Annual Report
New Income Fund
May 31, 1996
T. Rowe Price
REPORT HIGHLIGHTS
o The favorable bond market environment of 1995 faded quickly in 1996.
Interest rates rose on news of a pickup in economic growth and rising
commodity price levels. As a result, prices of high-quality bonds fell.
o Reflecting the difficult market, price declines on portfolio holdings
pushed the New Income Fund's six-month return into negative territory;
the 12-month return was modest but positive.
o We increased holdings of mortgage-backed securities because they
typically hold up comparatively well in a rising rate environment.
o Duration was shortened slightly as a defensive measure, and credit
quality remained high.
o The Federal Reserve seems likely to tighten in the coming months; this
could dampen inflation fears and improve the bond market outlook. Income
will probably be the principal component of returns.
Fellow Shareholders
The strong bond market rally of 1995 came to an abrupt halt at year-end. As
1996 got under way, the optimism that had underpinned the rally evaporated in
the face of diminishing prospects for a balanced budget agreement, a bounce in
the economy, and an increase in inflation. Interest rates rose, and, as a
result, most high-quality bond funds had negative returns for the six months
ended May 31 and positive but modest returns for the 12-month period.
MARKET ENVIRONMENT
The months since the start of 1996 were a mirror image of the preceding six
months. In the second half of 1995, the economy looked weak, progress in
federal deficit reduction seemed likely, the Federal Reserve was
accommodative, and interest rates were declining across the board. In 1996,
everything changed. Several developments in particular caused mounting concern
among bond investors: the 2.3% increase in real GDP in the first quarter
versus only 0.5% in the fourth quarter of 1995; significant increases in
payroll employment in February and March (220,000 per month during the first
five months of 1996); and rising prices led by oil and grains.
CHART 1 - Interest Rate Levels
Against this background, the yield on 30-year Treasury bonds increased 75
basis points in the six months ending May 31 after dropping 60 basis points
over the previous six months. (One hundred basis points equal one percent.)
The five-year Treasury note had a similar yield pattern over the same two
periods. Although yields on very short-term maturities rose in recent months,
they were still slightly lower on balance at the end of the 12-month period
than at the beginning, as represented by the one-year Treasury bill in the
chart.
Mortgage-backed securities were the best-performing sector in the high-grade
bond market for both the 6- and 12-month periods and the only one to eke out a
positive return since the rally ended. Treasury securities outperformed
corporates during the most recent six-month period but lagged them for the 12
months.
PERFORMANCE AND STRATEGY REVIEW
For the six-month period ending May 31, 1996, the New Income Fund had a total
return of -2.12%, underperforming the Lehman Aggregate Bond Index and slightly
lower than the fund's Lipper peer group average. For the fiscal year, the
fund's 3.7% return again trailed the Lehman Aggregate but modestly exceeded
its peer group average, as shown to the left.
PERFORMANCE COMPARISON
Periods Ended 5/31/96 6 Months 12 Months
New Income Fund - 2.12% 3.70%
Lehman Aggregate Bond Index - 1.16 4.38
Lipper Average of Corporate
Bond Funds A-Rated - 2.00 3.43
Your fund lagged its benchmarks in recent months principally because its
duration was longer than that of the market. (Duration measures a bond fund's
price sensitivity to interest rate changes.) At the beginning of 1996, we
thought rates could move a bit lower and, therefore, did not take defensive
measures at that time. In fact, the 30-year Treasury bond yield began a move
that took it almost 100 basis points beyond its year-end low of 5.95%. Our
overweighting in the better-performing mortgage securities sector cushioned
but could not totally offset the weaker performance of our Treasury holdings,
whose prices are sensitive to interest rate changes.
CHART 2 - SECURITY DIVERSIFICATION
As evidence of the economy's strength mounted, simultaneously clouding bond
market prospects, we increased our mortgage-backed holdings from 31% to 38%,
and reduced exposure to Treasury issues. As we expected, the mortgage area
held up better because rising interest rates slow the pace of mortgage
prepayments, thus making mortgage securities more attractive to investors.
This was the major portfolio shift during the past six months and led to a
shorter average maturity and duration. The fund's credit quality structure was
unchanged, with an average of AA+.
OUTLOOK
The Federal Reserve is expected to tighten monetary policy later this year.
Consumer inflation has been running at about a 4% rate this year mainly due to
an upsurge in energy prices, and the Fed does not want the strong economy to
cause persistently higher inflation. Any increase in the key federal funds
rate would be following, not leading, short-term rates onto higher ground. And
since shorter-term rates have risen further than long-term rates, the yield
curve has "flattened," meaning the spread between them has declined - a trend
likely to continue if the Fed tightens. While the recent rise in rates is
likely to dampen economic growth in the second half, the economy should be
healthy enough to forestall any rise in the unemployment rate.
_____________________________________________________________________________
THE FED DOES NOT WANT THE STRONG ECONOMY TO CAUSE PERSISTENTLY HIGHER
INFLATION.
Action by the Fed to restrain the economy could be good news for investors in
longer-term bonds, as inflation fears should ease. In this environment, bond
prices may stabilize, and returns should reflect coupon levels over the
remainder of the year. While we hope the worst is over, we will maintain our
relatively cautious stance in an effort to protect principal without undue
loss of income.
Respectfully submitted,
Charles P. Smith
President and
Chairman of the Investment Advisory Committee
June 20, 1996
T. Rowe Price New Income Fund
PORTFOLIO HIGHLIGHTS
KEY STATISTICS
11/30/95 5/31/96
_____________________________________________________________________________
Price Per Share $ 9.19 $ 8.70
Dividends Per Share
For 6 months 0.30 0.30
For 12 months 0.61 0.60
Dividend Yield *
For 6 months 6.81% 6.66%
For 12 months 7.11 6.85
Weighted Average Maturity (years) 10.6 9.5
Weighted Average Effective Duration (years) 5.4 5.3
Weighted Average Quality ** AA+ AA+
* 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 T. Rowe Price research.
SECTOR DIVERSIFICATION
Percent of Percent of
Net Assets Net Assets
11/30/95 5/31/96
_____________________________________________________________________________
U.S. Government Mortgage-Backed Securities 31% 38%
U.S. Government Obligations 41 32
Banking 7 7
Electric Utilities 3 4
Industrial 4 3
Commercial Paper - 2
U.S. Dollar-Denominated Foreign Securities 2 2
Investment Dealers 2 2
Telephone 2 2
Savings and Loan 1 2
All Other 6 5
Other Assets Less Liabilities 1 1
_____________________________________________________________________________
Total 100% 100%
T. Rowe Price New Income 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.
CHART 3 - New Income Fund Chart
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 5/31/96 1 Year 3 Years 5 Years 10 Years
_____________________________________________________________________________
New Income Fund 3.70% 5.33% 7.37% 7.80%
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original
purchase.
T. Rowe Price New Income Fund
FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
Year 3 Months# Year
Ended Ended Ended
5/31/96 5/31/95 5/31/94 2/28/94 2/28/93 2/29/92
_____________________________________________________________________________
NET ASSET VALUE
Beginning of
period $ 8.97 $ 8.65 $ 9.12 $ 9.24 $ 8.94 $8.60
Investment activities
Net invest-
ment income 0.60 0.58 0.14 0.54 0.57 0.67
Net realized and
unrealized
gain (loss) (0.27) 0.34 (0.40) (0.05) 0.30 0.36
Total from
investment
activities 0.33 0.92 (0.26) 0.49 0.87 1.03
Distributions
Net invest-
ment income (0.60) (0.58) (0.14) (0.54) (0.57) (0.67)
Net realized
gain - (0.02) (0.07) (0.07) - (0.02)
Total dis-
tributions (0.60) (0.60) (0.21) (0.61) (0.57) (0.69)
NET ASSET VALUE
End of period $ 8.70 $ 8.97 $ 8.65 $ 9.12 $ 9.24 $8.94
Ratios/Supplemental Data
Total return 3.70% 11.13% (2.84)% 5.36% 10.12% 12.40%
Ratio of expenses
to average
net assets 0.75% 0.78% 0.80%* 0.82% 0.84% 0.87%
Ratio of net
investment
income to average
net assets 6.66% 6.95% 6.43%* 5.77% 6.36% 7.64%
Portfolio
turnover
rate 35.5% 54.1% 91.5%* 58.3% 85.8% 49.7%
Net assets,
end of period
(in millions) $ 1,634 $ 1,566 $ 1,375 $ 1,458 $ 1,527 $1,307
* Annualized.
# The fund's fiscal year-end was changed to May 31.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price New Income Fund
May 31, 1996
STATEMENT OF NET ASSETS Par Value
In thousands
CORPORATE BONDS AND NOTES 22.9%
Banking 7.0%
ABN AMRO Bank (Chicago), N.V., Sub. Notes,
7.25%, 5/31/05 $ 5,000 $ 4,940
Banca Commerciale Italiana, Sr. Sub. Notes,
8.25%, 7/15/07 8,070 8,098
Banco Central Hispano-Americano,
C.I., Gtd. Notes,
7.50%, 6/15/05 6,000 5,876
Banesto Delaware, Gtd. Notes, 8.25%, 7/28/02 5,700 5,849
Bank of Boston, Sub. Notes, 6.625%, 12/1/05 10,000 9,373
Bank of Scotland International, (144a),
8.80%, 1/27/04 10,000 10,728
Chase Manhattan, Sub. Notes, 7.125%, 3/1/05 5,000 4,886
Den Danske Bank, (144a), 7.25%, 6/15/05 4,500 4,412
Deposit Guaranty, Sr. Notes, 7.25%, 5/1/06 10,400 10,099
Fifth Third Bank, 6.75%, 7/15/05 4,000 3,811
First National Bank of Boston, 8.375%, 12/15/02 8,000 8,389
Mercantile Bankshares, Sr. Notes,
6.13%, 7/15/98* 5,000 4,911
NationsBank N.A., 6.75%, 8/15/00 10,000 9,897
PNC Bank N.A., Sub. Notes, 7.875%, 4/15/05 12,000 12,245
Santander Financial Issuances
Gtd. Sub. Notes
6.80%, 7/15/05 2,000 1,898
7.875%, 4/15/05 4,000 4,082
Union Planters, Sub. Notes, 6.75%, 11/1/05 5,000 4,685
_____________________________________________________________________________
114,179
Electric Utilities 3.7%
Alabama Power, 1st Mtg. Bonds, 7.75%, 2/1/23 3,650 3,489
Big Rivers, Cooperative Utility Trust Cert.,
10.70%, 9/15/17 2,500 2,754
Commonwealth Edison
1st Mtg. Notes, 9.375%, 2/15/00 5,000 5,328
Deb., 6.40%, 10/15/05 5,000 4,428
Consumers Power, 1st Mtg. Notes, 6.375%, 9/15/03 5,000 4,596
Georgia Power
1st Mtg. Bonds
7.625%, 3/1/23 5,750 5,439
7.95%, 2/1/23 3,300 3,227
Gulf States Utilities, 1st Mtg. Bonds,
5.375%, 2/1/97 4,000 3,975
Monongahela Power, 1st Mtg. Bonds,
8.625%, 11/1/21 4,720 4,919
Montana Power, 8.25%, 2/1/07 $ 5,000 $ 5,160
Northern Indiana Public Service, MTN,
6.90%, 6/1/00 5,000 4,931
Pacificorp, MTN, 7.12%, 8/15/02 3,900 3,848
Potomac Capital Investment, MTN, (144a),
6.19%, 4/28/97 5,000 4,993
Texas Utilities Electric, 1st Mtg. Bonds,
7.875%, 3/1/23 3,450 3,291
_____________________________________________________________________________
60,378
Finance and Credit 0.8%
GPA Leasing USA Sub I, Equip. Trust Cert., (144a),
9.125%, 12/2/96 9,372 9,322
USF&G, Notes, 7.00%, 5/15/98 4,000 4,001
_____________________________________________________________________________
13,323
Health Care 0.7%
Kaiser Foundation Health Plan, Notes,
9.00%, 11/1/01 10,325 11,149
_____________________________________________________________________________
11,149
Industrials 2.7%
Clorox, Notes, 8.80%, 7/15/01 5,000 5,361
Ford Holdings, Gtd. Notes, 9.25%, 3/1/00 5,000 5,368
Lockheed, Deb., 7.875%, 3/15/23 5,000 4,858
Monsanto, Deb., 8.20%, 4/15/25 11,500 11,775
United Technologies, Deb., 8.875%, 11/15/19 4,340 4,886
Weyerhaeuser, Notes, 9.05%, 2/1/03 10,600 11,428
_____________________________________________________________________________
43,676
Investment Dealers 2.0%
Bear Stearns, Sr. Notes, 7.625%, 4/15/00 5,000 5,091
Lehman Brothers, Sr. Sub. Notes, 7.625%, 8/1/98 8,000 8,113
PaineWebber Group, Notes, 8.875%, 3/15/05 5,000 5,335
Salomon
MTN, 5.47%, 8/29/97 8,500 8,389
Sr. Notes, 7.25%, 5/1/01 5,000 4,954
_____________________________________________________________________________
31,882
Manufacturing 0.3%
Burlington Industries, Notes, 7.25%, 9/15/05 5,500 5,249
_____________________________________________________________________________
5,249
Media and Communications 0.9%
Capital Cities/ABC, Deb., 8.75%, 8/15/21 7,900 8,832
Tele-Communications
Sr. Notes
7.25%, 8/1/05 3,000 2,756
8.75%, 2/15/23 3,000 2,814
14,402
Petroleum 0.7%
BP America, Gtd. Notes, 8.50%, 4/15/01 $ 5,000 $ 5,305
Texaco Capital, Deb., 8.65%, 1/30/98 6,000 6,202
_____________________________________________________________________________
11,507
Savings and Loan 1.6%
Abbey National, MTN, 6.69%, 10/17/05 5,000 4,748
CENFED Financial, Sr. Deb., (144a),
11.17%, 12/15/01 5,000 5,272
Great Western Financial
6.125%, 6/15/98 5,900 5,847
6.375%, 7/1/00 6,000 5,861
Washington Mutual, 7.25%, 8/15/05 5,000 4,862
_____________________________________________________________________________
26,590
Telephone 1.9%
AT&T, 8.35%, 1/15/25 5,000 5,146
BellSouth Telecom, 7.875%, 8/1/32 6,400 6,280
GTE, Deb., 9.375%, 12/1/00 10,000 10,786
Pacific Bell, 6.625%, 10/15/34 11,200 9,512
_____________________________________________________________________________
31,724
Transportation 0.6%
Continental Airlines, PTC, (144a),
6.94%, 10/15/13 3,500 3,118
Qantas Airways, Sr. Notes, (144a),
6.625%, 6/30/98 7,000 6,944
_____________________________________________________________________________
10,062
_____________________________________________________________________________
Total Corporate Bonds and Notes (Cost $375,091) 374,121
U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 37.7%
U.S. Government Agency Obligations 2.5%
Federal Home Loan Mortgage
6.50%, 11/1/04 - 5/1/24 11,792 10,947
7.00%, 2/1/24 4,753 4,553
7.50%, 3/1 - 6/1/24 9,973 9,779
8.00%, 6/1/08 136 139
9.00%, 3/1/21 - 5/1/22 7,793 8,099
9.75%, 12/1/17 2,825 3,018
10.50%, 2/1/01 - 8/1/20 1,372 1,492
11.00%, 5/1/11 - 7/1/20 670 740
11.50%, 6/1/01 13 14
Federal National Mortgage Assn.
8.75%, 3/1/10 $ 16 $ 16
10.50%, 7/1/09 - 4/1/22 2,893 3,146
_____________________________________________________________________________
41,943
U.S. Government Guaranteed Obligations 35.2%
Government National Mortgage Assn.
I
6.00%, 12/15/23 - 4/15/24 3,532 3,170
6.50%, 9/15/23 - 4/15/26 61,301 56,642
7.00%, 4/15/22 - 5/15/26 113,609 108,316
7.50%, 8/15/16 - 5/15/26 124,927 122,789
8.00%, 7/15/16 - 5/15/26 68,686 69,518
8.50%, 9/15/16 - 5/15/26 50,524 52,026
9.00%, 1/15/09 - 4/15/25 30,042 31,618
9.50%, 6/15/09 - 3/15/25 78,255 84,335
11.00%, 12/15/09 - 1/15/21 23,985 26,599
11.50%, 3/15/10 - 10/15/15 2,992 3,366
II
7.00%, 12/20/23 1,519 1,438
9.00%, 6/20/16 - 5/20/22 9,170 9,516
GPM, I, 10.25%, 2/15/16 - 11/15/20 4,944 5,417
_____________________________________________________________________________
574,750
_____________________________________________________________________________
Total U.S. Government Mortgage-Backed Securities
(Cost $624,426) 616,693
U.S. GOVERNMENT OBLIGATIONS 32.4%
U.S. Treasury Obligations 32.4%
U.S. Treasury Bonds
6.00%, 2/15/26 3,250 2,849
6.25%, 8/15/23 10,645 9,498
7.25%, 5/15/16 5,860 5,901
7.625%, 2/15/25 1,000 1,061
7.875%, 2/15/21 35,000 37,734
8.00%, 11/15/21 42,160 46,132
8.125%, 5/15/21 32,140 35,595
U.S. Treasury Notes
5.75%, 9/30/97 7,000 6,975
5.875%, 7/31/97 5,000 4,994
6.125%, 9/30/00 $ 10,000 $ 9,817
6.50%, 8/15/97 - 8/15/05 90,075 87,958
6.875%, 8/31/99 - 5/15/06 34,805 34,968
7.125%, 9/30/99 6,375 6,488
7.25%, 5/15/04 - 8/15/04 95,185 97,577
7.50%, 11/15/01 - 2/15/05 33,400 34,683
7.75%, 11/30/99 76,250 79,097
7.875%, 11/15/04 27,215 28,963
_____________________________________________________________________________
Total U.S. Government Obligations (Cost $518,857) 530,290
ASSET-BACKED SECURITIES 0.6%
Auto-Backed 0.6%
Daimler-Benz Auto Grantor Trust, 3.90%, 10/15/98 1,372 1,357
Ford Credit Grantor Trust, 4.30%, 7/15/98 1,296 1,282
GMAC Grantor Trust, 4.15%, 3/16/98 611 606
Olympic Automobile Receivable, 4.95%, 10/15/99 1,080 1,070
Premier Auto Trust, 4.22%, 3/2/99 3,231 3,180
Toyota Auto Receivables, 3.90%, 8/17/98 1,163 1,145
Zions Auto Trust, 4.65%, 6/15/99 686 685
_____________________________________________________________________________
9,325
Home Equity Loans-Backed 0.0%
Home Equity Loan, REMIC, 5.65%, 11/15/14 696 672
_____________________________________________________________________________
672
_____________________________________________________________________________
Total Asset-Backed Securities (Cost $10,124) 9,997
U.S. $ DENOMINATED FOREIGN
SECURITIES1 2.1%
British Columbia Hydro & Power, Notes,
15.50%, 11/15/11 14,150 15,669
Inter-American Development Bank, Notes,
9.50%, 10/15/97 2,600 2,704
Province of Ontario
Deb.
15.75%, 3/15/12 9,000 10,100
17.00%, 11/5/11 5,000 5,545
_____________________________________________________________________________
Total U.S. $ Denominated Foreign Securities (Cost $36,263) 34,018
COMMERCIAL PAPER 2.5%
Countrywide Funding, 5.30%, 6/20/96 $ 10,000 $ 9,971
Investments in Commercial Paper through a
joint account,
5.41%, 6/3/96 19,789 19,789
Nestle Capital, 5.28%, 6/5/96 10,000 9,994
_____________________________________________________________________________
Total Commercial Paper (Cost $39,749) 39,754
BANK NOTES 0.9%
Wachovia Bank of North Carolina, 5.32%, 6/12/96 15,000 15,000
_____________________________________________________________________________
Total Bank Notes (Cost $15,000) 15,000
Total Investments in Securities
99.1% of Net Assets (Cost $1,619,510) $1,619,873
Other Assets Less Liabilities 14,489
NET ASSETS $1,634,362
Net Assets Consist of:
Accumulated net investment income - net of distributions $ 2,679
Accumulated net realized gain/loss - net of distributions (11,496)
Net unrealized gain (loss) 363
Paid-in-capital applicable to 187,765,192 shares of
$1.00 par value capital stock outstanding;
300,000,000 shares authorized 1,642,816
NET ASSETS $1,634,362
NET ASSET VALUE PER SHARE $ 8.70
* Private Placement
1 Marketable securities (payable in U.S. dollars) issued or guaranteed
by a foreign government or community.
GPM Graduated Payment Mortgage
MTN Medium Term Note
PTC Pass-Through Certificate
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 - total of such securities at
year-end amounts to 2.7% of net assets.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price New Income Fund
STATEMENT OF OPERATIONS
In thousands
Year
Ended
5/31/96
_____________________________________________________________________________
Investment Income
Interest income $ 120,158
Expenses
Investment management 7,886
Shareholder servicing 3,690
Custody and accounting 407
Prospectus and shareholder reports 130
Registration 43
Legal and audit 33
Directors 18
Miscellaneous 27
Total expenses 12,234
Net investment income 107,924
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 1,379
Change in net unrealized gain or
loss on securities (53,172)
Net realized and unrealized gain (loss) (51,793)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 56,131
The accompanying notes are an integral part of these financial statements.
T. Rowe Price New Income Fund
STATEMENT OF CHANGES IN NET ASSETS
In thousands
Year Year
Ended Ended
5/31/96 5/31/95
Increase (Decrease) in Net Assets
Operations
Net investment income $ 107,924 $ 98,482
Net realized gain (loss) 1,379 (11,115)
Change in net unrealized gain or loss (53,172) 68,296
Increase (decrease) in net assets
from operations 56,131 155,663
Distributions to shareholders
Net investment income (107,911) (95,838)
Net realized gain - (2,632)
Decrease in net assets from distributions (107,911) (98,470)
Capital share transactions*
Shares sold 394,756 355,522
Distributions reinvested 78,213 85,120
Shares redeemed (352,730) (306,988)
Increase (decrease) in net assets
from capital share transactions 120,239 133,654
Net Assets
Increase (decrease) during period 68,459 190,847
Beginning of period 1,565,903 1,375,056
End of period $ 1,634,362 $1,565,903
*Share information
Shares sold 43,673 41,628
Distributions reinvested 8,680 9,921
Shares redeemed (39,188) (35,940)
Increase (decrease) in shares outstanding 13,165 15,609
The accompanying notes are an integral part of these financial statements.
T. Rowe Price New Income Fund
May 31, 1996
NOTES TO FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies
T. Rowe Price New Income Fund, Inc., (the fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end management
investment company and commenced operations on October 12, 1973.
Valuation Debt securities are generally traded in the over-the-counter
market. Investments in securities originally issued with maturities of one
year or more are stated at fair value as furnished by dealers who make markets
in such securities or by an independent pricing service, which considers yield
or price of bonds of comparable quality, coupon, maturity, and type, as well
as prices quoted by dealers who make markets in such securities. Securities
with 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.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
fund, as authorized by the Board of Directors.
Premiums and Discounts Premiums and discounts on debt securities, other than
mortgage-backed securities, are amortized for both financial reporting and tax
purposes. Premiums and discounts on mortgage-backed securities are recognized
upon principal repayment as gain or loss for financial reporting purposes and
as ordinary income for tax purposes.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on the identified cost basis. Distributions to shareholders are
recorded by the fund on the ex-dividend date. Income and capital gain
distributions are determined in accordance with federal income tax regulations
and may differ from those determined in accordance with generally accepted
accounting principles.
Note 2 - Investment Transactions
Consistent with its investment objective, the fund engages in the following
practices to manage exposure to certain risks or enhance performance. The
investment objective, policies, program, and risk factors of the fund are
described more fully in the fund's prospectus and Statement of Additional
Information.
Commercial Paper Joint Account The fund, and other affiliated funds, may
transfer uninvested cash into a commercial paper joint account, the daily
aggregate balance of which is invested in high-grade commercial paper. All
securities purchased by the joint account satisfy the fund's criteria as to
quality, yield, and liquidity.
Securities Lending To earn additional income, the fund lends its securities
to approved brokers. At May 31, 1996, the market value of securities on loan
was $227,865,000, which was fully collateralized with 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.
Other Purchases and sales of portfolio securities, other than short-term and
U.S. government securities, aggregated $154,005,000 and $187,613,000,
respectively, for the year ended May 31, 1996. Purchases and sales of U.S.
government securities aggregated $517,349,000 and $376,832,000, respectively,
for the year ended May 31, 1996.
Note 3 - Federal Income Taxes
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income. The fund has unused realized capital loss carryforwards
for federal income tax purposes of $2,377,000, of which $1,115,000 expires in
2003, and $1,262,000 in 2004. The fund intends to retain gains realized in
future periods that may be offset by available capital loss carryforwards.
At May 31, 1996, the aggregate cost of investments for federal income tax and
financial reporting purposes was $1,619,510,000, and net unrealized gain
aggregated $363,000, of which $30,966,000 related to appreciated investments
and $30,603,000 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 $668,000 was payable at May 31, 1996. 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 0.305% for assets in excess of $50
billion. At May 31, 1996, and for the year then ended, the effective annual
group fee rate was 0.33% and 0.34%, respectively. The fund pays a pro rata
share of the group fee based on the ratio of its net assets to those of the
group.
In addition, the fund has entered into agreements with the manager and 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 $3,476,000 for the year ended May 31, 1996,
of which $274,000 was payable at period-end.
T. Rowe Price New Income Fund
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
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 financial
highlights present fairly, in all material respects, the financial position of
T. Rowe Price New Income Fund, Inc. (the "Fund") at May 31, 1996, and the
results of its operations, the changes in its net assets, and the financial
highlights for each of the fiscal periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (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 audits, which included confirmation of securities at May 31, 1996 by
correspondence with custodians, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
June 19, 1996
T. ROWE PRICE SHAREHOLDER SERVICES
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety
of information and services - at no extra cost.
Knowledgeable Service Representatives
By Phone Shareholder service representatives are available Monday through
Friday from 8 a.m. to 10 p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET.
Call 1-800-225-5132 to speak directly with a representative who will be able
to assist you with your accounts.
In Person Visit one of our Investor Center locations to meet with a
representative who will be able to assist you with your accounts.
You can also drop off applications or obtain prospectuses and other
literature.
Automated 24-Hour Services
Tele*Access(registered trademark) Call 1-800-638-2587 to obtain information
such as account balance, date and amount of your last transaction, latest
dividend payment, and fund prices and yields. Additionally, you can request
prospectuses, statements, new account and tax forms; reorder checks; and
initiate purchase, redemption, and exchange orders for identically registered
accounts.
T. Rowe Price OnLine Through a personal computer via dial-up modem, you can
replicate all the services available on Tele*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 move investments systematically from one
fund account to another, such as from a money fund to a stock fund. A low $50
minimum makes it easy to get started.
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,
and other securities at a substantial savings over regular commission rates.
To Open an Account Call a shareholder service representative at
1-800-225-5132.
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 - stock, bond, and money
market. Detail pages itemize account transactions by fund.
Shareholder Reports Portfolio managers review the performance of the funds in
plain language and discuss T. Rowe Price's economic outlook.
The T. Rowe Price Report 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 each 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, Personal Strategy Planner, Retirees Financial Guide, and
Retirement Planning Kit (also available on disk for PC use) help you determine
and reach your investment goals.
T. Rowe Price Mutual Funds
Stock Funds
Domestic
Balanced
Blue Chip Growth
Capital Appreciation
Capital Opportunity
Dividend Growth
Equity Income
Equity Index
Growth & Income
Growth Stock
Health Sciences
Mid-Cap Growth
Mid-Cap Value
New America Growth
New Era
New Horizons*
OTC
Science & Technology
Small-Cap Value*
Spectrum Growth
Value
International/Global
Emerging Markets Stock
European Stock
Global Stock
International Discovery
International Stock
Japan
Latin America
New Asia
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 Insured 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 Insured Intermediate Bond
Tax-Free Short-Intermediate
Virginia Short-Term Tax-Free Bond
Virginia Tax-Free Bond
International/Global
Emerging Markets Bond
Global Government Bond
International Bond
Short-Term Global Income
Money Market
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
Personal Strategy Balanced
Personal Strategy Growth
Personal Strategy Income
T. Rowe Price No-Load Variable Annuity
Equity Income Portfolio
International Stock Portfolio
Limited-Term Bond Portfolio
New America Growth Portfolio
Personal Strategy Balanced Portfolio
*Closed to new investors.
For yield, price, last transaction, and current balance, 24 hours, 7 days a
week, call:
1-800-638-2587 toll free
For assistance with your existing fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
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 New Income
Fund(registered trademark).
T. Rowe Price Investment Services, Inc., Distributor RPRTNIF 5/31/96
Chart 1 - Interest Rate Levels-A 3-line chart showing yields on the 30-year
Treasury bond, the 5-year Treasury note, and the 1-year Treasury bill from
5/31/95 to 5/31/96.
Chart 2 - Security Diversification-A pie chart showing security
diversification for 5/31/96: U.S. Governments and Agencies 32%, Corporates
23%, Mortgage-Backed 38%, and Other 7%.
Chart 3 - New Income Fund Chart
A line chart showing the cumulative growth of $10,000 invested in the New
Income Fund over the past 10 years compared with $10,000 invested in a
broad-based index over the same period.
