Report - Financial Statements
T. Rowe Price Tax-Free High Yield Fund
August 31, 1996
Portfolio Highlights
Sector Diversification
Percent of Percent of
Net Assets Net Assets
2/29/96 8/31/96
Hospital Revenue 22% 20%
Housing Finance Revenue 10 13
Industrial and Pollution Control Revenue 11 11
Nuclear Revenue 9 10
Life Care/Nursing Home Revenue 8 7
Ground Transportation Revenue 7 7
General Obligation - Local 5 6
Prerefunded Bonds 4 5
Lease Revenue 4 4
General Obligation - State 2 3
Solid Waste Revenue 4 3
Dedicated Tax Revenue 3 3
Miscellaneous Revenue 2 2
Electric Revenue 3 2
Educational Revenue 1 2
All Other 4 2
Other Assets Less Liabilities 1 -
Total 100% 100%
T. Rowe Price Tax-Free High Yield Fund
Unaudited
Financial Highlights For a share outstanding throughout each period
6 Months Year
Ended Ended
8/31/96 2/29/96 2/28/95 2/28/94 2/28/93 2/29/92
NET ASSET VALUE
Beginning of
period $ 12.10 $11.62 $12.26 $12.33 $11.65 $11.40
Investment activities
Net investment
income 0.35 0.72 0.73 0.74 0.78 0.81
Net realized
and unrealized
gain (loss) (0.26) 0.48 (0.60) 0.16 0.78 0.35
Total from
investment
activities 0.09 1.20 0.13 0.90 1.56 1.16
Distributions
Net investment
income (0.35) (0.72) (0.73) (0.74) (0.78) (0.81)
Net realized
gain - - (0.04) (0.23) (0.10) (0.10)
Total dis-
tributions (0.35) (0.72) (0.77) (0.97) (0.88) (0.91)
NET ASSET VALUE
End of
period $ 11.84 $12.10 $11.62 $12.26 $12.33 $11.65
Ratios/Supplemental Data
Total return 0.81% 10.62% 1.26% 7.49% 13.94% 10.56%
Ratio of expenses
to average
net assets 0.74%! 0.75% 0.79% 0.79% 0.81% 0.83%
Ratio of net
investment in-
come to average
net assets 5.85%! 6.07% 6.29% 5.95% 6.58% 7.01%
Portfolio turn-
over rate 44.5%! 39.3% 59.6% 59.3% 34.7% 51.0%
Net assets, end
of period (in
thousands) $994,888 $989,534 $873,546 $941,295 $853,185 $623,877
! Annualized.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Free High Yield Fund
Unaudited August 31, 1996
Statement of Net Assets Par Value
In thousands
ALABAMA 3.8%
Alexander Special Care Fac. Fin. Auth.,
Russell Hosp. Corp.
6.00%, 12/1/22 $ 3,250 $ 2,927
Baldwin County
Eastern Shore Health Care Auth., Thomas Hosp.
6.75%, 4/1/21 1,900 1,889
8.50%, 4/1/16 (Prerefunded 4/1/01!) 4,000 4,660
Courtland IDB, Solid Waste Disposal, Champion Int'l
5.90%, 2/1/17 8,000 7,530
Marshall County Health Care Auth.
Guntersville-Arab Medical Center
7.00%, 10/1/13 2,100 2,138
10.25%, 10/1/13 (Crossover Refunded) 6,750 7,555
Mobile
Capital Improvement Warrants, GO
Zero Coupon, 2/15/18 (MBIA Insured) 1,030 262
Zero Coupon, 8/15/18 (MBIA Insured) 4,550 1,116
Zero Coupon, 2/15/19 (MBIA Insured) 905 214
Zero Coupon, 8/15/19 (MBIA Insured) 4,675 1,069
Zero Coupon, 2/15/20 (MBIA Insured) 770 170
Zero Coupon, 8/15/20 (MBIA Insured) 4,810 1,025
Mobile Airport Auth., 8.875%, 10/1/15 * 2,000 2,201
Mobile IDB, Mobile Energy Services, 6.95%, 1/1/20 1,400 1,458
Shelby County, GO
7.40%, 8/1/07 2,000 2,184
7.70%, 8/1/17 1,000 1,106
Total Alabama (Cost $34,255) 37,504
ALASKA 0.5%
Alaska Housing Fin. Corp.,
5.875%, 12/1/24 (MBIA Insured) 5,000 4,869
Total Alaska (Cost $4,859) 4,869
ARIZONA 0.4%
Scottsdale IDA
Westminster Village
10.00%, 6/1/07 (Prerefunded 6/1/97!) 1,175 1,261
10.00%, 6/1/17 (Prerefunded 6/1/97!) 750 804
Tempe IDA, Friendship Village of Tempe,
6.75%, 12/1/13 $ 1,950 $ 1,921
Total Arizona (Cost $3,750) 3,986
ARKANSAS 0.3%
Independence County, PCR, Mississippi Power and Light
7.625% ,7/1/12 3,000 3,151
Total Arkansas (Cost $3,000) 3,151
CALIFORNIA 6.1%
California Housing Fin. Auth., Home Mortgage
6.15%, 8/1/25 (MBIA Insured) * 3,500 3,439
California HFFA, Daughters of Charity Health Systems
(St. Francis Medical Center), 5.75%, 10/1/23
(Escrowed to Maturity) 6,515 6,427
Foothill / Eastern Transportation Corridor Agency
California Toll Road
Zero Coupon, 1/1/15 2,500 731
Zero Coupon, 1/1/17 12,265 3,130
Zero Coupon, 1/1/19 10,000 2,217
Zero Coupon, 1/1/25 8,000 1,161
Zero Coupon, 1/1/26 20,000 2,710
Zero Coupon, 1/1/28 10,000 1,183
Zero Coupon, 1/1/30 25,000 2,563
5.00%, 1/1/35 4,000 3,222
Fresno Joint Powers Fin. Auth., 6.55%, 9/2/12 3,000 3,057
Inglewood Redev. Agency, Century Redev.,
6.125%, 7/1/23 3,440 3,289
Los Angeles County, Marina del Rey, COP, 6.50%, 7/1/08 3,250 3,267
Oakland, COP, VRDN (Currently 3.75%) 2,915 2,915
San Joaquin Hills Transportation Corridor Agency
Toll Road
Zero Coupon, 1/1/10 5,000 1,873
Zero Coupon, 1/1/28 15,675 1,473
6.75%, 1/1/32 4,000 4,086
7.00%, 1/1/30 5,850 6,089
San Jose Redev. Agency, Tax Allocation
5.25%, 8/1/16 (MBIA Insured) 4,000 3,729
Southern California Public Power Auth., 6.00%, 7/1/12 3,800 3,816
Total California (Cost $58,342) 60,377
COLORADO 3.9%
Arapahoe County
Capital Improvement Public Highway
Zero Coupon, 8/31/09 $ 10,000 $ 4,188
Zero Coupon, 8/31/15 10,000 2,601
7.00%, 8/31/26 5,000 5,249
Boulder County, Longmont United Hosp.
8.20%, 12/1/20
(Prerefunded 12/1/00!) 1,540 1,757
Boulder County, IDR
Boulder Medical Center
8.625%, 1/1/07 * 820 841
8.75%, 1/1/12 * 1,205 1,237
8.875%, 1/1/17 * 1,190 1,222
Colorado Housing Fin. Auth.
8.65%, 8/1/03 815 845
8.70%, 11/1/04 * 1,395 1,448
9.00%, 8/1/03 785 810
9.40%, 8/1/03 * 655 678
9.60%, 8/1/01 * 500 523
Denver City and County, Airport System, United Air Lines
6.875%, 10/1/32 * 12,200 12,381
El Paso County, School Dist. No. 20,
GO, 6.35%, 12/15/06 3,000 3,247
Westminster, Special Improvement Dist., 9.25%, 12/1/03
(Prerefunded 12/1/96!) 1,475 1,509
Total Colorado (Cost $36,335) 38,536
DELAWARE 1.2%
Delaware Economic Dev. Auth.
Delmarva Power and Light
7.15%, 7/1/18 (FGIC Insured) 2,500 2,768
Peninsula United Methodist Homes
8.50%, 5/1/22 2,500 2,654
Delaware HFA, Beebe Medical Center, 6.75%, 6/1/14 3,975 4,003
Wilmington Osteopathic Hosp. Assoc. of Delaware
Riverside Hosp., 10.20%, 10/1/18
(Prerefunded 10/1/98!) 2,000 2,255
Total Delaware (Cost $10,856) 11,680
DISTRICT OF COLUMBIA 1.5%
Dist. of Columbia
American Geophysical Union, 5.875%, 9/1/23 $ 1,750 $ 1,526
American Univ., VRDN (Currently 3.55%) 7,550 7,550
Medlantic Health Care
5.75%, 8/15/26 (MBIA Insured) 6,000 5,725
Total District of Columbia (Cost $14,987) 14,801
FLORIDA 3.3%
Brevard County Tourist Dev.,
Florida Marlins Spring Training Fac.
6.875%, 3/1/13 1,520 1,590
Broward County Resource Recovery
Broward Waste Energy, L.P. North
7.95%, 12/1/08 4,675 5,148
Broward Waste Energy, L.P. South
7.95%, 12/1/08 4,750 5,231
Charlotte County, IDR, Beverly Enterprises,
10.00%, 6/1/11 910 1,022
Collier County IDA, Beverly Enterprises,
10.75%, 3/1/03 2,035 2,298
Dade County, Zero Coupon, 2/1/12 (MBIA Insured) 14,715 6,030
Escambia County, IDR, Beverly Enterprises,
9.80%, 6/1/11 465 514
Hernando County, IDR, Beverly Enterprises,
10.00%, 9/1/11 870 980
Jacksonville, IDR, Beverly Enterprises,
9.75%, 10/1/11 900 984
Leon County, IDR, Beverly Enterprises,
9.80%, 6/1/11 455 503
Manatee County Housing Fin. Auth.,
Capital Appreciation
Zero Coupon, 10/1/15 5,695 778
Orange County IDA, Beverly Enterprises,
9.25%, 8/1/10 445 487
Santa Rosa County HFA, Gulf Breeze Hosp.,
8.60%, 10/1/02 890 952
St. John's County IDA, Vicar's Landing,
6.75%, 2/15/12 4,000 3,893
Venice Health Care, Bon Secours Health Systems
5.625%, 8/15/26 (MBIA Insured) 3,000 2,872
Total Florida (Cost $31,860) 33,282
GEORGIA 1.5%
Georgia Municipal Electric Auth., 6.25%, 1/1/17 4,000 4,140
Monroe County, PCR, Gulf Power, VRDN (Currently 4.00%) 1,400 1,400
Rockdale County Dev. Auth.
Solid Waste Disposal, Visy Paper
7.40%, 1/1/16 * $ 4,500 $ 4,554
7.50%, 1/1/26 * 4,400 4,468
Total Georgia (Cost $14,672) 14,562
HAWAII 0.4%
Hawaii Dept. of Budget and Finance, Kapi'olani Health
Obligated Group, 6.25%, 7/1/21 4,000 4,036
Total Hawaii (Cost $4,000) 4,036
IDAHO 1.0%
Gem County, PCR, Boise Cascade, Floating Rate
(Currently 5.445%), 1/5/97 167 167
Idaho HFA
Single Family
6.30%, 1/1/24 * 5,000 5,003
7.80%, 1/1/23 * 1,995 2,088
Idaho Student Loan Marketing Assoc., 6.70%, 10/1/07 * 2,500 2,566
Total Idaho (Cost $9,650) 9,824
ILLINOIS 5.8%
Aurora, Dreyer Medical Clinic, 8.75%, 7/1/14 4,385 4,983
Chicago, GO
6.25%, 1/1/15 (AMBAC Insured) 3,500 3,676
5.125%, 1/1/16 (FGIC Insured) 7,685 6,949
Chicago-O'Hare Int'l. Airport
American Airlines, 7.875%, 11/1/25 * 2,500 2,676
Special Fac., United Airlines, Inc., 8.20%, 5/1/18 2,000 2,168
Illinois, GO, 5.125%, 12/1/17 (FGIC Insured) 3,750 3,396
Illinois EFA, Art Institute of Chicago,
VRDN (Currently 3.55%) 1,000 1,000
Illinois HFA
Community Hosp. of Ottawa, 6.85%, 8/15/24 3,775 3,789
Covenant Retirement Community, 7.60%, 12/1/12 2,665 2,796
Glen Oaks Medical Center, 9.50%, 11/15/15 2,175 2,472
Hinsdale Health System, 9.00%, 11/15/15 4,770 5,334
Holy Cross Hosp., 6.75%, 3/1/24 $ 4,000 $ 3,977
Memorial Hosp., 7.25%, 5/1/22 9,500 9,764
Robbins Village, Resource Recovery, 9.25%, 10/15/14 * 2,550 2,544
Southwestern Illinois Dev. Auth., Anderson Hosp.
7.00%, 8/15/22 2,500 2,529
Total Illinois (Cost $56,098) 58,053
INDIANA 1.3%
Hammond, Sewage and Solid Waste Disposal, American Maize
Products, 8.00%, 12/1/24 * 4,000 4,410
Indianapolis Airport Auth., Federal Express,
7.10%, 1/15/17 * 8,000 8,423
Total Indiana (Cost $12,419) 12,833
KENTUCKY 3.3%
Florence Housing Fac., Bluegrass RHF Housing,
9.50%, 7/1/17
(Mandatory Tender 7/1/97!) 1,870 1,904
Jefferson County, Louisville Gas and Electric,
7.45%, 6/15/15 4,250 4,639
Jefferson County HFA, Beverly Enterprises,
9.75%, 8/1/07 830 905
Kenton County Airport Board
Delta Airlines
6.125%, 2/1/22 * 6,000 5,740
7.50%, 2/1/12 * 3,600 3,831
7.50%, 2/1/20 * 5,250 5,587
Kentucky Economic Dev. Fin. Auth.
Sisters of Charity of Nazareth
VRDN (Currently 3.85%) 6,600 6,600
St. Claire Medical Center, 7.125%, 9/1/21
(Prerefunded 9/1/01!) 3,600 3,990
Total Kentucky (Cost $31,251) 33,196
LOUISIANA 3.6%
Lake Charles Harbor and Terminal Dist., Panhandle
Eastern Corp., 7.75%, 8/15/22 5,000 5,590
Louisiana Offshore Terminal Auth., LOOP, 7.60%, 9/1/10 8,500 9,256
Louisiana PFA
IDR, Beverly Enterprises, 8.25%, 9/1/08 1,335 1,430
St. James Place of Baton Rouge, 10.00%, 11/1/21 4,500 4,985
Plaquemines Parish IDB, PCR, AMAX Inc.,
7.25%, 10/1/09 $ 1,280 $ 1,281
Saint Charles Parish, Louisiana Power and Light
8.00%, 12/1/14 8,000 8,701
West Feliciana Parish, PCR, Gulf States Utilities
8.00%, 12/1/24 4,000 4,251
Total Louisiana (Cost $33,127) 35,494
MAINE 1.0%
Maine HHEFA, Waterville Osteopathic Hosp., 9.875%, 7/1/13
(Prerefunded 7/1/97!) 4,185 4,506
Maine Housing Auth., Mortgage Purchase, 6.45%, 11/15/26
(AMBAC Insured) * 5,000 5,024
Total Maine (Cost $9,261) 9,530
MARYLAND 3.7%
Baltimore County
Golf Systems, VRDN (Currently 3.55%) 6,000 6,000
Stella Maris, 7.50%, 3/1/21 1,000 1,053
Berlin, Atlantic General Hosp., 8.375%, 6/1/22 1,935 2,027
Gaithersburg Economic Auth., Asbury Methodist Home
7.85%, 1/1/20 (Prerefunded 1/1/00!) 2,000 2,239
Maryland CDA
Single Family
Zero Coupon, 4/1/29 * 25,695 1,954
7.25%, 4/1/19 2,500 2,615
Maryland HHEFA
Doctor's Community Hosp., 5.50%, 7/1/24 3,000 2,582
Loyola College, VRDN (Currently 3.65%) 2,400 2,400
Union Hosp. of Cecil County, 6.70%, 7/1/22 2,725 2,729
Maryland Ind. Dev. Fin. Auth.
Associated Catholic Charities, 9.00%, 1/1/10 1,525 1,666
Economic Dev., American Association of
Blood Banks, 7.25%, 8/1/13 2,700 2,762
Economic Dev., Georgetown Bakery Management
Corp. Fac., 9.25%, 9/1/04 * 1,365 1,464
Maryland-National Capital Park and Planning Commission,
Little Bennett Golf Fac., 8.25%, 10/1/11 2,265 2,449
Montgomery County Housing Opportunities Commission
Multifamily, Strathmore Court at White Flint
8.75%, 7/1/27 $ 2,000 $ 2,057
Single Family
6.10%, 7/1/27 1,975 1,956
7.50%, 7/1/17 685 721
Total Maryland (Cost $35,232) 36,674
MASSACHUSETTS 2.7%
Massachusetts, GO, 7.50%, 6/1/04 2,750 3,172
Massachusetts Bay Transportation Auth.
General Transportation, GO
7.00%, 3/1/19 2,500 2,871
7.00%, 3/1/21 2,000 2,300
Massachusetts HEFA
Melrose Wakefield Health Care, 6.00%, 7/1/12 1,650 1,612
New England Deaconess Hosp., 7.20%, 4/1/22 3,535 3,761
Massachusetts Housing Fin. Agency
6.375%, 4/1/21 1,950 1,956
Single Family, 6.35%, 6/1/17 1,750 1,786
Massachusetts Ind. Fin. Agency, Nevins Home,
7.875%, 7/1/23 5,400 5,498
Massachusetts Turnpike Auth., 5.00%, 1/1/20 4,500 3,928
Total Massachusetts (Cost $25,728) 26,884
MICHIGAN 3.6%
Dickinson County, Economic Dev., Champion Int'l
5.85%, 10/1/18 4,000 3,752
Meridian Economic Dev. Corp., Burcham Hills Retirement
Center III, 9.625%, 7/1/19 (Prerefunded 7/1/97!) 2,790 2,996
Michigan HDA
6.20%, 6/1/27 * 5,000 4,925
6.50%, 12/1/17 3,520 3,619
7.75%, 12/1/19 * 950 963
Michigan Hosp. Fin. Auth.
Bay Medical Center, 8.25%, 7/1/12 2,000 2,133
Pontiac Osteopathic Hosp., 6.00%, 2/1/24 4,000 3,664
Saratoga Community Hosp., 8.75%, 6/1/10 3,900 4,085
Sisters of Mercy Health Corp., 7.50%, 2/15/18
(Prerefunded 2/15/01!) $ 1,650 $ 1,841
Royal Oak Hosp. Fin. Auth.
William Beaumont Hosp.
5.50%, 1/1/17 5,000 4,764
5.50%, 1/1/18 3,425 3,244
Total Michigan (Cost $34,456) 35,986
MINNESOTA 0.3%
Minnesota Housing Fin. Agency
Single Family
6.70%, 1/1/18 1,990 2,072
9.00%, 8/1/18 * 1,000 1,040
Total Minnesota (Cost $3,014) 3,112
MISSISSIPPI 2.0%
Adams County, Jefferson Davis Memorial Hosp.
8.00%, 10/1/16 3,805 4,081
Claiborne County, PCR
Systems Energy Resources
7.30%, 5/1/25 1,100 1,133
9.50%, 12/1/13 2,000 2,221
9.875%, 12/1/14 7,800 8,722
Mississippi Home Corp., Single Family, 9.25%, 3/1/12
(FGIC Insured) 265 285
Mississippi Hosp. Equipment and Fac. Auth., Magnolia Hosp.
7.375%, 10/1/21 3,000 2,962
Total Mississippi (Cost $18,610) 19,404
MISSOURI 1.7%
Hannibal IDA, Hannibal Medical Center, 9.50%, 3/1/22
(Prerefunded 9/1/01!) 4,000 4,977
Joplin IDA, Tri-State Osteopathic Hosp. Assoc.
8.25%, 12/15/14 1,180 1,254
Lees Summit IDA, John Knox Village, 7.125%, 8/15/12 1,500 1,572
Missouri HEFA
Bethesda Health Group, 7.50%, 8/15/12 $ 1,250 $ 1,257
Still Regional Medical Center, 7.70%, 2/1/13 4,250 4,488
Ray County, Ray County Memorial Hosp.,
9.625%, 11/15/13 3,200 3,461
Total Missouri (Cost $15,292) 17,009
MONTANA 0.4%
Montana Board of Housing
Subordinate Lien
7.85%, 10/1/04 (FHA Guaranteed) 755 791
8.40%, 10/1/03* 720 743
8.50%, 10/1/02 620 643
8.525%, 10/1/02 (FHA Guaranteed) 585 604
8.95%, 10/1/02* 655 678
9.20%, 10/1/01* 445 459
Total Montana (Cost $3,780) 3,918
NEBRASKA 1.9%
Douglas County Hosp. Auth., Immanuel Medical Center
7.00%, 9/1/21 (AMBAC Insured) 5,500 5,968
Nebraska Investment Fin. Auth.
Single Family
6.45%, 3/1/28 * (GNMA Guaranteed) 5,000 5,033
Residual Interest Bond/Inverse Floater
(Currently 11.377%), 3/15/22
(GNMA Guaranteed) * 665 727
Residual Interest Bond/Inverse Floater
(Currently 11.415%), 9/10/30
(GNMA Guaranteed) 1,600 1,772
Nebraska Public Power Dist., Electric, 5.25%, 1/1/22
(MBIA Insured) 6,000 5,534
Total Nebraska (Cost $18,237) 19,034
NEVADA 1.4%
Clark County, IDR
Southwest Gas
6.50%, 12/1/33 * $ 3,000 $ 2,906
7.30%, 9/1/27 3,000 3,170
7.50%, 9/1/32 * 5,000 5,303
Nevada Housing Division
Sub Lien
9.35%, 10/1/02 395 404
9.375%, 10/1/00 * 335 347
9.65%, 10/1/02 * 615 645
9.45%, 10/1/03 (FGIC Insured) * 660 685
Total Nevada (Cost $12,864) 13,460
NEW HAMPSHIRE 0.4%
New Hampshire HHEFA, Catholic Medical Center
8.25%, 7/1/13 2,000 2,141
New Hampshire Housing Fin. Auth., 8.625%, 7/1/13 * 1,850 1,926
Total New Hampshire (Cost $3,878) 4,067
NEW JERSEY 1.7%
New Jersey Economic Dev. Auth.
Holt Hauling and Warehouse System
9.75%, 12/15/16 * 1,000 1,044
10.25%, 9/15/14 500 523
Keswick Pines, 8.75%, 1/1/24 6,000 6,249
New Jersey HFFA, Raritan Bay Medical Center,
7.25%, 7/1/27 3,690 3,737
New Jersey Sports and Exposition Auth.,
Monmouth Park
8.00%, 1/1/25 5,250 5,684
Total New Jersey (Cost $16,065) 17,237
NEW YORK 10.3%
Babylon IDA
Babylon Community Waste Management
7.875%, 7/1/06 (Prerefunded 7/1/99!) 1,000 1,111
Ogden Martin Systems, 8.50%, 1/1/19
(Prerefunded 7/1/98!) $ 1,015 $ 1,120
Dormitory Auth. of the State of New York
City Univ.
5.625%, 7/1/16 3,100 2,918
6.00%, 7/1/14 2,730 2,695
State Univ. Ed. Fac.
5.25%, 5/15/13 5,000 4,543
5.25%, 5/15/19 5,000 4,442
5.875%, 5/15/17 3,000 2,900
Metropolitan Transportation Auth.
Service Contract
5.50%, 7/1/17 4,000 3,692
7.125%, 7/1/09 4,000 4,322
New York City
GO, 5.875%, 2/1/16 1,000 934
GO, 5.875%, 8/15/16 2,435 2,274
GO, 6.00%, 8/1/06 2,000 1,982
GO, 6.00%, 2/15/16 6,000 5,684
GO, 6.00%, 2/1/22 2,000 1,867
GO, 6.00%, 2/15/25 7,500 6,980
GO, 6.20%, 8/1/07 5,000 4,988
GO, 6.25%, 2/15/07 5,500 5,508
GO, 6.25%, 8/1/09 7,000 6,957
GO, 7.625%, 2/1/15 2,810 3,115
GO, 7.625%, 2/1/15 (Prerefunded 1/2/02!) 190 217
GO, 7.75%, 8/15/15 155 172
GO, 7.75%, 8/15/15 (Prerefunded 8/15/01!) 2,345 2,688
New York City Housing Dev. Corp., Multi-Family Housing
5.50%, 11/1/09 3,600 3,550
New York City IDA, Solid Waste Disposal, Visy Paper
7.95%, 1/1/28 * 2,000 2,093
New York City Municipal Water Fin. Auth., Water and Sewer
5.50%, 6/15/23 5,000 4,582
New York State Energy Research and Dev. Auth.
Electric Fac., Long Island Lighting
6.90%, 8/1/22 * 2,500 2,454
7.15%, 6/1/20 * 8,000 8,014
New York State Mortgage Agency
Homeowner Mortgage
Zero Coupon, 4/1/20 $ 11,800 $ 1,878
6.45%, 10/1/17 2,400 2,457
7.50%, 4/1/26 * 3,000 3,211
New York State Urban Dev. Corp.,
State Fac., 5.60%, 4/1/15 3,000 2,822
Total New York (Cost $99,846) 102,170
NORTH CAROLINA 0.3%
North Carolina Medical Care Commission
Stanly Memorial Hosp., 7.80%, 10/1/19
(Prerefunded 10/1/99!) 1,000 1,112
Valdese General Hosp., 8.75%, 10/1/16 2,075 2,364
Total North Carolina (Cost $3,043) 3,476
OHIO 4.1%
Cambridge, Guernsey Memorial Hosp., 8.00%, 12/1/11 1,500 1,597
Cleveland Parking Fac., 8.10%, 9/15/22 10,000 11,921
Dayton, Special Fac., Emery Air Freight Corp.,
6.05%, 10/1/09 2,500 2,490
Fairfield Economic Dev. Auth., Beverly Enterprises
8.50%, 1/1/03 2,060 2,198
Marion County Health Care Fac., United Church Homes
8.875%, 12/1/12 (Prerefunded 12/1/99!) 3,225 3,702
Middleburg Heights, Southwest General Hosp.,
7.20%, 8/15/19
(Prerefunded 8/15/01!) 2,000 2,241
Ohio Air Quality Dev. Auth., PCR, Toledo Edison
8.00%, 5/15/19 2,750 2,816
Ohio Housing Fin. Agency, Single Family, Residual Interest
Bond/Inverse Floater (Currently 9.925%), 3/31/31
(GNMA Guaranteed) * 740 779
Ohio Water Dev. Auth., PCR
Cleveland Electric
9.75%, 11/1/22 * 2,000 2,071
7.70%, 8/1/25 2,800 2,837
Toledo Edison
7.55%, 6/1/23 4,500 4,506
8.00%, 10/1/23* 3,700 3,788
Total Ohio (Cost $37,951) 40,946
OKLAHOMA 2.3%
Jackson County Memorial Hosp. Auth., Jackson County
Memorial Hosp., 7.30%, 8/1/15 $ 4,300 $ 4,129
LeFlore County Hosp. Auth., Eastern Oklahoma Medical
Center, 9.40%, 5/1/06 2,000 2,148
Oklahoma County IDA, Epworth Villa, 10.25%, 4/1/19 2,935 3,195
Tulsa Municipal Airport
American Airlines
7.375%, 12/1/20 * 2,000 2,104
7.60%, 12/1/30 * 5,240 5,581
Washington County Medical Auth.,
Jane Phillips Episcopal Hosp.,
8.50%, 11/1/10 5,200 5,614
Total Oklahoma (Cost $21,689) 22,771
OREGON 0.2%
Western Generation Agency, Wauna Cogeneration
7.25%, 1/1/09 * 2,000 2,070
Total Oregon (Cost $1,992) 2,070
PENNSYLVANIA 3.7%
Allegheny County Hosp. Dev. Auth., Rehabilitation Institute
of Pittsburgh, 7.00%, 6/1/22 2,000 2,023
Beaver County IDA, PCR
Cleveland Electric, 7.625%, 5/1/25 4,300 4,347
Toledo Edison, 7.75%, 5/1/20 2,000 2,041
Berks County IDA, Lutheran Home at Topton,
6.875%, 1/1/23 5,000 4,897
Blair County Hosp. Auth., Mercy Hosp., 8.125%, 2/1/14 2,700 2,849
Clarion IDA Health Fac., Beverly Enterprises,
10.125%, 5/1/07 830 908
Greene County IDA, Greene Health Care Assoc., Beverly
Enterprises, 6.875%, 3/1/13 2,430 2,427
Montgomery County Higher Ed. and Health Auth.
Brittany Pointe, 8.50%, 1/1/22 2,500 2,658
Redeemer Long Term Care and Elder Services
8.00%, 6/1/22 5,755 5,929
8.20%, 6/1/06 880 924
Pennsylvania HEFA
Carnegie Mellon Univ., VRDN (Currently 3.75%) $ 4,200 $ 4,200
Medical College of Pennsylvania, 8.375%, 3/1/11
(Prerefunded 3/1/99!) 2,200 2,439
Pennsylvania Housing Fac. Auth.,
Residual Interest Bond/Inverse
Floater (Currently 10.086%), 10/1/23 * 1,500 1,596
Total Pennsylvania (Cost $36,068) 37,238
PUERTO RICO 0.8%
Puerto Rico Commonwealth
5.50%, 7/1/15 3,000 2,884
Infrastructure Fin. Auth., 7.50%, 7/1/09 2,365 2,532
Puerto Rico Highway and Transportation Auth.,
5.50%, 7/1/15 3,000 2,884
Total Puerto Rico (Cost $8,064) 8,300
RHODE ISLAND 1.3%
Rhode Island Health and Ed. Building Corp., Rhode Island Hosp.
Residual Interest Bond/Inverse Floater
(Currently 9.867%), 8/15/21
(FGIC Insured) 1,000 1,128
Rhode Island Housing and Mortgage Fin. Corp.
8.05%, 4/1/22 * 5,000 5,222
Residual Interest Bond/Inverse Floater
(Currently 10.291%), 4/1/24 * 1,000 1,063
Homeownership Opportunity, 6.70%, 10/1/14 5,000 5,200
Total Rhode Island (Cost $11,975) 12,613
SOUTH DAKOTA 0.7%
South Dakota Building Auth., 7.50%, 12/1/16 4,400 4,527
South Dakota HDA, Homeownership, 6.65%, 5/1/14 2,500 2,593
Total South Dakota (Cost $6,963) 7,120
TENNESSEE 1.5%
Chattanooga and Hamilton County Hosp. Auth.,
Erlanger Medical
Center, VRDN (Currently 3.85%) 3,400 3,400
Metropolitan Gov't. of Nashville and Davidson Counties,
Water and Sewer,
Zero Coupon, 1/1/12 (FGIC Insured) $ 8,750 $ 9,174
Tennessee Housing Dev. Agency, 7.625%, 7/1/22 * 1,900 1,987
Total Tennessee (Cost $14,623) 14,561
TEXAS 7.3%
Alliance Airport Auth., American Airlines,
7.00%, 12/1/11 3,000 3,218
Bell County Health Fac. Dev. Corp.,
King's Daughter Hosp
9.25%, 7/1/08 3,155 3,465
Brazos River Auth., Houston Lighting and Power
6.375%, 4/1/12 (MBIA Insured) 10,000 10,551
Denison Hosp. Auth., Texoma Medical Center,
7.10%, 8/15/24 3,650 3,733
Gainesville IDC, GTE Valenite Corp., 8.90%, 5/15/11 * 3,170 3,422
Gulf Coast Waste Disposal Auth.,
Houston Lighting and Power
Floating Rate (Currently 4.95%), 6/1/98 5,000 5,000
Harris County, Toll Road,
6.375%, 8/15/24 (MBIA Insured) 2,500 2,598
Harris County Health Fac. Dev. Corp.
Memorial Hosp., 7.125%, 6/1/15 5,000 5,336
Methodist Hosp., VRDN (Currently 3.75%) 1,500 1,500
St. Luke's Episcopal Hosp
VRDN (Currently 3.75%) 4,300 4,300
Texas Medical Center, 7.375%, 5/15/20
(MBIA Insured) 2,350 2,570
Matagorda County Navigation Dist., PCR,
Central Power and Light
7.50%, 12/15/14 2,000 2,201
Paris Health Fac. Dev. Corp., McCuistion Regional Medical
Center, 7.60%, 2/1/12 4,500 4,740
San Antonio Electric and Gas
Zero Coupon, 2/1/10 (FGIC Insured) 5,000 2,321
Texas
GO, TRAN, 4.75%, 8/29/97 10,000 10,080
Veterans Housing Assistance, GO, 6.25%, 12/1/15 2,410 2,433
Tomball Hosp. Auth., Tomball Regional Hosp.,
6.10%, 7/1/08 5,000 4,939
Total Texas (Cost $68,891) 72,407
UTAH 1.3%
Davis County, Solid Waste Management and Energy Recovery
Special Service Dist., 6.125%, 6/15/09 2,000 1,914
Intermountain Power Agency
5.25%, 7/1/14 $ 1,000 $ 939
5.75%, 7/1/19** 4,000 3,738
Utah Housing Fin. Agency
Sub Lien
6.25%, 7/1/05 610 643
7.50%, 7/1/05 850 893
7.60%, 7/1/05 855 898
7.75%, 7/1/05 875 919
7.75%, 1/1/23 * 365 382
8.40%, 7/1/08 * 185 189
8.55%, 7/1/04 330 339
8.65%, 7/1/04 660 679
8.70%, 7/1/01 175 179
9.00%, 1/1/19 * 505 518
9.25%, 7/1/01 230 240
9.30%, 7/1/00 * 65 67
9.60%, 7/1/02 * 50 51
9.75%, 7/1/02 80 82
9.85%, 7/1/02 * 180 184
9.875%, 1/1/99 * 70 73
10.50%, 1/1/99 * 70 71
10.625%, 7/1/99 * 55 55
Total Utah (Cost $12,945) 13,053
VERMONT 0.1%
Vermont Ed. and Health Buildings Fin. Agency,
Medical Center Hosp. of Vermont,
7.45%, 9/1/23 (FGIC Insured) 1,400 1,455
Total Vermont (Cost $1,400) 1,455
VIRGINIA 1.8%
Chesapeake Bay Bridge and Tunnel Commission
5.00%, 7/1/22 (MBIA Insured) 5,920 5,275
Henrico County IDA,
Bon Secours Health System (Maryview Hosp.)
7.50%, 9/1/11 1,730 1,935
Norfolk Port and Ind. Auth., Henson Aviation,
9.625%, 8/1/12 * 860 960
Virginia HDA
Zero Coupon, 7/1/29 * 830 70
7.10%, 1/1/22 $ 4,000 $ 4,243
7.10%, 1/1/25 5,000 5,289
Total Virginia (Cost $16,981) 17,772
WASHINGTON 1.3%
Washington, GO, 5.70%, 10/1/15 7,500 7,405
Washington Public Power Supply System
Zero Coupon, 7/1/14 6,400 2,158
6.30%, 7/1/12 2,000 2,094
7.25%, 7/1/09 1,000 1,138
Total Washington (Cost $12,257) 12,795
WEST VIRGINIA 0.8%
West Virginia Hosp. Fin. Auth.
Charleston Area Medical Center, 5.75%, 9/1/13
(MBIA Insured) 5,750 5,768
West Virginia Univ. Hosp., Residual Interest
Bond/Inverse Floater (Currently 9.16%)
1/1/18 (MBIA Insured) 2,000 1,997
Total West Virginia (Cost $7,642) 7,765
WISCONSIN 1.8%
Wisconsin HEFA, National Regency Of New Berlin
8.00%, 8/15/25 6,000 5,644
Wisconsin HFA, Villa Clement, 8.75%, 6/1/12 1,500 1,503
Wisconsin Housing and Economic Dev. Auth.
7.75%, 9/1/17 4,045 4,164
8.00%, 3/1/21 * 1,935 1,983
Homeownership, 6.45%, 9/1/27 * 5,000 5,033
Total Wisconsin (Cost $18,282) 18,327
WYOMING 1.2%
Sweetwater County, Solid Waste Disposal, FMC Corp.
6.90%, 9/1/24* 5,000 5,169
Sweetwater County, PCR, Idaho Power,
VRDN (Currently 3.85%) 3,600 3,600
Wyoming CDA, Single Family, 6.70%, 6/1/17 3,320 3,438
Total Wyoming (Cost $11,402) 12,207
Total Investments in Securities
99.5% of Net Assets (Cost $947,892) $ 989,545
Other Assets Less Liabilities 5,343
NET ASSETS $ 994,888
Net Assets Consist of:
Accumulated net investment income - net of distributions $ 58
Accumulated net realized gain/loss - net of distributions (15,232)
Net unrealized gain (loss) 41,653
Paid-in-capital applicable to 83,999,946 shares of $0.01 par
value capital stock outstanding; 1,000,000,000 shares authorized 968,409
NET ASSETS $ 994,888
NET ASSET VALUE PER SHARE $ 11.84
* Interest subject to alternative minimum tax
** When-issued security
! Used in determining portfolio maturity
AMBAC AMBAC Indemnity Corp.
CDA Community Development Administration
COP Certificates of Participation
EFA Educational Facility Authority
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 Bond
IDC Industrial Development Corp.
IDR Industrial Development Revenue
MBIA Municipal Bond Investors Assurance Corp.
PCR Pollution Control Revenue
PFA Public Finance Agency
TRAN Tax Revenue Anticipation Note
VRDN Variable Rate Demand Note
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Free High Yield Fund
Unaudited
Statement of Operations
In thousands
6 Months
Ended
8/31/96
Investment Income
Interest Income $ 32,583
Expenses
Investment management 3,114
Shareholder servicing 367
Custody and accounting 124
Registration 31
Prospectus and shareholder reports 13
Legal and audit 13
Directors 6
Miscellaneous 12
Total expenses 3,680
Net investment income 28,903
Realized and Unrealized Gain/Loss
Net realized gain (loss) on
Securities (3,741)
Futures 196
Net realized gain (loss) (3,545)
Change in net unrealized gain or loss on securities (17,625)
Net realized and unrealized gain (loss) (21,170)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 7,733
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Free High Yield Fund
Unaudited
Statement of Changes in Net Assets
In thousands
6 Months Year
Ended Ended
8/31/96 2/29/96
Increase (Decrease) in Net Assets
Operations
Net investment income $ 28,903 $ 56,650
Net realized gain (loss) (3,545) 5,145
Change in net unrealized gain or loss (17,625) 32,000
Increase (decrease) in net assets from operations 7,733 93,795
Distributions to shareholders
Net investment income (28,896) (56,650)
Capital share transactions*
Shares sold 126,008 261,013
Distributions reinvested 20,094 39,048
Shares redeemed (119,585) (221,218)
Increase (decrease) in net assets from capital
share transactions 26,517 78,843
Net Assets
Increase (decrease) during period 5,354 115,988
Beginning of period 989,534 873,546
End of period $ 994,888 $ 989,534
*Share information
Shares sold 10,639 21,873
Distributions reinvested 1,697 3,271
Shares redeemed (10,109) (18,562)
Increase (decrease) in shares outstanding 2,227 6,582
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Free High Yield Fund
Unaudited August 31, 1996
Notes to Financial Statements
Note 1 - Significant Accounting Policies
T. Rowe Price Tax-Free 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 March 1, 1985.
Valuation Debt securities are generally traded in the over-the-counter
market. Investments in securities 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.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
fund, as authorized by the Board of Directors.
Premiums and Discounts Premiums and original issue discounts on municipal
securities are amortized 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.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on the identified cost basis. Distributions to shareholders are
recorded by the fund on the ex-dividend date. Income and capital gain
distributions are determined in accordance with federal income tax regulations
and may differ from those determined in accordance with generally accepted
accounting principles.
Note 2 - Investment Transactions
Consistent with its investment objective, the fund engages in the following
practices to manage exposure to certain risks or enhance performance. The
investment objective, policies, program, and risk factors of the fund are
described more fully in the fund's prospectus and Statement of Additional
Information.
Noninvestment-Grade Debt Securities At August 31, 1996, the fund held
investments in noninvestment-grade debt securities, commonly referred to as
"high-yield" or "junk" bonds. A real or perceived economic downturn or higher
interest rates could adversely affect the liquidity or value, or both, of such
securities because such events could lessen the ability of issuers to make
principal and interest payments.
Other Purchases and sales of portfolio securities, other than short-term
securities, aggregated $232,004,000 and $202,566,000, respectively, for the
six months ended August 31, 1996.
Note 3 - Federal Income Taxes
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of
its income. The fund has unused realized capital loss carryforwards for
federal income tax purposes of $11,239,000, of which $11,104,000 expires in
2003 and $135,000 in 2004. The fund intends to retain gains realized in future
periods that may be offset by available capital loss carryforwards.
At August 31, 1996, the aggregate cost of investments for federal income tax
and financial reporting purposes was $947,892,000, and net unrealized gain
aggregated $41,653,000, of which $44,953,000 related to appreciated
investments and $3,300,000 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 $534,000 was payable at August 31, 1996. The fee is computed
daily and paid monthly, and consists of an individual fund fee equal to 0.30%
of average daily net assets and a group fee. The group fee is based on the
combined assets of certain mutual funds sponsored by the manager or Rowe
Price-Fleming International, Inc. (the group). The group fee rate ranges from
0.48% for the first $1 billion of assets to 0.305% for assets in excess of $50
billion. At August 31, 1996, and for the six months 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.
In addition, the fund has entered into agreements with the manager and a
wholly owned subsidiary of the manager, pursuant to which the fund receives
certain other services. The manager computes the daily share price and
maintains the financial records of the fund. T. Rowe Price Services, Inc., is
the fund's transfer and dividend disbursing agent and provides shareholder and
administrative services to the fund. The fund incurred expenses pursuant to
these related party agreements totaling approximately $338,000 for the six
months ended August 31, 1996, of which $64,000 was payable at period-end.
T. Rowe Price Investment Services And Information
Knowledgeable Service Representatives
By Phone 1-800-225-5132 Available Monday through Friday from
8 a.m. to 10 p.m. and weekends from 8:30 a.m. to 5 p.m. ET.
In Person Available in T. Rowe Price Investor Centers.
Account Services
Checking Available on most fixed income funds.
Automatic Investing From your bank account or paycheck.
Automatic Withdrawal Scheduled, automatic redemptions.
Distribution Options Reinvest all, some, or none of your distributions.
Automated 24-Hour Services Including Tele*Access(registered trademark) and
T. Rowe Price OnLine.
Discount Brokerage*
Individual Investments Stocks, bonds, options, precious metals,
and other securities at a savings over regular commission rates.
Investment Information
Combined Statement Overview of your T. Rowe Price accounts.
Shareholder Reports Fund managers' reviews of their strategies and results.
The T. Rowe Price Report Quarterly investment newsletter discussing markets
and financial strategies.
Performance Update Quarterly review of all T. Rowe Price fund results.
Insights Educational reports on investment strategies and financial markets.
Investment Guides Asset Mix Worksheet, College Planning Kit, Personal
Strategy Planner, Retirees Financial Guide, and Retirement Planning Kit.
*A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
For yield, price, last transaction, and current balance, 24 hours, 7 days a
week, call:
1-800-638-2587 toll free
For assistance with your existing fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
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10th Floor
Tampa, FL 33607
T. Rowe Price
100 East Pratt Street
Baltimore, Maryland 21202
http://www.troweprice.com
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 Tax-Free High
Yield Fund(registered trademark).
T. Rowe Price Investment Services, Inc., Distributor RPRTTFH 8/31/96
THE SHAREHOLDER LETTER AND REPORT FOR THE COMBINED TAX-FREE FUNDS ARE ATTACHED
HERE BY ACCESSING THE FOLLOWING:
Semiannual Report
Tax-Free Funds
August 31, 1996
T. Rowe Price
Report Highlights
o The last six months saw the bond market give back the gains of the prior
six months as the economy grew stronger and expectations of further
easing by the Federal Reserve evaporated.
o The collapse of tax reform proposals helped municipals outperform the
taxable market.
o Most of the increase in interest rates took place during the first three
months of 1996. Since then, interest rates in the intermediate and long
end of the market have moved in a trading range. Very short-term rates
declined over the past year.
o All five funds generated greater returns than their peer group averages
during the 6- and 12-month periods ended August 31, despite the negative
environment so far this year.
o The Fed may tighten monetary policy in the next few months. We expect to
manage these portfolios with a cautious outlook on municipal bond
prices, focusing on improving income when we can.
Fellow Shareholders
The last six months saw the fixed income markets give back the gains realized
during the prior six months, as the economy strengthened and market
expectations of further easing by the Federal Reserve evaporated. The
municipal market declined less than the taxable market after the issue of tax
reform faded. While six-month returns were extremely modest, we are pleased to
report that all of the funds discussed here outperformed their peer group
averages during the 6- and 12-month periods ended August 31, 1996.
MARKET ENVIRONMENT
The economy regained strength in 1996 after slowing in 1995, with only a
modest pickup in inflation. Stronger growth alone was enough to reverse
expectations of any further Federal Reserve easing after two interest rate
cuts in the second half of 1995 and one earlier this year. While the Fed has
not yet tightened in 1996, it adopted a bias toward tightening in July. Market
rates moved up in anticipation of tighter monetary policy.
Most of the adjustment in interest rates occurred in the first quarter of
1996. The 30-year Treasury bond, which reached the 6% level at the end of
1995, backed up to 6.75% in the first quarter and has since traded within a
range of approximately 6.75% to 7.25%.
Chart 1 - Municipal Bond and Note Yields line chart
In the municipal market, rates rose roughly 50 basis points (100 basis points
equal one percent) from the lowest point reached in early 1996, but nowhere
near the high levels of late 1994. Long-term high-grade general obligation
bonds yielded 5.75% on August 31, 1996, versus 5.45% six months ago and 5.85%
a year ago. Five-year high-grade bonds were 25 basis points higher in yield
than in August 1995. Very short-term rates (less than 90 days) moved lower
over the past year, while one-year rates ended the last 12 months unchanged at
3.9% but 65 basis points higher than six months ago. The net result over the
past six months was a higher and flatter yield curve.
All was not doom and gloom in the municipal bond market over the past six
months. The fading of tax reform concerns caused the municipal market to
outperform taxable markets by a wide margin. As rates approached and then
exceeded 6%, strong retail demand for municipals provided support for the
market. During the summer of 1995, long-term municipal yields equaled 90% or
more of comparable taxable yields; this year, yields moved down to 81% of
taxable alternatives, allowing the municipal market to regain the ground it
lost.
Consistent with this environment, money market and short-term bond funds
provided the best overall returns for the past six months, while longer-term
funds provided the best returns over the 12-month period. High-yield funds
performed well over both periods as quality spreads narrowed, providing
additional price appreciation while their higher coupons cushioned them in the
market downturn.
For the first time since 1993 municipal issuance is rising, running 18% ahead
of 1995 levels through August. This coincides with a peaking last year in the
calling away of bonds issued at the higher interest rate levels of the 1980s,
possibly pointing to a better balance of supply and demand going forward.
Tax-Exempt Money Fund
The short-term yield curve steepened noticeably during the reporting period.
For the past six months, one-year securities averaged 40 basis points more
than overnight securities, providing us with an incentive to extend
maturities.
Tax-exempt money fund assets throughout the industry grew slightly since last
February but are up a significant 10% over year-ago levels. New issuance
declined modestly over the same period.
Performance Comparison chart
Periods Ended 8/31/96 6 Months 12 Months
Tax-Exempt Money Fund 1.52% 3.16%
Lipper Tax-Exempt Money
Market Funds Average 1.45 3.05
Regarding portfolio strategy, our weighted average maturity was 66 days on
August 31, little changed from the 65-day maturity at fiscal year-end.
However, this was longer than the average 57-day maturity of our peer group,
and we maintained a longer average maturity throughout the entire six-month
period due to the steepening yield curve and good balance between supply and
demand. This longer weighted average maturity helped fund performance in the
rate environment that has prevailed in recent months. Your fund outperformed
its peer group average during both the 6- and 12-month periods ended August
31, as shown in the table.
Tax-Free Short-Intermediate Fund
After extending the fund's duration (a measure of interest rate sensitivity)
last year to take advantage of falling rates, we began positioning the
portfolio for a rising rate environment in early 1996. Consequently, both the
weighted average maturity and duration of the portfolio were almost six months
shorter at the end of August than at the end of February. We increased our
weighting in bonds and notes maturing in under one year, which have less price
sensitivity, and lowered our holdings of bonds with 5- to 10-year maturities
from 21% to 11% of assets. At the same time, we tried to take advantage of
trading opportunities by lengthening and shortening maturities modestly each
time the market moved to temporarily undervalued or overvalued positions.
Performance Comparison
Periods Ended 8/31/96 6 Months 12 Months
Tax-Free Short-
Intermediate Fund 0.87% 3.84%
Lipper Short-Intermediate
Debt Funds Average 0.64 3.33
We also used higher-yielding securities to offset shorter durations and
preserve the portfolio's level of income. This strategy helped performance as
quality spreads narrowed and higher coupons cushioned the portfolio. The
fund's overall credit quality, which remained at AA as measured by T. Rowe
Price's ratings, is still quite strong.
These interest rate and credit strategies enabled your fund to outperform its
benchmark for both the 6- and 12-month periods ended August 31, as can be seen
in the table on page 3.
Tax-Free Insured Intermediate Bond Fund
We extended the fund's duration during the second half of 1995 as interest
rates declined, then maintained a slightly defensive posture at the beginning
of 1996 when rates began to rise again. Since March, we have managed the
portfolio to take advantage of the interest rate trading range, lengthening or
shortening duration around a neutral benchmark. The fund ended the six-month
period with a weighted average maturity of 7.7 years and a duration of 5.6
years, about where duration was at the end of February.
Performance Comparison chart
Periods Ended 8/31/96 6 Months 12 Months
Tax-Free Insured
Intermediate Bond Fund 0.19% 3.96%
Lipper Intermediate
Municipal Debt Funds Average 0.13 3.89
We also took steps to increase holdings in higher-yielding sectors of the
insured market. With insured municipal issuance running 40% above 1995 levels
in a rising and volatile rate environment, prices of insured bonds came under
pressure from time to time. We took advantage of an excellent opportunity to
increase positions in more yield-sensitive sectors of the insured market,
specifically hospital, solid waste disposal, and nuclear revenue bonds (see
the Sector Diversification table following this letter).
Your fund's performance surpassed that of the average for its peer group for
both the 6- and 12-month periods ended August 31, as shown in the table.
Tax-Free Income Fund
We began the last six months in an aggressive posture following the strong
market at the close of 1995, but reduced our exposure to rising interest rates
significantly from April to June. Over the most recent four months, we moved
the fund's duration from more than 8.0 years to below 7.5 years.
Performance Comparison chart
Periods Ended 8/31/96 6 Months 12 Months
Tax-Free Income Fund 0.01% 5.45%
Lipper General Municipal
Debt Funds Average -0.29 4.68
We accomplished this by selling longer-term bonds and reinvesting the proceeds
in maturities under 10 years, and by focusing on higher-coupon bonds with
defensive characteristics. On August 31, the fund's weighted average maturity
and duration were at the low end of their range for the past year and below
their peer group averages.
In developing our strategy, we elected to sell some of the low-coupon
long-term bonds that performed so well at the end of 1995, and maintained our
allocation to noncallable bonds since we believe the positive performance they
can provide during a rally is worth preserving for another day. We emphasized
states with high income tax rates in our portfolio, as they enjoy steady
demand even in rising rate environments.
The fund's duration moves paid off in terms of performance: we outpaced the
peer group average for both the six-month and one-year periods ended August
31, as shown in the table. The net asset value of the fund was essentially
unchanged from a year ago, with income providing all of the return.
Tax-Free High Yield Fund
The municipal high-yield market performed well over the past six and 12 months
thanks to continuing strong demand and relatively light new issuance. These
factors resulted in narrowing credit quality spreads for over a year - meaning
that yields tightened between higher- and lower-quality bonds.
We began the last six months with a somewhat defensive market stance, enabling
the fund to outperform its peer group as interest rates rose. For the rest of
the period, we maintained a more neutral posture. The fund's duration remained
in a range between 7.0 and 7.3 years. Cash levels averaged about 5%, and the
weighted average maturity hovered around 19 years.
Lower-quality bonds became less attractive to us as yield spreads narrowed. As
a result, we allowed the fund's exposure to below-investment-grade bonds to
drift to 25% of net assets from 30% over the past year. We are always
searching for high-yield opportunities, but in general we do not expect to
materially increase our exposure to lower-quality bonds in the near future.
The fund's average credit quality has been stable at BBB+ for almost a year.
Chart 2 - Quality Diversification pie chart
Performance Comparison chart
Periods Ended 8/31/96 6 Months 12 Months
Tax-Free High Yield Fund 0.81% 5.83%
Lipper High Yield Municipal
Debt Funds Average 0.28 5.43
At present, our market outlook is cautious as recent data suggest a rate of
economic growth stronger than the Federal Reserve might like. Absent an
unexpectedly large issuance of lower-quality bonds, we believe the municipal
high-yield market will maintain its present narrow spreads versus higher-
quality bonds. We are pleased to report that the various strategy moves
outlined above enabled your fund to outperform its peer group averages for
both the 6- and 12-month periods ended August 31, 1996, as shown in the table.
Outlook
The last six months have seen a major change in the outlook for the economy,
causing a shift in the shape and level of the municipal yield curve. The risk
of an overheating economy has grown, and the Fed will likely nudge rates
higher to cool things down in coming months. The current expansion is now over
five years old, roughly twice the length of an average expansion prior to
1982. However, old age is not a cause for an expansion to end. There is no
reason why the current expansion could not continue if interest rates are high
enough to restrain inflation, yet low enough to keep unemployment at bay.
Little has changed from a year ago in terms of interest rate levels, but much
has changed about market psychology. A year ago, this market was consumed with
worries about the impact of tax reform proposals on municipal bonds, and it
was convinced the economy was slowing down. Today, tax reform is on the back
burner and the economy has picked up steam.
As mentioned, we believe the Fed is likely to raise short-term rates, a move
that is at least partly discounted by the market. Municipal securities have
performed well this year in relation to their taxable counterparts, resulting
in lower yield relationships (as a percent of taxable yields) that will be
difficult to improve upon. An expected pickup in supply again after a quiet
summer may also put some pressure on the municipal market.
For these reasons, we expect to continue managing the funds with a cautious
perspective on interest rates, trying to add performance value both through
credit research and by taking advantage of trading ranges.
Respectfully submitted,
William T. Reynolds
Director
Fixed Income Division
Mary J. Miller
Director
Municipal Bond Department
September 20, 1996
Keeping Taxes To A Minimum
As the saying goes, it's not what you earn but what you keep that counts. The
ability to provide tax-exempt income is the chief appeal of municipal bond
funds, and investors in higher tax brackets often find these funds
advantageous. Some funds invest in securities that offer the triple benefit of
being free from federal, state, and local taxes.
Investors should remember, however, that the total return on most municipal
bond funds may not be entirely tax-free. To avoid federal income taxes,
municipal funds must distribute all of their capital gains to shareholders
each year. These distributions are fully taxable. On infrequent occasions,
municipal funds may also purchase securities whose income is taxable, if
permitted by the prospectus.
Therefore, to judge accurately how well a fund minimizes taxes, investors
should focus not just on income but on the gain or loss from the sale of
securities, since both components make up total return. A fund's overall tax
efficiency - the percentage of its return that actually winds up in
shareholders' pockets - is calculated by dividing its after-tax total return
by its pretax total return. For example, an optimum tax efficiency of 100%
would indicate that these two returns were equal - the shareholders paid no
taxes. In reality, most municipal funds fall somewhat below this level due
primarily to taxable capital gain distributions.
At T. Rowe Price, our main goal in managing municipal bond portfolios is to
provide competitive total return performance. At the same time, we strive to
minimize capital gain distributions and other factors that would saddle our
shareholders with taxes. "We don't allow tax considerations to drive our
portfolio management, but we remain sensitive to taxes in our overall approach
to management," says Mary J. Miller, Director of T. Rowe Price's Municipal
Bond Department.
Inevitably, there are times when market conditions necessitate the sale of a
security despite the tax consequences. However, we are generally able to
offset capital gains with losses incurred on the sale of other securities.
Under Internal Revenue Service rules, losses can be carried for up to eight
years to offset gains. "Our goal is to minimize capital gains by offsetting
them with losses, so there would be no taxable event to the shareholder," says
Ms. Miller.
While not intentionally pursuing losses, T. Rowe Price aims to take advantage
of them when they occur. For instance, when municipal bond prices have reached
a cyclical low, we may sell some securities that are trading below our
purchase price and reinvest the proceeds in higher-yielding securities. That
strategy enhances the fund's income and also provides a tax loss that can be
employed anytime in the following eight years to offset capital gains.
According to a report from Morningstar,* the Tax-Free Insured Intermediate
Bond Fund had an average tax efficiency rating of 98.1% during the three years
ended August 31, 1996; the figures for the other funds cover the five-year
period ended August 31 and are as follows: Tax-Free Short-Intermediate 100%;
Tax-Free Income 97.9%; and Tax-Free High Yield 96.7%. (Money funds are
presumed to be 100% efficient.) While our foremost goal is to provide
competitive total returns, we will continue to do our best to limit the amount
of money you have to surrender to the IRS.
*Although data are gathered from reliable sources, completeness and accuracy
cannot be guaranteed.
T. Rowe Price Tax-Free Funds
Portfolio Highlights
KEY STATISTICS
2/29/96 8/31/96
Tax-Exempt Money Fund
Price Per Share $1.00 $1.00
Dividends Per Share
For 6 months 0.016 0.015
For 12 months 0.033 0.031
Dividend Yield
(7-Day Compound) * 2.95% 3.06%
Weighted Average Maturity (days) 65 66
Weighted Average Quality ** First Tier First Tier
Tax-Free Short-Intermediate Fund
Price Per Share $5.37 $5.30
Dividends Per Share
For 6 months 0.11 0.12
For 12 months 0.23 0.23
Dividend Yield *
For 6 months 4.38% 4.32%
For 12 months 4.47 4.40
Weighted Average Maturity
(years) 3.6 3.2
Weighted Average Effective
Duration (years) 3.0 2.6
Weighted Average Quality *** AA AA
Tax-Free Insured Intermediate Bond Fund
Price Per Share $10.84 $10.62
Dividends Per Share
For 6 months 0.24 0.24
For 12 months 0.48 0.48
Dividend Yield *
For 6 months 4.48% 4.44%
For 12 months 4.61 4.51
Weighted Average Maturity
(years) 7.2 7.7
Weighted Average Effective Duration
(years) 5.5 5.6
Weighted Average Quality *** AA AA
Tax-Free Income Fund
Price Per Share $9.66 $9.40
Dividends Per Share
For 6 months 0.26 0.26
For 12 months 0.52 0.52
Dividend Yield *
For 6 months 5.45% 5.44%
For 12 months 5.62 5.52
Weighted Average Maturity
(years) 18.1 17.0
Weighted Average Effective Duration
(years) 8.3 7.5
Weighted Average Quality *** AA- AA-
Tax-Free High Yield Fund
Price Per Share $12.10 $11.84
Dividends Per Share
For 6 months 0.36 0.35
For 12 months 0.72 0.71
Dividend Yield *
For 6 months 6.00% 5.92%
For 12 months 6.22 6.05
Weighted Average Maturity
(years) 20.0 19.4
Weighted Average Effective Duration
(years) 7.2 7.1
Weighted Average Quality *** BBB+ BBB+
* 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.
** All securities purchased in the money fund are rated in the two highest
categories (tiers) as established by national rating agencies or, if
unrated, are deemed of comparable quality by T. Rowe Price.
*** Based on T. Rowe Price research.
T. Rowe Price Tax-Free Funds
Performance Comparison
These charts show the value of a hypothetical $10,000 investment in each fund
over the past 10 fiscal year periods or since inception (for funds lacking
10-year records). The result is compared with a broad-based average or index.
The index return does not reflect expenses, which have been deducted from the
fund's return.
Chart 3, 4, 5, 6, and 7 (SEC charts): Tax-Exempt Money Fund, Tax-Free Insured
Intermediate Bond Fund, Tax-Free Insured Intermediate Bond Fund, Tax-Free
Income Fund, Tax-Free High Yield Fund
Average Annual Compound Total Return
This table shows how each fund would have performed each year if its actual
(or cumulative) returns for the periods shown had been earned at a constant
rate.
Since Inception
Periods Ended 8/31/96 1 Year 5 Years 10 Years Inception Date
Tax-Exempt Money 3.16% 2.74% 3.82% - 4/8/81
Tax-Free
Short-Intermediate 3.84 5.08 5.32 - 12/23/83
Tax-Free Insured
Intermediate Bond 3.96 - - 6.57% 11/30/92
Tax-Free Income 5.45 7.47 6.56 - 10/26/76
Tax-Free High Yield 5.83 7.71 7.86 - 3/1/85
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original
purchase.
For yield, price, last transaction, and current balance, 24 hours, 7 days a
week, call:
1-800-638-2587 toll free
For assistance with your existing fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
T. Rowe Price
100 East Pratt Street
Baltimore, Maryland 21202
http://www.troweprice.com
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 Tax-Free
Funds.
T. Rowe Price Investment Services, Inc., Distributor RPRTTFF 8/31/96
APPENDIX
Chart 1 - Municipal Bond and Note Yields chart showing 30-year AAA GO, 5-year
AAA GO, and 1-year MIG1 note from 8/31/95 through 8/31/96.
Chart 2 - Quality Diversification pie chart showing quality diversification of
AAA 4%, AA 22%, A 18%, BBB 31%, and BB and Below 25% on 8/31/96
Charts 3, 4, 5, 6, and 7 - SEC graphs:
line charts showing the cumulative growth of $10,000 invested in the TEM,
TSTI, TFII, TFI, and TFH Funds over the past 10 years (or "from inception" for
funds lacking 10-year histories) compared with $10,000 invested in a
broad-based index or average over the same period.
