7%
Babylon IDA, Babylon Community Waste Management,
7.875%, 7/1/06 (Pre-refunded 7/1/99+)........................... $ 1,000 $ 1,148
Babylon Recycling Center, 8.875%, 3/1/11 *++........................ 1,895 853
Ogden Martin Systems, 8.50%, 1/1/19................................. 1,015 1,109
Dormitory Auth. of the State of New York, City Univ., 6.00%, 7/1/14......... 5,230 5,076
Dept. of Health of the State of New York, 5.50%, 7/1/20............. 4,000 3,516
State Univ. Ed. Fac., 5.75%, 5/15/24................................ 4,500 4,141
Metropolitan Transportation Auth., 7.125%, 7/1/09........................... 4,000 4,292
New York City, GO, 7.50%, 2/1/02............................................ 1,000 1,106
6.00%, 8/1/06................................................... 5,675 5,656
6.20%, 8/1/07................................................... 5,000 5,033
5.625%, 10/1/12................................................. 2,500 2,287
7.625%, 2/1/15.................................................. 3,000 3,311
7.75%, 8/15/15.................................................. 2,500 2,795
7.00%, 2/1/18................................................... 8,000 8,318
New York City Municipal Water Fin. Auth., (FGIC Insured),
VRDN (Currently 3.15%).............................................. 4,200 4,200
New York State Mortgage Agency, Capital Appreciation Home Ownership,
Zero Coupon, 4/1/20................................................. 11,800 1,565
Homeowner Mortgage, 6.45%, 10/1/17.................................. 2,400 2,404
New York State Urban Dev. Corp., Correctional Fac., Zero Coupon, 1/1/08..... 5,000 2,173
Syracuse IDA, Parking Fac., 7.70%, 6/1/15 (Pre-refunded 6/1/99+)............ 1,000 1,133
- ----------------------------------------------------------------------------------------------------------------------------
NORTH CAROLINA -- 1.4%
North Carolina Eastern Municipal Power Agency, 7.00%, 1/1/08................ 8,930 9,520
North Carolina Medical Care Commission, Stanley Memorial Hosp.,
7.80%, 10/1/19.................................................. 1,000 1,069
Valdese General Hosp., 8.75%, 10/1/16............................... 2,140 2,303
- ----------------------------------------------------------------------------------------------------------------------------
OHIO -- 3.9%
Cambridge, Guernsey Memorial Hosp., 8.00%, 12/1/11.......................... 1,500 1,609
Cleveland Parking Fac., 8.10%, 9/15/22...................................... 12,000 13,016
Marion County Health Care Fac., United Church Homes,
8.875%, 12/1/12 (Pre-refunded 12/1/99+)............................. 3,225 3,882
Middleburg Heights, Southwest General Hosp., 7.20%, 8/15/19................. 2,000 2,155
Ohio Air Quality Dev. Auth. PCR, Toledo Edison, 8.00%, 5/15/19 *............ 2,000 2,093
Ohio Housing Fin. Agency, Single Family Mortgage, 11.375%, 8/1/10........... 55 56
Residual Interest Bond / Inverse Floater, 3/31/31
(Currently 10.227%) *........................................... 750 765
Ohio Water Dev. Auth. PCR, Cleveland Electric, 9.75%, 11/1/97 *............. 2,000 2,219
Toledo Edison, 7.40%, 11/1/22 *..................................... 7,000 7,078
7.55%, 6/1/23................................................... 2,500 2,555
- ----------------------------------------------------------------------------------------------------------------------------
OKLAHOMA -- 3.7%
Jackson County Memorial Hosp. Auth., 7.30%, 8/1/15.......................... 4,300 4,281
LeFlore County Hosp. Auth., Eastern Oklahoma Medical Center, 9.40%, 5/1/06.. 2,000 2,165
Oklahoma County IDA, Epworth Villa, 10.25%, 4/1/19.......................... 3,000 3,310
</TABLE>
7
<PAGE>
T. Rowe Price Tax-Free High Yield Fund
Statement of Net Assets
<TABLE>
<CAPTION>
Amounts in Thousands
-----------------------------
Face Amount Value
----------- ---------
<S> <C> <C>
OKLAHOMA (cont'd)
Oklahoma Dev. Fin. Auth., Solid Waste Disposal Fac.
(Midway Environmental Management), 9.50%, 9/1/99 *.............. $ 645 $ 651
9.50%, 9/1/15 *................................................. 3,105 3,113
Trustees of the Tulsa Municipal Airport, American Airlines, 9.375%, 6/1/04.. 3,000 3,184
7.375%, 12/1/20 *............................................... 6,500 6,450
7.60%, 12/1/30 *................................................ 5,000 5,002
Washington County Medical Auth., Jane Phillips Episcopal-Memorial Medical
Center, 8.50%, 11/1/10.......................................... 5,200 5,648
- ----------------------------------------------------------------------------------------------------------------------------
OREGON -- 0.2%
Western Generation Agency, Wauna Cogeneration, 7.25%, 1/1/09 *.............. 2,000 2,006
- ----------------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA -- 4.0%
Allegheny County Hosp. Dev. Auth., Health and Ed. Rehabilitation
Institute of Pittsburgh, (MBIA Insured), 7.00%, 6/1/22.............. 2,000 2,005
Beaver County PCR, Toledo Edison, 12.25%, 9/15/15........................... 1,000 1,092
Berks County IDA, Lutheran Home, 6.875%, 1/1/23............................. 5,000 4,875
Blair County Hosp. Auth., Mercy Hosp., 8.125%, 2/1/14....................... 2,700 2,876
Butler County IDA, Herr-Voss, 8.60%, 11/1/99 *.............................. 720 754
Clarion IDA Health Fac., Beverly Enterprises, 10.125%, 5/1/07............... 900 1,041
Greene County IDA, Beverly Enterprises, 6.875%, 3/1/13...................... 2,430 2,445
Montgomery County Higher Ed. and Health Auth., Brittany Pointe,
8.50%, 1/1/22................................................... 2,500 2,640
Redeemer Long Term Care & Elder Services, 8.20%, 6/1/06............. 925 974
8.00%, 6/1/22................................................... 5,755 5,975
Pennsylvania Higher Ed. Fac. Auth., Medical College of Pennsylvania,
8.375%, 3/1/11.................................................. 2,200 2,401
Pennsylvania Housing Fac. Auth., Residual Interest Bond / Inverse Floater,
10/1/23 (Currently 10.37%) *.................................... 1,500 1,538
Schuylkill County IDA, Schuylkill Energy Resources, Inc., 6.50%, 1/1/10 *... 7,500 7,103
- ----------------------------------------------------------------------------------------------------------------------------
PUERTO RICO -- 2.5%
Puerto Rico Aqueduct and Sewer Auth., 7.90%, 7/1/07......................... 2,500 2,775
7.875%, 7/1/17.................................................. 3,000 3,328
Puerto Rico Housing Bank and Fin. Agency, 4.375%, 12/1/97................... 5,000 4,910
Puerto Rico Ind., Med., Higher Ed. & Environmental Pollution Control
Fac. Fin. Auth., Catholic Univ. of Puerto Rico, 9.375%, 12/1/07
(Pre-refunded 12/1/97+)......................................... 7,635 8,842
Puerto Rico Infrastructure Fin. Auth., 7.50%, 7/1/09........................ 2,365 2,597
- ----------------------------------------------------------------------------------------------------------------------------
RHODE ISLAND -- 1.4%
Rhode Island Health & Ed. Building Corp., Rhode Island Hosp., (FGIC Insured),
Residual Interest Bond / Inverse Floater, 8/15/21
(Currently 10.331%)............................................. 1,000 1,071
Rhode Island Housing & Mortgage Fin. Corp., 8.05%, 4/1/22 *................. 5,000 5,253
Residual Interest Bond / Inverse Floater, 4/1/24
(Currently 10.722%) *.......................................... 1,000 1,019
Homeownership Opportunity, 6.70%, 10/1/14........................... 5,000 5,068
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Amounts in Thousands
--------------------------
Face Amount Value
----------- -----
<S> <C> <C>
SOUTH DAKOTA -- 0.8%
South Dakota Building Auth., 7.50%, 12/1/16................................. $ 4,400 $ 4,735
South Dakota Housing Dev. Auth., Homeownership Mortgage, 6.65%, 5/1/14...... 2,500 2,528
- ---------------------------------------------------------------------------------------------------------------------------
TENNESSEE -- 1.1%
Chattanooga-Hamilton County Hosp. Auth., VRDN (Currently 3.15%)............. 2,100 2,100
Health & Ed. Fac. Board of the Metropolitan Gov't. of Nashville and Davidson
County, Metropolitan Nashville Teachers' Nursing Fac., 10.25%, 10/1/19 2,250 2,126
Memphis, GO, VRDN (Currently 3.20%)......................................... 1,000 1,000
Tennessee Housing Dev. Agency, 7.625%, 7/1/22 *............................. 1,900 1,961
5.95%, 7/1/28....................................................... 3,000 2,760
- ---------------------------------------------------------------------------------------------------------------------------
TEXAS -- 6.4%
Bell County Health Fac. Dev. Corp., King's Daughter Hosp., 9.25%, 7/1/08.... 3,445 3,917
Brazos River Auth., Texas Utilities, 8.25%, 12/1/16 *....................... 1,000 1,078
9.875%, 10/1/17 *................................................... 2,130 2,435
Denison Hosp. Auth., Texoma Medical Center, 7.10%, 8/15/24.................. 3,650 3,645
Gainesville IDC, GTE Valenite, 8.90%, 5/15/11 *............................. 3,360 3,667
Gulf Coast Waste Disposal Auth., Houston Lighting & Power,
Floating Rate, 6/1/98 (Currently 4.35%)............................. 5,000 4,925
Harris County Health Fac. Dev. Corp., Memorial Hosp., 7.125%, 6/1/15........ 2,500 2,712
Methodist Hosp., VRDN (Currently 3.15%)............................. 5,300 5,300
St. Luke's Episcopal Hosp., VRDN (Currently 3.15%).................. 4,700 4,700
Texas Medical Center, (MBIA Insured), 7.375%, 5/15/20............... 2,350 2,535
Matagorda County Navigation Dist. Number One PCR, Central Power & Light,
7.50%, 12/15/14..................................................... 2,000 2,172
Paris Health Fac. Dev. Corp., McCuistion Regional Medical Center,
7.60%, 2/1/12....................................................... 4,500 4,740
Tarrant County Health Fac. Dev. Corp., Harris Methodist Health System,
6.00%, 9/1/24....................................................... 3,500 3,332
Tomball Hosp. Auth., Tomball Regional Hosp., 6.125%, 7/1/23................. 10,000 8,765
Weslaco Health Fac. Dev. Corp., Knapp Medical Center,
10.375%, 6/1/16 (Pre-refunded 6/1/98+).............................. 3,500 4,177
- ---------------------------------------------------------------------------------------------------------------------------
UTAH -- 2.5%
Davis County, Solid Waste Management & Energy Recovery
Special Service Dist., 6.125%, 6/15/09.............................. 6,000 5,557
Intermountain Power Agency, Utah Power Supply, 5.50%, 7/1/20................ 7,685 6,851
Utah Housing Fin. Agency, 8.55%, 7/1/04..................................... 490 504
8.65%, 7/1/04....................................................... 830 853
7.60%, 7/1/05....................................................... 1,030 1,040
7.75%, 7/1/05....................................................... 1,035 1,047
Sub Lien, 9.875%, 1/1/99 *.......................................... 210 218
10.50%, 1/1/99 *.................................................... 310 332
10.625%, 7/1/99 *................................................... 205 217
9.30%, 7/1/00 *..................................................... 180 185
8.70%, 7/1/01....................................................... 390 398
</TABLE>
9
<PAGE>
T. Rowe Price Tax-Free High Yield Fund
Statement of Net Assets
<TABLE>
<CAPTION>
Amounts in Thousands
--------------------------
Face Amount Value
----------- -----
<S> <C> <C>
UTAH (cont'd)
Utah Housing (cont'd)
Sub Lien (cont'd)
9.25%, 7/1/01....................................................... $ 490 $ 514
9.60%, 7/1/02 *..................................................... 125 129
9.75%, 7/1/02....................................................... 205 212
9.85%, 7/1/02 *..................................................... 370 385
6.25%, 7/1/05....................................................... 890 890
7.50%, 7/1/05....................................................... 1,000 1,024
8.40%, 7/1/08 *..................................................... 360 374
9.00%, 1/1/19 *..................................................... 900 930
7.75%, 1/1/23 *..................................................... 615 652
- ---------------------------------------------------------------------------------------------------------------------------
VERMONT -- 0.2%
Vermont Ed. and Health Buildings Fin. Agency, Medical Center Hosp.
of Vermont, (FGIC Insured), 7.45%, 9/1/23........................... 1,400 1,399
Vermont Housing Fin. Agency, 8.70%, 12/1/06 *............................... 310 320
- ---------------------------------------------------------------------------------------------------------------------------
VIRGINIA -- 2.7%
Fairfax County IDA, Fairfax Hosp. System, VRDN (Currently 3.00%)............ 1,000 1,000
Henrico County IDA, Bon Secours Health System (Maryview Hosp.),
7.50%, 9/1/11....................................................... 1,885 2,141
Norfolk Port & Ind. Auth., Henson Aviation, 9.625%, 8/1/12 *................ 980 1,106
Peninsula Ports Auth., Dominion Terminal, 7.375%, 6/1/20.................... 4,450 4,610
Roanoke IDA, Roanoke Memorial Hosp., VRDN (Currently 3.00%)................. 1,200 1,200
Virginia HDA, Commonwealth Mortgage, 7.10%, 1/1/22.......................... 4,000 4,143
7.10%, 1/1/25....................................................... 5,000 5,179
Zero Coupon, 7/1/29 *............................................... 870 59
Virginia Housing Dev. Auth., Commonwealth Mortgage, 6.25%, 7/1/11........... 5,000 5,013
- ---------------------------------------------------------------------------------------------------------------------------
WASHINGTON -- 0.3%
Washington Public Power Supply System,
7.25%, 7/1/09....................................................... 1,000 1,120
6.30%, 7/1/12....................................................... 2,000 2,030
- ---------------------------------------------------------------------------------------------------------------------------
WEST VIRGINIA -- 0.7%
Berkeley County Building Commission, City Hosp., 6.50%, 11/1/22............. 2,000 1,984
West Virginia Hosp. Fin. Auth., Cabell Huntington Hosp.
(AMBAC Insured), 6.25%, 1/1/19...................................... 2,400 2,385
West Virginia Univ. Hosp., (MBIA Insured), Residual Interest
Bond/Inverse Floater, 1/1/18 (Currently 9.70%)...................... 2,000 1,888
- ---------------------------------------------------------------------------------------------------------------------------
WISCONSIN -- 1.2%
Wisconsin HFA, Villa Clement, 8.75%, 6/1/12................................. 1,500 1,535
Wisconsin Housing and Economic Dev. Auth., 7.75%, 9/1/17.................... 4,460 4,752
8.00%, 3/1/21 *..................................................... 4,480 4,618
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Amounts in Thousands
---------------------------
Face Amount Value
----------- -----
<S> <C> <C>
WYOMING -- 1.3%
Wyoming Community Dev. Auth., Single Family Mortgage, 6.70%, 6/1/17......... $ 3,500 $ 3,574
6.00%, 6/1/23....................................................... 9,000 8,340
===========================================================================================================================
TOTAL INVESTMENTS IN SECURITIES - 99.0% (COST - $865,226)................... 892,459
===========================================================================================================================
Other Assets Less Liabilities - 1.0% ....................................... 9,419
--------
NET ASSETS CONSISTING OF:
Accumulated net investment income - net of distributions.................... 40
Accumulated realized gains/losses - net of distributions.................... (6,627)
Net unrealized appreciation of investments.................................. 27,141
Paid-in-capital applicable to 76,913,554 shares of $0.01 par value capital
stock outstanding; 1,000,000,000 shares authorized................. 881,324
--------
NET ASSETS - 100.0%......................................................... $901,878
========
NET ASSET VALUE PER SHARE................................................... $11.73
========
</TABLE>
* - Interest subject to alternative minimum tax
+ - Used in determining portfolio maturity
++ - Nonincome producing
AMBAC - AMBAC Indemnity Corp.
COP - Certificates of Participation
FGIC - Financial Guaranty Insurance Company
FHA - Federal Housing Authority
GNMA - Government National Mortgage Association
GO - General Obligation
HDA - Housing Development Authority
HEFA - Health & Educational Facility Authority
HFA - Health Facility Authority
HFFA - Health Facility Financing Authority
HHEFA - Health & Higher Educational Facility Authority
IDA - Industrial Development Authority
IDB - Industrial Development Board
IDR - Industrial Development Revenue
MBIA - Municipal Bond Investors Assurance Corp.
PCR - Pollution Control Revenue
RAN - Revenue Anticipation Note
TAN - Tax Anticipation Note
VRDN - Variable Rate Demand Note
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
T. Rowe Price Tax-Free High Yield Fund
Statement of Operations / Six Months Ended August 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Amounts in Thousands
--------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest income............................................................... $ 30,745
Expenses
Investment management fees.................................................. $ 2,877
Shareholder servicing fees & expenses....................................... 404
Custodian and accounting fees & expenses.................................... 118
Registration fees & expenses................................................ 42
Prospectus & shareholder reports............................................ 30
Legal & auditing fees....................................................... 36
Directors' fees & expenses.................................................. 9
Proxy & annual meeting...................................................... 7
Miscellaneous............................................................... 11
-------
Total expenses.............................................................. 3,534
---------
Net investment income......................................................... 27,211
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss
Securities.................................................................. (6,043)
Futures..................................................................... (3)
-------
Net realized loss........................................................... (6,046)
Change in net unrealized appreciation or depreciation......................... (31,503)
-------
Net loss on investments....................................................... (37,549)
=========
DECREASE IN NET ASSETS FROM OPERATIONS........................................ $(10,338)
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
T. Rowe Price Tax-Free High Yield Fund
Statement of Changes in Net Assets (Unaudited)
<TABLE>
<CAPTION>
Amounts in Thousands
-------------------------------------------
Six Months Ended Year Ended
Aug. 31, 1994 Feb. 28, 1994
------------------ -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income........................................... $ 27,211 $ 54,721
Net realized gain (loss) on investments......................... (6,046) 17,384
Change in unrealized appreciation or depreciation of investments (31,503) (6,992)
---------- ---------
Increase (decrease) in net assets from operations............... (10,338) 65,113
---------- ---------
Distributions to shareholders
Net investment income........................................... (27,211) (54,721)
Net realized gain on investments................................ (2,998) (17,058)
---------- ---------
Decrease in net assets from distributions to shareholders....... (30,209) (71,779)
---------- ---------
Capital share transactions
Sold 11,275 and 28,847 shares................................... 132,520 358,379
Distributions reinvested of 1,826 and 4,275 shares.............. 21,393 53,067
Redeemed 12,973 and 25,510 shares............................... (152,783) (316,670)
---------- ---------
Increase in net assets from capital share transactions.......... 1,130 94,776
---------- ---------
Total increase (decrease)......................................... (39,417) 88,110
NET ASSETS
Beginning of period............................................. 941,295 853,185
---------- ---------
End of period................................................... $ 901,878 $ 941,295
========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
T. Rowe Price Tax-Free High Yield Fund
Notes to Financial Statements/August 31, 1994 (Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Tax-Free High Yield Fund (the Fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end management
investment company.
A) Security valuation - Debt securities are generally traded in the
over-the-counter market. Investments in securities with remaining 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 remaining maturities 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.
Financial futures contracts are valued at closing settlement 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.
B) Premiums and Discounts - Premiums on municipal securities are amortized
for both financial and tax reporting purposes. Discounts, other than
original issue, are not amortized for financial reporting purposes.
C) 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 an identified cost basis. Distributions to shareholders are
recorded by the Fund on the ex-dividend date. Income and capital gain
distributions are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
Payments ("variation margin") made or received by the Fund, dependent on the
daily fluctuations in the value of the futures contracts, are recorded as
unrealized gains or losses until the contracts are closed.
NOTE 2 - INVESTMENT TRANSACTIONS
As a part of its investment program, the Fund engages in the following
activities, the nature and risk of which are set forth more fully in the
Fund's Prospectus and Statement of Additional Information.
A) Non-Investment Grade Debt Securities - The Fund has investments in
non-investment 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.
B) Futures - A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument at a specified price, date, time and place designated at the time
the contract is made. Risks arise from the possible illiquidity of the
futures market and from movements in security values. At August 31, 1994,
the Fund had a short position in 100 U. S. Treasury Bond futures contracts
which expire in September, 1994, and which have a contract value of
$10,372,000. Net unrealized depreciation of $92,000 on these contracts at
August 31, 1994, is included in the accompanying financial statements.
Municipal securities having a market value of $1,367,000 were pledged as
initial margin on these contracts.
C) Other - Purchases and sales of portfolio securities, other than short-term
securities, aggregated $250,153,000 and $233,932,000, respectively, for the
six months ended August 31, 1994.
14
<PAGE>
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 income.
At August 31, 1994, the aggregate cost of investments for federal
income tax and financial reporting purposes was $865,226,000 and net
unrealized appreciation aggregated $27,233,000, of which $38,349,000 related
to appreciated investments and $11,116,000 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, computed daily and paid monthly, consisting 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 0.31% for assets in
excess of $34 billion. The effective annual Group Fee rate at August 31,
1994, and for the six months then ended was 0.34%. The Fund pays a pro rata
portion of the Group Fee based on the ratio of the Fund's net assets to those
of the Group.
T. Rowe Price Services, Inc. (TRPS) is a wholly owned subsidiary of
the Manager. TRPS provides transfer and dividend disbursing agent functions
and shareholder services for all accounts. The Manager, under a separate
agreement, calculates the daily share price and maintains the financial
records of the Fund. For the six months ended August 31, 1994, the Fund
incurred fees totalling approximately $359,000 for these services provided by
related parties. At August 31, 1994, investment management and service fees
payable were $581,000.
15
<PAGE>
T. Rowe Price Tax-Free High Yield Fund
Financial Highlights (Unaudited)
<TABLE>
<CAPTION>
For a share outstanding throughout each period
---------------------------------------------------------------------
Six Months Year Ended
Ended --------------------------------------------------------
Aug. 31, Feb. 28, Feb. 28, Feb. 29, Feb. 28, Feb. 28,
1994 1994 1993 1992 1991 1990
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $12.26 $12.33 $11.65 $11.40 $11.39 $11.25
------ ------ ------ ------ ------ ------
Investment Activities
Net investment income.................... 0.36 0.74 0.78 0.81 0.83 0.84
Net realized and unrealized gain (loss).. (0.49) 0.16 0.78 0.35 0.04 0.20
------ ------ ------ ------ ------ ------
Total from Investment Activities............. (0.13) 0.90 1.56 1.16 0.87 1.04
------ ------ ------ ------ ------ ------
Distributions
Net investment income.................... (0.36) (0.74) (0.78) (0.81) (0.83) (0.84)
Net realized gain........................ (0.04) (0.23) (0.10) (0.10) (0.03) (0.06)
------ ------ ------ ------ ------ ------
Total Distributions.......................... (0.40) (0.97) (0.88) (0.91) (0.86) (0.90)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD............... $11.73 $12.26 $12.33 $11.65 $11.40 $11.39
====== ====== ====== ====== ====== ======
- ---------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Total Return................................. (1.01)% 7.49% 13.94% 10.56% 7.93% 9.54%
Ratio of Expenses to Average Net Assets...... 0.79%+ 0.79% 0.81% 0.83% 0.85% 0.88%
Ratio of Net Investment Income
to Average Net Assets.................... 6.09%+ 5.95% 6.58% 7.01% 7.30% 7.38%
Portfolio Turnover Rate...................... 56.0%+ 59.3% 34.7% 51.0% 51.2% 72.4%
Net Assets, End of Period (in thousands)..... $901,878 $941,295 $853,185 $623,877 $505,025 $443,372
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
16
<PAGE>
Fellow Shareholders
Solid economic growth continued through the summer despite increases in
interest rates during late winter and spring. Real GDP increased 3.8% in the
second quarter, and payroll employment gains averaged 270,000 per month in
the three months ended August 31. The civilian unemployment rate remained
around 6.1% while the capacity utilization rate stayed at about 84% -- both
measures indicating little slack left in the economy. The Federal Reserve
paused to reassess the health of the economy in July, but continued to
increase rates in August when the strength of the economy became clearer. In
addition, fears of a pickup in inflation became evident.
Short-term interest rates continued to rise during the three months
ended August 31 because of these concerns and the Fed's fifth tightening
move, which raised its target for the federal funds rate another 50 basis
points to 4.75%. Intermediate-term interest rates did not rise as much as
short-term rates, while the yield on the benchmark 30-year Treasury bond was
essentially unchanged during the period. This contrasts with the preceding
quarter, when note and bond yields rose between 75 and 125 basis points in
response to earlier Fed moves.
In the tax-exempt market, short-term yields also rose while
intermediate- and long-term yields were mostly flat. The yield on six-month
notes closed the quarter at 3.65%, 40 basis points higher than at the end of
the May 31 quarter. Intermediate-term bonds with five-year maturities
actually rose slightly in price with yields declining five basis points to
4.75%, while the yield on AAA 30-year General Obligation bonds was up five
basis points to 6.1% during the period. This yield continued to average about
82% of the yield on long-term Treasury bonds, indicating that long-term
municipal bonds would benefit investors in income tax brackets over 18%.
Municipal Bond and Note Yields
[ARTWORK APPEARS HERE]
The disproportionate rise in short-term rates relative to longer-term
rates has led to a "flattening" of the yield curve typical of an economic
expansion. Notwithstanding the sharp rise in long-term rates earlier this
year, bond yields ordinarily do not fluctuate as much as money market yields
over the business cycle since bonds, with their long-term horizons, are less
susceptible to cyclical pressures. As a result, the "slope" of the yield
curve usually flattens in times of prosperity and steepens when the economy
is slowing down.
SUMMARY AND OUTLOOK
We expect the general rise in interest rates to lead to slower economic
growth during the second half of the year--but not to a decisive slowdown.
The Federal Reserve is likely to lift its target for the fed funds rate even
further to ensure that the economy does not continue growing at above-average
rates, spurring inflationary pressures. Further tightening moves will surely
lead to higher yields on money market securities, but the outlook for
intermediate- and long-term interest rates is more complex. To the extent
that economic growth slows, the 200-basis-point increase in long-term rates
over year-ago levels may be enough of a cushion against moderately higher
inflation. If economic growth is above average or if inflation gains
<PAGE>
momentum, however, we would expect intermediate- and long-term rates to trend
higher.
We are a bit more optimistic about the tax-exempt market than the
taxable market since demand for tax-free income remains strong. In addition,
the supply of new issues is down from levels of the past two years--a
situation that we expect to continue for the balance of the year. This
combination of strong demand and reduced supply should help tax-free bonds
outperform their taxable equivalents.
We appreciate the continued confidence that all of our shareholders
have placed in us.
Respectfully submitted,
/s/ William T. Reynolds
William T. Reynolds
Director
Fixed-Income Division
September 23, 1994
A Word About Derivatives
As you are probably aware, derivatives are securities whose returns are
determined by an underlying index, asset, or security. Some derivatives can
be extremely risky and others conservative, actually serving to reduce risk.
We have historically been cautious regarding the use of these instruments.
Over the past quarter, derivative usage other than for hedging principal
volatility represented less than 3% of any municipal bond fund's assets.
While our past use of derivatives has not been significant, we feel
that there are times when certain types of derivatives are appropriate. We
want to assure you that, as with any investment of your money, we will employ
a prudent and professional approach in the use of derivatives.
TAX-EXEMPT MONEY FUND
We began the quarter with expectations that tax-exempt short-term interest
rates would rise sharply because of both fundamental and technical factors.
Our fundamental outlook was validated by the Fed's mid-August tightening
move, but the market's reaction to the heavy seasonal slate of new offerings
was different from past experience. Typically, municipal note yields rise in
late July and August as supply outstrips demand and yields become attractive
relative to taxable securities until the new supply is absorbed.
This year, the move to higher yields from technical considerations
was muted for several reasons, including: an overall reduction in seasonal
borrowings from previous years; an extension in maturities past money market
range; and the restructuring of newly issued notes into variable rate
securities. While these factors alleviated supply pressures, on the demand
side money fund assets were firm throughout the quarter, and the short-term
market received support from long-term investors who held higher-than-normal
cash positions against rising interest rates.
Even though yields on short-term tax-exempt securities remained less
attractive than in the past compared with taxable equivalents, we extended
our weighted average maturity late in the quarter as it became apparent that
we might not see the previously favorable relationships. Our note purchases
were concentrated in the four- to nine-month maturity range. This maturity
range offers higher yields than shorter-term securities while preserving our
flexibility to take advantage of rising rates. Your Fund turned in favorable
performances for the three- and six-month periods, as is shown below.
Performance Comparison
<TABLE>
<CAPTION>
Periods Ended 8/31/94
3 Months 6 Months
--------- ---------
<S> <C> <C>
Tax-Exempt Money Fund 0.58% 1.10%
Donoghue's Tax-Free
Money Fund Average* 0.55 1.06
=========================================================
</TABLE>
*Stockbroker and General Purpose Funds.
2
<PAGE>
TAX-FREE SHORT-INTERMEDIATE FUND
Intermediate-term interest rates took a breather after a volatile first
quarter, moving in a narrow range and ending the quarter virtually unchanged.
The contraction in the number of new issues and steady demand for
intermediate-term bonds, which are more defensive than long-term bonds, lent
stability to this part of the market. Issuance of new debt is about 40% below
year-ago levels throughout the country, with certain regional exceptions, and
new issuance of intermediate-term bonds has been particularly light.
We used this stable environment to lower our effective duration and
weighted average maturity slightly to 2.4 and 2.9 years, respectively, from
their levels at the end of the previous fiscal quarter. The weighted average
quality of portfolio securities was virtually unchanged at the AA level. In
line with our defensive posture, we emphasized higher-coupon bonds with
shorter durations rather than bonds with lower coupons, and avoided the
potential tax problem posed by "market discount" bonds, which allows capital
gains to be taxed as ordinary income in certain instances.
With inflationary pressures likely to increase, we expect to keep the
Fund's duration at the short end of our neutral range. Your Fund performed in
line with the average for its peer group during the quarter and outperformed
for the longer period, as shown below.
Performance Comparison
<TABLE>
<CAPTION>
Periods Ended 8/31/94
3 Months 6 Months
---------- --------
<S> <C> <C>
Tax-Free Short-Intermediate
Fund 1.03% 0.90%
Lipper Short Municipal
Debt Fund Average 1.01 0.64
========================================================
</TABLE>
TAX-FREE INSURED INTERMEDIATE BOND FUND
A stable market environment during the quarter, strong demand for tax-free
income, and a reduction in the supply of new issues caused municipal bond
yields in the five- to 10-year range to decline by five basis points. AAA
General Obligation yields in this maturity range closed the quarter 70% to
73%, respectively, of the yields on similar Treasuries--versus 71% and 74% at
the end of May.
Portfolio duration was extended slightly from 5.3 years to 5.4 years
during the quarter. The weighted average maturity was also slightly longer at
7.2 years, compared with 7.0 years in May. We sold securities in the five- to
seven-year area and reinvested the proceeds in both cash and 10-year
securities. This type of maturity structure should set the stage for better
relative performance as the yield curve flattens. Your Fund also emphasized
high coupon bonds that cushion price declines when rates rise and eliminate
the "market discount" problem (which allows capital gains to be taxed as
income in some instances).
Over the past six months this Fund has performed well against its
peers with a somewhat defensive posture. At this point we see little reason
to change course, considering our expectation for higher interest rates. An
even more defensive posture could be warranted if the economy continues to
grow strongly.
Performance Comparison
<TABLE>
<CAPTION>
Periods Ended 8/31/94
3 Months 6 Months
--------- ---------
<S> <C> <C>
Tax-Free Insured Intermediate
Bond Fund 1.31% 0.36%
Lipper Intermediate Municipal
Debt Fund Average 1.37 -0.28
=========================================================
</TABLE>
3
<PAGE>
TAX-FREE INCOME FUND
During the last three- and six-month periods we managed the Fund less
aggressively than in prior years, believing that stronger economic growth and
the Federal Reserve's tightening would result in higher interest rates. The
Fund's duration, which measures sensitivity to changing rates, remained in
the 7.5- to 7.7-year range and reflects a neutral posture relative to the
market. The Fund's weighted average maturity of approximately 17 1/2 years is
down significantly from year-ago levels, and the Fund's portfolio contains
less volatile bonds than in the past.
Throughout the first eight months of the year, we have been buying
securities exhibiting relatively low volatility, whose expected returns are
generated primarily by income. Specifically, we have been concentrating on
bonds with higher coupons with maturities in the vicinity of 20 years. In
most instances we preferred high-quality bonds since the yields on
lower-quality securities are not high enough to compensate for the additional
risk.
We chose not to be fully defensive in the last quarter since rates
have already risen substantially and municipal bonds offered good value
compared with other fixed-income securities on an after-tax basis.
A major benefit of the rise in rates so far this year is an increase
in the Fund's dividend yield from 5.57% to 5.74%. Additionally, your Fund
outperformed its peer group in both the three- and six-month periods.
Performance Comparison
<TABLE>
<CAPTION>
Periods Ended 8/31/94
3 Months 6 Months
--------- ---------
<S> <C> <C>
Tax-Free Income Fund 1.45% -1.39%
Lipper General Municipal
Debt Fund Average 1.38 -1.83
=========================================================
</TABLE>
TAX-FREE HIGH YIELD FUND
The quarter ended August 31 was favorable for the Fund. We maintained a neutral
posture as our concern about rising interest rates was offset significantly by
favorable market conditions for municipal bonds. We currently define as neutral
a duration between 6.75 and 7.5 years and a weighted average maturity (WAM)
between 20 and 22 years. We maintained an effective duration of 7.5 and a WAM of
around 20 years. The percentage of securities with maturities of 10 years or
longer was unchanged at 85% from the previous quarter. The Fund's weighted
average credit quality held steady at BBB+, and exposure to below-investment-
grade securities was unchanged at 24% of net assets.
The relatively low level of new issues coming to market served as
support for tax-exempt bond prices, as previously discussed. Looking ahead to
the third fiscal quarter, we may adopt a slightly more defensive posture,
particularly if inflationary pressures show signs of building up. The Fund's
three- and six-month results compared favorably with peer group averages
shown below.
Performance Comparison
<TABLE>
<CAPTION>
Periods Ended 8/31/94
3 Months 6 Months
--------- ----------
<S> <C> <C>
Tax-Free High Yield Fund 1.73% -1.01%
Lipper High Yield Municipal
Debt Fund Average 1.58 -1.47
=========================================================
</TABLE>
4
<PAGE>
Financial Summary
<TABLE>
<CAPTION>
Net Asset Value Dividend Per Share Dividend Yield*
Per Share 3 Months Ended 3 Months Ended
------------------ ------------------ -------------------
05/31/94 08/31/94 05/31/94 08/31/94 05/31/94 08/31/94
<C> <C> <C> <C> <C> <C>
Tax-Exempt Money $ 1.00 $ 1.00 $ 0.005 $ 0.006 2.38% 2.66%
Tax-Free Short-Intermediate 5.26 5.26 0.053 0.054 4.00 4.08
Tax-Free Insured Intermediate Bond 10.34 10.36 0.111 0.114 4.28 4.41
Tax-Free Income 9.22 9.22 0.129 0.133 5.57 5.74
Tax-Free High Yield 11.71 11.73 0.180 0.181 6.07 6.18
</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;
the Tax-Exempt Money Fund reports a 7-day compound yield.
Quality Diversification
<TABLE>
<CAPTION>
Weighted Average
Quality Ratings* Quality*
---------------------------------------------- ---------------------
1 2 3 4 5-10 05/31/94 08/31/94
<S> <C> <C> <C> <C> <C> <C> <C>
Tax-Exempt Money 13% 85% 2% 0% 0% 1.9 1.9
Tax-Free Short-Intermediate 22 54 22 2 - 2.1 2.1
Tax-Free Insured Intermediate Bond 14 74 12 - - 1.9 2.0
Tax-Free Income 10 52 26 11 1 2.4 2.4
Tax-Free High Yield 5 18 16 36 25 3.6 3.6
</TABLE>
* On a T. Rowe Price scale of 1 to 10, with Grade 1 representing highest
quality.
5
Duration and Maturity
<TABLE>
<CAPTION>
Weighted Average Weighted Average
Effective Duration (years) Maturity (years)
-------------------------- ------------------
05/31/94 08/31/94 05/31/94 08/31/94
<S> <C> <C> <C> <C>
Tax-Exempt Money - - 49* 58*
Tax-Free Short-Intermediate 2.6 2.4 3.1 2.9
Tax-Free Insured Intermediate Bond 5.3 5.4 7.0 7.2
Tax-Free Income 7.6 7.7 17.6 17.8
Tax-Free High Yield 7.3 7.5 19.6 20.6
</TABLE>
* Maturity is in days.
5
<PAGE>
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--Shareholder service representatives are available from 8:00 a.m. to
10:00 p.m., Monday - Friday, and weekends from 9:00 a.m. to 5:00 p.m., E.T. Call
1-800-225-5132 to speak directly with a representative who will be able to
assist you with your accounts.
IN PERSON--Visit one of our investor center locations to meet with a
representative who will be able to assist you with your accounts. While there,
you can drop off applications or obtain prospectuses and other literature.
AUTOMATED 24-HOUR SERVICES
Tele*Access/(R)/ (1-800-638-2587) provides information such as account
balance, date and amount of your last transaction, latest dividend payment, and
fund prices and yields. Additionally, you have the ability to request
prospectuses, statements, account and tax forms; reorder checks; and initiate
purchase, redemption, and exchange orders for identically registered accounts.
PC*Access/(R)/ provides the same information as Tele*Access, but on a
personal computer via dial-up modem.
ACCOUNT SERVICES
Checking--Write checks for $500 or more on any money market and bond
fund accounts (except the High Yield Fund).
Automatic Investing--Build your account over time by investing directly
from your bank account or paycheck with Automatic Asset Builder. Additionally,
Automatic Exchange enables you to set up systematic investments from one fund
account into another, such as from a money fund into a stock fund. A low, $50
minimum makes it easy to get started.
Automatic Withdrawal--If you need money from your fund account on a
regular basis, you can establish scheduled, automatic redemptions.
Dividend and Capital Gains Payment Options--Reinvest all or some of your
distributions, or take them in cash. We give you maximum flexibility and
convenience.
INVESTMENT INFORMATION
Combined Statement--A comprehensive overview of your T. Rowe Price
accounts. The summary page gives your earnings by tax category, provides total
portfolio value, and lists your investments by type -- stock, bond, and money
market. Detail pages itemize account transactions by fund.
Quarterly Shareholder Reports--Portfolio managers review the performance
of the funds in plain language and discuss T. Rowe Price's economic outlook.
The T. Rowe Price Report--A quarterly newsletter with relevant articles
on market trends, personal financial planning, and T. Rowe Price's economic
perspective.
Insights--A library of information that includes reports on mutual fund
tax issues, investment strategies, and financial markets.
Detailed Investment Guides--Our widely acclaimed Asset Mix Worksheet,
College Planning Kit, Retirees Financial Guide, Retirement Planning Kit (also
available on disk for PC use), and Guide to Risk-Adjusted Performance can help
you determine and reach your investment goals.
DISCOUNT BROKERAGE
You can trade stocks, bonds, options, precious metals, and other securities
at a substantial savings over regular commission rates. Call a shareholder
service representative for more information.
6
<PAGE>
T. Rowe Price No-Load Mutual Funds
STABILITY
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
California Tax-Free Money
New York Tax-Free Money
Summit Municipal Money
Market
Tax-Exempt Money
CONSERVATIVE INCOME
Adjustable Rate
U.S. Government
Short-Term Bond
Short-Term Global Income
Summit Limited-Term Bond
U.S. Treasury Intermediate
Florida Insured Intermediate
Tax-Free
Maryland Short-Term
Tax-Free Bond
Summit Municipal
Intermediate
Tax-Free Insured
Intermediate Bond
Tax-Free Short-Intermediate
INCOME
Global Government Bond
GNMA
New Income
Spectrum Income
Summit GNMA
U.S. Treasury Long-Term
California Tax-Free Bond
Georgia Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Tax-Free Income
Virginia Tax-Free Bond
AGGRESSIVE INCOME
High Yield
International Bond
Tax-Free High Yield
CONSERVATIVE GROWTH
Balanced
Capital Appreciation
Dividend Growth
Equity Income
Equity Index
Growth & Income
Spectrum Growth
Value
GROWTH
Blue Chip Growth
European Stock
Growth Stock
International Stock
Japan
Mid-Cap Growth
New Era
Small-Cap Value
AGGRESSIVE GROWTH
International Discovery
Latin America
New America Growth
New Asia
New Horizons
OTC
Science & Technology
PERSONAL STRATEGY FUNDS
Personal Strategy Income
Personal Strategy Balanced
Personal Strategy Growth
Call if you want to know about any T. Rowe Price Fund. We'll send you a
prospectus with more complete information, including management fees and other
expenses. Read it carefully before you invest or send money.
7
<PAGE>
SemiAnnual Report
T. Rowe Price
- -------------
Tax-Free Funds
August 31, 1994
[LOGO OF RAM APPEARS HERE]
For yield, price, last transaction
and current balance, 24 hours,
7 days a week, call:
1-800-638-2587 toll free
625-7676 Baltimore area
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 distri-
bution only to shareholders and to
others who have received a copy of
the prospectus of the T. Rowe Price
Tax-Free Funds.
[LOGO OF T. ROWE PRICE APPEARS HERE]
<PAGE>
Chart for Tax-Free Funds semiannual report (Aug. 31, 1994)
Chart 1. Municipal bond and note yields. Line graphs of 30-year AAA GO bonds,
5-year AAA GO, and 6-month Moody's Investment Grade 1 Note, showing yields from
8/31/93 through 8/31/94.
