<PAGE>
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T. Rowe Price
- -------------------------------------------------------------------------------
Tax-Free High Yield Fund
February 29, 1996
- -------------------------------------------------------------------------------
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Sector Diversification
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of
Net Assets
----------
<S> <C>
Hospital Revenue 22%
Industrial and Pollution
Control Revenue 11
Housing Finance Revenue 10
Nuclear Revenue 9
LifeCare/Nursing Home Revenue 8
Ground Transportation Revenue 7
General Obligation - Local 5
Solid Waste Revenue 4
Lease Revenue 4
<CAPTION>
Percent of
Net Assets
----------
<S> <C>
Prerefunded Bonds 4%
Dedicated Tax Revenue 3
Electric Revenue 3
General Obligation - State 2
Miscellaneous Revenue 2
Water and Sewer Revenue 2
Educational Revenue 1
Pooled Loan Revenue 1
Escrowed to Maturity 1
Other Assets Less Liabilities 1
</TABLE>
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Statement of Net Assets
T. Rowe Price Tax-Free High Yield Fund / February 29, 1996
- -------------------------------------------------------------------------------
(amounts in thousands)
<TABLE>
<CAPTION>
Amount Value
------ -------
<S> <C> <C>
ALABAMA -- 3.8%
Alabama Special Care Fac., Daughters of Charity, St. Vincents Hosp.,
5.00%, 11/1/25............................................................ $2,000 $1,811
Alexander Special Care Fac. Fin. Auth., Russell Hosp. Corp.,
6.00%, 12/1/22............................................................ 3,250 3,014
Baldwin County Eastern Shore Hosp. Auth., Thomas Hosp.,
8.50%, 4/1/16............................................................. 4,000 4,378
Courtland IDB, Solid Waste Disposal, Champion Int'l,
5.90%, 2/1/17............................................................. 8,000 7,914
Marshall County Health Care Auth., Guntersville-Arab Medical Center,
7.00%, 10/1/13............................................................ 2,100 2,170
10.25%, 10/1/13........................................................... 6,750 7,779
Mobile, Capital Improvement Warrants, GO, (MBIA Insured),
Zero Coupon, 2/15/18...................................................... 1,030 255
Zero Coupon, 8/15/18...................................................... 4,550 1,086
Zero Coupon, 2/15/19...................................................... 905 208
Zero Coupon, 8/15/19...................................................... 4,675 1,040
Zero Coupon, 2/15/20...................................................... 770 165
Zero Coupon, 8/15/20...................................................... 4,810 997
Mobile Airport Auth., 8.875%, 10/1/15*........................................ 2,000 2,278
Mobile IDB, Mobile Energy Services, 6.95%, 1/1/20............................. 1,400 1,485
</TABLE>
<PAGE>
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amount Value
------ -------
<S> <C> <C>
Shelby County, GO, (MBIA Insured), 7.40%, 8/1/07.............................. $ 2,000 $2,247
7.70%, 8/1/17............................................................. 1,000 1,136
- ------------------------------------------------------------------------------------------------
ALASKA -- 0.5%
Alaska Housing Fin. Corp., (MBIA Insured), 5.875%, 12/1/24.................... 3,625 3,612
Anchorage, School, GO, (FGIC Insured), 5.00%, 10/1/15......................... 1,000 952
- -------------------------------------------------------------------------------------------------
ARIZONA -- 0.4%
Scottsdale IDA, Westminster Village,
10.00%, 6/1/07 (Prerefunded 6/1/97+)...................................... 1,235 1,365
10.00%, 6/1/17 (Prerefunded 6/1/97+)...................................... 750 828
Tempe IDA, Friendship Village of Tempe, 6.75%, 12/1/13........................ 1,950 1,964
- ------------------------------------------------------------------------------------------------
ARKANSAS -- 0.3%
Independence County, PCR, Mississippi Power and Light,
7.625%, 7/1/12............................................................... 3,000 3,195
- ------------------------------------------------------------------------------------------------
CALIFORNIA -- 6.9%
California HFFA, Daughters of Charity Health Systems
(St. Francis Medical Center), 5.75%, 10/1/23.............................. 6,515 6,840
Foothill/Eastern Transportation Corridor Agency, California Toll Road,
Zero Coupon, 1/1/15....................................................... 2,500 770
Zero Coupon, 1/1/17....................................................... 7,265 1,955
Zero Coupon, 1/1/19....................................................... 10,000 2,346
Zero Coupon, 1/1/26....................................................... 20,000 2,966
6.00%, 1/1/34............................................................. 2,000 1,911
5.00%, 1/1/35............................................................. 4,000 3,308
Fresno Joint Powers Fin. Auth., 6.55%, 9/2/12................................. 3,000 3,122
Inglewood Redev. Agency, Century Redev., 6.125%, 7/1/23....................... 3,440 3,443
Los Angeles County, Marina del Rey, COP, 6.50%, 7/1/08........................ 3,250 3,327
San Joaquin Hills Transportation Corridor Agency, Toll Road,
Zero Coupon, 1/1/03....................................................... 5,600 3,521
Zero Coupon, 1/1/10....................................................... 13,100 4,922
Zero Coupon, 1/1/17....................................................... 1,400 379
Zero Coupon, 1/1/19....................................................... 23,425 5,557
Zero Coupon, 1/1/25....................................................... 25,000 4,019
Zero Coupon, 1/1/28....................................................... 15,675 1,504
7.00%, 1/1/30............................................................. 5,850 6,221
6.75%, 1/1/32............................................................. 4,000 4,172
San Jose Redev. Agency, Tax Allocation, (MBIA Insured), 5.25%, 8/1/16......... 4,000 3,826
Southern California Public Power Auth., 6.00%, 7/1/12......................... 3,800 3,900
- ------------------------------------------------------------------------------------------------
COLORADO -- 3.7%
Arapahoe County, Capital Improvement Public Highway,
Zero Coupon, 8/31/09...................................................... 10,000 4,230
Zero Coupon, 8/31/15...................................................... 10,000 2,664
Boulder County, Longmont United Hosp., 8.20%, 12/1/20
(Prerefunded 12/1/00+).................................................... 1,540 1,812
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Amount Value
------ -------
<S> <C> <C>
Boulder County, IDR, Boulder Medical Center, 8.625%, 1/1/07*.................. $ 820 $ 851
8.75%, 1/1/12*............................................................ 1,205 1,251
8.875%, 1/1/17*........................................................... 1,190 1,236
Colorado Housing Fin. Auth., 9.60%, 8/1/01*................................... 575 609
8.65%, 8/1/03............................................................. 870 912
9.00%, 8/1/03............................................................. 840 877
9.40%, 8/1/03*............................................................ 710 745
8.70%, 11/1/04*........................................................... 1,445 1,520
Denver City and County, Airport System, United Airlines,
6.875%, 10/1/32*.......................................................... 11,200 11,704
Sisters of Charity of Leavenworth Health Services, 5.00%, 12/1/23......... 4,000 3,637
El Paso County, School Dist. No. 20, GO, 6.35%, 12/15/06...................... 3,000 3,188
Westminster, Special Improvement Dist., 9.25%, 12/1/03........................ 1,475 1,541
- ------------------------------------------------------------------------------------------------
DELAWARE -- 1.2%
Delaware Economic Dev. Auth., Delmarva Power and Light,
(FGIC Insured), 7.15%, 7/1/18............................................. 2,500 2,834
Peninsula United Methodist Homes, 8.50%, 5/1/22........................... 2,500 2,690
Delaware HFA, Beebe Medical Center, 6.75%, 6/1/14............................. 3,975 4,088
Wilmington Osteopathic Hosp. Assoc. of Delaware, Riverside Hosp.,
10.20%, 10/1/18 (Prerefunded 10/1/98+).................................... 2,000 2,330
- ------------------------------------------------------------------------------------------------
DISTRICT OF COLUMBIA -- 0.2%
Dist. of Columbia, American Geophysical Union, 5.875%, 9/1/23................. 1,750 1,562
- ------------------------------------------------------------------------------------------------
FLORIDA -- 3.2%
Brevard County Tourist Dev., Florida Marlins Spring Training Fac.,
6.875%, 3/1/13............................................................ 1,520 1,614
Broward County Resource Recovery, Broward Waste Energy, L.P. North,
7.95%, 12/1/08............................................................ 4,675 5,242
Broward Waste Energy, L.P. South, 7.95%, 12/1/08.......................... 4,750 5,327
Charlotte County, IDR, Beverly Enterprises, 10.00%, 6/1/11.................... 955 1,095
Collier County IDA, Beverly Enterprises, 10.75%, 3/1/03....................... 2,150 2,477
Dade County, (MBIA Insured), Zero Coupon, 2/1/12.............................. 14,715 6,041
Escambia County, IDR, Beverly Enterprises, 9.80%, 6/1/11...................... 475 533
Hernando County, IDR, Beverly Enterprises, 10.00%, 9/1/11..................... 915 1,053
Jacksonville, IDR, Beverly Enterprises, 9.75%, 10/1/11........................ 930 1,032
Leon County, IDR, Beverly Enterprises, 9.80%, 6/1/11.......................... 475 533
Manatee County Housing Fin. Auth., Capital Appreciation,
Zero Coupon, 10/1/15...................................................... 7,080 899
Orange County IDA, Beverly Enterprises, 9.25%, 8/1/10......................... 460 514
Santa Rosa County HFA, Gulf Breeze Hosp., 8.60%, 10/1/02...................... 1,000 1,099
St. John's County IDA, Vicar's Landing, 6.75%, 2/15/12........................ 4,000 4,004
- ------------------------------------------------------------------------------------------------
GEORGIA -- 1.6%
Fulco Hosp. Auth., Georgia Baptist Health Care System, 6.25%, 9/1/13.......... 2,500 2,467
Georgia Municipal Electric Auth., 6.25%, 1/1/17............................... 4,000 4,281
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Amount Value
------ -------
<S> <C> <C>
Rockdale County Dev. Auth., Solid Waste Disposal, Visy Paper,
7.50%, 1/1/26*............................................................ $4,400 $4,516
7.40%, 1/1/16*............................................................ 4,500 4,619
- ------------------------------------------------------------------------------------------------
IDAHO -- 0.5%
Gem County, PCR, Boise Cascade, Floating Rate, 1/5/97
(Currently 5.445%)........................................................ 167 167
Idaho Housing Agency, Single Family Mortgage, 7.80%, 1/1/23*.................. 2,130 2,255
Idaho Student Loan Marketing Assoc., 6.70%, 10/1/07*.......................... 2,500 2,540
- ------------------------------------------------------------------------------------------------
ILLINOIS -- 6.5%
Aurora, Dreyer Medical Clinic, 8.75%, 7/1/14.................................. 4,485 4,940
Chicago, GO, (AMBAC Insured), 6.25%, 1/1/15................................... 3,500 3,780
(FGIC Insured), 5.125%, 1/1/25............................................ 8,000 7,437
Water, (FGIC Insured), 5.00%, 11/1/20....................................... 3,000 2,757
Chicago - O'Hare Int'l. Airport, American Airlines, 7.875%, 11/1/25*.......... 2,500 2,729
Illinois, GO, (FGIC Insured), 5.125%, 12/1/17................................. 3,750 3,527
Illinois Dev. Fin. Auth., Palos Community Hosp., VRDN
(Currently 3.25%)......................................................... 2,000 2,000
Illinois HFA, Community Hosp. of Ottawa, 6.85%, 8/15/24....................... 3,775 3,855
Covenant Retirement Community, 7.60%, 12/1/12............................... 2,665 2,839
Glen Oaks Medical Center, 9.50%, 11/15/15................................... 2,175 2,553
Hinsdale Health System, 9.00%, 11/15/15..................................... 4,770 5,477
Holy Cross Hosp., 6.75%, 3/1/24............................................. 4,000 4,025
Memorial Hosp., 7.25%, 5/1/22............................................... 9,500 9,881
Metropolitan Pier and Exposition Auth., McCormick Place, 7.00%, 7/1/26........ 2,400 2,580
Southwestern Illinois Dev. Auth., Anderson Hosp., 7.00%, 8/15/22.............. 2,500 2,558
Solid Waste Disposal, Shell Oil Company, Wood River,
VRDN (Currently 3.55%)*................................................... 3,000 3,000
- ------------------------------------------------------------------------------------------------
INDIANA -- 0.5%
Hammond, Sewage and Solid Waste Disposal, American Maize Products,
8.00%, 12/1/24*........................................................... 4,000 4,487
- ------------------------------------------------------------------------------------------------
KENTUCKY -- 3.0%
Florence Housing Fac., Bluegrass RHF Housing,
9.50%, 7/1/17 (Mandatory Tender 7/1/97+).................................. 1,920 2,007
Jefferson County, Louisville Gas and Electric, 7.45%, 6/15/15................. 4,250 4,699
Jefferson County HFA, Beverly Enterprises, 9.75%, 8/1/07...................... 865 957
Kenton County Airport Board, Delta Airlines, 7.50%, 2/1/12*................... 3,600 3,909
7.50%, 2/1/20*............................................................ 5,250 5,687
6.125%, 2/1/22*........................................................... 6,000 5,763
Kentucky Economic Dev. Fin. Auth., Sisters of Charity of Nazareth,
VRDN (Currently 3.65%).................................................... 2,300 2,300
St. Claire Medical Center, 7.125%, 9/1/21 (Prerefunded 9/1/01+)............. 3,600 4,099
- ------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Amount Value
------ -------
<S> <C> <C>
LOUISIANA -- 3.5%
Lake Charles Harbor and Terminal Dist., Panhandle Eastern Corp.,
7.75%, 8/15/22............................................................ $ 5,000 $ 5,658
Louisiana Offshore Terminal Auth., LOOP, 7.60%, 9/1/10........................ 8,500 9,337
Louisiana PFA, IDR, Beverly Enterprises, 8.25%, 9/1/08........................ 1,380 1,499
St. James Place of Baton Rouge, 10.00%, 11/1/21............................. 4,500 5,121
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............... 6,865 7,695
West Feliciana Parish, PCR, Gulf States Utilities, 8.00%, 12/1/24............. 4,000 4,319
- ------------------------------------------------------------------------------------------------
MAINE -- 0.5%
Maine HHEFA, Waterville Osteopathic Hosp., 9.875%, 7/1/13
(Prerefunded 7/1/97+)..................................................... 4,280 4,763
- ------------------------------------------------------------------------------------------------
MARYLAND -- 4.5%
Baltimore County, Spring Hill Apartments, (GNMA Guaranteed),
VRDN (Currently 3.35%).................................................... 2,100 2,100
Stella Maris, 7.50%, 3/1/21................................................. 1,000 1,062
Berlin, Atlantic General Hosp., 8.375%, 6/1/22................................ 1,960 2,084
Gaithersburg Economic Auth., Asbury Methodist Home,
7.85%, 1/1/20 (Prerefunded 1/1/00+)....................................... 2,000 2,296
Maryland CDA, Single Family, 7.25%, 4/1/19.................................... 2,500 2,650
Zero Coupon, 4/1/29*...................................................... 25,695 1,834
Maryland HHEFA, Doctor's Community Hosp., 5.50%, 7/1/24....................... 3,200 2,755
Frederick Memorial Hosp., (FGIC Insured), 5.00%, 7/1/23..................... 2,870 2,664
Loyola College, VRDN (Currently 3.65%)...................................... 2,400 2,400
Pooled Loan Program, VRDN (Currently 3.25%)................................. 10,000 10,000
Union Hosp. of Cecil County, 6.70%, 7/1/22.................................. 2,725 2,768
Maryland Ind. Dev. Fin. Auth., Associated Catholic Charities,
9.00%, 1/1/10............................................................. 1,525 1,694
Economic Dev., American Association of Blood Banks, 7.25%, 8/1/13........... 2,700 2,814
Economic Dev., Georgetown Bakery Management Corp. Fac., 9.25%, 9/1/04*...... 1,475 1,606
Maryland-National Capital Park & Planning Commission,
Little Bennett Golf Fac., 8.25%, 10/1/11.................................... 2,265 2,489
Montgomery County Housing Opportunities Commission, Multifamily,
Strathmore Court at White Flint, 8.75%, 7/1/27.............................. 2,000 2,092
Single Family, 7.50%, 7/1/17................................................ 685 729
- ------------------------------------------------------------------------------------------------
MASSACHUSETTS -- 3.4%
Massachusetts, GO, 7.50%, 6/1/04.............................................. 2,750 3,281
Water Resource Auth., (MBIA Insured), 5.00%, 12/1/25........................ 10,000 9,202
Massachusetts Bay Transportation Auth., General
Transportation System, GO, 7.00%, 3/1/19.................................... 2,500 2,979
7.00%, 3/1/21............................................................. 2,000 2,396
Massachusetts HEFA, New England Deaconess Hosp., 7.20%, 4/1/22................ 3,535 3,806
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Amount Value
------ -------
<S> <C> <C>
Massachusetts Housing Fin. Agency, Capital Asset Pool, (MBIA Insured),
6.375%, 4/1/21............................................................ $1,950 $1,966
Single Family, 6.35%, 6/1/17................................................ 1,750 1,789
Massachusetts Ind. Fin. Agency, Nevins Home, 7.875%, 7/1/23................... 5,460 5,646
New England Memorial Hosp., 8.875%, 7/1/13 (Prerefunded 7/1/98+)............ 2,730 3,018
- ------------------------------------------------------------------------------------------------
MICHIGAN -- 3.1%
Dickinson County, Economic Dev., Champion Int'l, 5.85%, 10/1/18............... 4,000 3,926
Meridian Economic Dev. Corp., Burcham Hills Retirement Center III,
9.625%, 7/1/19............................................................ 2,825 3,021
Michigan HDA, 6.50%, 12/1/17.................................................. 4,000 4,132
7.75%, 12/1/19 *.......................................................... 1,175 1,239
Michigan Hosp. Fin. Auth., Bay Medical Center, 8.25%, 7/1/12.................. 2,000 2,159
Henry Ford Hosp., 5.25%, 11/15/20........................................... 6,000 5,697
Pontiac Osteopathic Hosp., 6.00%, 2/1/24.................................... 4,475 4,079
Saratoga Community Hosp., 8.75%, 6/1/10..................................... 4,000 4,256
Sisters of Mercy Health Corp., 7.50%, 2/15/18 (Prerefunded 2/15/01+)........ 1,650 1,889
- ------------------------------------------------------------------------------------------------
MINNESOTA -- 0.3%
Minnesota Housing Fin. Agency, Single Family Mortgage, 6.70%, 1/1/18.......... 2,000 2,104
9.00%, 8/1/18*............................................................ 1,000 1,053
- ------------------------------------------------------------------------------------------------
MISSISSIPPI -- 2.6%
Adams County, Jefferson Davis Memorial Hosp., 8.00%, 10/1/16.................. 3,805 4,138
Claiborne County, PCR, Systems Energy Resources, 9.50%, 12/1/13............... 2,000 2,269
9.875%, 12/1/14........................................................... 6,100 6,974
7.30%, 5/1/25............................................................. 1,100 1,156
Mississippi Business Fin. Corp., Solid Waste Disposal, VRDN
(Currently 3.60%)*........................................................ 5,900 5,900
Mississippi Home Corp., Single Family Mortgage, (FGIC Insured),
9.25%, 3/1/12............................................................. 295 323
Mississippi Hosp. Equipment and Fac. Auth., Magnolia Hosp.,
7.375%, 10/1/21........................................................... 3,000 3,027
Rush Memorial Foundation, 8.75%, 1/1/16..................................... 2,000 2,210
- ------------------------------------------------------------------------------------------------
MISSOURI -- 1.7%
Hannibal IDA, Hannibal Medical Center, 9.50%, 3/1/22.......................... 4,000 4,814
Joplin IDA, Tri-State Osteopathic Hosp. Assoc., 8.25%, 12/15/14............... 1,180 1,260
Lees Summit IDA, John Knox Village, 7.125%, 8/15/12........................... 1,500 1,599
Missouri HEFA, Bethesda Health Group, 7.50%, 8/15/12.......................... 1,250 1,315
Still Regional Medical Center, 7.70%, 2/1/13................................ 4,250 4,552
Ray County, Ray County Memorial Hosp., 9.625%, 11/15/13....................... 3,200 3,535
- ------------------------------------------------------------------------------------------------
MONTANA -- 0.9%
Montana Board of Housing, (FHA Guaranteed), 9.20%, 10/1/01*................... 510 532
8.50%, 10/1/02............................................................ 685 719
8.525%, 10/1/02........................................................... 650 678
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Amount Value
------ -------
<S> <C> <C>
Montana Board of Housing, (FHA Guaranteed), 7.85%, 10/1/04.................... $ 790 $ 839
8.95%, 10/1/02*........................................................... 715 749
8.40%, 10/1/03*........................................................... 765 799
Montana Board of Investments, Yellowstone Energy Limited Partnership,
7.00%, 12/31/19*.......................................................... 5,000 4,831
- ------------------------------------------------------------------------------------------------
NEBRASKA -- 0.9%
Douglas County Hosp. Auth., Immanuel Medical Center,
(AMBAC Insured), 7.00%, 9/1/21............................................ 5,500 6,158
Nebraska Investment Fin. Auth., Single Family Mortgage,
(GNMA Guaranteed),
Residual Interest Bond/Inverse Floater, 3/15/22 (Currently 11.368%)*........ 765 863
Residual Interest Bond/Inverse Floater, 9/10/30 (Currently 11.541%)*........ 1,600 1,830
- ------------------------------------------------------------------------------------------------
NEVADA -- 1.5%
Clark County, IDR, Southwest Gas, 7.30%, 9/1/27............................... 3,000 3,232
7.50%, 9/1/32*............................................................ 5,000 5,390
6.50%, 12/1/33*........................................................... 4,000 4,053
Nevada Housing Division, Sub Lien, 9.375%, 10/1/00*........................... 380 397
9.35%, 10/1/02*........................................................... 420 435
9.65%, 10/1/02*........................................................... 645 685
(FGIC Insured), 9.45%, 10/1/03*........................................... 690 726
- ------------------------------------------------------------------------------------------------
NEW HAMPSHIRE -- 0.4%
New Hampshire HHEFA, Catholic Medical Center, 8.25%, 7/1/13................... 2,000 2,170
New Hampshire Housing Fin. Auth., 8.625%, 7/1/13*............................. 1,885 1,979
- ------------------------------------------------------------------------------------------------
NEW JERSEY -- 1.9%
New Jersey Economic Dev. Auth., Holt Hauling and Warehouse System,
10.25%, 9/15/14........................................................... 500 524
9.75%, 12/15/16*.......................................................... 1,000 1,070
Keswick Pines, 8.75%, 1/1/24................................................ 6,000 6,340
New Jersey HFFA, Raritan Bay Medical Center, 7.25%, 7/1/27.................... 5,000 5,096
New Jersey Sports and Exposition Auth., Monmouth Park, 8.00%, 1/1/25.......... 5,250 5,780
- ------------------------------------------------------------------------------------------------
NEW YORK -- 8.7%
Babylon IDA, Babylon Community Waste Management,
7.875%, 7/1/06 (Prerefunded 7/1/99+)...................................... 1,000 1,135
Babylon Recycling Center, 8.875%, 3/1/11*++++............................... 1,895 853
Ogden Martin Systems, 8.50%, 1/1/19 (Prerefunded 7/1/98+)................... 1,015 1,150
Dormitory Auth. of the State of New York, City Univ., 6.00%, 7/1/14........... 2,730 2,816
5.625%, 7/1/16............................................................ 3,100 3,068
Dept. of Health, 5.50%, 7/1/25.............................................. 6,000 5,635
State Univ. Ed. Fac., 5.875%, 5/15/17....................................... 3,000 3,049
5.25%, 5/15/19............................................................ 5,000 4,694
Metropolitan Transportation Auth., 5.50%, 7/1/17.............................. 4,000 3,882
Contract Transit Fac., 7.125%, 7/1/09....................................... 4,000 4,432
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Amount Value
------ -------
<S> <C> <C>
New York City, GO, 6.00%, 8/1/06.............................................. $ 2,000 $ 2,025
6.25%, 2/15/07............................................................ 5,500 5,649
6.20%, 8/1/07............................................................. 5,000 5,110
7.625%, 2/1/15............................................................ 3,000 3,340
7.75%, 8/15/15............................................................ 2,500 2,800
5.75%, 2/1/20............................................................. 2,505 2,350
New York City IDA, Solid Waste Disposal, Visy Paper, 7.95%, 1/1/28*.......... 3,900 4,015
New York City Municipal Water Fin. Auth., Water and Sewer,
5.50%, 6/15/23............................................................ 5,000 4,815
New York State Energy Research and Dev. Auth., Electric Fac.,
Long Island Lighting, 7.15%, 6/1/20*........................................ 8,000 8,279
6.90%, 8/1/22*............................................................ 1,500 1,531
New York State Medical Care Fac. Fin. Agency, Presbyterian Hosp.,
5.375%, 2/15/25........................................................... 3,000 2,850
New York State Mortgage Agency, Homeowner Mortgage, 6.45%, 10/1/17............ 2,400 2,482
Zero Coupon, 4/1/20....................................................... 11,800 1,771
7.50%, 4/1/26*............................................................ 3,000 3,166
New York State Urban Dev. Corp., Correctional Capital Fac.,
Zero Coupon, 1/1/08....................................................... 5,000 2,585
State Fac., 5.60%, 4/1/15................................................... 3,000 2,965
- ------------------------------------------------------------------------------------------------
NORTH CAROLINA -- 0.3%
North Carolina Medical Care Commission, Stanley Memorial Hosp.,
7.80%, 10/1/19............................................................ 1,000 1,068
Valdese General Hosp., 8.75%, 10/1/16....................................... 2,075 2,260
- ------------------------------------------------------------------------------------------------
OHIO -- 4.1%
Cambridge, Guernsey Memorial Hosp., 8.00%, 12/1/11............................ 1,500 1,615
Cleveland Parking Fac., 8.10%, 9/15/22........................................ 10,000 11,035
Fairfield EDA, Beverly Enterprises, 8.50%, 1/1/03............................. 2,060 2,228
Franklin County Hosp., Holy Cross Health Systems, VRDN
(Currently 3.30%)......................................................... 2,000 2,000
Marion County Health Care Fac., United Church Homes,
8.875%, 12/1/12 (Prerefunded 12/1/99+).................................... 3,225 3,808
Middleburg Heights, Southwest General Hosp., 7.20%, 8/15/19
(Prerefunded 8/15/01+).................................................... 2,000 2,306
Ohio Air Quality Dev. Auth., PCR, Toledo Edison, 8.00%, 5/15/19............... 2,750 2,909
Ohio Housing Fin. Agency, Single Family Mortgage,
(GNMA Guaranteed), Residual Interest Bond/Inverse Floater, 3/31/31
(Currently 9.852%)*..................................................... 740 805
Ohio Water Dev. Auth., PCR, Cleveland Electric, 9.75%, 11/1/22 *.............. 2,000 2,128
7.70%, 8/1/25............................................................. 2,800 2,973
Toledo Edison, 7.55%, 6/1/23................................................ 4,500 4,663
8.00%, 10/1/23............................................................ 3,700 3,970
- ------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Amount Value
------ -------
<S> <C> <C>
OKLAHOMA -- 2.4%
Jackson County Memorial Hosp. Auth., 7.30%, 8/1/15............................ $4,300 $4,200
LeFlore County Hosp. Auth., Eastern Oklahoma Medical Center,
9.40%, 5/1/06............................................................. 2,000 2,180
Oklahoma County IDA, Epworth Villa, 10.25%, 4/1/19............................ 2,970 3,287
Tulsa Municipal Airport, American Airlines, 7.375%, 12/1/20*.................. 2,000 2,145
7.60%, 12/1/30*........................................................... 5,240 5,717
Washington County Medical Auth., Jane Phillips Episcopal Hosp.,
8.50%, 11/1/10............................................................ 5,200 5,701
- ------------------------------------------------------------------------------------------------
OREGON -- 0.2%
Western Generation Agency, Wauna Cogeneration, 7.25%, 1/1/09*................. 2,000 2,110
- ------------------------------------------------------------------------------------------------
PENNSYLVANIA -- 4.8%
Allegheny County Hosp. Dev. Auth., Health and Ed. Rehabilitation
Institute of Pittsburgh, 7.00%, 6/1/22...................................... 2,000 2,040
Beaver County IDA, PCR, Cleveland Electric, 7.625%, 5/1/25.................... 3,400 3,600
Toledo Edison, 7.75%, 5/1/20................................................ 2,000 2,141
Berks County IDA, Lutheran Home at Topton, 6.875%, 1/1/23..................... 5,000 5,010
Blair County Hosp. Auth., Mercy Hosp., 8.125%, 2/1/14......................... 2,700 2,859
Butler County IDA, Herr-Voss, 8.60%, 11/1/99*................................. 480 492
Clarion IDA Health Fac., Beverly Enterprises, 10.125%, 5/1/07................. 865 962
Greene County IDA, Greene Health Care Assoc., Beverly Enterprises,
6.875%, 3/1/13............................................................ 2,430 2,447
Montgomery County Higher Ed. and Health Auth., Brittany Pointe,
8.50%, 1/1/22............................................................. 2,500 2,696
Redeemer Long Term Care and Elder Services, 8.20%, 6/1/06..................... 880 937
8.00%, 6/1/22............................................................. 5,755 6,006
Pennsylvania HEFA, Carnegie Mellon Univ., VRDN (Currently 3.45%).............. 3,000 3,000
Medical College of Pennsylvania, 8.375%, 3/1/11............................. 2,200 2,384
Pennsylvania Housing Fac. Auth.,
Residual Interest Bond/Inverse Floater, 10/3/23 (Currently 10.137%)*........ 1,500 1,646
Philadelphia, GO, (MBIA Insured), 5.00%, 5/15/20.............................. 2,500 2,315
Schuylkill County IDA, Schuylkill Energy Resources, Inc., 6.50%, 1/1/10*...... 9,200 9,372
- ------------------------------------------------------------------------------------------------
PUERTO RICO -- 1.1%
Puerto Rico Aqueduct and Sewer Auth., GO, 7.90%, 7/1/07
(Prerefunded 7/1/98+)..................................................... 2,500 2,778
Puerto Rico Commonwealth, GO, 5.50%, 7/1/15................................... 3,000 3,003
Puerto Rico Commonwealth Highway and Transportation Auth.,
5.50%, 7/1/15............................................................. 3,000 2,986
Puerto Rico Infrastructure Fin. Auth., 7.50%, 7/1/09.......................... 2,365 2,578
- ------------------------------------------------------------------------------------------------
RHODE ISLAND -- 1.3%
Rhode Island Health and Ed. Building Corp., Rhode Island Hosp.,
(FGIC Insured), Residual Interest Bond/Inverse Floater, 4/1/24,
(Currently 10.337%)..................................................... 1,000 1,096
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Amount Value
------ -------
<S> <C> <C>
Rhode Island Housing and Mortgage Fin. Corp., 8.05%, 4/1/22*.................. $ 5,000 $ 5,289
Residual Interest Bond/Inverse Floater, 8/15/21, (Currently 10.12%)*........ 1,000 1,175
Homeownership Opportunity, 6.70%, 10/1/14................................... 5,000 5,262
- ------------------------------------------------------------------------------------------------
SOUTH DAKOTA -- 0.7%
South Dakota Building Auth., 7.50%, 12/1/16................................... 4,400 4,583
South Dakota HDA, Homeownership Mortgage, 6.65%, 5/1/14....................... 2,500 2,622
- ------------------------------------------------------------------------------------------------
TENNESSEE -- 0.5%
Chattanooga and Hamilton County Hosp. Auth., Erlanger Medical Center,
VRDN (Currently 3.55%).................................................... 3,400 3,400
Tennessee Housing Dev. Agency, 7.625%, 7/1/22*................................ 1,900 2,007
- ------------------------------------------------------------------------------------------------
TEXAS -- 7.9%
Alliance Airport Auth., American Airlines, 7.00%, 12/1/11*.................... 3,000 3,285
Bell County Health Fac. Dev. Corp., King's Daughter Hosp.,
9.25%, 7/1/08............................................................. 3,305 3,687
Brazos River Auth., Houston Lighting and Power, (MBIA Insured),
6.375%, 4/1/12............................................................ 10,000 10,802
Denison Hosp. Auth., Texoma Medical Center, 7.10%, 8/15/24.................... 3,650 3,783
Gainesville IDC, Valenite, 8.90%, 5/15/11*.................................... 3,270 3,581
Gulf Coast Waste Disposal Auth., Houston Lighting and Power,
Floating Rate, 6/1/98 (Currently 5.25%)................................... 5,000 5,000
Harris County, Toll Road, (MBIA Insured), 6.375%, 8/15/24..................... 2,500 2,695
Harris County Health Fac. Dev. Corp., Memorial Hosp., 7.125%, 6/1/15.......... 5,000 5,460
Methodist Hosp., VRDN (Currently 3.45%)..................................... 5,100 5,100
Texas Medical Center, (MBIA Insured), 7.375%, 5/15/20....................... 2,350 2,626
Harris County IDC, Lubrizol Corp., VRDN (Currently 3.25%)..................... 4,000 4,000
Matagorda County Navigation Dist., PCR, Central Power and Light,
7.50%, 12/15/14........................................................... 2,000 2,232
Paris Health Fac. Dev. Corp., McCuistion Regional Medical Center,
7.60%, 2/1/12............................................................. 4,500 4,807
San Antonio Electric and Gas, (FGIC Insured), Zero Coupon, 2/1/10............. 5,000 2,333
Texas, Veterans Housing Assistance, GO, 6.25%, 12/1/15........................ 2,700 2,756
Texas Turnpike Auth., Dallas North Tollway, President George Bush
Turnpike, (FGIC Insured), 5.00%, 1/1/25................................... 5,000 4,600
Tomball Hosp. Auth., Tomball Regional Hosp., 6.10%, 7/1/08.................... 5,000 5,076
Waco Health Fac. Dev. Corp., Daughters of Charity, 5.00%, 11/1/25............. 2,600 2,341
Weslaco Health Fac. Dev. Corp., Knapp Medical Center,
10.375%, 6/1/16 (Prerefunded 6/1/98+)..................................... 3,500 4,024
- ------------------------------------------------------------------------------------------------
UTAH -- 2.2%
Davis County, Solid Waste Management and Energy Recovery Special
Service Dist., 6.125%, 6/15/09.............................................. 2,000 1,949
Intermountain Power Agency, 5.25%, 7/1/14..................................... 1,000 969
5.00%, 7/1/21............................................................. 3,250 2,958
5.00%, 7/1/23............................................................. 9,270 8,293
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Amount Value
------ -------
<S> <C> <C>
Utah Housing Fin. Agency, Sub Lien, 9.875%, 1/1/99*........................... $ 100 $ 105
10.50%, 1/1/99*........................................................... 95 97
10.625%, 7/1/99*.......................................................... 85 91
9.30%, 7/1/00*............................................................ 90 94
8.70%, 7/1/01............................................................. 230 238
9.25%, 7/1/01............................................................. 325 343
9.60%, 7/1/02*............................................................ 70 72
9.75%, 7/1/02............................................................. 110 114
9.85%, 7/1/02*............................................................ 245 253
8.55%, 7/1/04............................................................. 370 385
8.65%, 7/1/04............................................................. 715 744
6.25%, 7/1/05............................................................. 690 736
7.50%, 7/1/05............................................................. 910 971
7.60%, 7/1/05............................................................. 925 986
7.75%, 7/1/05............................................................. 925 986
8.40%, 7/1/08*............................................................ 235 249
9.00%, 1/1/19*............................................................ 605 642
7.75%, 1/1/23*............................................................ 460 488
- ------------------------------------------------------------------------------------------------
VERMONT -- 0.2%
Vermont Ed. and Health Buildings Fin. Agency, Medical Center Hosp.
of Vermont, (FGIC Insured), 7.45%, 9/1/23................................... 1,400 1,498
- ------------------------------------------------------------------------------------------------
VIRGINIA -- 1.5%
Henrico County IDA, Bon Secours Health System (Maryview Hosp.),
7.50%, 9/1/11............................................................. 1,785 2,051
Norfolk Port and Ind. Auth., Henson Aviation, 9.625%, 8/1/12*................. 890 1,011
Roanoke IDA, Roanoke Memorial Hosp., Carilion Health System,
VRDN (Currently 3.30%).................................................... 2,400 2,400
Virginia HDA, 7.10%, 1/1/22................................................... 4,000 4,213
7.10%, 1/1/25............................................................. 5,000 5,276
Zero Coupon, 7/1/29*...................................................... 830 64
- ------------------------------------------------------------------------------------------------
WASHINGTON -- 1.6%
Univ. of Washington, Housing and Dining, (MBIA Insured),
5.00%, 12/1/21............................................................ 2,375 2,182
Washington, GO, 5.70%, 10/1/15................................................ 7,500 7,733
Washington Public Power Supply, 7.25%, 7/1/09................................. 1,000 1,169
6.30%, 7/1/12............................................................. 2,000 2,126
Zero Coupon, 7/1/14....................................................... 6,400 2,145
- ------------------------------------------------------------------------------------------------
WEST VIRGINIA -- 0.8%
West Virginia Hosp. Fin. Auth., Charleston Area Medical Center,
(MBIA Insured), 5.75%, 9/1/13............................................. 5,750 5,857
West Virginia Univ. Hosp., (MBIA Insured),
Residual Interest Bond/Inverse Floater, 1/1/18, (Currently 9.60%)......... 2,000 2,070
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Amount Value
------ -------
<S> <C> <C>
WISCONSIN -- 1.6%
Wisconsin HEFA, National Regency Of New Berlin, 8.00%, 8/15/25................ $6,000 $5,774
Wisconsin HFA, Villa Clement, 8.75%, 6/1/12................................... 1,500 1,510
Wisconsin Housing and Economic Dev. Auth., 7.75%, 9/1/17...................... 4,460 4,755
8.00%, 3/1/21*............................................................ 3,175 3,358
- ------------------------------------------------------------------------------------------------
WYOMING -- 1.0%
Converse County, PCR, Pacificorp, (AMBAC Insured),
VRDN (Currently 3.55%).................................................... 1,000 1,000
Sweetwater County, Solid Waste Disposal, FMC Corp., (AMBAC Insured),
6.90%, 9/1/24 *........................................................... 5,000 5,259
Wyoming Community Dev. Auth., Single Family Mortgage, 6.70%, 6/1/17........... 3,365 3,525
- ------------------------------------------------------------------------------------------------
Total Investments in Securities -- 98.4% of Net Assets (Cost $914,508)........ 973,786
- ------------------------------------------------------------------------------------------------
<CAPTION>
Net Assets Consist of:........................................................ Value
---------
<S> <C> <C>
Accumulated net investment income - net of distributions...................... $ 51
Accumulated net realized gain/loss - net of distributions.....................(11,687)
Net unrealized gain (loss).................................................... 59,278
Paid-in-capital applicable to 81,773,353 shares of $0.01 par value capital
stock outstanding; 1,000,000,000 shares authorized........................941,892
--------
Other Assets Less Liabilities........................................... 15,748
--------
NET ASSETS.................................................................... $989,534
========
NET ASSET VALUE PER SHARE..................................................... $12.10
======
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Interest subject to alternative minimum tax HEFA Health & Educational Facility Authority
+ Used in determining portfolio maturity HFA Health Facility Authority
++++ Non-income producing HFFA Health Facility Financing Authority
AMBAC AMBAC Indemnity Corp. HHEFA Health & Higher Educational Facility Authority
CDA Community Development Administration IDA Industrial Development Authority
COP Certificates of Participation IDB Industrial Development Bond
EDA Educational Development Authority IDC Industrial Development Corp.
FGIC Financial Guaranty Insurance Company IDR Industrial Development Revenue
FHA Federal Housing Authority MBIA Municipal Bond Investors Assurance Corp.
GNMA Government National Mortgage Association PCR Pollution Control Revenue
GO General Obligation PFA Public Facility Authority
HDA Housing Development Authority VRDN Variable Rate Demand Note
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
- -------------------------------------------------------------------------------
Statement of Operations
- -------------------------------------------------------------------------------
T. Rowe Price Tax-Free High Yield Fund / Year Ended February 29, 1996
(in thousands)
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest income................................................. $63,701
-------
Expenses
Investment management....................................... 5,968
Shareholder servicing....................................... 627
Custody and accounting...................................... 244
Prospectus and shareholder reports.......................... 92
Registration................................................ 45
Legal and audit............................................. 39
Directors................................................... 14
Miscellaneous............................................... 22
-------
Total expenses.............................................. 7,051
-------
Net investment income........................................... 56,650
-------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Securities.................................................. 5,623
Futures..................................................... (478)
-------
Net realized gain (loss).................................... 5,145
Change in net unrealized gain or loss on securities............. 32,000
-------
Net realized and unrealized gain (loss)......................... 37,145
-------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS............... $93,795
=======
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
- -------------------------------------------------------------------------------
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------
T. Rowe Price Tax-Free High Yield Fund
(in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended
Feb. 29, 1996 Feb. 28, 1995
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
Operations
Net investment income........................... $ 56,650 $ 54,310
Net realized gain (loss)........................ 5,145 (16,226)
Change in net unrealized gain or loss........... 32,000 (31,366)
--------- ---------
Increase (decrease) in net assets from
operations..................................... 93,795 6,718
--------- ---------
Distributions to shareholders
Net investment income........................... (56,650) (54,310)
Net realized gain............................... -- (2,999)
--------- ---------
Decrease in net assets from distributions....... (56,650) (57,309)
--------- ---------
Capital share transactions*
Shares sold..................................... 261,013 258,095
Distributions reinvested........................ 39,048 40,053
Shares redeemed................................. (221,218) (315,306)
--------- ---------
Increase (decrease) in net assets from
capital share transactions..................... 78,843 (17,158)
--------- ---------
Increase (decrease) in net assets................... 115,988 (67,749)
NET ASSETS
Beginning of period................................. 873,546 941,295
--------- ---------
End of period....................................... $ 989,534 $ 873,546
========= =========
- -------------------------------------------------------------------------------
*Share information
Shares sold..................................... 21,873 22,361
Distributions reinvested........................ 3,271 3,474
Shares redeemed................................. (18,562) (27,429)
--------- ---------
Increase (decrease) in shares outstanding....... 6,582 (1,594)
========= =========
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
- -------------------------------------------------------------------------------
Notes To Financial Statements
- -------------------------------------------------------------------------------
T. Rowe Price Tax-Free High Yield Fund / February 29, 1996
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.
A) Valuation - Debt securities are generally traded in the over-the-counter
market. Investments in securities originally issued with maturities of one year
or more are stated at fair value as furnished by dealers who make markets in
such securities or by an independent pricing service, which considers yield or
price of bonds of comparable quality, coupon, maturity, and type, as well as
prices quoted by dealers who make markets in such securities. Securities with
maturities when issued of less than one year are stated at fair value, which is
determined by using a matrix system that establishes a value for each security
based on money market yields.
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 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.
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 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.
A) Noninvestment-Grade Debt Securities - At February 29, 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.
B) Other - Purchases and sales of portfolio securities, other than short-term
securities, aggregated $399,093,000 and $348,205,000, respectively, for the year
ended February 29, 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.
In order for the fund's capital accounts and distributions to shareholders
to reflect the tax character of certain transactions, $4,000 of undistributed
net investment income was reclassified as a decrease to undistributed net
realized gains during the year ended February 29, 1996. The results of
operations and net assets were not affected by the reclassifications.
15
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
At February 29, 1996, the aggregate cost of investments for federal income
tax and financial reporting purposes was $914,508,000 and net unrealized gain
aggregated $59,278,000, of which $63,273,000 related to appreciated investments
and $3,995,000 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 $502,000 was payable at February 29, 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 0.31% for assets in excess of $34 billion. At
February 29, 1996, and for the year then ended, the effective annual Group Fee
rate was 0.33% and 0.34%, respectively. The fund pays a pro rata share of the
Group Fee based on the ratio of its net assets to those of the Group.
In addition, the fund has entered into agreements with the Manager and 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 $614,000 for the year
ended February 29, 1996, of which $60,000 was payable at period-end.
16
<PAGE>
- -------------------------------------------------------------------------------
Financial Highlights
- -------------------------------------------------------------------------------
T. Rowe Price Tax-Free High Yield Fund
<TABLE>
<CAPTION>
For a share outstanding throughout each period
----------------------------------------------------
Year Ended
----------------------------------------------------
Feb. 29, Feb. 28, Feb. 28, Feb. 28, Feb. 29,
1996 1995 1994 1993 1992
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......... $ 11.62 $ 12.26 $ 12.33 $ 11.65 $ 11.40
-------- -------- -------- -------- --------
Investment Activities
Net investment income..................... 0.72 0.73 0.74 0.78 0.81
Net realized and unrealized gain (loss)... 0.48 (0.60) 0.16 0.78 0.35
-------- -------- -------- -------- --------
Total from Investment Activities.......... 1.20 0.13 0.90 1.56 1.16
-------- -------- -------- -------- --------
Distributions
Net investment income..................... (0.72) (0.73) (0.74) (0.78) (0.81)
Net realized gain......................... -- (0.04) (0.23) (0.10) (0.10)
-------- -------- -------- -------- --------
Total distributions....................... (0.72) (0.77) (0.97) (0.88) (0.91)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD................ $ 12.10 $ 11.62 $ 12.26 $ 12.33 $ 11.65
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Total return.................................. 10.62% 1.26% 7.49% 13.94% 10.56%
Ratio of expenses to average net assets....... 0.75% 0.79% 0.79% 0.81% 0.83%
Ratio of net investment income
to average net assets..................... 6.07% 6.29% 5.95% 6.58% 7.01%
Portfolio turnover rate....................... 39.3% 59.6% 59.3% 34.7% 51.0%
Net assets, end of period (in thousands)...... $989,534 $873,546 $941,295 $853,185 $623,877
- ----------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors
of T. Rowe Price Tax-Free High Yield Fund, Inc.
We have audited the accompanying statement of net assets of T. Rowe Price
Tax-Free High Yield Fund, Inc. as of February 29, 1996, and the related
statement of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
February 29, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of T.
Rowe Price Tax-Free High Yield Fund, Inc. as of February 29, 1996, the results
of its operations, the changes in its net assets, and financial highlights for
each of the respective periods stated in the first paragraph, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
March 19, 1996
<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 a.m. to 10
p.m. Monday - Friday, and weekends from 8:30 a.m. to 5 p.m. ET. 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 most bond
fund accounts (except the High Yield Fund and Emerging Markets Bond 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.
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.
Performance Update--A quarterly report reviewing recent market
developments and providing comprehensive performance information for every T.
Rowe Price fund.
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.
19
<PAGE>
- -------------------------------------------------------------------------------
T. Rowe Price No-Load Mutual Funds
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
STABILITY INCOME CONSERVATIVE PERSONAL STRATEGY
Prime Reserve Global Government Bond GROWTH FUNDS
Summit Cash Reserves GNMA Balanced Personal Strategy Income
U.S. Treasury Money New Income Capital Appreciation Personal Strategy Balanced
California Tax-Free Money Spectrum Income Dividend Growth Personal Strategy Growth
New York Tax-Free Money Summit GNMA Equity Income
Summit Municipal Money U.S. Treasury Long-Term Equity Index Call if you want to know
Market California Tax-Free Bond Global Stock about any T. Rowe Price
Tax-Exempt Money Georgia Tax-Free Bond Growth & Income fund. We'll send you a
Maryland Tax-Free Bond Spectrum Growth prospectus with more
CONSERVATIVE INCOME New Jersey Tax-Free Bond Value complete information,
Short-Term Bond New York Tax-Free Bond including management
Short-Term Global Income Summit Municipal Income GROWTH fees and other expenses.
Short-Term U.S. Government Tax-Free Income Blue Chip Growth Read it carefully before
Summit Limited-Term Bond Virginia Tax-Free Bond European Stock you invest or send
U.S. Treasury Intermediate Growth Stock money
Florida Insured Intermediate AGGRESSIVE INCOME International Stock
Tax-Free Corporate Income Japan
Maryland Short-Term Emerging Markets Bond Mid-Cap Growth T. Rowe Price Investment
Tax-Free Bond High Yield New Era Services, Inc., Distributor.
Summit Municipal International Bond OTC
Intermediate Tax-Free High Yield Small-Cap Value
Tax-Free Insured
Intermediate Bond AGGRESSIVE GROWTH
Tax-Free Short-Intermediate Capital Opportunity
Virginia Short-Term Health Sciences
Tax-Free Bond Emerging Markets Stock
International Discovery
Latin America
New America Growth
New Asia
New Horizons
Science & Technology
</TABLE>
<PAGE>
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Fellow Shareholders
- --------------------------------------------------------------------------------
The fiscal year ended February 29, 1996, was a banner year for bonds and the
funds that invest in them. Prices rose as yields fell through much of the year,
generating good returns for investors in fixed income securities. We were
pleased that all the T. Rowe Price municipal funds discussed here outperformed
their peer group averages over the entire fiscal year.
Market Environment
The economy slowed in 1995, and the rate of inflation remained moderate. After
tightening monetary policy in 1994 and early 1995, the Federal Reserve reversed
course when it became clear that the economy was running out of steam. Since
July, the Fed has lowered the key federal funds rate three times, from 6% to
5.25% at the end of the fiscal year.
Against a background of slower growth, moderate inflation, and apparent
progress on reducing the federal budget deficit, bond yields tumbled. The
30-year Treasury yield, nearly 7.5% a year ago, fell briefly below 6% in late
December. At fiscal year-end, the long bond yield had edged back up to 6.5%, as
efforts to come up with deficit reduction
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Municipal Bond and Note Yields
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[GRAPH APPEARS HERE]
- --------------------------------------------------------------------------------
Source: T. Rowe Price Associates
legislation flagged in early 1996. Signs that stronger economic growth might
resume in 1996 also contributed to recent uneasiness in the bond market.
After moving only slightly lower during the first half of the fiscal year
ended February 29, long-term municipal yields fell further in the second half.
Thirty-year prime general obligation (GO) bonds yielded 5.95% on February 28,
1995, and on August 31 were only 10 basis points lower (100 basis points equal
one percent). During the most recent six months, prices rose further as yields
dropped an additional 45 basis points to 5.40%.
Municipal bonds with short maturities followed a different pattern as their
yields fell more in the first half of the year than in the second. After falling
70 basis points to 4.30% on August 31, the yield of five-year prime GO bonds
fell only 10 basis points more by February 29, 1996. The net result was a lower
and steeper yield curve that led to significant price appreciation from 1994's
lows.
New issuance of municipal bonds hit a five-year low in 1995 -- 3% below 1994's
levels. Light supply for the second year in a row would have been more of a
problem if demand had not also been soft due to strong stock market returns and
tax reform discussions. Although new supply declined overall, the use of bond
insurance grew, and insured bonds constituted 43% of newly issued securities.
Bond insurers were willing to insure new issues as well as bonds in the
secondary market at a fairly low cost.
Tax-Exempt Money Fund
Short-term rates fell during the past year, with six-month to one-year yields
declining further than yields on shorter maturities. Compared with year-ago
levels, one- to seven-day yields were 50 to 70 basis points lower, while the
longer yields were 100 to 130 basis points lower. This led to a flattening in
the money
<PAGE>
market yield curve, meaning that longer maturities did not offer significantly
higher yields than short maturities (occasionally, long yields were actually
lower).
In this environment, we adopted a "barbell" strategy, concentrating
investments at both ends of the money market maturity range. The longer
maturities enabled us to lock in yields that we believed would move lower as the
Federal Reserve continued to reduce interest rates, while the short-maturity
holdings provided a high level of income considering their low level of risk.
Another indication of the remarkable shift in the yield curve was the average
spread between overnight and one-year yields -- a meager 13 basis points over
the past 12 months versus 121 basis points during the preceding 12-month period.
The yields on short-term tax-exempt issues remained relatively low compared
with the yields on their taxable counterparts, making them attractive only to
those in the highest tax brackets. Nevertheless, assets in all tax-exempt money
funds grew a robust 16% to $134 billion over the year.
Our barbell strategy, plus our lengthening weighted average maturity in recent
months, enabled your fund to outperform its peer group average during the 6- and
12-month periods ended February 29.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/29/96
6 Months 12 Months
-------- ---------
<S> <C> <C>
Tax-Exempt Money Fund 1.62% 3.38%
IBC/Donoghue Money Fund
Report Average* 1.58 3.31
- ------------------------------------------------------------------------------
</TABLE>
*Stockholder and General Purpose Funds
Tax-Free Short-Intermediate Fund
For most of the past six months, your fund sought to maintain an aggressive
posture on weighted average maturity. The combination of a weak economic
environment and prospects for federal deficit reduction enhanced the possibility
that the Federal Reserve would loosen monetary policy by lowering the fed funds
rate.
In an effort to benefit from this anticipated move, we gradually lengthened
the fund's weighted average maturity from 3.0 years at the beginning of
September to as long as 3.8 years in January. As yields fell to extremely low
levels in January and budget negotiations stalled in Washington, we began to
shorten maturities. By fiscal year-end, the weighted average maturity declined
to 3.6 years.
This strategy allowed the fund to provide solid returns and outperform its
peer group average during both the 6- and 12-month periods ended February 29.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/29/96
6 Months 12 Months
-------- ---------
<S> <C> <C>
Tax-Free Short-Intermediate
Fund 2.95% 6.87%
Lipper Short-Intermediate
Debt Funds Average 2.67 6.79
- ------------------------------------------------------------------------------
</TABLE>
Tax-Free Insured Intermediate Bond Fund
Our strategy was similar to that of the Tax-Free Short-Intermediate Fund for the
reasons outlined there. We began the six-month period with a shorter duration (a
measure of a bond fund's price sensitivity to changes in interest rates) than
our more aggressive posture at the end of May. As we moved through the final
months of 1995, we reversed course and began to lengthen from 5.4 years at the
end of August to a high of 5.7 years in January.
Another component of our strategy entailed taking advantage of supply and
demand imbalances. Relative values in the municipal market are dictated to a
great extent by the supply of new issues. Bond values rise in states with low
supply and decline in states where supply is abundant. We adopted a strategy of
rotating out of low supply states into high supply states to take advantage of
the lower prices. For example, during the last six months, we sold bonds issued
in Florida and California and replaced them with New York
2
<PAGE>
and Georgia securities, which allowed us to increase the fund's return without
assuming additional interest rate risk.
This overall strategy resulted in strong returns that surpassed our peer group
average for both periods shown below.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/29/96
6 Months 12 Months
-------- ---------
<S> <C> <C>
Tax-Free Insured
Intermediate Bond Fund 3.77% 9.57%
Lipper Intermediate Municipal
Debt Funds Average 3.72 8.97
- ------------------------------------------------------------------------------
</TABLE>
Tax-Free Income Fund
Given the sluggish economic environment that persisted over most of the last 12
months, we maintained a modestly aggressive posture throughout the year. Our
relatively long market profile was reflected by a duration of 7.5 years or
higher and a weighted average maturity in the range of 18 to 19 years. We also
focused on buying individual bonds with the potential for significant price
appreciation. Our sizable positions in noncallable and discount bonds, typically
the best performing structures in falling rate environments, contributed to our
aggressive posture.
From the credit perspective, our strategy focused on minimizing exposure to
areas our analysts perceived as vulnerable. For example, we identified the
electric utility sector as one that would be susceptible to proposed legislative
and regulatory changes. This proved to be the case, as many credits were
downgraded by the rating agencies. Insured bonds also played an important role
in our portfolio last year. The heavy issuance of insured bonds, discussed
earlier, provided an opportunity to pick up additional safety at relatively low
cost.
The fund provided excellent returns over the last six months and the fiscal
year, outperforming the average for similar funds by about the same margin in
each period.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/29/96
6 Months 12 Months
-------- ---------
<S> <C> <C>
Tax-Free Income Fund 5.44% 10.31%
Lipper General Municipal
Debt Funds Average 4.99 9.87
- ------------------------------------------------------------------------------
</TABLE>
The fund is still positioned somewhat aggressively, but we are looking for
opportunities to reduce its duration and weighted average maturity. A more
positive outlook on the economy and continued prospects of anemic cash flows to
bond funds merit a neutral to slightly defensive posture. Additionally, we plan
to sell some of the noncallable and discount bonds that performed so well last
year and replace them with bonds whose income we expect to be the dominant
component of returns.
Tax-Free High Yield Fund
The municipal high yield market enjoyed a solid comeback last year, recovering
nicely from the beating it took in 1994. Your fund began the year with a neutral
market stance and a relatively low concentration in below investment-grade
securities. Over the following months, and particularly in the first half of the
year, we lengthened duration slightly. For much of calendar 1995, the fund
maintained a duration of 7.2 to 7.5 years and a weighted average maturity of
about 20 years. Cash reserves averaged between 4% and 6% of assets. Late in the
year, duration drifted to a more neutral stance of 7.0 to 7.2 years, ending the
fiscal year at 7.2 years.
Additionally, the bond market decline of 1994 increased the yield spread
between higher- and lower-quality securities, providing us with an opportunity
to increase your fund's below investment-grade holdings from 24% to 27% of net
assets. Much of this move occurred during the first half of the year. We believe
this worked out well for three reasons. First, it provided the opportunity to
lock in attractive yields while taking reasonable credit risk.
3
<PAGE>
Second, credit quality spreads narrowed significantly as the market rallied
through the year. This meant that, on average, lower-quality bonds enjoyed
larger relative price gains. Third, the move entailed only a slight diminution
of your fund's overall credit quality. As always, we sought to maximize
diversification when buying lower-quality bonds.
Your fund outperformed its peer group over the fiscal year and slightly lagged
it during the most recent six-month period. The fund has exceeded the average
performance of other tax-free high yield funds, measured by the benchmark shown
below, for the past eight fiscal years and for nine of its 11 complete fiscal
years.
- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/29/96
6 Months 12 Months
-------- ---------
<S> <C> <C>
Tax-Free High Yield Fund 4.98% 10.62%
Lipper High Yield Municipal
Debt Funds Average 5.15 10.18
- ------------------------------------------------------------------------------
</TABLE>
At this time we have adopted a more cautious stance for the fund amid signs
that economic growth could be picking up. We scaled back our purchases of
lower-quality bonds, as mentioned. Credit quality spreads have narrowed
significantly, particularly during the second half of 1995, due to modest
issuance and continued strong demand. At present, the fund's average credit
quality stands at BBB+ with no material change currently anticipated.
Outlook
The municipal market paid substantial attention to the topic of tax reform last
year. Concerns that proposed revisions to the tax code would be detrimental to
municipal bonds kept municipal securities from performing quite as well as
taxable alternatives. As we anticipated, these fears have lessened somewhat as
tax reform discussions have faded from prominence. Municipals have already
recaptured some of the ground lost to taxable bonds, which we attribute to
reduced worries about the impact of tax reform.
The unusually fierce weather this winter, as well as the partial government
shutdowns, tended to delay and distort many recent economic statistics, but it
looks as though the economy is on track for a year of moderate growth. This
should be enough to keep the unemployment rate in its current zone without
significantly exacerbating inflationary pressures. This March the economic
upturn completed its fifth year, making it one of the longest peacetime
expansions on record, but still without signs of an impending recession.
Further easing by the Federal Reserve may be slow in coming, since the Fed is
concerned about the risk of fueling inflationary pressures when the economy has
only limited margins of excess capacity. The prospects for sharp deficit
reduction and the moderate inflation outlook that gave the bond market
confidence last year are not as compelling so far in 1996. Consequently, we
expect the bulk of returns this year to come from coupon income rather than
capital appreciation.
Respectfully submitted,
/s/ William T. Reynolds
William T. Reynolds
Director
Fixed Income Division
/s/ Mary J. Miller
Mary J. Miller
Director
Municipal Bond Department
March 20, 1996
4
<PAGE>
- --------------------------------------------------------------------------------
Financial Summary
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value Dividend Per Share* Dividend Yield**
Per Share 6 Months Ended 6 Months Ended
8/31/95 2/29/96 8/31/95 2/29/96 8/31/95 2/29/96
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Tax-Exempt Money $ 1.00 $ 1.00 $0.017 $0.016 3.26% 2.95%
Tax-Free Short-Intermediate 5.33 5.37 0.12 0.11 4.46 4.38
Tax-Free Insured Intermediate Bond 10.68 10.84 0.24 0.24 4.62 4.48
Tax-Free Income 9.41 9.66 0.26 0.26 5.63 5.45
Tax-Free High Yield 11.87 12.10 0.36 0.36 6.26 6.00
- ---------------------------------------------------------------------------------------------------
</TABLE>
* Taxability of dividends: 100% of the dividends paid for the 12 months ended
2/29/96 were exempt from federal income tax.
** 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.
Tax-Exempt Money reports a seven-day compound yield.
- --------------------------------------------------------------------------------
Quality Diversification
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quality Ratings* Weighted Average Quality*
1 2 3 4 5-10 8/31/95 2/29/96
--------------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Tax-Exempt Money 13% 87% -- -- -- 1.9 1.9
Tax-Free Short-Intermediate 41 35 20% 4% -- 1.8 1.9
Tax-Free Insured Intermediate Bond 21 66 13 -- -- 1.8 1.9
Tax-Free Income 10 50 25 12 3% 2.4 2.4
Tax-Free High Yield 4 21 16 32 27 3.7 3.6
- ---------------------------------------------------------------------------------------------------
</TABLE>
* On a T. Rowe Price scale of 1 to 10, with Grade 1 representing highest
quality.
- --------------------------------------------------------------------------------
Performance Comparison -- Tax-Exempt Money Fund
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
As of
2/29/96
-----------
<S> <C>
Tax-Exempt Money Fund $14,659
Lipper Tax-Exempt Money $14,593
Market Funds Average
</TABLE>
Note: The index return does not reflect expenses, which have been deducted from
the fund's return.
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
Duration and Maturity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Weighted Average Weighted Average
Effective Duration (years) Maturity (years)
8/31/95 2/29/96 8/31/95 2/29/96
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Tax-Exempt Money -- -- 55* 65*
Tax-Free Short-Intermediate 2.5 3.0 3.0 3.6
Tax-Free Insured Intermediate Bond 5.4 5.5 7.2 7.2
Tax-Free Income 7.8 8.3 18.1 18.1
Tax-Free High Yield 7.3 7.2 20.1 20.0
- ----------------------------------------------------------------------------------------------
</TABLE>
* Maturity is in days.
- --------------------------------------------------------------------------------
Average Annual Compound Total Return
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Periods Ended 2/29/96
1 Year 5 Years 10 Years or Since Inception
--------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Exempt Money 3.38% 2.82% 3.90%
Tax-Free Short-Intermediate 6.87 5.52 5.27
Tax-Free Insured Intermediate Bond 9.57 -- -- 7.57% (11/92)
Tax-Free Income 10.31 8.46 7.21
Tax-Free High Yield 10.62 8.69 8.46
- -----------------------------------------------------------------------------------------
</TABLE>
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
- ------------------------------------------
Performance Comparison --
Tax-Free Insured Intermediate Bond Fund
- ------------------------------------------
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
As of
2/29/96
-----------
<S> <C>
Tax-Free Insured $12,672
Intermediate Bond Fund
Lehman 7-Year GO $12,460
Bond Index
</TABLE>
Note: The index return does not reflect
expenses, which have been deducted from
the fund's return.
- ------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Performance Comparison -- Tax-Free Short-Intermediate Fund
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
As of
2/29/96
-----------
<S> <C>
Tax-Free Short-Intermediate Fund $17,193
Lehman 3-Year GO Bond Index $18,355
</TABLE>
Note: The index return does not reflect expenses, which have been deducted from
the fund's return.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Comparison -- Tax-Free Income Fund
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
As of
2/29/96
-----------
<S> <C>
Tax-Free Income Fund $20,054
Lehman Municipal Bond Index $22,001
</TABLE>
Note: The index return does not reflect expenses, which have been deducted from
the fund's return.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Comparison -- Tax-Free High Yield Fund
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
As of
2/29/96
-----------
<S> <C>
Tax-Free High Yield Fund $22,562
Lehman Revenue Bond Index $23,188
</TABLE>
Note: The index return does not reflect expenses, which have been deducted from
the fund's return.
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
Annual Report
- --------------------------------------------------------------------------------
For yield, price, last transaction, T. Rowe Price
and current balance, 24 hours, -------------
7 days a week, call:
1-800-638-2587 toll free Tax-Free Funds
625-7676 Baltimore area
For assistance with your existing
fund account, call:
Shareholder Service Center February 29, 1996
1-800-225-5132 toll free
625-6500 Baltimore area
T. Rowe Price
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for distribution
only to shareholders and to others who have
received a copy of the prospectus of the
T. Rowe Price Tax-Free Funds.
[LOGO OF T. ROWE PRICE APPEARS HERE]
TFF RPTTFF 2/29/96
