- --------------------------------------------------------------------------------
T. Rowe Price
- --------------------------------------------------------------------------------
Annual Report
New Income Fund
- --------------------------------------------------------------------------------
November 30, 1997
- --------------------------------------------------------------------------------
REPORT HIGHLIGHTS
================================================================================
New Income Fund
o Longer-term interest rates declined on balance during the six months ended
November 30, more than retracing their earlier rise and creating a positive
environment for bonds.
o Among high-quality bonds, corporates led the way for the past six months,
but mortgage-backed securities had the best returns for the 12-month
period.
o The fund's six-month return exceeded both its Lipper peer group and the
Lehman Aggregate Bond Index.
o We lengthened duration slightly to increase appreciation opportunities and
added corporates to enhance yield.
o Prospects are good for continued low inflation and moderate growth- a
favorable environment for bonds over time.
Fellow Shareholders
================================================================================
Reversing the pattern of the preceding six months, interest rates fell and
prices of high-quality bonds rose during the six months ended November 30, 1997.
Bond yields more than retraced their previous rise, due in part to a flight to
the safety of Treasuries when global stock markets sold off in the wake of
Southeast Asia's financial crisis. Longer-term bonds and your fund generated
strong returns for the past six months.
<PAGE>
[Edgar description: Interest Rate Levels - a 3-line chart showing the
30-year Treasury Bond, 5-year Treasury Note and 1-year Treasury Bill yields from
5/31/97 to 11/30/97. [wrap preceding paragraph around chart and start next
paragraph if necessary]
The economy maintained its momentum over the past six months, ri sing at a
3.5% annual rate during the third quarter. Inflation remained subdued, aided by
the dollar's continued strength, which made imports cheaper. The U.S. bond
market and the dollar were both boosted by the currency crises that began in
Thailand in July and spread quickly to other Pacific Rim countries, devastating
stock returns in virtually every market. Investors sought the safe haven of U.S.
dollars, and, when the U.S. stock market caught a serious case of jitters in
October, they rushed to buy U.S. Treasury securities. With inflation quiescent
and equity markets in turmoil, the Federal Reserve understandably took no
monetary policy action during this period.
Long-term rates fell significantly more than short-term rates, causing the
yield curve to flatten. As of November 30, the difference in yields between
30-year Treasury bonds and one-year Treasury notes had narrowed from about 115
basis points six months ago to about 58 in November (100 basis points equal one
percentage point).
Among high-grade bond market sectors, corporate bonds provided the best
returns for the six-month period, as investors sought higher income returns in a
falling rate environment. Lower-rated bonds within the investment-grade sector
generated the highest returns. This is typical during periods of strong economic
growth as fears of credit downgrades and defaults diminish. Mortgage-backed
securities fell to third place during the period, reflecting investor concern
over rising prepayment rates. (Prepayments typically pick up when rates fall.)
For the last 12 months, however, mortgage-backed securities outstripped both
Treasuries and corporates.
================================================================================
Performance Comparison
- --------------------------------------------------------------------------------
Periods Ended 11/30/97 6 Months 12 Months
- --------------------------------------------------------------------------------
New Income Fund 6.66% 6.93%
Lehman Aggregate Bond Index 6.55 7.55
Lipper Average of Corporate
Bond Funds A-Rated 6.58 6.93
================================================================================
For the six-month period, the fund provided a strong return of 6.66%,
generated by income of $0.29 per share and a $0.29 rise in share value. This was
slightly above the benchmark Lehman index and an average of competitor funds.
Despite the recent rally, the fund's share price on November 30 was only two
cents above its level of a year earlier, so total return for the year was
powered primarily by income. For the 12 months, the fund lagged the benchmark
index but matched the average competitor fund.
<PAGE>
As the likelihood of any tightening by the Fed faded, we felt comfortable
lengthening the fund's duration from 4.9 years to 5.4 years to take advantage of
falling rates. (Duration measures a bond fund's sensitivity to interest rate
changes. A duration of 5.0 years, for instance, means a fund's price would drop
about 5% for each one-percentage-point rise in interest rates.) The principal
change we made in portfolio composition during the period was to increase our
investment in corporate bonds from 21% of net assets to 41% to increase yield
and take advantage of a temporary widening in yield spreads between
credit-quality tiers in September and October. The bonds purchased were
primarily A-rated. This asset move was accomplished by trimming mortgage-backed
securities from 38% to 35% of net assets to decrease exposure to prepayment
risk, by reducing Treasury holdings from 27% to 18%, and also by redeploying
some cash reserves. The fund's weighted average credit rating declined
marginally from AA+ to AA.
OUTLOOK
[Edgar description: Pie chart - Security Diversification as of 11/30/97.
U.S. Treasury Securities 18%; mortgage-backed securities 35%; corporate bonds
40%, reserves 6%, other 1%] [wrap preceding and following paragraphs around pie]
Despite the economy's strength, we believe the recent developments in Asia
and continued subdued inflation may obviate the need for any immediate action by
the Federal Reserve. Indeed, we do not expect any change in policy for the next
quarter or two, and it is no longer a foregone conclusion that the Fed's next
move will be a tightening. Looking further ahead, we expect a continuation of
good growth, but a touch slower than the recent pace. Consumers, burdened with
debt and perhaps reacting a bit to the volatility on Wall Street, may pare back
big-ticket purchases next year, and business fixed investment should slow from
its recent torrid pace. All this points to a positive environment for fixed
income securities over the coming months.
Respectfully submitted,
/s/
Charles P. Smith
President and Chairman of the Investment Advisory Committee
December 19, 1997
================================================================================
Operating Policy Change
- --------------------------------------------------------------------------------
Your fund's Board of Directors has approved a change in one of the New
Income Fund's investment policies, which will become effective January 15, 1998.
Currently, any security purchased by the fund must be rated within the four
highest credit categories (i.e., investment grade) by at least one established
public rating agency or, if unrated, must have an equivalent rating assigned by
T. Rowe Price. The fund may not purchase any security rated below investment
grade-below BBB-by Standard & Poor's, Moody's, or Fitch. This restriction is
being changed to allow the fund to invest up to 15% of its total assets in
split-rated securities, which are securities rated investment grade by at least
one rating agency but below-investment grade by another rating agency.
<PAGE>
There are many cases where our own research analysts may concur with a BBB
rating but one of the outside agencies does not, thereby prohibiting the fund
from purchasing the security. The Directors are providing this additional
flexibility because our rigorous research gives us confidence that we can take
advantage of opportunities to purchase credits we believe will improve, thereby
enhancing fund returns.
This supplements the New Income Fund prospectus dated October 1, 1997.
================================================================================
T. Rowe Price New Income Fund
================================================================================
Portfolio Highlights
- --------------------------------------------------------------------------------
Key statistics
5/31/97 11/30/97
- --------------------------------------------------------------------------------
Price Per Share ...................................... $ 8.77 $ 9.06
Dividends Per Share
For 6 months .................................... 0.29 0.29
For 12 months ................................... 0.58 0.58
Dividend Yield *
For 6 months .................................... 6.69% 6.53%
For 12 months ................................... 6.86 6.72
Weighted Average Maturity (years) .................... 10.4 12.2
Weighted Average Effective Duration (years) .......... 4.9 5.4
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.
================================================================================
T. Rowe Price New Income Fund
================================================================================
Portfolio Highlights
- --------------------------------------------------------------------------------
SECTOR DIVERSIFICATION
Percent of Percent of
Net Assets Net Assets
5/31/97 11/30/97
- --------------------------------------------------------------------------------
Mortgage-Backed Securities ....................... 38% 35%
U.S. Treasury Securities ......................... 27 18
Banking .......................................... 8 12
Electric Utilities ............................... 6 7
Finance and Credit ............................... 1 7
Retail ........................................... 1 3
Short-Term Obligations ........................... 10 2
Investment Dealers ............................... 1 2
Insurance ........................................ 1 2
All Other ........................................ 6 9
Other Assets Less Liabilities .................... 1 3
- --------------------------------------------------------------------------------
Total ............................................ 100% 100%
================================================================================
<PAGE>
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.
[New Income Fund SEC graph]
================================================================================
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 11/30/97 ......... 1 Year 3 Years 5 Years 10 Years
New Income Fund ................ 6.93% 9.75% 7.24% 8.55%
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original purchase.
================================================================================
<PAGE>
T. Rowe Price New Income Fund
================================================================================
Unaudited
<TABLE>
For a share outstanding throughout each period
====================================================================================================================================
Financial Highlights
<CAPTION>
6 Months Year 3 Months# Year
Ended Ended Ended Ended
11/30/97 5/31/97 5/31/96 5/31/95 5/31/94 2/28/94 2/28/93
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period ............ $ 8.77 $ 8.70 $ 8.97 $ 8.65 $ 9.12 $ 9.24 $ 8.94
Investment activities
Net investment income ...... 0.29 0.58 0.60 0.58 0.14 0.54 0.57
Net realized and
unrealized gain (loss) ..... 0.29 0.07 (0.27) 0.34 (0.40) (0.05) 0.30
Total from
investment activities ...... 0.58 0.65 0.33 0.92 (0.26) 0.49 0.87
Distributions
Net investment income ...... (0.29) (0.58) (0.60) (0.58) (0.14) (0.54) (0.57)
Net realized gain .......... -- -- -- (0.02) (0.07) (0.07) --
Total distributions ........ (0.29) (0.58) (0.60) (0.60) (0.21) (0.61) (0.57)
NET ASSET VALUE
End of period .................. $ 9.06 $ 8.77 $ 8.70 $ 8.97 $ 8.65 $ 9.12 $ 9.24
Ratios/Supplemental Data
Total return ................... 6.66% 7.70% 3.70% 11.13% (2.84)% 5.36% 10.12%
Ratio of expenses to
average net assets ............. 0.71%+ 0.74% 0.75% 0.78% 0.80%+ 0.82% 0.84%
Ratio of net investment
income to average
net assets ..................... 6.44%+ 6.65% 6.66% 6.95% 6.43%+ 5.77% 6.36%
Portfolio turnover rate ........ 68.4% 87.1% 35.5% 54.1% 91.5%+ 58.3% 85.8%
Net assets, end of period
(in millions) .................. $ 1,894 $ 1,711 $ 1,634 $ 1,566 $ 1,375 $ 1,458 $ 1,527
====================================================================================================================================
<FN>
+ Annualized.
# The fund's fiscal year-end was changed to May 31.
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price New Income Fund
================================================================================
Unaudited November 30, 1997
Statement of Net Assets Par/Shares Value
In thousands
- --------------------------------------------------------------------------------
CORPORATE BONDS AND NOTES 40.6%
Automobiles and Related 0.4%
Ford Motor Credit, Sr. Unsub. Notes, 7.20%, 6/15/07 .......... $6,820 $7,117
7,117
Banking 11.6%
ABN AMRO NV, Sub. Deb., 7.30%, 12/1/26 ....................... 10,000 10,072
Banco Generale, Sr. Sub. Notes, (144a), 7.70%, 8/1/02 ........ 7,000 6,653
Banco Latinoamericano, (144a), 6.69%, 12/23/99 ............... 10,000 9,979
Banco Santiago, Sub. Notes, 7.00%, 7/18/07 ................... 5,000 5,021
Bank of Boston Capital Trust, Gtd. Notes, 8.25%, 12/15/26 .... 10,000 10,710
Bank of Oklahoma, 7.125%, 8/15/07 ............................ 12,000 12,350
Den Danske Bank, (144a), VR, 7.40%, 6/15/10 .................. 10,000 10,284
First Chicago NBD, Gtd. Bonds, (144a), 7.95%, 12/1/26 ........ 10,000 10,332
First Empire Capital Trust I, Gtd. Bonds, 8.234%, 2/1/27 ..... 10,000 10,651
Hubco Capital Trust I, 8.98%, 2/1/27 ......................... 7,000 7,499
M & I Capital Trust, 7.65%, 12/1/26 .......................... 11,300 11,222
MBNA
MTN, 6.15%, 10/1/03 ...................................... 5,000 4,954
Sub. Notes, 7.25%, 9/15/02 ............................... 7,000 7,166
Mercantile Bancorporation, Sr. Notes, 7.05%, 6/15/04 ......... 15,000 15,357
Mercantile Bankshares, Sr. Notes, (144a), 6.13%, 7/15/98 + ... 5,000 5,002
Merita Bank, Non-Cum. Step-Up Perpetual Cap. Securities
7.15%, 9/11/02 ....................................... 11,000 11,181
Midland Bank, Sub. Notes, 7.625%, 6/15/06 .................... 10,000 10,554
PNC Bank, Sub. Notes, 7.875%, 4/15/05 ........................ 12,000 12,839
PNC Institutional Capital, (144a), 7.95%, 12/15/26 ........... 8,000 8,362
Santander Financial, Gtd. Sub. Notes, 7.875%, 4/15/05 ........ 8,250 8,886
Scotland International, Sub. Notes, (144a), 8.80%, 1/27/04 ... 5,000 5,589
Skandinaviska Enskilda Banken
Step-Up Perpetual Sub. Notes, (144a)
8.125%, 9/6/06 ....................................... 5,000 5,358
Societe Generale, Step-Up Perpetual Sub. Notes, (144a)
7.85%, 4/30/07 ....................................... 8,000 8,331
Toronto Dominion Bank, Sub. Notes, 6.50%, 1/15/07 ............ 12,000 12,011
220,363
Beverages 0.9%
Embotelladora Andina, 7.00%, 10/1/07 ......................... 5,000 4,982
Panamerican Beverages, Sr. Notes, (144a), 7.25%, 7/1/09 ...... 13,000 13,000
17,982
Building and Real Estate 0.9%
Meditrust, 7.00%, 8/15/07 .................................... $ 6,500 $ 6,495
Simon Debartolo Group, 7.00%, 7/15/09 ........................ 10,000 10,031
16,526
<PAGE>
Cable Operators 1.9%
Clear Channel, Deb., 7.25%, 10/15/27 ......................... 12,000 11,914
Comcast Cable Communications, 8.375%, 5/1/07 ................. 5,000 5,465
Cox Enterprises, 7.375%, 7/15/27 ............................. 17,000 17,936
35,315
Consumer Services 0.6%
Service Corporation International, 7.70%, 4/15/09 ............ 10,000 10,655
10,655
Electric Utilities 6.8%
Alabama Power, 1st Mtg. Bonds, 7.75%, 2/1/23 ................. 3,650 3,777
Big Rivers, Cooperative Utility Trust Cert., 10.70%, 9/15/17 . 2,500 2,640
Consolidated Edison, Deb .....................................
6.375%, 4/1/03 ....................................... 5,860 5,853
6.45%, 12/1/07 ....................................... 7,000 6,952
Consumers Energy, 1st Mtg. Bonds, 6.375%, 9/15/03 ............ 5,000 4,868
DR Investments, Sr. Notes, (144a), 7.45%, 5/15/07 ............ 5,000 5,282
Georgia Power
1st Mtg. Bonds
7.625%, 3/1/23 ....................................... 5,750 5,914
7.95%, 2/1/23 ........................................ 2,809 2,906
Houston Lighting & Power, 7.75%, 3/15/23 ..................... 10,000 10,351
Jersey Central Power & Light
1st Mtg. Notes, 6.75%, 11/1/25 ........................... 9,000 8,372
MTN, 6.85%, 11/27/06 ..................................... 10,000 10,160
Montana Power, 1st Mtg. Bonds, 8.25%, 2/1/07 ................. 5,000 5,503
National Rural Utilities Cooperative Finance, 6.70%, 6/15/02 . 5,000 5,091
Northern Indiana Public Service, MTN, 6.90%, 6/1/00 .......... 5,000 5,077
Pennsylvania Power & Light, 1st Mtg. Notes, 6.875%, 3/1/04 ... 5,000 5,095
Philadelphia Electric, 1st Ref. Mtg., 8.00%, 4/1/02 .......... 8,050 8,507
Public Service Electric & Gas, 1st Ref. Mtg., 6.125%, 8/1/02 . 3,450 3,416
Texas Utilities Electric, 1st Mtg. Bonds, 7.875%, 3/1/23 ..... 8,450 8,621
Virginia Electric & Power, 1st Ref. Mtg., 7.50%, 6/1/23 ...... 10,950 11,150
West Texas Utilities, 1st Mtg. Bonds, 6.375%, 10/1/05 ........ 7,860 7,867
127,402
Finance and Credit 6.0%
Banesto Finance, Gtd. Sub. Notes, 7.50%, 3/25/07 ............. 5,000 5,245
CIT Capital Trust I, Gtd. Cap. Securities, 7.70%, 2/15/27 .... $10,000 $10,469
Fairfax Financial Holdings, 8.25%, 10/1/15 ................... 12,760 13,982
Hutchison Whampoa Finance, (144a), 6.95%, 8/1/07 ............. 18,000 17,558
Jefferson Pilot Capital Trust, (144a), 8.14%, 1/15/46 ........ 5,000 5,175
MCN Financing, Gtd. Notes, 6.305%, 6/1/37 .................... 15,000 15,009
National City Capital Trust I, Gtd. Notes, 6.75%, 6/1/29 ..... 17,000 17,096
Safeco Capital Trust, (144a), 8.072%, 7/15/37 ................ 15,000 15,285
Trenwick Capital Trust I, Cap. Securities, 8.82%, 2/1/37 ..... 2,925 3,224
Zurich Capital Trust, (144a), 8.376%, 6/1/37 ................. 10,000 10,751
113,794
Food Processing 0.6%
Nabisco, 6.70%, 6/15/02 ...................................... 10,000 10,086
Quaker Oats, 7.44%, 3/2/26 ................................... 1,000 1,070
11,156
<PAGE>
Food and Tobacco 0.5%
Philip Morris, 7.65%, 7/1/08 ................................. 10,000 10,503
10,503
Industrials 0.6%
Celulosa Arauco Y Constitucion, (144a), 7.20%, 9/15/09 ....... 12,500 12,298
12,298
Insurance 2.4%
Hartford Life, 6.90%, 6/15/04 ................................ 14,850 15,127
Liberty Mutual Insurance, (144a), 8.20%, 5/4/07 .............. 12,000 13,139
Metropolitan Life Insurance, (144a), 7.80%, 11/1/25 .......... 16,850 17,808
46,074
Investment Dealers 2.3%
Donaldson Lufkin & Jenrette, 6.375%, 5/26/00 ................. 10,000 10,029
Jefferies Group, Sr. Notes, (144a), 7.50%, 8/15/07 ........... 5,000 5,075
Lehman Brothers
Sr. Sub. Notes
5.75%, 11/15/98 ...................................... 5,000 4,975
7.625%, 8/1/98 ....................................... 8,000 8,076
Morgan Stanley Group, 6.875%, 3/1/07 ......................... 5,000 5,080
PaineWebber Group, Sr. Notes, 7.625%, 10/15/08 ............... 10,000 10,618
43,853
Petroleum 0.3%
Parker & Parsley Petroleum, Sr. Notes, 8.875%, 4/15/05 ....... 5,000 5,622
5,622
Railroads 0.6%
CSX, Deb., 7.45%, 5/1/07 ..................................... $10,000 $10,540
10,540
Retail 2.9%
Federated Department Stores, Sr. Deb., 7.45%, 7/15/17 ........ 17,000 17,514
Food Lion, 7.55%, 4/15/07 .................................... 6,000 6,325
Kroger, 7.65%, 4/15/07 ....................................... 9,000 9,536
Sears Roebuck, MTN, 6.93%, 11/15/02 .......................... 12,500 12,768
The Gap, 6.90%, 9/15/07 ...................................... 9,000 9,187
55,330
Savings and Loan 0.3%
CENFED Financial, Sr. Deb., (144a), 11.17%, 12/15/01 ......... 5,000 5,531
5,531
Transportation 0.4%
Qantas Airways, Sr. Notes, (144a), 6.625%, 6/30/98 ........... 7,000 7,026
7,026
Utilities 0.6%
Western Resources, 1st Mtg. Bonds, 6.875%, 8/1/04 ............ 12,000 12,078
12,078
Total Corporate Bonds and Notes (Cost $750,761) .............. 769,165
<PAGE>
U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES 35.0%
U.S. Government Agency Asset-Backed 0.8%
Federal Home Loan Mortgage, REMIC -
Government National Mortgage Assn. Collateral
5.15%, 8/25/12 ....................................... 9,672 9,591
Federal National Mortgage Assn., REMIC, 8.10%, 4/25/25 ....... 4,500 4,712
14,303
U.S. Government Agency Obligations 6.9%
Federal Home Loan Mortgage
6.50%, 11/1/04 - 6/1/24 .............................. 10,545 10,476
7.00%, 2/1/24 ........................................ 4,134 4,168
7.50%, 3/1 - 6/1/24 .................................. 8,622 8,807
8.00%, 6/1/08 ........................................ 95 97
9.00%, 3/1/21 - 5/1/22 ............................... 6,058 6,450
9.75%, 12/1/17 ....................................... 2,193 2,389
10.50%, 2/1/01 - 8/1/20 .............................. 871 960
11.00%, 5/1/11 - 7/1/20 .............................. 423 476
11.50%, 6/1/01 ....................................... 4 5
Federal Home Loan Mortgage
REMIC
5.50%, 10/15/20 $ .................................... 5,000 $ 4,764
6.00%, 5/15/16 ....................................... 4,734 4,724
6.50%, 6/15/23 ....................................... 31,663 31,454
7.00%, 8/15/09 - 9/15/24 ............................. 40,600 40,931
7.50%, 2/15/06 ....................................... 1,957 1,977
Federal National Mortgage Assn ...............................
8.75%, 3/1/10 ........................................ 12 12
10.50%, 7/1/09 - 4/1/22 .............................. 1,990 2,208
REMIC
7.00%, 11/25/18 ...................................... 2,317 2,313
8.00%, 11/25/24 ...................................... 8,233 8,861
131,072
U.S. Government Guaranteed Obligations 27.3%
Government National Mortgage Assn
I
6.00%, 12/15/23 - 4/15/24 ............................ 13,160 12,735
6.50%, 4/15/23 - 9/15/27 ............................. 70,569 69,640
7.00%, 4/15/22 - 10/15/27 ............................ 112,425 113,055
7.50%, 8/15/16 - 9/15/27 ............................. 76,184 78,180
8.00%, 12/15/24 - 10/15/27 ........................... 56,660 59,138
8.50%, 9/15/16 - 3/15/27 ............................. 47,260 49,796
9.00%, 1/15/09 - 4/15/25 ............................. 16,989 18,306
9.50%, 6/15/09 - 3/15/25 ............................. 54,646 59,519
11.00%, 12/15/09 - 1/15/21 ........................... 16,165 18,365
11.50%, 3/15/10 - 10/15/15 ........................... 2,181 2,506
II
7.00%, 12/20/23 - 9/20/27 ............................ 25,794 25,756
8.50%, 9/20/26 ....................................... 150 157
9.00%, 6/20/16 - 5/20/22 ............................. 6,675 7,153
GPM, I, 10.25%, 2/15/16 - 11/15/20 ....................... 2,531 2,790
517,096
Total U.S. Government Mortgage-Backed Securities (Cost $649,748) 662,471
<PAGE>
U.S. GOVERNMENT OBLIGATIONS 17.5%
U.S. Treasury Obligations 17.5%
U.S. Treasury Bonds
6.125%, 11/15/27 ..................................... 13,240 13,389
U.S. Treasury Bonds
6.375%, 8/15/27 $ .................................... 55,910 $58,138
6.50%, 11/15/26 ...................................... 8,000 8,426
6.75%, 8/15/26 ....................................... 54,550 59,289
8.00%, 11/15/21 ...................................... 16,035 19,748
8.125%, 5/15/21 ...................................... 32,140 40,009
U.S. Treasury Notes
5.75%, 11/15/00 ...................................... 10,000 9,986
6.25%, 10/31/01 ...................................... 29,000 29,380
6.375%, 1/15/00 ...................................... 48,300 48,851
7.75%, 11/30/99 ...................................... 43,750 45,336
Total U.S. Government Obligations (Cost $311,918) ............ 332,552
ASSET-BACKED SECURITIES 0.2%
Auto-Backed 0.0%
Premier Auto Trust, 4.22%, 3/2/99 ............................ 684 680
680
Receivables-Backed 0.2%
Continental Airlines, PTC, 6.94%, 10/15/13 ................... 3,431 3,505
3,505
Total Asset-Backed Securities (Cost $4,115) .................. 4,185
EQUITY AND CONVERTIBLE SECURITIES 1.0%
Banking 0.5%
Chase Preferred Capital, Pfd. Stock, (Series A) .............. 400 10,425
10,425
Financial 0.5%
Pinto Totta International Finance
Pfd. Stock, (144a), (Series A) ........................... 9 8,671
8,671
Total Equity and Convertible Securities (Cost $18,685) ...... 19,096
MONEY MARKET FUNDS 2.4%
Reserve Investment Fund, 5.71% # ............................. 44,781 44,781
Total Money Market Funds (Cost $44,781) ..................... 44,781
Total Investments in Securities
96.7% of Net Assets (Cost $1,780,008) ....................... $ 1,832,250
Other Assets Less Liabilities ................................ 61,797
NET ASSETS ................................................... $ 1,894,047
<PAGE>
Net Assets Consist of:
Accumulated net investment income -
net of distributions ......................................... $ 2,699
Accumulated net realized gain/loss -
net of distributions ......................................... 5,808
Net unrealized gain (loss) ................................... 52,242
Paid-in-capital applicable to 209,158,836
shares of $1.00 par value capital stock
outstanding; 300,000,000 shares authorized ................... 1,833,298
NET ASSETS ................................................... $ 1,894,047
NET ASSET VALUE PER SHARE .................................... $ 9.06
+ Private Placement
# Seven-day yield
GPM Graduated Payment Mortgage
MTN Medium Term Note
PTC Pass-through Certificate
REMIC Real Estate Mortgage Investment Conduit
VR Variable Rate
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 - totalof such securities at year-end amounts to
10.9% of net assets.
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price New Income Fund
================================================================================
Unaudited
Statement of Operations
- --------------------------------------------------------------------------------
In thousands
6 Months
Ended
11/30/97
Investment Income
Interest and dividend income .................................... $ 64,955
Expenses
Investment management ....................................... 4,307
Shareholder servicing ....................................... 1,795
Custody and accounting ...................................... 175
Prospectus and shareholder reports .......................... 80
Registration ................................................ 51
Legal and audit ............................................. 14
Directors ................................................... 10
Miscellaneous ............................................... 9
Total expenses .............................................. 6,441
Net investment income ........................................... 58,514
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities .......................... 12,574
Change in net unrealized gain or loss on securities ............. 44,914
Net realized and unrealized gain (loss) ......................... 57,488
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS .......................................... $116,002
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price New Income Fund
================================================================================
Unaudited
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands
6 Months Year
Ended Ended
11/30/97 5/31/97
Increase (Decrease) in Net Assets
Operations
Net investment income ........................... $ 58,514 $ 111,049
Net realized gain (loss) ........................ 12,574 4,730
Change in net unrealized gain or loss ........... 44,914 6,965
Increase (decrease) in net assets from operations 116,002 122,744
Distributions to shareholders
Net investment income ........................... (58,516) (111,027)
Capital share transactions *
Shares sold ..................................... 226,506 323,914
Distributions reinvested ........................ 34,922 71,848
Shares redeemed ................................. (135,597) (331,111)
Increase (decrease) in net assets from capital
share transactions .............................. 125,831 64,651
Net Assets
Increase (decrease) during period ................... 183,317 76,368
Beginning of period ................................. 1,710,730 1,634,362
End of period ....................................... $1,894,047 $ 1,710,730
*Share information
Shares sold ..................................... 25,357 36,821
Distributions reinvested ........................ 3,890 8,164
Shares redeemed ................................. (15,166) (37,672)
Increase (decrease) in shares outstanding ....... 14,081 7,313
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price New Income Fund
================================================================================
Unaudited November 30, 1997
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.
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 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.
Equity securities listed or regularly traded on a securities exchange are
valued at the last quoted sales price on the day the valuations are made. A
security which is listed or traded on more than one exchange is valued at the
quotation on the exchange determined to be the primary market for such security.
Listed securities not traded on a particular day and securities regularly traded
in the over-the-counter market are valued at the mean of the latest bid and
asked prices. Other equity securities are valued at a price within the limits of
the latest bid and asked prices deemed by the Board of Directors, or by persons
delegated by the Board, best to reflect fair value.
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. Dividend income and 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.
<PAGE>
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.
SECURITIES LENDING The fund lends its securities to approved brokers to
earn additional income and takes cash and U.S. Treasury securities as collateral
to secure the loans. Collateral is maintained at not less than 100% of the value
of loaned securities. At November 30, 1997, the value of securities on loan was
$216,917,000. 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 $529,214,000 and $160,224,000,
respectively, for the six months ended November 30, 1997. Purchases and sales of
U.S. government securities aggregated $861,685,000 and $1,006,347,000,
respectively, for the six months ended November 30, 1997.
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.
At November 30, 1997, the aggregate cost of investments for federal income
tax and financial reporting purposes was $1,780,008,000, and net unrealized gain
aggregated $52,242,000, of which $55,321,000 related to appreciated investments
and $3,079,000 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 $732,000 was payable at November 30, 1997. 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, 1997, 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.
<PAGE>
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
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 $1,074,000 for the six months
ended November 30, 1997, of which $197,000 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 29.5% of the outstanding shares of the New Income Fund at November
30, 1997. For the six months then ended, the fund was allocated $615,000 of
Spectrum expenses, $111,000 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, 1997, totaled
$1,022,000 and are reflected as interest income in the accompanying Statement of
Operations.
<PAGE>
T. Rowe Price Shareholder Services
================================================================================
INVESTMENT SERVICES AND INFORMATION
KNOWLEDGEABLE SERVICE REPRESENTATIVES
BY PHONE 1-800-225-5132 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.
IN PERSON Available in T. Rowe Price Investor Centers.
ACCOUNT SERVICES
CHECKING Available on most fixed income funds ($500 minimum).
AUTOMATIC INVESTING From your bank account or paycheck.
AUTOMATIC WITHDRAWAL scheduled, automatic redemptions.
DISTRIBUTION OPTIONS Reinvest all, some, or none of your
distributions.
AUTOMATED 24-HOUR SERVICES Including Tele*AccessRegistration Mark
and T. Rowe Price OnLine.
DISCOUNT BROKERAGE*
INDIVIDUAL INVESTMENTS Stocks, bonds, options, precious metals,
and other securities at a savings over regular commission rates.
INVESTMENT INFORMATION
COMBINED STATEMENT Overview of your T. Rowe Price accounts.
SHAREHOLDER REPORTS Fund managers' reviews of their strategies
and results.
T. ROWE PRICE REPORT Quarterly investment newsletter discussing
markets and financial strategies.
PERFORMANCE UPDATE Quarterly review of all T. Rowe Price fund
results.
INSIGHTS Educational reports on investment strategies and
financial markets.
INVESTMENT GUIDES Asset Mix Worksheet, College Planning Kit,
Diversifying Overseas: A Guide to International Investing,
Personal Strategy Planner, Retirees Financial Guide, and
Retirement Planning Kit.
* A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
<PAGE>
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access [Registration Mark]:
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 New Income Fund [Registration Mark.]
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
T. Rowe Price Investment Services, Inc., Distributor. F43-051 11/30/97
