<PAGE>
Semiannual Report
GNMA FUND
- -----------------
NOVEMBER 30, 1998
- -----------------
[LOGO OF T. ROWE PRICE APPEARS HERE]
T. ROWE PRICE
<PAGE>
Report Highlights
- --------------------------------------------------------------------------------
GNMA Fund
. Mortgage-backed securities were not immune to the turmoil in global markets,
but your fund managed to post respectable results for the 6- and 12-month
periods ended November 30, 1998.
. The fund outpaced the average for similar funds as the share price rose and
the income dividend remained constant during the past six months, despite
falling interest rates.
. The fund's good relative performance was due primarily to its reduction of
prepayment risk and emphasis on preservation of principal.
. Our holdings in high-coupon seasoned mortgages decreased by midyear but we
have begun to reinvest in them as they currently offer potential for good
returns.
. We expect economic growth to slow in the months ahead and believe GNMA bonds
will do well as investors focus on their high credit quality.
<PAGE>
FELLOW SHAREHOLDERS
Interest rates fell over the last six months, continuing their downward
trajectory. Your fund was positioned for this type of environment, but it was
still a difficult period as global financial markets were thrown into turmoil.
In October, mortgage-backed securities lagged the Treasury market, resulting in
a widening difference in yields between the two securities. Despite this
volatility, the fund turned in a respectable performance during the 6- and
12-month periods ended November 30.
MARKET ENVIRONMENT
While U.S. GDP growth remains solid, many foreign economies are weak, which has
disrupted the usual yield relationships among global bonds. Fund holdings are
not subject to credit risk, but mortgage-backed bonds were not totally immune
to the volatile environment, and their yield premiums above Treasury yields
expanded more than we would normally have expected. Against this backdrop of
global uncertainty, the Fed has cut interest rates three times since September,
and investors interpreted the monetary easing as both stabilizing and
encouraging. By the end of November, fixed income markets had begun to settle
down. As confidence returned to financial markets, the yield premiums of GNMAs
versus Treasury bonds narrowed once again.
[LINE GRAPH APPEARS HERE]
10-Year Current Coupon
Nov-97 5.86 6.99
5.75 6.9
5.63 6.63
Feb-98 5.63 6.87
5.63 6.62
5.75 6.67
May-98 5.57 6.63
5.46 6.56
5.5 6.59
Aug-98 5.2 6.47
4.46 5.92
4.63 6.15
Nov-98 4.83 6.13
During the past six months, the yield on the current coupon GNMA fell from 6.65%
to 6.25%. The 10-year Treasury yield dropped from 5.57% to 4.83% in the same
period, so the difference in yields between the two securities widened overall
from 108 to 142 basis points, as shown in the chart (100 basis points equal one
percent). Thirty-year mort
1
<PAGE>
- -----------------------------------------------------------
PREPARING FOR THE YEAR 2000
- --------------------------------------------------------------------------------
The Year 2000 draws closer every day, and it holds special meaning beyond the
arrival of a new millennium. The issue for investors is that many computer
programs throughout the world use two digits instead of four to identify the
year and may assume the next century starts with 1900. If these programs are not
modified, they will not be able to correctly handle the century change when the
year changes from "99" to "00" on January 1, 2000, and they will no longer be
able to perform necessary functions. The Year 2000 issue affects all companies
and organizations.
T. Rowe Price has been taking steps to assure that its computer systems and
processes are capable of functioning in the Year 2000. Detailed plans for
remediation efforts have been developed and are currently being executed.
Our Plan of Action
We began to address these issues several years ago by requiring that all new
systems process and store four-digit years. We will complete all reprogramming
efforts for the major application systems, including business applications
required to service our customers and processing infrastructure necessary to
ensure the integrity of customer data and investments, by December 31, 1998,
leaving a full 12 months for system testing. Because we exchange data
electronically with customers and vendors, we are working with them to assess
the adequacy of their own compliance efforts. Our goal is to ensure the
continuation of the same level of service to all our mutual fund shareholders
and clients after December 31, 1999.
We are asking all vendors and companies we do business with for a Year 2000
compliance status, with the expectation that some organizations will not be able
to modify their interface files prior to December 31, 1999. Our goal is to
identify any noncompliant files so that we can implement alternative solutions.
In addition, we are scheduling tests for critical vendors and companies that
claim Year 2000 compliance to ensure that time-related data and calculations
function properly as we move into the next century.
Smooth Transition Planned
We believe our programs and initiatives will provide a smooth transition into
the next millennium. We are assessing all systems providing products or services
to our retail mutual fund shareholders, retirement plan sponsors, and
participants, and we are taking steps to modify them where necessary for the
Year 2000. Our plan provides time to develop solutions for all noncompliant
systems and data files from customers or vendors.
The Securities Industry Association (SIA) is coordinating Year 2000 testing to
assure that securities markets, clearing corporations, depositories, and third
party service providers can send, receive, and process files and transactions
accurately. In late July 1998, the SIA completed a beta test of Year 2000
readiness. The test was considered successful in terms of transactions completed
and will serve as the basis for the SIA's industry-wide approach. During October
1998, T. Rowe Price completed its beta test of Year 2000 readiness with the SIA
and is ready for the industry-wide test that is scheduled for March and April
1999.
For a more detailed discussion of our Year 2000 effort, as well as continuing
updates on our progress, please check our Web site (www.troweprice.com).
2
<PAGE>
gage rates hit a low of 6.49% in October, and the Mortgage Bankers' Association
Refinancing Index jumped to a new all-time high, exceeding the record set last
January.
PERFORMANCE REVIEW
- --------------------------
PERFORMANCE COMPARISON
- --------------------------
Periods Ended 11/30/98 6 Months 12 Months
- --------------------------------------------------------------------------------
GNMA Fund 3.44% 7.22%
................................................................................
Lipper GNMA Funds Average 3.24 7.09
................................................................................
For the six months ended November 30, 1998, your fund returned 3.44%, 20 basis
points more than the Lipper peer group average. During the 12-month period, the
fund's return was 7.22%, also ahead of the average for similar funds. The fund's
share price rose two cents to $9.59 during the six-month period. Dividends per
share remained constant at $0.31. Even though the yield on 10-year Treasuries
fell 74 basis points and mortgage yields declined 40 basis points, your fund's
six-month dividend yield decreased only 22 basis points since the end of May to
6.45%.
STRATEGY
Our primary investment focus remained on preserving principal and minimizing
prepayment risk due to mortgage refinancings. We were successful in these
efforts as 1998 witnessed two refinancing waves while the overall increase of
prepayments in the fund was actually rather contained. The chart on page 4 shows
the effect of prepayments on the fund in four years--1993, 1996, 1997, and 1998.
To put fund prepayments in perspective, the chart on page 3
[LINE GRAPH APPEARS HERE]
Moderately Seasoned Seasoned
New Mortgages Mortgages Mortgages
11/30/94 4 3 5
4 2 5
3 2 4
3 2 4
5 3 6
5 4 6
5/31/95 6 5 8
7 6 9
9 7 10
8 7 11
7 6 9
6.1 6.6 9
11/30/95 5.2 5.8 8.2
4.7 6.1 7.9
4.5 6.3 7.6
6.6 7.9 10.2
6.2 9.1 11.5
5.1 8.7 11.9
5/31/96 4.5 8.9 12.3
3.7 8.2 11.5
3.5 8.2 10.7
3 7.8 9.9
2.5 7.4 8.9
2.4 7.3 9
11/30/96 2.7 7.7 9
3.2 7.2 8.7
0.4 7.7 7.8
0.3 7.1 7.9
0.4 9.5 10.2
0.7 9.7 9.6
5/31/97 0.6 9 10
0.8 9.4 10.4
1.3 10.6 12.3
1.8 10.1 11.1
1.8 11.8 12.4
2.5 12.5 11.7
11/30/97 3 9.8 11.5
4.2 10.6 11.7
9 9.6 11.7
18.6 17.9 20.6
19.6 21.4 25.2
17.1 18.5 22.8
5/31/98 13.4 19.6 19.7
12.6 18.1 18.4
13 17.9 18.1
12 16.1 16.2
12.3 16.4 16.6
11.7 15.2 15.4
11/30/98 38 36.7 37.3
42 38.3 38.1
42.2 39.5 39.7
41.6 39.7 39.9
40.5 38.9 39
39.8 38.6 38.7
5/31/99 38.9 38.1 38.1
37.5 36.6 36.6
36.5 35.8 35.7
34.8 33.8 33.7
33.9 33.1 32.9
31.4 30.5 30.2
11/30/99 29 28.2 27.9
3
<PAGE>
shows prepayment levels for various types of mortgages during the past five
years.
We were able to protect the portfolio against prepayment risk through our
holdings in collateralized mortgage obligations, project and construction loan
securities, and low loan balance mortgages, all of which contain barriers to
refinancing. Portfolio holdings also include forward contracts, reflected as
Other Assets Less Liabilities in the Sector Diversification table following this
letter.
Higher-coupon seasoned mortgages, which had helped us maintain income, had been
refinanced faster than we expected earlier this year, and as a result our
exposure to this sector was reduced by midyear. However, these securities
currently offer new opportunities for superior total returns, and we have
started to reinvest in them. We have been consistently positioning the portfolio
for the falling interest rate environment of the past six months, and we expect
this trend to continue, although at a decreasing rate. As always, we will study
the markets closely for the right combination of securities in an effort to
generate the highest possible return for shareholders.
[LINE GRAPH APPEARS HERE]
1998 1997 1996 1993
Jan 1.42 1.33 1.24 2.57
Feb 1.2 1.16 1.35 1.89
Mar 1.67 1.4 1.46 1.89
Apr 2.05 1.37 1.51 2.55
May 1.87 1.08 1.5 3.25
Jun 1.61 1.19 1.43 3.28
Jul 1.86 1.39 1.35 3.51
Aug 1.76 1.27 1.47 2.86
Sep 1.64 1.34 1.35 3.02
Oct 1.58 1.25 1.23 2.83
Nov 1.86 1.41 1.33 3.07
Dec 2 1.85 1.19 3.28
OUTLOOK
Concern about global economic weakness is still with us, and we expect it to
play a key role in the domestic environment in 1999. Inflation remains under
control, U.S. economic growth appears to be slowing, and we anticipate possible
further cuts in key short-term rates by the Fed. We are already seeing signs of
a slowdown in the U.S. manufacturing sector. Finally, with the household savings
rate in the U.S. close to zero, the likelihood of a slowdown in consumer
spending has increased. In this scenario, we expect interest rates to move a bit
lower.
4
<PAGE>
While worry about credit risk overseas is likely to continue, we expect
mortgage-backed securities to fare well in the months ahead as investors focus
more on their high credit quality. Mortgage refinancings may slow temporarily
but could continue to be problematic if rates fall further--a situation we will
monitor carefully. The strategies we put in place during the past year have
served shareholders well. In the type of environment we envision over the next
six months and beyond, we believe mortgage securities offer the potential for
attractive overall returns.
Thank you for investing with T. Rowe Price.
Respectfully submitted,
/s/ Peter Van Dyke
Peter Van Dyke
President
December 18, 1998
Change in Management
Peter Van Dyke, a managing director of T. Rowe Price Associates and director of
the taxable bond department, is retiring at the end of 1998. Mr. Van Dyke joined
the company in 1985 and had managed the GNMA Fund since 1987. We wish him the
best in his future pursuits. Deborah L. Boyer, a vice president of T. Rowe Price
Associates, has been appointed chairman of the GNMA Fund's Investment Advisory
Committee, responsible for day-to-day management of the portfolio. Ms. Boyer
joined T. Rowe Price in 1996 and became a member of the fund's Advisory
Committee shortly afterward. For nearly two years, she has worked closely with
Mr. Van Dyke in managing the fund. Prior to 1996, she was an assistant vice
president and government bond trader for First Chicago NBD Corporation. Other
members of the fund's Investment Advisory Committee include Connice A. Bavely,
Heather R. Landon, James M. McDonald, Edward M. Notzon III, and William T.
Reynolds.
The preceding updates the GNMA Fund prospectus of October 1, 1998.
5
<PAGE>
T. ROWE PRICE GNMA FUND
- --------------------------------------------------------------------------------
- ------------------------
PORTFOLIO HIGHLIGHTS
- --------------------------------------------------------------------------------
KEY STATISTICS
5/31/98 11/30/98
- --------------------------------------------------------------------------------
Price Per Share $9.57 $9.59
................................................................................
Dividends Per Share
................................................................................
For 6 months 0.31 0.31
................................................................................
For 12 months 0.63 0.62
................................................................................
Dividend Yield *
................................................................................
For 6 months 6.67% 6.45%
................................................................................
For 12 months 6.89 6.66
................................................................................
30-Day Standardized Yield 6.36 6.23
................................................................................
Weighted Average Maturity (years) ** 7.6 7.1
................................................................................
Weighted Average Effective Duration (years) 3.6 3.2
................................................................................
Weighted Average Quality *** AAA AAA
................................................................................
* Dividends earned and reinvested for the periods indicated are annualized
and divided by the average daily net asset values per share for the same
period.
** Based on prepayment-adjusted life of GNMA securities.
*** Based on T. Rowe Price research.
SECTOR DIVERSIFICATION
Percent of Percent of
Net Assets Net Assets
5/31/98 11/30/98
- --------------------------------------------------------------------------------
GNMA Securities 104% 102%
................................................................................
Other Government Agency Securities 3 3
................................................................................
Short-Term Obligations 1 2
................................................................................
U.S. Treasury Obligations - 2
................................................................................
Other Assets Less Liabilities - 8 - 9
- --------------------------------------------------------------------------------
Total 100% 100%
6
<PAGE>
T. ROWE PRICE GNMA FUND
- --------------------------------------------------------------------------------
- ------------------------------
PERFORMANCE COMPARISON
- --------------------------------------------------------------------------------
This chart shows the value of a hypothetical $10,000 investment in the fund over
the past 10 fiscal year periods or since inception (for funds lacking 10-year
records). The result is compared with a broad-based average or index. The index
return does not reflect expenses, which have been deducted from the fund's
return.
GNMA FUND
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Salomon Lipper Fund-Line Fund-Area
Nov-88 10,000 10,000 10,000 10,000
Nov-89 11,423 11,223 11,262 11,262
Nov-90 12,539 12,171 12,267 12,267
Nov-91 14,414 13,813 13,925 13,925
Nov-92 15,716 14,940 15,058 15,058
Nov-93 16,835 16,010 16,103 16,103
Nov-94 16,563 15,561 15,738 15,738
Nov-95 19,324 18,045 18,489 18,489
Nov-96 20,760 19,184 19,556 19,556
Nov-97 22,385 20,578 20,988 20,988
Nov-98 24,028 22,053 22,504 22,504
- ----------------------------------------
AVERAGE ANNUAL COMPOUND TOTAL RETURN
- --------------------------------------------------------------------------------
This table shows how the fund would have performed each year if its actual (or
cumulative) returns for the periods shown had been earned at a constant rate.
Periods Ended 11/30/98 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
GNMA Fund 7.22% 6.77% 6.92% 8.45%
................................................................................
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original
purchase.
7
<PAGE>
T. ROWE PRICE GNMA FUND
- --------------------------------------------------------------------------------
Unaudited
- -----------------------
FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 Months Year 3 Months++ Year
Ended Ended Ended Ended
11/30/98 5/31/98 5/31/97 5/31/96 5/31/95 5/31/94 2/28/94
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 9.57 $ 9.30 $ 9.19 $ 9.51 $ 9.14 $ 9.60 $ 9.92
..........................................................................................
Investment activities
Net investment income 0.31 0.63 0.65 0.67 0.68 0.17 0.68
Net realized and
unrealized gain (loss) 0.02 0.27 0.11 (0.32) 0.37 (0.46) (0.32)
..........................................................................................
Total from
investment activities 0.33 0.90 0.76 0.35 1.05 (0.29) 0.36
..........................................................................................
Distributions
Net investment income (0.31) (0.63) (0.63) (0.67) (0.66) (0.17) (0.68)
Tax return of capital - - (0.02) - (0.02) - -
..........................................................................................
Total distributions (0.31) (0.63) (0.65) (0.67) (0.68) (0.17) (0.68)
..........................................................................................
NET ASSET VALUE
End of period $ 9.59 $ 9.57 $ 9.30 $ 9.19 $ 9.51 $ 9.14 $ 9.60
------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Total return* 3.44% 9.97% 8.46% 3.72% 12.11% (3.03)% 3.71%
.....................................................................................................................
Ratio of expenses to
average net assets 0.71%+ 0.70% 0.74% 0.74% 0.76% 0.76%+ 0.77%
.....................................................................................................................
Ratio of net investment
income to average
net assets 6.36%+ 6.67% 6.98% 7.04% 7.50% 7.24%+ 6.93%
.....................................................................................................................
Portfolio turnover rate 86.0%+ 120.6% 115.9% 113.6% 121.3% 151.8%+ 92.5%
.....................................................................................................................
Net assets, end of period
(in millions) $ 1,169 $ 1,123 $ 944 $ 904 $ 810 $ 802 $ 883
.....................................................................................................................
</TABLE>
* Total return reflects the rate that an investor would have earned on an
investment in the fund during each period, assuming reinvestment of all
distributions.
+ Annualized.
++ The fund's fiscal year-end was changed to May 31.
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
T. ROWE PRICE GNMA FUND
- --------------------------------------------------------------------------------
Unaudited November 30, 1998
<TABLE>
<CAPTION>
- -----------------------
STATEMENT OF NET ASSETS Par/Shares Value
- ------------------------------------------------------------------------------------
In thousands
U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES 105.4%
U.S. Government Guaranteed Obligations 105.4%
Government National Mortgage Assn.
<S> <C> <C>
I
6.00%, 11/15/23 - 7/15/28 $ 70,142 $ 69,536
........................................................................
6.50%, 6/15/23 - 10/15/28 134,906 136,311
........................................................................
7.00%, 4/15/17 - 9/15/28 166,818 170,863
........................................................................
7.50%, 3/15/07 - 11/15/28 147,386 152,362
........................................................................
8.00%, 3/15/14 - 10/15/28 140,911 147,236
........................................................................
8.50%, 12/15/04 - 11/15/27 37,435 39,938
........................................................................
9.00%, 4/15/16 - 9/15/24 38,038 40,781
........................................................................
9.50%, 6/15/09 - 12/15/24 8,037 8,700
........................................................................
10.00%, 10/15/15 - 3/15/26 30,206 33,199
........................................................................
10.50%, 1/15/13 - 11/15/21 2,677 2,978
........................................................................
11.00%, 2/15/10 - 6/15/19 581 653
........................................................................
11.50%, 4/15/10 - 7/15/20 2,747 3,128
........................................................................
12.00%, 5/15/11 - 8/15/15 3,513 4,065
........................................................................
12.50%, 4/15/10 - 7/15/15 1,304 1,520
........................................................................
13.00%, 1/15/11 - 8/15/15 576 676
........................................................................
13.50%, 5/15/10 - 1/15/15 933 1,097
........................................................................
II
6.50%, 3/20/26 - 11/20/28 20,876 21,059
........................................................................
8.00%, 10/20/24 - 5/20/27 18,484 19,190
........................................................................
8.50%, 4/20/16 - 2/20/23 13,626 14,501
........................................................................
10.00%, 9/20/16 - 5/20/25 1,075 1,177
........................................................................
11.00%, 2/20/14 - 9/20/20 1,353 1,518
........................................................................
11.50%, 12/20/13 - 7/20/20 943 1,072
........................................................................
12.50%, 10/20/13 - 1/20/16 147 171
........................................................................
13.00%, 10/20/13 - 9/20/15 419 491
........................................................................
Construction Loan, I
6.67%, 2/15/01 2,296 2,326
........................................................................
6.81%, 2/15/00 579 586
........................................................................
6.875%, 11/15/00 4,438 4,581
........................................................................
7.00%, 4/15/00 9,454 9,868
........................................................................
</TABLE>
9
<PAGE>
T. ROWE PRICE GNMA FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par/Shares Value
- ------------------------------------------------------------------------------------
In thousands
Government National Mortgage Assn.
GPM, I
<S> <C> <C>
8.75%, 6/15/17 - 6/15/22 $ 303 $ 323
........................................................................
9.00%, 5/15/09 - 3/15/14 276 295
........................................................................
9.25%, 5/15/16 - 8/15/21 3,797 4,076
........................................................................
9.50%, 6/15 - 11/15/09 1,654 1,793
........................................................................
9.75%, 4/15/16 - 2/15/21 3,062 3,327
........................................................................
10.25%, 1/15 - 2/15/18 59 65
........................................................................
10.75%, 2/15/16 - 4/15/19 514 572
........................................................................
11.00%, 8/15 - 9/15/10 162 181
........................................................................
11.50%, 2/15 - 6/15/13 42 48
........................................................................
12.00%, 10/15/10 - 2/15/13 256 294
........................................................................
12.25%, 1/15/14 - 2/15/15 103 118
........................................................................
12.50%, 4/15/10 - 10/15/12 400 464
........................................................................
12.75%, 10/15/13 - 6/15/14 165 192
........................................................................
GPM, II
9.25%, 2/20/16 95 102
........................................................................
9.75%, 3/20 - 7/20/21 80 86
........................................................................
10.25%, 3/20 - 9/20/16 26 29
........................................................................
11.00%, 9/20/13 - 1/20/14 52 58
........................................................................
12.25%, 1/20/14 - 10/20/15 126 144
........................................................................
12.75%, 10/20/13 - 7/20/15 183 212
........................................................................
Project Loan, I
6.30%, 11/15/33 3,598 3,635
........................................................................
7.75%, 3/15/20 3,932 4,247
........................................................................
8.00%, 11/15/12 - 11/15/17 6,302 6,748
........................................................................
8.50%, 1/15/27 389 405
........................................................................
9.25%, 10/15/23 9,631 10,153
........................................................................
REMIC
6.50%, 2/20/21 - 10/20/27 62,849 63,120
........................................................................
6.73%, 8/15/01 5,519 5,605
........................................................................
7.00%, 10/16/21 - 5/16/24 18,400 19,010
........................................................................
7.493%, 7/16/24 35,450 37,599
........................................................................
7.50%, 7/16/12 - 5/16/23 30,968 32,102
........................................................................
Interest Only, 8.00%, 6/16/23 ** 6,071 759
........................................................................
</TABLE>
10
<PAGE>
T. ROWE PRICE GNMA FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par/Shares Value
- ------------------------------------------------------------------------------------
In thousands
Government National Mortgage Assn.
<S> <C> <C>
TBA, I
6.50%, 1/1/28 $ 55,000 $ 55,567
........................................................................
8.00%, 1/1/28 12,000 12,484
........................................................................
Construction Loan, 6.67%, 6/15/38 10,441 10,582
........................................................................
Construction Loan, 6.73%, 1/1/38 14,304 14,527
........................................................................
Construction Loan, 6.81%, 6/30/38 2,241 2,268
........................................................................
Construction Loan, 6.875%, 4/30/38 4,920 5,078
........................................................................
Construction Loan, 7.00%, 1/1/38 9,226 9,629
...............................................................................
U. S. Department of Veteran Affairs, VR
REMIC
Interest Only, 0.3165%, 3/15/29 ** 158,290 1,657
........................................................................
7.25%, 10/15/08 10,545 11,089
........................................................................
7.50%, 5/15/24 18,750 19,764
........................................................................
9.54%, 3/15/25 3,364 3,687
...............................................................................
Total U.S. Government Mortgage-Backed Securities
(Cost $1,197,864) 1,231,677
.............
U.S. GOVERNMENT OBLIGATIONS 1.7%
U.S. Treasury Obligations 1.7%
U.S.Treasury Bonds
5.50%, 8/15/28 10,000 10,563
........................................................................
Strip, Zero Coupon, 2/15/16 24,000 9,580
........................................................................
Total U.S. Government Obligations (Cost $20,509) 20,143
.............
MONEY MARKET FUNDS 2.1%
Government Reserve Investment Fund, 4.77% # 24,130 24,130
...............................................................................
Total Money Market Funds (Cost $24,130) 24,130
.............
</TABLE>
11
<PAGE>
T. ROWE PRICE GNMA FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
- ------------------------------------------------------------------------------------
In thousands
<S> <C>
Total Investments in Securities
109.2% of Net Assets (Cost $1,242,503) $ 1,275,950
Including $110,016 Payable for Investments Securities Purchased (107,110)
NET ASSETS $ 1,168,840
-------------
Net Assets Consist of:
Accumulated net investment income - net of distributions $ (6,048)
Accumulated net realized gain/loss - net of distributions (15,854)
Net unrealized gain (loss) 33,447
Paid-in-capital applicable to 121,916,404 no par value shares of
benefitial interest outstanding; unlimited number of shares authorized 1,157,295
.............
NET ASSETS $ 1,168,840
-------------
NET ASSET VALUE PER SHARE $ 9.59
-------------
</TABLE>
** For Interest Only securities, amount represents notional principal on
which the fund receives interest
# Seven-day yield
GPM Graduated Payment Mortgage
REMIC Real Estate Mortgage Investment Conduit
TBA To be announced security was purchased on a forward commitment basis
VR Variable Rate
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
T. ROWE PRICE GNMA FUND
- --------------------------------------------------------------------------------
Unaudited
- -----------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
In thousands
6 Months
Ended
11/30/98
Investment Income
Interest income $ 41,009
.............
Expenses
Investment management 2,737
Shareholder servicing 1,120
Custody and accounting 164
Registration 51
Prospectus and shareholder reports 31
Proxy and annual meeting 13
Legal and audit 8
Trustees 5
Miscellaneous 3
.............
Total expenses 4,132
.............
Net investment income 36,877
.............
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 3,642
Change in net unrealized gain or loss on securities (1,569)
.............
Net realized and unrealized gain (loss) 2,073
.............
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 38,950
-------------
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
T. ROWE PRICE GNMA FUND
- --------------------------------------------------------------------------------
Unaudited
- -----------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
In thousands
6 Months Year
Ended Ended
11/30/98 5/31/98
Increase (Decrease) in Net Assets
Operations
Net investment income $ 36,877 $ 69,522
Net realized gain (loss) 3,642 3,526
Change in net unrealized gain or loss (1,569) 24,279
..........................
Increase (decrease) in net assets from operations 38,950 97,327
..........................
Distributions to shareholders
Net investment income (36,877) (69,522)
..........................
Capital share transactions *
Shares sold 111,786 274,655
Distributions reinvested 17,563 34,207
Shares redeemed (85,724) (157,571)
..........................
Increase (decrease) in net assets from capital
share transactions 43,625 151,291
..........................
Net Assets
Increase (decrease) during period 45,698 179,096
Beginning of period 1,123,142 944,046
..........................
End of period $1,168,840 $ 1,123,142
--------------------------
* Share information
Shares sold 11,649 28,810
Distributions reinvested 1,828 3,589
Shares redeemed (8,947) (16,533)
..........................
Increase (decrease) in shares outstanding 4,530 15,866
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
T. ROWE PRICE GNMA FUND
- --------------------------------------------------------------------------------
Unaudited November 30, 1998
- -----------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 and
commenced operations on November 26, 1985.
The accompanying financial statements are prepared in accordance with generally
accepted accounting principles for the investment company industry; these
principles may require the use of estimates by fund management.
Valuation Debt securities are generally traded in the over-the-counter market.
Investments in securities with original maturities of one year or more are
stated at fair value as furnished by dealers who make markets in such securities
or by an independent pricing service, which considers yield or price of bonds of
comparable quality, coupon, maturity, and type, as well as prices quoted by
dealers who make markets in such securities. Securities with original maturities
of less than one year are stated at fair value, which is determined by using a
matrix system that establishes a value for each security based on money market
yields.
Investments in mutual funds are valued at the closing net asset value per share
of the mutual fund on the day of valuation.
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.
Premiums and Discounts Premiums and discounts on all mortgage-backed securities
(MBS) are recognized upon disposition or principal repayment as gain or loss for
financial reporting purposes. For tax purposes, premiums and discounts on MBS
acquired on or before June 8, 1997, are recognized upon disposition or principal
repayment as ordinary income. For MBS acquired after June 8, 1997, premiums are
recognized as gain or loss; discounts are recognized as gain or loss, except to
the extent of accrued market discount.
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.
15
<PAGE>
T. ROWE PRICE GNMA FUND
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT TRANSACTIONS
Purchases and sales of U.S. government securities, aggregated $572,331,000 and
$532,830,000, respectively, for the six months ended November 30, 1998.
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. As of May 31, 1998, the fund has capital loss carryforwards for
federal income tax purposes of $19,496,000, of which $9,253,000 expires in 2002,
$1,747,000 in 2003, and $8,496,000 in 2005. The fund intends to retain gains
realized in future periods that may be offset by available capital loss
carryforwards.
At November 30, 1998, the cost of investments for federal income tax was
substantially the same as for financial reporting purposes and totaled
$1,242,503,000. Net unrealized gain aggregated $33,447,000 at period end, of
which $34,730,000 related to appreciated investments and $1,283,000 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 $452,000 was payable at November 30, 1998. The fee is computed daily
and paid monthly, and consists 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 0.30% for assets in excess of $80 billion. At
November 30, 1998, and for the six months then ended, the effective annual group
fee rate was 0.32%. 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 two
wholly owned subsidiaries of the manager, pursuant to which the fund receives
certain other services. The manager computes the daily share price and maintains
the financial records of the fund. T. Rowe Price Services, Inc. is the fund's
16
<PAGE>
T. ROWE PRICE GNMA FUND
- --------------------------------------------------------------------------------
transfer and dividend disbursing agent and provides shareholder and
administrative services to the fund. T. Rowe Price Retirement Plan Services,
Inc., provides subaccounting and recordkeeping services for certain retirement
accounts invested in the fund. The fund incurred expenses pursuant to these
related party agreements totaling approximately $538,000 for the six months
ended November 30, 1998, of which $96,000 was payable at period-end.
Additionally, the fund is one of several T. Rowe Price-sponsored mutual funds
(underlying funds) in which the T. Rowe Price Spectrum Funds (Spectrum) may
invest. Spectrum does not invest in the underlying funds for the purpose of
exercising management or control. Expenses associated with the operation of
Spectrum are borne by each underlying fund to the extent of estimated savings to
it and in proportion to the average daily value of its shares owned by Spectrum,
pursuant to special servicing agreements between and among Spectrum, the
underlying funds, T. Rowe Price, and, in the case of T. Rowe Price Spectrum
International, Rowe Price-Fleming International. Spectrum Income Fund held
approximately 38.1% of the outstanding shares of the GNMA Fund at November 30,
1998. For the six months then ended, the fund was allocated $538,000 of Spectrum
expenses, $100,000 of which was payable at period-end.
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve Funds
are offered as cash management options only to mutual funds and other accounts
managed by T. Rowe Price and its affiliates and are not available to the public.
The Reserve Funds pay no investment management fees. Distributions from the
Reserve Funds to the fund for the six months ended November 30, 1998, totaled
$363,000 and are reflected as interest income in the accompanying Statement of
Operations.
17
<PAGE>
T. ROWE PRICE SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
INVESTMENT SERVICES AND INFORMATION
Knowledgeable Service Representatives
By Phone Shareholder service representatives are available from 8 a.m. to 10
p.m. ET Monday through Friday and from 8:30 a.m. to 5 p.m. ET on weekends. 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. You can also
drop off applications or obtain prospectuses and other literature at these
centers.
Automated 24-Hour Services
Tele*Access(R) Call 1-800-638-2587 to obtain information such as account
balance, date and amount of your last transaction, latest dividend payment, fund
prices, and yields. Additionally, you have the ability to request prospectuses,
statements, and account and tax forms; to reorder checks; and to initiate
purchase, redemption, and exchange orders for identically registered accounts.
Internet. T. Rowe Price Web site: www.troweprice.com All the information and
services available on Tele*Access are available on our Web site, including
transactions in your fund and Discount Brokerage accounts (with preauthorized
access).
Account Services
Checking Write checks for $500 or more on any money market and most bond fund
accounts (except the High Yield and Emerging Markets Bond Funds).
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 $50 minimum makes it
easy to get started.
18
<PAGE>
T. ROWE PRICE SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
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.
DISCOUNT BROKERAGE*
Investments Available You can trade stocks, bonds, options, precious metals,
mutual funds, and other securities at a savings over regular commission rates.
To Open an Account Call a shareholder service representative for more
information.
INVESTMENT INFORMATION
Combined Statement A comprehensive overview of your T. Rowe Price accounts is
provided. The summary page gives you earnings by tax category, provides total
portfolio value, and lists your investments by type. Detail pages itemize
account transactions.
Shareholder Reports Portfolio managers review the performance of the funds in
plain language and discuss T. Rowe Price's economic outlook.
T. Rowe Price Report This is a quarterly newsletter with relevant articles on
market trends, personal financial planning, and T. Rowe Price's economic
perspective.
Performance Update This quarterly report reviews recent market developments and
provides comprehensive performance information for every T. Rowe Price fund.
Insights This library of information includes reports on mutual fund tax issues,
investment strategies, and financial markets.
Detailed Investment Guides Our widely acclaimed Asset Mix Worksheet, College
Planning Kit, Diversifying Overseas: A Guide to International Investing,
Retirees Financial Guide, and Retirement Planning Kit (also available on disk or
CD-ROM for PC use) can help you determine and reach your investment goals.
*A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
19
<PAGE>
T. ROWE PRICE MUTUAL FUNDS
- --------------------------------------------------------------------------------
STOCK FUNDS
................................................................................
Domestic
Blue Chip Growth
Capital Appreciation
Capital Opportunity
Diversified Small-Cap Growth
Dividend Growth
Equity Income
Equity Index 500*
Extended Equity Market Index
Financial Services
Growth & Income
Growth Stock
Health Sciences
Media & Telecommunications
Mid-Cap Growth
Mid-Cap Value
New America Growth
New Era
New Horizons**
Real Estate
Science & Technology
Small-Cap Stock
Small-Cap Value
Spectrum Growth
Total Equity Market Index
Value
International/Global
Emerging Markets Stock
European Stock
Global Stock
International Discovery
International Stock
Japan
Latin America
New Asia
Spectrum International
BOND FUNDS
................................................................................
Domestic Taxable
Corporate Income
GNMA
High Yield
New Income
Short-Term Bond
Short-Term U.S. Government
Spectrum Income
Summit GNMA
Summit Limited-Term Bond
U.S. Treasury Intermediate
U.S. Treasury Long-Term
Domestic Tax-Free
California Tax-Free Bond
Florida Intermediate Tax-Free***
Georgia Tax-Free Bond
Maryland Short-Term
Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Summit Municipal Intermediate
Tax-Free High Yield
Tax-Free Income
Tax-Free Intermediate Bond+
Tax-Free Short-Intermediate
Virginia Short-Term
Tax-Free Bond
Virginia Tax-Free Bond
International/Global
Emerging Markets Bond
Global Bond++
International Bond
MONEY MARKET FUNDS+++
................................................................................
Taxable
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
Tax-Free
California Tax-Free Money
New York Tax-Free Money
Summit Municipal
Money Market
Tax-Exempt Money
BLENDED ASSET FUNDS
................................................................................
Balanced
Personal Strategy Balanced
Personal Strategy Growth
Personal Strategy Income
Tax-Efficient Balanced
T. ROWE PRICE NO-LOAD
VARIABLE ANNUITY
................................................................................
Equity Income Portfolio
International Stock Portfolio
Limited-Term Bond Portfolio
Mid-Cap Growth Portfolio
New America Growth Portfolio
Personal Strategy Balanced Portfolio
Prime Reserve Portfolio
*Formerly named Equity Index.
**Closed to new investors.
***Formerly named Florida Insured Intermediate Tax-Free.
+Formerly named Tax-Free Insured Intermediate Bond.
++Formerly named Global Government Bond.
+++Neither the funds nor their share prices are insured or guaranteed by the
U.S. government.
Please call for a prospectus. Read it carefully before investing.
The T. Rowe Price No-Load Variable Annuity [#V6021] is issued by Security
Benefit Life Insurance Company. In New York, it [#FSB201(11-96)] is issued by
First Security Benefit Life Insurance Company of New York, White Plains, NY. T.
Rowe Price refers to the underlying portfolios' investment managers and the
distributors, T. Rowe Price Investment Services, Inc.; T. Rowe Price Insurance
Agency, Inc.; and T. Rowe Price Insurance Agency of Texas, Inc. The Security
Benefit Group of Companies and the T. Rowe Price companies are not affiliated.
The variable annuity may not be available in all states. The contract has
limitations. Call a representative for costs and complete details of the
coverage.
20
<PAGE>
T. ROWE PRICE GNMA FUND
- --------------------------------------------------------------------------------
- ------------------------------------------------------------
ANNUAL MEETING RESULTS
- --------------------------------------------------------------------------------
The GNMA Fund held an annual meeting on October 15, 1998, to elect directors of
the fund and to ratify the Board of Directors' selection of
PricewaterhouseCoopers L.L.P. as the fund's independent accountants.
The results of voting were as follows (by number of shares):
For nominees to the Board of Directors of the GNMA Fund:
Calvin W. Burnett
In favor: 76,748,321.087
Withheld: 1,691,205.469
Anthony W. Deering
In favor: 77,165,580.169
Withheld: 1,273,946.387
F. Pierce Linaweaver
In favor: 76,945,531.346
Withheld: 1,493,995.210
William T. Reynolds
In favor: 77,241,234.723
Withheld: 1,198,291.833
James S. Riepe
In favor: 77,212,393.463
Withheld: 1,227,133.093
John G. Schreiber
In favor: 77,301,879.326
Withheld: 1,137,647.230
M. David Testa
In favor: 77,237,406.185
Withheld: 1,202,120.371
For PricewaterhouseCoopers L.L.P.
as independent accountants:
In favor: 76,295,056.374
Withheld: 779,641.003
Abstained: 1,364,829.179
21
<PAGE>
For yield, price, last transaction, current balance, or to conduct transactions,
24 hours, 7 days a week, call Tele*Access(R): 1-800-638-2587 toll free
For assistance with your existing fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
410-625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
www.troweprice.com
T. Rowe Price Associates
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.
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
[LOGO OF T. ROWE PRICE APPEARS HERE]
T. Rowe Price Investment Services, Inc., Distributor. F70-051 11/30/98
