Fellow Shareholders
The bond market rally that got under way in late 1994 strengthened
during your fund's final fiscal quarter, overcoming 1994's weak
performance. The net result was double-digit returns for many bond
funds, including yours, for the 12-month period ended May 31.
Market Environment
A happy ending was hardly assured when your fund's fiscal year began
last June. The Federal Reserve was raising the federal funds rate
(the overnight lending rate among banks) in a series of steps to
cool the economy and dampen inflationary expectations. Longer-term
rates also rose as investors worried about inflation. When the Fed's
efforts to curb growth seemed ineffective as the year wore on, bond
yields soared and prices plunged.
Nevertheless, the bear gave way to the bull as 1994 drew to a
close. Attractive yields, evidence of stable inflation, and hints
that Fed policy was beginning to take hold bolstered demand for
bonds, triggering a strong turnaround and improving returns.
During the fund's last quarter, intermediate- and long-term
rates fell significantly, but short-term rates were more stable. The
result was a significant flattening of the yield curve, meaning
there was little difference between yields on short- and long-term
bonds. The chart shows both the sharp
Chart1 - Treasury Yield Curves
jump in yields across the spectrum of Treasury issues between May
31, 1994, and November 4, when the 30-year bond yield peaked, and
also the subsequent drop in yields, particularly in the 2- to
10-year maturity range. As your fund's year ended, only maturities
longer than 10 years offered much yield advantage over money market
securities.
Performance and Strategy Review
Our conservative approach proved timely during the negative market
environment, cushioning the fund against the worst of the drop in
bond prices and enabling it to outperform its Lipper peer group
average in each of the first three fiscal quarters. During the final
quarter, we were a bit surprised by the extent of the economy's
slowdown and consequent surge in bond prices. Reflecting our more
defensive posture, the fund lagged its peer group for this
three-month period. For the year, however, your fund's 11.13% return
compared favorably with the Lipper group's 10.67% average, as shown
below. For both periods, returns
slightly trailed the unmanaged Lehman Brothers Aggregate Bond Index.
Performance Comparison
Periods Ended 5/31/95
_____________________
3 Months 12 Months
_____________________
New Income Fund 5.63% 11.13%
Lehman Brothers Aggregate
Bond Index 5.97 11.48
Lipper Average of Corporate
Bond Funds - A-Rated 6.32 10.67
We made few changes to the portfolio during the quarter,
maintaining a fairly even allocation among U.S. Government
securities, mortgage-backed securities, and corporate bonds. Over
the course of the year, we gradually trimmed our corporate position
from over half of the portfolio to less than one-third in order to
increase government securities, as shown in the Portfolio
Diversification chart.
Chart2 - Portfolio Diversification
Although corporate bonds performed well on a relative basis
throughout the year, our concern was to prepare the portfolio for
the slower economy we believed would follow the Fed's tighter
monetary policy. When growth slows markedly, investors typically
favor higher-quality issues, which then tend to show the best
results. As you can see in the table following this report, the
fund's overall credit quality rose during the year.
We continued to like the above-average income and high credit
quality provided by mortgage-backed securities and maintained our
allocation in the 30% to 33% range all year. These securities
performed well as interest rates climbed because prepayments fell
sharply, but lagged during the most recent three-month period, as
falling rates raised fears of a future increase in prepayments.
However, we do not expect prepayments to come close to matching the
levels of the pre-1994 falling interest rate cycle, so they should
not have as unfavorable an impact on prices of mortgage securities.
The fund's weighted average maturity (10.1 years) and weighted
average effective duration (5.1 years) are both slightly higher than
a year ago but are lower than at the end of the previous quarter.
(Duration measures price sensitivity to interest rate changes; a
duration of five years means that the fund's price can be expected
to rise or fall by 5% for each percentage point change in the level
of interest rates.) As mentioned earlier, little or no yield is
gained by extending out on the yield curve, but principal risk
increases.
Summary and Outlook
Reacting to the economy's unexpectedly sharp slowdown in the first
quarter and signs of a bigger dip in the second, investors pushed
bond prices higher and interest rates lower in recent weeks. The
rally was also spurred by hopeful signs that the budget deficit may
be reduced, and by speculation that the Federal Reserve might soon
cut the fed funds rate.
With hindsight, our outlook for the bond market last quarter
was not optimistic enough, since the rally had plenty of steam left.
Nevertheless, we believe rates will not drop sharply from current
levels and bond returns in coming months will be powered more by
income than by robust appreciation. Without question, the much
ballyhooed soft landing has hit some bumps, but we do not expect the
expansion to veer off the runway. Rather, we foresee a gradual
return by year-end to an annualized rate of growth closer to the
long-term trend of 2% to 2.5%.
In this environment, we expect to maintain our emphasis on
quality. Narrow yield differences among investment-grade corporates
are bound to widen, in our view, particularly if the economy remains
soft. This would benefit our higher-grade holdings. In addition, we
will maintain our slightly overweighted position in mortgages, both
for their incremental yield and because they should outperform
Treasuries if the prepayment threat has been overestimated. With
this strategy, we anticipate solid results for your fund in the
coming months.
Respectfully submitted,
Charles P. Smith
President and Chairman of the
Investment Advisory Committee
June 19, 1995
Statistical Highlights
T. Rowe Price New Income Fund / May 31, 1995
Key Statistics
Periods Ended
Dividend Yield* 5/31/95
___________________________ _______________
3 Months 6.95%
12 Months 6.97
Dividend Per Share
___________________________
3 Months $0.15
12 Months 0.58
Change in Price Per Share
___________________________
3 Months (From $8.64 to $8.97) $0.33
12 Months (From $8.65 to $8.97) 0.32
*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.
Quality Diversification
Percent of Net Assets
TRPA Quality Rating* 5/31/94 2/28/95 5/31/95
__________________ _______ _______ _______
1 45% 72% 71%
2 13 8 9
3 28 12 12
4 13 7 7
Below 4 1 1 1
________________________________________________________________
Weighted Average 2.1 1.6 1.6
*On a scale of 1 to 10, with Grade 1 representing highest quality.
Maturity Diversification
Percent of Net Assets
Range 5/31/94 2/28/95 5/31/95
__________________ _______ _______ _______
Short-Term
(0 to 1 Year) 6% 3% 6%
Short Intermediate-
Term (1+ to 5 Years) 43 26 18
Long Intermediate-
Term (5+ to 10 Years) 28 39 47
Long-Term
(Over 10 Years) 23 32 29
________________________________________________________________
Weighted Average
Maturity 9.1 yrs. 10.7 yrs. 10.1 yrs.
________________________________________________________________
Weighted Average
Effective Duration 4.9 yrs. 5.3 yrs. 5.1 yrs.
Sector Diversification*
Percent of Net Assets
5/31/94 2/28/95 5/31/95
_______ _______ _______
U.S. Governments,
Agencies and
Agency-Backed 45% 70% 68%
Banking 14 5 6
Industrial 8 4 4
Electric Utilities 6 4 4
Finance and Credit 4 2 2
U.S. $ Denominated
Foreign Securities 3 2 2
Commercial Paper 0 0 2
Telephone 3 2 2
*Sectors representing at least 2% of net assets on 5/31/95.
Chart3 - Fiscal Year Performance Comparison
Average Annual Compound Total Return
Periods Ended May 31, 1995
1 Year 5 Years 10 Years
_______ ________ _________
11.13% 9.13% 9.14%
Note: For the above periods ended 3/31/95, the fund's
returns were 4.79%, 8.43%, and 9.12%, respectively.
Total return and principal value represent past performance
and will vary. Shares may be worth more or less at
redemption than at original purchase.
Investment Record
T. Rowe Price New Income Fund
The table below shows the investment record of one share of the T.
Rowe Price New Income Fund purchased at the original offering price
of $10.00. Over this time, interest rates have been volatile. The
results shown should not be considered a representation of the
dividend income or capital gain or loss which may be realized from
an investment made in the fund today.
With
Dividends
With and
Capital Divi- Capital
Fiscal Net Income Gain dends Gains
Year Asset Divi- Distri- Rein- Rein- Total
Ended Value dends butions2 vested vested2 Return
______ ______ ______ _________ ______ ________ _______
12/31/731$ 9.97 - $ 9.97 $ 9.97 -0.30%
1974 9.39 $0.66 10.07 10.07 1.00
1975 9.66 0.79 11.27 11.27 11.92
1976 10.23 0.78 12.93 12.93 14.76
1977 10.01 0.77 13.66 13.66 5.65
1978 9.66 0.76 $0.01 14.26 14.29 4.56
1979 9.22 1.18 4 15.42 15.44 8.09
1980 8.35 1.13 15.86 15.88 2.86
1981 7.79 1.07 16.95 16.97 6.86
1982 8.46 1.07 21.03 21.07 24.12
2/28/833 8.56 0.17 21.71 21.75 3.23
1984 8.24 0.95 5 23.40 23.44 7.79
1985 8.18 0.94 26.06 26.10 11.34
1986 8.95 0.88 31.64 31.69 21.40
1987 9.17 0.75 35.17 35.23 11.17
1988 8.76 0.76 36.67 36.73 4.27
1989 8.26 0.81 38.02 38.08 3.67
1990 8.37 0.75 42.10 42.16 10.73
1991 8.60 0.70 0.01 47.00 47.12 11.77
1992 8.94 0.67 0.02 52.74 52.97 12.40
1993 9.24 0.57 58.08 58.33 10.12
1994 9.12 0.54 0.07 60.73 61.45 5.36
5/31/946 8.65 0.14 0.07 58.54 59.71 -2.84
1995 8.97 0.58 0.02 64.93 66.35 11.13
________________________________________________________________
Total $17.42 $0.20
1 From inception 8/31/73 to 12/31/73.
2 Includes long-term capital gain of $0.01 on 1/4/78;
short-term capital gain of $0.01 on 12/31/90;
short-term capital gain of $0.02 on 12/31/91;
long-term capital gain of $0.07 on 12/31/93;
long-term capital gain of $0.07 on 3/31/94; and
long-term capital gain of $0.02 on 6/30/94.
3 Fiscal year-end changed from December 31 to February 28;
figures are for two months from 1/1/83 to 2/28/83.
4 Declaration of dividends changed from quarterly to
monthly.
5 Declaration of dividends changed from monthly to daily.
6 Fiscal year-end changed from February 28 to May 31;
figures are for three months from 3/1/94 to 5/31/94.
Statement of Net Assets
T. Rowe Price New Income Fund / May 31, 1995
(amounts in thousands)
Corporate Bonds & Notes - 23.9%
Amount Value
___________ ___________
BANKING - 5.5%
ABN AMRO Bank Chicago, N.V., Sub.
Notes, 7.25%, 5/31/05. . . . . . . . . . . $ 5,000 $ 5,103
Banesto Delaware, Gtd. Notes,
8.25%, 7/28/02 . . . . . . . . . . . . . . 5,700 5,907
Bank of Scotland International,
(144a), 8.80%, 1/27/04 . . . . . . . . . . 10,000 11,049
Banque Paribas, 8.35%, 6/15/07 . . . . . . . . 7,500 8,032
First Chicago, MTN, 5.50%, 4/15/96 . . . . . . 5,000 4,968
8.20%, 11/14/96. . . . . . . . . . . . . . 5,000 5,136
First National Bank Boston,
8.375%, 12/15/02 . . . . . . . . . . . . . 8,000 8,576
First USA Bank Wilmington,
4.55%, 8/23/95 . . . . . . . . . . . . . . 10,000 9,982
4.80%, 9/15/95 . . . . . . . . . . . . . . 5,000 4,994
Mercantile Bankshares, Sr. Notes,
6.13%, 7/15/98
(Private Placement). . . . . . . . . . . . 5,000 4,874
Napa Valley Bancorp, Sr. Notes,
10.87%, 6/30/95. . . . . . . . . . . . . . 5,000 5,037
PNC Bank N.A., Sub. Notes,
7.875%, 4/15/05. . . . . . . . . . . . . . 12,000 12,617
86,275
BEVERAGES - 0.2%
Seagram (Joseph E.) & Sons, Notes,
7.00%, 4/15/08 . . . . . . . . . . . . . . 3,000 2,952
ELECTRIC UTILITIES - 4.0%
Alabama Power, 1st Mtg. Bonds,
7.75%, 2/1/23. . . . . . . . . . . . . . . 3,650 3,712
Commonwealth Edison, 1st Mtg. Bonds,
9.375%, 2/15/00. . . . . . . . . . . . . . 5,000 5,517
Consumers Power, 1st Mtg. Bonds,
6.375%, 9/15/03. . . . . . . . . . . . . . 5,000 4,702
Cooperative Utility Trust, Equip. Trust
Cert., 10.70%, 9/15/17 . . . . . . . . . . 2,500 2,829
Florida Power & Light, MTN,
4.85%, 6/24/96 . . . . . . . . . . . . . . 4,600 4,538
Georgia Power, 1st Mtg. Bonds,
7.625%, 3/1/23 . . . . . . . . . . . . . . 5,750 5,290
7.95%, 2/1/23. . . . . . . . . . . . . . . 3,300 3,437
Gulf States Utilities, 1st Mtg. Bonds,
5.375%, 2/1/97 . . . . . . . . . . . . . . 4,000 3,780
Long Island Lighting, 1st Mtg. Bonds,
5.50%, 4/1/97. . . . . . . . . . . . . . . 5,500 5,357
Monongahela Power, 8.625%, 11/1/21 . . . . . . 4,720 5,057
Northern Indiana Public Service, MTN,
6.90%, 6/1/00. . . . . . . . . . . . . . . 5,000 5,050
Pacificorp, MTN, 7.12%, 8/15/02. . . . . . . . 3,900 3,981
Southern California Edison, 1st Mtg. Bonds,
9.25%, 6/15/21 . . . . . . . . . . . . . . 5,000 5,343
Texas Utilities Electric, 1st Mtg. Bonds,
7.875%, 3/1/23 . . . . . . . . . . . . . . 3,450 3,394
61,987
FINANCE & CREDIT - 2.1%
Advanta, Notes, 5.125%, 11/15/96 . . . . . . . 10,000 9,802
American General Finance,
7.25%, 5/5/15. . . . . . . . . . . . . . . 6,000 6,150
GPA Leasing USA Sub I, Equip. Trust Cert.,
(144a), 9.125%, 12/2/96. . . . . . . . . . 9,518 8,917
Lehman Brothers, 7.625%, 8/1/98. . . . . . . . 8,000 8,058
32,927
INDUSTRIALS - 4.2%
Clark Equipment, MTN, 5.57%, 6/11/96 . . . . . 5,000 4,953
Clorox, Notes, 8.80%, 7/15/01. . . . . . . . . 5,000 5,534
Deere & Company, MTN, 8.78%, 3/16/98 . . . . . 9,000 9,156
Ford Holdings, Gtd. Notes,
9.25%, 3/1/00. . . . . . . . . . . . . . . 5,000 5,522
MCA Funding, MTN, 4.88%, 5/20/96 . . . . . . . 5,000 4,872
Monsanto, Deb., 8.20%, 4/15/25 . . . . . . . . $ 11,500 $ 12,125
Qantas Airways, Sr. Notes, (144a),
6.625%, 6/30/98. . . . . . . . . . . . . . 7,000 6,968
United Technologies, Deb.,
8.875%, 11/15/19 . . . . . . . . . . . . . 4,340 5,001
Weyerhaeuser, Notes, 9.05%, 2/1/03 . . . . . . 10,600 11,969
66,100
INVESTMENT DEALERS - 1.0%
Bear Stearns, 7.625%, 4/15/00. . . . . . . . . 5,000 5,165
Morgan Stanley Group, 6.75%, 3/4/03. . . . . . 5,000 4,866
Paine Webber Group, 8.875%, 3/15/05. . . . . . 5,000 5,381
15,412
MISCELLANEOUS - 1.6%
Capital Cities/ABC, Notes,
8.75%, 8/15/21 . . . . . . . . . . . . . . 7,900 9,090
Kaiser Foundation Health Plan, Notes,
9.00%, 11/1/01 . . . . . . . . . . . . . . 10,325 11,559
Waste Management, Deb.,
7.875%, 8/15/96. . . . . . . . . . . . . . 5,000 5,091
25,740
PETROLEUM - 1.4%
BP America, Gtd. Notes, 8.50%, 4/15/01 . . . . 5,000 5,481
Mobil, Deb., 7.625%, 2/23/33 . . . . . . . . . 9,250 9,350
Texaco Capital, Deb., 8.65%, 1/30/98 . . . . . 6,000 6,320
21,151
RAILROADS - 0.4%
Consolidated Rail, Deb., 9.75%, 6/15/20. . . . 5,000 6,258
RETAIL - 0.7%
Dayton Hudson, Notes, 7.875%, 6/15/23. . . . . 5,000 5,027
9.40%, 2/15/01 . . . . . . . . . . . . . . 5,620 6,297
11,324
SAVINGS & LOAN - 0.7%
CENFED Financial, Sr. Deb., (144a),
11.17%, 12/15/01 . . . . . . . . . . . . . 5,000 5,375
Great Western Financial,
6.375%, 7/1/00 . . . . . . . . . . . . . . 6,000 5,897
11,272
TELEPHONE - 2.1%
AT&T, 8.35%, 1/15/25 . . . . . . . . . . . . . 5,000 5,266
Bellsouth Telecom, 7.875%, 8/1/32. . . . . . . 6,400 6,625
GTE, Deb., 9.375%, 12/1/00 . . . . . . . . . . 10,000 11,176
Pacific Bell, 6.625%, 10/15/34 . . . . . . . . 11,200 9,870
32,937
________________________________________________________________________
Total Corporate Bonds & Notes (Cost $362,012) 374,335
U.S. Government Mortgage-Backed Securities - 32.5%
U.S. GOVERNMENT GUARANTEED OBLIGATIONS - 29.4%
Government National Mortgage Assn., I,
6.00%, 12/15/23 - 4/15/24. . . . . . . . . 3,647 3,399
6.50%, 9/15/23 - 5/15/24 . . . . . . . . . 8,202 7,874
7.00%, 9/15/22 - 9/15/24 . . . . . . . . . 49,265 48,498
7.50%, 8/15/16 - 8/15/24 . . . . . . . . . 79,389 80,114
8.00%, 7/15/16 - 11/15/24. . . . . . . . . 57,931 60,014
8.50%, 9/15/16 - 5/15/25 . . . . . . . . . $ 53,938 $ 56,251
9.00%, 1/15/09 - 4/15/25 . . . . . . . . . 32,256 33,950
9.50%, 6/15/09 - 3/15/25 . . . . . . . . . 103,798 109,975
11.00%, 12/15/09 - 1/15/21 . . . . . . . . 30,797 34,098
11.50%, 3/15/10 - 10/15/15 . . . . . . . . 3,959 4,419
II, 7.00%, 12/20/23. . . . . . . . . . . . . . 1,622 1,583
9.00%, 6/20/16 - 5/20/22 . . . . . . . . . 11,879 12,357
GPM, I, 10.25%, 2/15/16 - 11/15/20 . . . . . . 7,265 7,862
460,394
U.S. GOVERNMENT AGENCY OBLIGATIONS - 3.1%
Federal Home Loan Mortgage, 6.50%,
11/1/04 - 6/1/24 . . . . . . . . . . . . . 12,474 12,007
7.00%, 2/1/24. . . . . . . . . . . . . . . 5,061 4,982
7.50%, 3/1 - 6/1/24. . . . . . . . . . . . 10,660 10,710
8.00%, 6/1/08. . . . . . . . . . . . . . . 175 179
9.00%, 3/1/21 - 5/1/22 . . . . . . . . . . 9,575 9,982
9.75%, 12/1/17 . . . . . . . . . . . . . . 3,314 3,472
10.50%, 2/1/01 - 8/1/20. . . . . . . . . . 1,652 1,767
11.00%, 5/1/11 - 7/1/20. . . . . . . . . . 741 797
11.50%, 6/1/01 . . . . . . . . . . . . . . 19 20
Federal National Mortgage Assn.,
8.75%, 3/1/10. . . . . . . . . . . . . . . 24 25
10.50%, 7/1/09 - 4/1/22. . . . . . . . . . 3,715 4,020
47,961
________________________________________________________________________
Total U.S. Government Mortgage-Backed Securities
(Cost $505,095) 508,355
U.S. Government Obligations - 35.6%
U.S. Treasury Bonds, 6.25%, 8/15/23. . . . . . 13,295 12,472
7.50%, 11/15/24. . . . . . . . . . . . . . 4,100 4,509
7.875%, 2/15/21. . . . . . . . . . . . . . 35,000 39,534
8.00%, 11/15/21. . . . . . . . . . . . . . 42,160 48,379
8.125%, 5/15/21. . . . . . . . . . . . . . 32,140 37,307
U.S. Treasury Notes, 5.875%, 2/15/04 . . . . . 125 121
6.375%, 8/15/02. . . . . . . . . . . . . . 10,000 10,087
6.50%, 8/15/97 . . . . . . . . . . . . . . 2,700 2,734
6.50%, 5/15/05 . . . . . . . . . . . . . . 31,000 31,475
6.875%, 3/31/97. . . . . . . . . . . . . . 11,750 11,959
6.875%, 8/31/99. . . . . . . . . . . . . . 13,180 13,579
7.125%, 9/30/99. . . . . . . . . . . . . . 6,375 6,633
7.25%, 11/30/96. . . . . . . . . . . . . . 7,360 7,504
7.25%, 5/15/04 . . . . . . . . . . . . . . 109,225 116,000
7.25%, 8/15/04 . . . . . . . . . . . . . . 14,300 15,203
7.50%, 12/31/96. . . . . . . . . . . . . . 2,945 3,018
7.50%, 11/15/01. . . . . . . . . . . . . . 42,000 44,953
7.50%, 5/15/02 . . . . . . . . . . . . . . 6,000 6,441
7.50%, 2/15/05 . . . . . . . . . . . . . . 16,750 18,158
7.75%, 11/30/99. . . . . . . . . . . . . . 87,000 92,696
7.875%, 11/15/04 . . . . . . . . . . . . . $ 32,215 $ 35,698
________________________________________________________________________
Total U.S. Government Obligations
(Cost $520,017) 558,460
Asset-Backed Securities - 2.1%
AUTO-BACKED - 1.4%
Daimler-Benz Auto Grantor Trust,
3.90%, 10/15/98. . . . . . . . . . . . . . 3,579 3,517
Ford Credit Grantor Trust,
4.30%, 7/15/98 . . . . . . . . . . . . . . 2,967 2,915
GMAC Grantor Trust, 4.15%, 3/15/98 . . . . . . 1,866 1,845
Olympic Automobile Receivable,
4.95%, 10/15/99. . . . . . . . . . . . . . 2,227 2,176
Premier Auto Trust, 4.22%, 3/2/99. . . . . . . 6,174 6,030
RCSB Grantor Trust, 7.75%, 11/15/96. . . . . . 595 594
Toyota Auto Receivables,
3.90%, 8/17/98 . . . . . . . . . . . . . . 3,133 3,074
Zions Auto Trust, 4.65%, 6/15/99 . . . . . . . 1,821 1,810
21,961
CREDIT CARD-BACKED - 0.6%
Standard Credit Card Trust, Credit Card
Participation Cert.,
9.375%, 8/10/96. . . . . . . . . . . . . . 10,000 10,003
WHOLE LOANS-BACKED - 0.1%
Home Equity Loan, REMIC,
5.65%, 11/15/14. . . . . . . . . . . . . . 952 918
_________________________________________________________________________
Total Asset-Backed Securities (Cost $33,287) 32,882
U.S. $ Denominated Foreign Securities1 - 2.3%
British Columbia Hydro & Power, Notes,
15.50%, 11/15/11 . . . . . . . . . . . . . . . 14,150 16,765
Inter-American Development Bank, Notes,
9.50%, 10/15/97. . . . . . . . . . . . . . . . 2,600 2,783
Province of Ontario, Deb.,
15.75%, 3/15/12. . . . . . . . . . . . . . 9,000 10,834
17.00%, 11/5/11. . . . . . . . . . . . . . 5,000 6,011
________________________________________________________________________
Total U.S. $ Denominated Foreign Securities
(Cost $36,471) 36,393
Certificate of Deposit - 1.0%
NBD Bank, N.A., 6.02%, 6/28/95
(Cost $15,000). . . . . . . . . . . . . . 15,000 15,000
Commercial Paper - 2.3%
Caisse des Depots et Consignations,
5.95%, 6/19/95 . . . . . . . . . . . . . . . . 7,400 7,374
Knight-Ridder, 5.95%, 6/19/95. . . . . . . . . 5,815 5,782
President & Fellows Harvard College,
6.15%, 6/1/95. . . . . . . . . . . . . . . 2,958 2,957
Prudential Funding, 6.00%, 7/3/95. . . . . . . 20,000 19,789
_________________________________________________________________________
Total Commercial Paper (Cost $35,910) 35,902
Total Investments in Securities - 99.7% of
Net Assets (Cost $1,507,792) . . . . . . . . . 1,561,327
Other Assets Less Liabilities . . . . . . . . $ 4,576
__________
Net Assets Consist of: Value
__________
Accumulated net investment income -
net of distributions . . . . . . . . . . . $ 2,666
Accumulated net realized gain/loss -
net of distributions . . . . . . . . . . . (12,875)
Net unrealized gain (loss) . . . . . . . . . . 53,535
Paid-in-capital applicable to
174,599,980 shares of $1.00 par
value capital stock outstanding;
300,000,000 shares authorized. . . . . . . 1,522,577
_________
NET ASSETS . . . . . . . . . . . . . . . . . . $1,565,903
__________
__________
NET ASSET VALUE PER SHARE. . . . . . . . . . . $8.97
_____
_____
1 - Marketable securities (payable in U.S. dollars) issued or
guaranteed by a foreign government or community.
GPM - Graduated Payment Mortgage
MTN - Medium Term Notes
REMIC - Real Estate Mortgage Investment Conduit
144a - Security was purchased pursuant to Rule 144a under the
Securities Act of 1933 and may not be resold subject
to that rule except to qualified institutional buyers
Statement of Operations
T. Rowe Price New Income Fund / Year Ended May 31, 1995
(in thousands)
INVESTMENT INCOME
Interest income. . . . . . . . . . . . . . . . . . . . . . . $109,553
_________
Expenses
Investment management . . . . . . . . . . . . . . . . . . 6,972
Shareholder servicing . . . . . . . . . . . . . . . . . . 3,334
Custodian and accounting. . . . . . . . . . . . . . . . . 427
Prospectus and shareholder reports. . . . . . . . . . . . 150
Proxy and annual meeting. . . . . . . . . . . . . . . . . 59
Registration. . . . . . . . . . . . . . . . . . . . . . . 45
Legal and audit . . . . . . . . . . . . . . . . . . . . . 33
Directors . . . . . . . . . . . . . . . . . . . . . . . . 25
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . 26
_________
Total expenses. . . . . . . . . . . . . . . . . . . . . . 11,071
_________
Net investment income. . . . . . . . . . . . . . . . . . . . 98,482
_________
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on securities . . . . . . . . . . . (11,115)
Change in net unrealized gain or loss on securities. . . . . 68,296
_________
Net realized and unrealized gain (loss). . . . . . . . . . . 57,181
_________
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS. . . . . . $155,663
_________
_________
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Net Assets
T. Rowe Price New Income Fund
(in thousands)
Three
Year Ended Months Ended Year Ended
May 31, 1995 May 31, 1994# Feb. 28, 1994
___________ ____________ ___________
INCREASE (DECREASE) IN NET
ASSETS FROM
Operations
Net investment
income . . . . . . . . $ 98,482 $ 22,707 $ 89,878
Net realized gain
(loss) . . . . . . . . (11,115) 1,015 24,262
Change in net unrealized
gain or loss . . . . . 68,296 (65,071) (32,142)
__________ __________ __________
Increase (decrease) in
net assets from
operations . . . . . . 155,663 (41,349) 81,998
__________ __________ __________
Distributions to
shareholders
Net investment
income . . . . . . . . (95,838) (22,682) (89,878)
Net realized
gain . . . . . . . . . (2,632) (11,110) (11,782)
__________ __________ __________
Decrease in net
assets from
distributions. . . . . (98,470) (33,792) (101,660)
__________ __________ __________
Capital share transactions*
Shares sold. . . . . . . 355,522 60,807 323,889
Distributions
reinvested . . . . . . 85,120 30,328 90,466
Shares redeemed. . . . . (306,988) (98,897) (464,033)
__________ __________ __________
Increase (decrease) in
net assets from
capital share
transactions . . . . . 133,654 (7,762) (49,678)
__________ __________ __________
Increase (decrease) in net
assets . . . . . . . . . 190,847 (82,903) (69,340)
NET ASSETS
Beginning of period. . . . 1,375,056 1,457,959 1,527,299
__________ __________ __________
End of period. . . . . . . $1,565,903 $1,375,056 $1,457,959
__________ __________ __________
__________ __________ __________
*Share information
Shares sold. . . . . . . 41,628 6,891 34,796
Distributions
reinvested . . . . . . . 9,921 3,456 9,735
Shares redeemed. . . . . (35,940) (11,216) (49,912)
__________ __________ __________
Increase (decrease)
in shares
outstanding. . . . . . 15,609 (869) (5,381)
__________ __________ __________
__________ __________ __________
# The fund's fiscal year-end was changed to May 31.
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
T. Rowe Price New Income Fund / May 31, 1995
Note 1 - Significant Accounting Policies
T. Rowe Price New Income Fund (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 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 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 - Except for mortgage-backed securities,
premiums and discounts on debt securities are amortized for both
financial and tax reporting purposes. In accordance with federal
income tax regulations, market discounts and premiums on
mortgage-backed securities are included in the gain or loss recorded
upon principal repayment of the security for financial reporting
purposes and 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 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 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 and enhance
performance. The investment objective, policies, program, risk
factors, and following practices of the fund are described more
fully in the fund's Prospectus and Statement of Additional
Information.
A) Securities Lending - To earn additional income, the fund lends
its securities to approved brokers. At May 31, 1995, the market
value of securities on loan was $378,467,000, for which the fund was
fully collateralized by cash. Although the risk is mitigated by the
collateral, the fund could experience a delay in recovering its
securities and a possible loss of income or value if the borrower
fails to return them.
B) Other - Purchases and sales of portfolio securities, other than
short-term and U.S. Government securities, aggregated $89,595,000
and $450,343,000, respectively, for the year ended May 31, 1995.
Purchases and sales of U.S. Government securities aggregated
$735,378,000 and $307,514,000, respectively,for the year ended May
31, 1995.
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 an unused
realized capital loss carryforward for federal income tax purposes
of $1,115,000 which expires in 2003. The fund intends to retain
gains realized in future periods that may be offset by available
capital loss carryforwards.
At May 31, 1995, the aggregate cost of investments for federal
income tax and financial reporting purposes was $1,507,792,000 and
net unrealized gain aggregated $53,535,000, of which $64,722,000
related to appreciated investments and $11,187,000 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 $642,000 was payable at May 31,
1995. 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 0.31% for assets in
excess of $34 billion. At May 31, 1995, and for the year then ended,
the effective annual Group Fee rate was 0.34%. 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. (TRPS) is the fund's
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. Additionally, 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 among 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.
The fund incurred expenses pursuant to these related party
agreements totaling approximately $3,124,000 for the year ended May
31, 1995, of which $318,000 was payable at year-end.
<TABLE>
<CAPTION>
Financial Highlights
T. Rowe Price New Income Fund
For a share outstanding throughout each period
________________________________________________________________________
Three Months Year ended
Year ended ended ____________________________________________
May 31, May 31, Feb. 28, Feb. 28, Feb. 29, Feb. 28,
1995 1994# 1994 1993 1992 1991
________ __________ _______ _______ _______ _______
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD . . . . . . $8.65 $9.12 $9.24 $8.94 $8.60 $8.37
_____ _____ _____ _____ _____ _____
Investment Activities
Net investment
income. . . . . . . . . . . . 0.58 0.14 0.54 0.57 0.67 0.70
Net realized and unrealized
gain (loss) . . . . . . . . . 0.34 (0.40) (0.05) 0.30 0.36 0.24
_____ _____ _____ _____ _____ _____
Total from Investment
Activities. . . . . . . . . . 0.92 (0.26) 0.49 0.87 1.03 0.94
_____ _____ _____ _____ _____ _____
Distributions
Net investment income . . . . . (0.58) (0.14) (0.54) (0.57) (0.67) (0.70)
Net realized gain . . . . . . . (0.02) (0.07) (0.07) - (0.02) (0.01)
_____ _____ _____ _____ _____ _____
Total Distributions . . . . . . (0.60) (0.21) (0.61) (0.57) (0.69) (0.71)
_____ _____ _____ _____ _____ _____
NET ASSET VALUE,
END OF PERIOD . . . . . . . . . $8.97 $8.65 $9.12 $9.24 $8.94 $8.60
_____ _____ _____ _____ _____ _____
_____ _____ _____ _____ _____ _____
RATIOS/SUPPLEMENTAL DATA
Total Return . . . . . . . . . . . 11.13% (2.84)% 5.36% 10.12% 12.40% 11.77%
Ratio of Expenses to Average
Net Assets. . . . . . . . . . . 0.78% 0.80%! 0.82% 0.84% 0.87% 0.88%
Ratio of Net Investment Income
to Average Net Assets . . . . . 6.95% 6.43%! 5.77% 6.36% 7.64% 8.33%
Portfolio Turnover
Rate. . . . . . . . . . . . . . 54.1% 91.5%! 58.3% 85.8% 49.7% 20.7%
Net Assets, End of
Period (in
millions) . . . . . . . . . . . $1,566 $1,375 $1,458 $1,527 $1,307 $1,131
<FN>
# The fund's fiscal year-end was changed to May 31.
! Annualized.
</FN>
</TABLE>
Report of Independent Accountants
To the Board of Directors and Shareholders of the T. Rowe Price New
Income Fund, Inc.
In our opinion, the accompanying statement of net assets and the
related statements of operations and of changes in net assets and
the selected per share data and information (which appears under the
heading "Financial Highlights") present fairly, in all material
respects, the financial position of the T. Rowe Price New Income
Fund, Inc. at May 31, 1995, and the results of its operations, the
changes in its net assets and the selected per share data and
information for each of the fiscal periods presented, in conformity
with generally accepted accounting principles. These financial
statements and selected per share data and information (hereafter
referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audit, which included confirmation of securities at May 31,
1995 by correspondence with custodians and brokers and, where
appropriate, the application of alternative auditing procedures for
unsettled security transactions, provides a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
June 19, 1995
Chart1 - Treasury Yield Curves
A three line chart showing yields for November 4, 1994, May 31,
1994, and May 31, 1995.
Chart2 - Portfolio Diversification
Two pie charts showing the percentage allocation of assets among
mortgages, corporates, and U.S. government and agency bonds for May
31, 1994 vs. May 31, 1995.
Chart3 - Fiscal Year Performance Comparison
A two line chart showing TRP New Income Fund index return
performance vs. competition over a ten-year period, from May 1985 to
May 1995.