<PAGE>
SemiAnnual Report
T.RowePrice
- -----------
GNMA Fund
November 30, 1994
FOR YIELD, PRICE, LAST TRANSACTION,
AND CURRENT BALANCE, 24 HOURS,
7 DAYS A WEEK, CALL:
1-800-638-2587 toll free
625-7676 Baltimore area
FOR ASSISTANCE WITH YOUR
EXISTING FUND ACCOUNT, CALL:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
T. ROWE PRICE
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for distribution only to shareholders and to others
who have received a copy of the prospectus of the T. Rowe Price GNMA Fund.
[logo]
<PAGE>
Fellow Shareholders
Few bond investors will be sorry to see the end of 1994, one of the most
difficult years for bonds since 1950. With the Federal Reserve steadily
pushing the federal funds rate higher to cool the economy and preempt a rise
in inflation, longer-term bond yields also soared and prices fell. After
several years of solid to spectacular returns, most bond fund results were
negative for the year through November 30. While mortgage-backed securities
shared this fate, their returns held up better than those of most other
high-quality bonds.
During the first half of the summer, longer-term rates fluctuated in a
fairly narrow range, as shown below. Subsequently, they resumed rising in
response to indications of robust economic growth, hints of inflationary
pressures, and the Fed's sixth and largest increase this year in the federal
funds target rate in mid-November.
[chart]
Yield Comparison
Line graph shows yields on Current Coupon GNMA and 10-year Treasury note from
5/31/94 through 11/30/94
MARKET ENVIRONMENT
Mortgage-backed securities performed relatively well during the last three-
and six-month periods as the market environment changed significantly. A year
ago, prepayments were high and most mortgage-backed securities sold at a
premium (price above par). Since mortgages are always paid off at par,
prepayments caused capital losses for investors. Today, the prepayment rate is
extremely low, and about 80% of all mortgages sell at discounts to their par
value. Thus, prepayments provide a capital gain for investors who purchase
mortgage securities at a discount. Not surprisingly, investors now favor
mortgages that are more likely to be prepaid.
In another contrast with last year, seasoned mortgages (over five years
old), which used to have the lowest prepayment rates, now have the highest,
principally because prepayments of newer mortgages have plummeted, as the
chart below shows. This has benefited holders of seasoned mortgages in two
ways: investors have bid up their prices, and prepayments generally create a
capital gain.
[chart]
Prepayment Experience and Projections by Year Seasoning/Production
Line graph shows prepayment rates on New Mortgages, Moderately Seasoned and
Seasoned Mortgages from 10/93 through 5/95-10/95
<PAGE>
Your Fund, which has a lower portfolio turnover rate than its peer group,
has retained significant holdings of seasoned issues.
PERFORMANCE AND STRATEGY REVIEW
Reflecting market conditions, the drop in your Fund's share price for the last
three-month period exceeded the income generated, resulting in a negative
total return. However, the Fund was more successful in maintaining its value
in a deteriorating market than the average GNMA fund, as you can see in the
table below.
Performance Comparison
Periods Ended 11/30/94
3 Months 6 Months
---------- ----------
GNMA Fund -1.52% 0.34%
Lipper GNMA Fund Average -1.91 -0.35
- ----------------------------------------------
In line with our view that the economy will start to cool next year and
that the worst of the rate rise is behind us, our strategy has been to slowly
increase the Fund's sensitivity to interest rate changes. Rather than sell our
older holdings, which, as we noted, are being prepaid at above-average rates
and enhance Fund performance, we have purchased lower-coupon, lower-priced
securities for forward delivery. These "forwards" will be paid for by future
cash flows from interest and prepayments and are the reason our holdings
exceed 100% of net assets, as shown in the sector diversification table
following this report. We have also started to gradually add longer-term
Treasury securities to the portfolio, since they will perform well if interest
rates begin to ease.
OUTLOOK
So far the main impact of higher rates has been on residential and business
construction activity, while the rest of the economy has not been materially
affected. In fact, real GDP growth in the third quarter was revised from 3.4%
to 3.9%. The Fed is likely to continue raising the federal funds rate in
coming months until it sees that economic growth is slowing to its long-term
trend. Money market rates can be expected to climb in step with increases in
fed funds rates, but bond yields may plateau around their recent levels.
Considering their yield advantage and the drop in prepayments, GNMAs
should continue to perform well compared with other high-quality bonds. We
believe longer-term interest rates will begin to level off, so that overall
returns on bonds will reflect their coupons and will be more consistent with
historical performance levels.
Respectfully submitted,
s/Peter Van Dyke
Peter Van Dyke
President and Chairman of the
Investment Advisory Committee
December 20, 1994
<PAGE>
Statistical Highlights
T. Rowe Price GNMA Fund / November 30, 1994 (Unaudited)
Key Statistics
Periods
Dividend Yield* Ended 11/30/94
- -----------------------------------------------
3 Months 7.75%
6 Months 7.69
Dividend Per Share
- --------------------------------
3 Months $0.17
6 Months 0.34
Change in Price Per Share
- --------------------------------
3 Months (From $9.14 to $8.83) -$0.31
6 Months (From $9.14 to $8.83) -0.31
- -----------------------------------------------
*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.
Income return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
Quality Diversification
Percent of Net Assets
TRPA Quality Rating* 8/31/94 11/30/94
- -----------------------------------------------
1 100% 100%
2 0 0
3 0 0
4 0 0
- -----------------------------------------------
Weighted Average 1.0 1.0
- -----------------------------------------------
*On a scale of 1 to 10, with Grade 1 representing highest quality.
Sector Diversification
Percent of Net Assets
8/31/94 11/30/94
- -----------------------------------------------
GNMA Securities 105% 104%
U.S. Treasury Securities 2 13
Other Government
Agency Securities 1 1
Other Assets Less Liabilities -8 -18
- ----------------------------------------------
Maturity Diversification*
Percent of Net Assets
8/31/94 11/30/94
- ---------------------------------------------------
Short-Term (0 to 1 Year) -7% -9%
Short Intermediate-
Term (1+ to 5 Years) 7 7
Long Intermediate-
Term (5+ to 10 Years) 68 57
Long-Term (Over 10 Years) 32 45
- ---------------------------------------------------
Weighted Average Maturity 8.4 yrs. 8.7 yrs.
- ---------------------------------------------------
Weighted Average Effective
Duration 4.4 yrs. 6.2 yrs.
- ---------------------------------------------------
*Based on prepayment-adjusted life of GNMA securities.
<PAGE>
Statement of Net Assets (Amounts in thousands)
T. Rowe Price GNMA Fund / November 30, 1994 (Unaudited)
U.S. Government Guaranteed Obligations---105.3%
Face
Amount Value
---------- --------
Federal Housing Authority, 9.95%, 10/1/32............. $4,990 $5,077
Government National Mortgage Assn., I, 6.50%,
6/15/23 - 6/15/24............................... 47,991 41,156
7.00%, 4/15/17 - 8/15/24.......................... 141,497 126,024
7.50%, 10/15/16 - 9/15/24......................... 124,861 115,630
8.00%, 11/15/12 - 10/15/24........................ 145,010 140,951
8.50%, 12/15/04 - 7/15/21......................... 45,512 45,582
9.00%, 4/15/16 - 9/15/24.......................... 86,162 87,487
9.50%, 12/15/24................................... 61,183 63,704
10.00%, 1/15/16 - 7/15/24......................... 14,823 15,836
10.50%, 1/15/13 - 11/15/21........................ 7,600 8,226
11.00%, 3/15/10 - 6/15/19......................... 1,504 1,660
11.50%, 6/15/10 - 4/15/19......................... 3,097 3,449
12.00%, 12/15/10 - 10/15/15....................... 14,361 16,228
12.50%, 4/15/10 - 7/15/15......................... 3,656 4,167
13.00%, 1/15/11 - 8/15/15......................... 1,720 1,978
13.50%, 5/15/10 - 2/15/15......................... 2,306 2,676
II, 8.00%, 10/20/24................................. 3,869 3,652
8.50%, 4/20/16 - 2/20/23.......................... 33,258 32,235
10.00%, 9/20/16 - 8/20/21......................... 2,446 2,547
11.00%, 11/20/15 - 9/20/20........................ 3,365 3,629
11.50%, 12/20/13 - 7/20/20........................ 2,398 2,611
12.50%, 10/20/13 - 1/20/16........................ 286 318
13.00%, 10/20/13 - 9/20/15........................ 1,356 1,525
Graduated Payment Mortgage, I, 8.75%, 6/15/17 -
6/15/22....................................... 1,689 1,677
9.00%, 5/15/09 - 3/15/14........................ 860 856
9.25%, 5/15/16 - 8/15/21........................ 10,289 10,241
9.50%, 6/15 - 11/15/09.......................... 3,565 3,645
9.75%, 4/15/16 - 9/15/21........................ 13,571 13,876
10.75%, 2/15/16 - 7/15/19....................... 2,878 3,079
12.00%, 10/15/10 - 2/15/13...................... 794 880
12.25%, 9/15/13 - 5/15/15....................... 636 708
12.50%, 4/15/10 - 10/15/12...................... 1,051 1,171
12.75%, 10/15/13 - 5/15/15...................... 730 814
II, 9.75%, 12/20/20 - 7/20/21..................... 618 627
12.25%, 1/20/14 - 12/20/15...................... 599 662
12.75%, 10/20/13 - 7/20/15...................... 684 758
Interest Only, 8.00%, 6/16/23**..................... 18,890 4,061
Project Loan, I, 8.00%, 11/15/12.................... 506 479
8.50%, 1/15/27.................................... 400 391
9.25%, 10/15/23................................... 9,948 10,012
10.00%, 2/15/30................................... 10,922 11,459
10.75%, 3/15/26................................... 6,175 6,616
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TOTAL U.S. GOVERNMENT GUARANTEED OBLIGATIONS
(COST---$824,382) 798,360
U.S. Government Obligations---12.7%
U.S. Treasury Bonds, 7.50%, 11/15/24.................. $20,000 $18,772
U.S. Treasury Notes, 4.625%, 8/15/95.................. 65,625 64,712
U.S. Treasury Stripped Cert., Zero Coupon, 8/15/10.... 45,800 12,933
- --------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS (COST---$98,539) 96,417
- --------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES---118.0%
(COST---$922,921) 894,777
- --------------------------------------------------------------------------
Payable for Investments Purchased---(19.6)%........... (148,802)
Other Assets Less Liabilities---1.6% ................. 11,852
--------
NET ASSETS CONSISTING OF:
Accumulated net investment income---net of
distributions ...................................... 37
Accumulated realized gains/losses---net of
distributions ...................................... (48,638)
Net unrealized loss................................... (28,144)
Paid-in-capital applicable to 85,868,100 no par value
shares of beneficial interest outstanding; unlimited
number of shares authorized......................... 834,572
----------
NET ASSETS---100.0% .................................. $757,827
--------
--------
NET ASSET VALUE PER SHARE ............................ $8.83
--------
--------
- --------------------------------------------------------------------------
** - For Interest Only securities, face amount represents notional principal,
on which the Fund receives interest.
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of Operations
T. Rowe Price GNMA Fund / Six Months Ended November 30, 1994 (Unaudited)
Amounts in
Thousands
-------------------
INVESTMENT INCOME
Interest income.......................................... $32,729
Expenses
Investment management fees............................. $1,936
Shareholder servicing fees & expenses.................. 688
Custodian and accounting fees & expenses............... 216
Prospectus & shareholder reports....................... 32
Proxy & annual meeting expenses........................ 36
Registration fees & expenses........................... 26
Legal & auditing fees.................................. 16
Trustees' fees & expenses.............................. 9
Miscellaneous expenses................................. 10
---------
Total expenses......................................... 2,969
---------
Net investment income.................................... 29,760
REALIZED AND UNREALIZED LOSS
Net realized loss........................................ (11,293)
Change in net unrealized gain or loss.................... (16,127)
---------
Net loss................................................. (27,420)
---------
INCREASE IN NET ASSETS FROM OPERATIONS................... $2,340
---------
---------
- -----------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of Changes in Net Assets
T. Rowe Price GNMA Fund (Unaudited)
Three
Months
Six Ended
Months May 31, Year
Ended 1994 Ended
Nov. 30, [double Feb. 28,
1994 dagger] 1994
--------------- --------------- ---------------
Amounts in Thousands
-----------------------------------------------
INCREASE (DECREASE) IN
NET ASSETS
Operations
Net investment income....... $29,760 $15,120 $64,345
Net realized gain (loss).... (11,293) (15,465) 2,925
Change in net unrealized
gain or loss.............. (16,127) (26,398) (32,931)
--------------- --------------- ---------------
Increase (decrease) in net
assets from operations.... 2,340 (26,743) 34,339
--------------- --------------- ---------------
Distributions to shareholders
Net investment income....... (29,732) (15,111) (64,288)
--------------- --------------- ---------------
Capital share transactions/1/
Sold........................ 65,708 40,427 274,783
Distributions reinvested.... 23,639 11,990 55,910
Redeemed.................... (106,432) (91,650) (331,125)
--------------- --------------- ---------------
Decrease in net assets
from capital share
transactions.............. (17,085) (39,233) (432)
--------------- --------------- ---------------
Total decrease................ (44,477) (81,087) (30,381)
NET ASSETS
Beginning of period......... 802,304 883,391 913,772
--------------- --------------- ---------------
End of period............... $757,827 $802,304 $883,391
--------------- --------------- ---------------
--------------- --------------- ---------------
- ------------------------------------------------------------------------------
/1/Share transactions
Sold........................ 7,286 shs. 4,344 shs. 27,861 shs.
Distributions reinvested.... 2,623 1,299 5,689
Redeemed.................... (11,811) (9,853) (33,688)
--------------- --------------- ---------------
Decrease in shares
outstanding............... (1,902) shs. (4,210) shs. (138) shs.
--------------- --------------- ---------------
--------------- --------------- ---------------
- ------------------------------------------------------------------------------
[double dagger] The Fund's fiscal year-end was changed to May 31.
The accompanying notes are an integral part of these financial statements.
<PAGE>
Notes to Financial Statements
T. Rowe Price GNMA Fund / November 30, 1994 (Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price GNMA Fund (the Fund) is registered under the Investment Company
Act of 1940 as a diversified, open-end management investment company.
A) Security valuation - Debt securities are generally traded in the
over-the-counter market. Investments in securities with remaining maturities
of one year or more are stated at fair value as furnished by dealers who make
markets in such securities or by an independent pricing service, which
considers yield or price of bonds of comparable quality, coupon, maturity, and
type, as well as prices quoted by dealers who make markets in such securities.
Securities with remaining maturities less than one year are stated at fair
value which is determined by using a matrix system that establishes a value
for each security based on money market yields.
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 Trustees.
B) Premiums and Discounts - Except for mortgage-backed securities, premiums
and discounts on debt securities are amortized for both financial and tax
reporting purposes.
C) Other - Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on an identified cost basis. Distributions to shareholders are
recorded by the Fund on the ex-dividend date. Income and capital gain
distributions are determined in accordance with federal income tax regulations
which may differ from generally accepted accounting principles.
NOTE 2 - PORTFOLIO TRANSACTIONS
Purchases and sales of U.S. Government securities, other than short-term
securities, aggregated $484,204,000 and $472,526,000 respectively, for the six
months ended November 30, 1994.
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the Fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income. The Fund has unused realized capital loss carryforwards
for federal income tax purposes of $34,020,000 at May 31, 1994, which expire
in 1995 through 2002.
At November 30, 1994, the aggregate cost of investments for federal income
tax and financial reporting purposes was $922,921,000 and net unrealized loss
aggregated $28,144,000, of which $3,288,000 related to appreciated investments
and $31,432,000 to depreciated investments.
NOTE 4 - RELATED PARTY TRANSACTIONS
The investment management agreement between the Fund and T. Rowe Price
Associates, Inc. (the Manager) provides for an annual investment management
fee, computed daily and paid monthly, consisting of an Individual Fund Fee
equal to 0.15% of average daily net assets and a Group Fee. The Group Fee is
based on the combined assets of certain mutual funds sponsored by the Manager
or Rowe Price-Fleming International, Inc. (the Group). The Group Fee rate
ranges from 0.48% for the first $1 billion of assets to 0.31% for assets in
excess of $34 billion. The effective annual Group Fee rate at November 30,
1994, and for the six months then ended was 0.34%. The Fund pays a pro rata
portion of the Group Fee based on the ratio of the Fund's net assets to those
of the Group.
<PAGE>
T. Rowe Price Services, Inc. (TRPS) and Retirement Plan Services, Inc.
(RPS) are wholly owned subsidiaries of the Manager. TRPS provides transfer and
dividend disbursing agent functions and shareholder services for all accounts.
RPS provides subaccounting and recordkeeping services for certain retirement
accounts invested in the Fund. The Manager, under a separate agreement,
calculates the daily share price and maintains the financial records of the
Fund. The Fund is one of several T. Rowe Price mutual funds (the Underlying
Funds) in which the T. Rowe Price Spectrum Income Fund (Spectrum) invests. In
accordance with an Agreement between Spectrum, the Underlying Funds, the
Manager and TRPS, expenses from the operation of Spectrum are borne by the
Underlying Funds based on each Underlying Fund's proportionate share of assets
owned by Spectrum. For the six months ended November 30, 1994, the Fund
incurred fees totalling approximately $627,000, for these services provided by
related parties. At November 30, 1994, investment management and service fees
payable were $408,000.
<PAGE>
Financial Highlights
T. Rowe Price GNMA Fund (Unaudited)
<TABLE>
<CAPTION>
For a share outstanding throughout each period
---------------------------------------------------------------
Three
Months
Six ended
Months May 31, Year ended
ended 1994 --------------------------------------------
Nov. 30, [double Feb. 28, Feb. 28, Feb. 29, Feb. 28, Feb. 28,
1994 dagger] 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD............ $9.14 $9.60 $9.92 $9.79 $9.47 $9.16 $8.93
-------- -------- -------- -------- -------- -------- --------
Investment Activities
Net investment income.......... 0.34 0.17 0.68 0.75 0.80 0.83 0.85
Net realized and unrealized
gain (loss).................. (0.31) (0.46) (0.32) 0.13 0.32 0.31 0.23
-------- -------- -------- -------- -------- -------- --------
Total from Investment
Activities..................... 0.03 (0.29) 0.36 0.88 1.12 1.14 1.08
Distributions
Net investment income.......... (0.34) (0.17) (0.68) (0.75) (0.80) (0.83) (0.85)
-------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE,
END OF PERIOD.................. $8.83 $9.14 $9.60 $9.92 $9.79 $9.47 $9.16
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
- ------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Total Return..................... 0.34% (3.03)% 3.71% 9.36% 12.28% 13.02% 12.41%
Ratio of Expenses to
Average Net Assets............. 0.76% 0.76% 0.77% 0.79% 0.86% 0.85% 0.90%
[dagger] [dagger]
Ratio of Net Investment
Income to Average Net Assets... 7.58% 7.24% 6.93% 7.65% 8.25% 8.94% 9.19%
[dagger] [dagger]
Portfolio Turnover Rate.......... 112.4% 151.8% 92.5% 94.2% 66.0% 91.8% 170.8%
[dagger] [dagger]
Net Assets, End of Period
(in thousands)................. $757,827 $802,304 $883,391 $913,722 $715,249 $468,969 $386,193
- -------------------------------------------------------------------------------------------------
<FN>
[double dagger]The Fund's fiscal year-end was changed to May 31.
[dagger]Annualized.
</TABLE>
<PAGE>
T. Rowe Price No-Load Mutual Funds
STABILITY
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
California Tax-Free Money
New York Tax-Free Money
Summit Municipal Money Market
Tax-Exempt Money
CONSERVATIVE INCOME
Adjustable Rate U.S. Government
Short-Term Bond
Short-Term Global Income
Summit Limited-Term Bond
U.S. Treasury Intermediate
Florida Insured Intermediate Tax-Free
Maryland Short-Term Tax-Free Bond
Summit Municipal Intermediate
Tax-Free Insured Intermediate Bond
Tax-Free Short-Intermediate
Virginia Short-Term Tax-Free Bond
INCOME
Global Government Bond
GNMA
New Income
Spectrum Income
Summit GNMA
U.S. Treasury Long-Term
California Tax-Free Bond
Georgia Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Virginia Tax-Free Bond
Summit Municipal Income
Tax-Free Income
AGGRESSIVE INCOME
High Yield
International Bond
Personal Strategy Income
Tax-Free High Yield
CONSERVATIVE
GROWTH
Balanced
Capital Appreciation
Dividend Growth
Equity Income
Growth & Income
Personal Strategy Balanced
Personal Strategy Growth
Spectrum Growth
Value
GROWTH
Blue Chip Growth
European Stock
Growth Stock
International Stock
Japan
Mid-Cap Growth
New Era
Small-Cap Value
AGGRESSIVE GROWTH
Capital Opportunity
International Discovery
New America Growth
New Asia
New Horizons
OTC
Science & Technology
Call if you want to know about any T. Rowe Price Fund. We'll send you a
prospectus with more complete information, including management fees and other
expenses. Read it carefully before you invest or send money.