<PAGE>
Annual Report
New
Income
Fund
May 31, 1997
[LOGO OF T. ROWE PRICE APPEARS HERE]
T. Rowe Price
<PAGE>
Report Highlights
. The Federal Reserve tightened in March to slow the surging economy; the
consequent interest rate rise led to lackluster returns on high-quality bonds
for the six-month period ended May 31.
. Mortgage-backed securities were the performance leaders among high-quality
bonds, as rising interest rates assuaged prepayment risk.
. The fund's 6- and 12-month returns of 0.26% and 7.70%, respectively, lagged
its Lipper peer group slightly for the shorter period but exceeded it for the
longer.
. We pared our holdings of mortgage-backed securities but continued to
overweight them in the portfolio at 38% of net assets.
. While additional Fed tightening is possible this year, prospects are good for
continued moderate inflation and growth--a favorable environment for bonds
over time.
<PAGE>
Fellow Shareholders
Interest rates rose and prices of high-quality bonds declined on balance for the
six months ended May 31, 1997, the reverse of the credit market scenario in the
first half of the fund's fiscal year. Bond fund returns for the six-month period
were basically flat, as coupon income tended to offset price drops. For the 12-
month period returns were solid, driven almost entirely by income.
Over the past six months, the economy developed considerable momentum.
Consumer sentiment reached unusually high levels, and household spending
on durable goods surged. Jobs were created at a rapid rate, and the
civilian unemployment rate dropped to 4.8% in May, its lowest level in
over two decades. The GDP rose at a 5.8% annual rate in the first
quarter, roughly double its trend rate since the current upturn began in
1991.
Against this background, the Federal Reserve abandoned its patient wait
for the economy to slow on its own and, on March 25, raised the target
for the key federal funds rate from 5.25% to 5.50%--the first tightening
since 1995. This sent shock waves through the stock and bond markets,
but they gradually regained their equilibria in April as interest rates
leveled off or declined slightly, as shown in the chart.
Among high-grade bond market sectors, mortgage-backed securities
outstripped both Treasuries and corporates for the six-month period, as
the rise in interest rates dampened the rate at which homeowners prepaid
their mortgages. The strong performance in recent months enabled
mortgage securities to provide the highest overall returns for the
12-month period
[LINE GRAPH APPEARS HERE]
INTEREST RATE LEVELS
<TABLE>
<CAPTION>
30-Year 5-Year 1-Year
<S> <C> <C> <C>
5/31/96 6.93 6.55 5.70
7.02 6.63 5.79
6.94 6.52 5.80
8/31/96 7.03 6.60 5.81
6.95 6.48 5.72
6.71 6.15 5.48
11/30/96 6.41 5.90 5.41
6.58 6.12 5.50
6.89 6.36 5.62
2/28/97 6.75 6.31 5.60
7.00 6.66 5.94
6.98 6.62 5.93
5/31/97 6.99 6.60 5.86
</TABLE>
1
<PAGE>
as well. Treasury issues outperformed corporate bonds for the six-month
period but not for the whole 12 months. Within the investment-grade
corporate sector, the lowest credit tier (bonds rated BBB) generated the
highest returns. This is typical during periods of strong economic growth
as fears of credit downgrades and defaults diminish.
Performance and Strategy Review
For the six-month period ended May 31, the fund managed a small positive
return that was a few basis points behind that of its Lipper peer group
average and also lagged the broad index. (One hundred basis points equal
one percentage point.) Although total return for the past six months was
lackluster because of the $0.27 drop in share price, the fund's dividend
income for this period ($0.29 per share) was unchanged from the preceding
six-month period. The fund's 7.70% return for the fiscal year, consisting
largely of income but also a modest rise in share price ($8.70 to $8.77),
exceeded its peer group average but not the index.
Performance Comparison
<TABLE>
<CAPTION>
Periods Ended 5/31/97 6 Months 12 Months
<S> <C> <C>
New Income Fund 0.26% 7.70%
Lehman Aggregate
Bond Index 0.94 8.32
Lipper Average of Corporate
Bond Funds A-Rated 0.29 7.60
</TABLE>
We shortened the fund's duration from 5.5 years to 4.9 years because the
buoyant economy increased the potential for higher inflation and a
tightening by the Fed--which, in fact, occurred. (Duration is a measure
of interest rate sensitivity. For example, the share price of a fund with
a duration of four years would fall about 4% for each one-percentage-
point rise in rates and vice versa.)
The principal change we made in portfolio composition was to reduce
holdings of mortgage-backed securities from 44% to 38% of net assets on
<TABLE>
<CAPTION>
SECURITY DIVERSIFICATION
<S> <C>
Reserves 12%
Other 2%
U.S. Treasury Securities 27%
Mortgage-Backed Securities 38%
Corporate Bonds 21%
</TABLE>
Based on net assets as of 5/31/97.
2
<PAGE>
May 31. Even so, mortgage-backed securities remained significantly
overweighted in the portfolio because we like the additional yield they
provide over Treasury securities with no loss of credit quality. These
securities perform well when interest rates fluctuate in a fairly narrow
range, which we anticipate over the coming months, but we reined in the
position a bit in case our forecast is wrong. We trimmed holdings of
corporate bonds from 23% of net assets to 21%, since tight yield spreads
among credit quality levels offered little inducement to move down the
quality chain in search of higher income. The fund maintained a high
weighted average credit rating of AA+.
Outlook
With the economy strong and labor markets under stress, some additional
tightening of monetary policy is possible this year as the Fed tries to
restrain the economy's blistering pace. Credit markets may again be
roiled by a higher federal funds rate. Nevertheless, if inflation remains
under control, we do not believe longer-term interest rates will
necessarily move much higher. Barring a serious miscalculation by the
Fed, we think prospects are good for moderate growth and a favorable
market for debt securities over the long term.
Respectfully submitted,
/s/ Charles P. Smith
Charles P. Smith
President and Chairman of the Investment Advisory Committee
June 17, 1997
3
<PAGE>
T. Rowe Price New Income Fund
- --------------------------------------------------------------------------------
- --------------------
Portfolio Highlights
- --------------------
<TABLE>
<CAPTION>
Key statistics
11/30/96 5/31/97
<S> <C> <C>
Price Per Share $ 9.04 $8.77
Dividends Per Share
For 6 months 0.29 0.29
For 12 months 0.59 0.58
Dividend Yield *
For 6 months 6.79% 6.69%
For 12 months 6.84 6.86
Weighted Average Maturity (years) 9.9 10.4
Weighted Average Effective Duration (years) 5.5 4.9
Weighted Average Quality ** AA+ AA+
</TABLE>
* 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.
- --------------------
Portfolio Highlights
- --------------------
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION
Percent of Percent of
Net Assets Net Assets
11/30/96 5/31/97
<S> <C> <C>
Mortgage-Backed Securities 44% 38%
U.S. Treasury Securities 30 27
Commercial Paper 5 10
Banking 11 8
Electric Utilities 4 6
All Other 12 10
Other Assets Less Liabilities - 6 1
Total 100% 100%
</TABLE>
4
<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.
[LINE GRAPH APPEARS HERE]
NEW INCOME FUND
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Lehman Aggregate
Bond Index New Income Fund
<S> <C> <C>
05/87 10,000 10,000
05/88 10,696 10,790
05/89 11,929 11,765
05/90 13,048 12,696
05/91 14,684 14,275
05/92 16,510 15,930
05/93 18,376 17,437
05/94 18,507 17,681
05/95 20,631 19,648
05/96 21,536 20,374
05/97 23,327 21,942
</TABLE>
- ------------------------------------
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.
<TABLE>
<CAPTION>
Periods Ended 5/31/97 1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New Income Fund 7.70% 7.46% 6.61% 8.17%
............................................................................
</TABLE>
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original
purchase.
5
<PAGE>
T. Rowe Price New Income Fund
- --------------------------------------------------------------------------------
- ---------------------
FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year 3 Months++ Year
Ended Ended Ended
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>
NET ASSET VALUE
Beginning of period $ 8.70 $ 8.97 $ 8.65 $ 9.12 $ 9.24 $ 8.94
..................................................................
Investment activities
Net investment income 0.58 0.60 0.58 0.14 0.54 0.57
Net realized and
unrealized gain (loss) 0.07 (0.27) 0.34 (0.40) (0.05) 0.30
..................................................................
Total from
investment activities 0.65 0.33 0.92 (0.26) 0.49 0.87
..................................................................
Distributions
Net investment income (0.58) (0.60) (0.58) (0.14) (0.54) (0.57)
Net realized gain - - (0.02) (0.07) (0.07) -
..................................................................
Total distributions (0.58) (0.60) (0.60) (0.21) (0.61) (0.57)
..................................................................
NET ASSET VALUE
End of period $ 8.77 $ 8.70 $ 8.97 $ 8.65 $ 9.12 $ 9.24
------------------------------------------------------------------
</TABLE>
Ratios/Supplemental Data
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Total return 7.70% 3.70% 11.13% (2.84)% 5.36% 10.12%
.......................................................................................................
Ratio of expenses to
average net assets 0.74% 0.75% 0.78% 0.80%+ 0.82% 0.84%
.......................................................................................................
Ratio of net investment
income to average
net assets 6.65% 6.66% 6.95% 6.43%+ 5.77% 6.36%
.......................................................................................................
Portfolio turnover rate 87.1% 35.5% 54.1% 91.5%+ 58.3% 85.8%
.......................................................................................................
Net assets, end of period
(in millions) $ 1,711 $ 1,634 $ 1,566 $ 1,375 $ 1,458 $ 1,527
.......................................................................................................
</TABLE>
+ Annualized.
++ The funds fiscal year-end was changed to May 31.
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
T. Rowe Price New Income Fund
- --------------------------------------------------------------------------------
May 31, 1997
<TABLE>
<CAPTION>
- -----------------------
STATEMENT OF NET ASSETS Par/Shares Value
- ------------------------------------------------------------------------------------------
In thousands
CORPORATE BONDS AND NOTES 21.3%
<S> <C> <C>
Banking 7.1%
ABN AMRO NV, Sub. Deb., 7.30%, 12/1/26 $ 10,000 $ 9,241
.......................................................................................
Banco Latinoamericano, (144a), 6.69%, 12/23/99 10,000 9,956
.......................................................................................
Bank of Boston Capital Trust, Gtd. Notes, 8.25%, 12/15/26 10,000 9,971
.......................................................................................
First Chicago NBD, Gtd. Bonds, (144a), 7.95%, 12/1/26 10,000 9,589
.......................................................................................
First Empire Capital Trust I, Gtd. Bonds, 8.234%, 2/1/27 10,000 9,794
.......................................................................................
Hubco Capital Trust I, 8.98%, 2/1/27 7,000 7,006
.......................................................................................
M & I Capital Trust, 7.65%, 12/1/26 11,300 10,604
.......................................................................................
Mercantile Bankshares, Sr. Notes, (144a), 6.13%, 7/15/98+ 5,000 4,985
.......................................................................................
PNC Bank, Sub. Notes, 7.875%, 4/15/05 12,000 12,385
.......................................................................................
PNC Institutional Capital, (144a), 7.95%, 12/15/26 8,000 7,756
.......................................................................................
Scotland International, Sub. Notes, (144a), 8.80%, 1/27/04 10,000 10,833
.......................................................................................
Societe Generale, Step-Up Perpetual Sub. Notes, (144a)
7.85%, 4/29/49 8,000 8,065
....................................................................................
Toronto Dominion Bank, Sub. Notes, 6.50%, 1/15/07 12,000 11,784
.......................................................................................
121,969
.............
Consumer Services 0.6%
Service Corporation International, 7.70%, 4/15/09 10,000 10,161
.......................................................................................
10,161
.............
Electric Utilities 6.4%
Alabama Power, 1st Mtg. Bonds, 7.75%, 2/1/23 3,650 3,488
.......................................................................................
Big Rivers, Cooperative Utility Trust Cert., 10.70%, 9/15/17 2,500 2,660
.......................................................................................
Consolidated Edison, Deb., 6.375%, 4/1/03 5,860 5,675
.......................................................................................
Consumers Energy, 1st Mtg. Bonds, 6.375%, 9/15/03 5,000 4,741
.......................................................................................
Georgia Power
1st Mtg. Bonds
7.625%, 3/1/23 5,750 5,384
....................................................................................
7.95%, 2/1/23 3,300 3,182
.......................................................................................
Houston Lighting & Power, 7.75%, 3/15/23 10,000 9,531
.......................................................................................
Jersey Central Power & Light
1st Mtg. Notes, 6.75%, 11/1/25 9,000 7,874
......................................................................................
MTN, 6.85%, 11/27/06 10,000 9,620
.......................................................................................
Montana Power, 1st Mtg. Bonds, 8.25%, 2/1/07 5,000 5,225
.......................................................................................
Northern Indiana Public Service, MTN, 6.90%, 6/1/00 5,000 4,978
.......................................................................................
Pacificorp, MTN, 7.12%, 8/15/02 3,900 3,912
.......................................................................................
Pennsylvania Power & Light, 1st Mtg. Notes, 6.875%, 3/1/04 5,000 4,954
.......................................................................................
</TABLE>
7
<PAGE>
T. Rowe Price New Income Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par/Shares Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Philadelphia Electric, 1st Ref. Mtg., 8.00%, 4/1/02 $ 8,050 $ 8,330
................................................................................
Public Service Electric & Gas, 1st Ref. Mtg., 6.125%,
8/1/02 3,450 3,329
................................................................................
Texas Utilities Electric, 1st Mtg. Bonds, 7.875%, 3/1/23 8,450 8,221
................................................................................
Virginia Electric & Power, 1st Ref. Mtg., 7.50%, 6/1/23 10,950 10,440
................................................................................
West Texas Utilities, 1st Mtg. Bonds, 6.375%, 10/1/05 7,860 7,467
................................................................................
109,011
...........
Finance and Credit 2.3%
Fairfax Financial Holdings, 8.25%, 10/1/15 8,000 8,101
................................................................................
Jefferson Pilot Capital Trust, (144a), 8.14%, 1/15/46 5,000 4,881
................................................................................
National City Capital Trust, Gtd. Notes, 6.75%, 6/1/29 17,000 17,045
................................................................................
Zurich Capital Trust, (144a), 8.376%, 6/1/37 10,000 10,170
................................................................................
40,197
...........
Food Processing 0.1%
Quaker Oats, 7.44%, 3/2/26 1,000 963
................................................................................
963
...........
Industrials 0.9%
Bard (C.R.), 6.70%, 12/1/26 10,000 9,608
................................................................................
Clorox, 8.80%, 7/15/01 5,000 5,344
................................................................................
14,952
...........
Investment Dealers 1.1%
Lehman Brothers
Sr. Sub. Notes
5.75%, 11/15/98 5,000 4,955
............................................................................
7.625%, 8/1/98 8,000 8,104
................................................................................
Salomon, MTN, 6.31%, 10/29/98 5,000 4,991
................................................................................
18,050
...........
Railroads 0.6%
CSX, Deb., 7.45%, 5/1/07 10,000 10,063
................................................................................
10,063
...........
Retail 0.9%
Food Lion, 7.55%, 4/15/07 6,000 6,061
................................................................................
Kroger, 7.65%, 4/15/07 9,000 9,104
................................................................................
15,165
...........
Savings and Loan 0.3%
CENFED Financial, Sr. Deb., (144a), 11.17%, 12/15/01 5,000 5,331
................................................................................
5,331
...........
</TABLE>
8
<PAGE>
T. Rowe Price New Income Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par/Shares Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Telephone 0.6%
GTE, Deb., 9.375%, 12/1/00 $ 10,000 $ 10,789
................................................................................
10,789
...........
Transportation 0.4%
Qantas Airways, Sr. Notes, (144a), 6.625%, 6/30/98 7,000 7,018
................................................................................
7,018
...........
Total Corporate Bonds and Notes (Cost $366,813) 363,669
U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES 38.0%
U.S. Government Agency Asset-Backed 0.3%
Federal National Mortgage Assn., REMIC, 8.10%, 4/25/25 4,500 4,632
................................................................................
4,632
...........
U.S. Government Agency Obligations 2.2%
Federal Home Loan Mortgage
6.50%, 11/1/04 - 6/1/24 11,025 10,472
...........................................................................
7.00%, 2/1/24 4,374 4,294
...........................................................................
7.50%, 3/1 - 6/1/24 9,133 9,118
...........................................................................
8.00%, 6/1/08 108 110
...........................................................................
9.00%, 3/1/21 - 5/1/22 6,598 6,956
...........................................................................
9.75%, 12/1/17 2,292 2,468
...........................................................................
10.50%, 2/1/01 - 8/1/20 988 1,078
...........................................................................
11.00%, 5/1/11 - 7/1/20 496 550
...........................................................................
11.50%, 6/1/01 6 7
................................................................................
Federal National Mortgage Assn.
8.75%, 3/1/10 13 13
...........................................................................
10.50%, 7/1/09 - 4/1/22 2,274 2,481
................................................................................
37,547
...........
U.S. Government Guaranteed Obligations 35.5%
Government National Mortgage Assn.
I
6.00%, 12/15/23 - 4/15/24 3,434 3,187
...........................................................................
6.50%, 9/15/23 - 4/15/26 39,790 37,894
...........................................................................
7.00%, 4/15/22 - 2/15/27 131,743 128,728
...........................................................................
7.50%, 8/15/16 - 12/15/25 72,578 72,869
...........................................................................
8.00%, 7/15/16 - 4/15/27 119,470 122,383
...........................................................................
8.50%, 9/15/16 - 4/15/27 102,149 106,300
...........................................................................
9.00%, 1/15/09 - 11/15/25 30,773 32,675
...........................................................................
</TABLE>
9
<PAGE>
T. Rowe Price New Income Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par/Shares Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Government National Mortgage Assn.
I
9.50%, 6/15/09 - 3/15/25 $ 62,430 $ 67,463
...........................................................................
11.00%, 12/15/09 - 1/15/21 18,520 20,832
...........................................................................
11.50%, 3/15/10 - 10/15/15 2,352 2,674
...........................................................................
II
7.00%, 12/20/23 1,410 1,374
...........................................................................
8.50%, 9/20/26 171 177
...........................................................................
9.00%, 6/20/16 - 5/20/22 7,654 8,099
...........................................................................
GPM, I, 10.25%, 2/15/16 - 11/15/20 3,103 3,384
................................................................................
608,039
...........
Total U.S. Government Mortgage-Backed Securities (Cost $646,371) 650,218
...........
U.S. GOVERNMENT OBLIGATIONS 27.2%
U.S. Treasury Obligations 27.2%
U.S. Treasury Bonds
6.00%, 2/15/26 3,250 2,860
...........................................................................
6.50%, 11/15/26 24,000 22,627
...........................................................................
6.75%, 8/15/26 71,550 69,638
...........................................................................
7.875%, 2/15/21 15,850 17,423
...........................................................................
8.00%, 11/15/21 18,860 21,026
...........................................................................
8.125%, 5/15/21 32,140 36,258
................................................................................
U.S. Treasury Notes
6.125%, 9/30/00 3,000 2,975
...........................................................................
6.25%, 5/31/00 - 2/15/03 22,500 22,316
...........................................................................
6.50%, 5/15 - 8/15/05 104,900 103,910
...........................................................................
6.625%, 6/30/01 - 5/15/07 21,800 21,831
...........................................................................
7.00%, 7/15/06 9,000 9,194
...........................................................................
7.25%, 5/15/04 69,250 71,728
...........................................................................
7.50%, 11/15/01 3,650 3,789
...........................................................................
7.75%, 11/30/99 58,250 60,161
................................................................................
Total U.S. Government Obligations (Cost $459,243) 465,736
...........
ASSET-BACKED SECURITIES 0.9%
Auto-Backed 0.4%
Daimler-Benz Auto Grantor Trust, 3.90%, 10/15/98 366 363
................................................................................
Ford Credit Grantor Trust, 4.30%, 7/15/98 348 347
................................................................................
GMAC Grantor Trust, 4.15%, 3/16/98 113 113
................................................................................
</TABLE>
10
<PAGE>
T. Rowe Price New Income Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par/Shares Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Premier Auto Trust, 4.22%, 3/2/99 $ 1,316 $ 1,304
................................................................................
Western Financial Grantor Trust, 6.20%, 2/1/02 4,984 4,976
................................................................................
7,103
...........
Home Equity Loans-Backed 0.0%
Home Equity Loan, REMIC, 5.65%, 11/15/14 517 508
................................................................................
508
...........
Receivables-Backed 0.5%
Continental Airlines, PTC, 6.94%, 10/15/13 3,431 3,326
................................................................................
Green Tree Financial, 6.25%, 1/15/28 5,000 4,994
................................................................................
8,320
...........
Total Asset-Backed Securities (Cost $16,078) 15,931
...........
EQUITY AND CONVERTIBLE SECURITIES 0.6%
Banking 0.6%
Chase Preferred Capital, Pfd. Stock, (Series A) 400 10,250
................................................................................
Total Equity and Convertible Securities (Cost $9,960) 10,250
...........
COMMERCIAL PAPER 9.8%
Caisse des Depots et Consignations, 4(2), 5.58%, 6/17/97 25,000 24,934
................................................................................
Delaware Funding
4(2)
5.53%, 6/16/97 10,000 9,975
...........................................................................
5.55%, 6/2/97 22,111 22,111
...........................................................................
Halifax Building Society, 5.50%, 6/6/97 20,000 19,981
................................................................................
Internationale Nederland, 5.58%, 6/16/97 25,000 24,938
................................................................................
National Australia Funding, 5.52%, 6/5/97 25,000 24,980
................................................................................
Preferred Receivables Funding, 5.53%, 6/12/97 8,575 8,559
................................................................................
Investments in Commercial Paper through a Joint Account
5.60 - 5.69%, 6/2/97 32,971 32,971
................................................................................
Total Commercial Paper (Cost $168,460) 168,449
...........
CERTIFICATES OF DEPOSIT 1.5%
Deutschebank Finance, 5.55%, 6/5/97 25,000 25,000
................................................................................
Total Certificates of Deposit (Cost $25,000) 25,000
...........
</TABLE>
11
<PAGE>
T. Rowe Price New Income Fund
- --------------------------------------------------------------------------------
Value
- --------------------------------------------------------------------------------
In thousands
<TABLE>
<S> <C>
Total Investments in Securities
99.3% of Net Assets (Cost $1,691,925) $ 1,699,253
Other Assets Less Liabilities 11,477
............
NET ASSETS $ 1,710,730
------------
Net Assets Consist of:
Accumulated net investment income - net of distributions $ 2,701
Accumulated net realized gain/loss - net of distributions (6,766)
Net unrealized gain (loss) 7,328
Paid-in-capital applicable to 195,078,443 shares of
$1.00 par value capital stock outstanding; 300,000,000
shares authorized 1,707,467
............
NET ASSETS $ 1,710,730
------------
NET ASSET VALUE PER SHARE $ 8.77
------------
</TABLE>
+ Private Placement
GPM Graduated Payment Mortgage
MTN Medium Term Note
PTC Pass-through Certificate
REMIC Real Estate Mortgage Investment Conduit
4(2) Commercial Paper sold within terms of a
private placement memorandum, exempt
from registration under section 4.2 of the
Securities Act of 1933, as amended, and
may be sold only to dealers in that program
or other "accredited investors".
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 4.6% of net assets.
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
T. Rowe Price New Income Fund
- --------------------------------------------------------------------------------
- -------------------------
Statement of Operations
- --------------------------------------------------------------------------------
In thousands
<TABLE>
<CAPTION>
Year
Ended
5/31/97
<S> <C>
Investment Income
Interest and dividend income $ 123,450
...........
Expenses
Investment management 7, 984
Shareholder servicing 3,777
Custody and accounting 384
Prospectus and shareholder reports 113
Registration 75
Legal and audit 27
Directors 20
Miscellaneous 21
...........
Total expenses 12,401
...........
Net investment income 111,049
...........
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 4,730
Change in net unrealized gain or loss on securities 6,965
...........
Net realized and unrealized gain (loss) 11,695
...........
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 122,744
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
T. Rowe Price New Income Fund
- --------------------------------------------------------------------------------
- ------------------------------------
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands
<TABLE>
<CAPTION>
Year
Ended
5/31/97 5/31/96
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations
Net investment income $ 111,049 $ 107,924
Net realized gain (loss) 4,730 1,379
Change in net unrealized gain or loss 6,965 (53,172)
..........................
Increase (decrease) in net assets from operations 122,744 56,131
..........................
Distributions to shareholders
Net investment income (111,027) (107,911)
..........................
Capital share transactions*
Shares sold 323,914 394,756
Distributions reinvested 71,848 78,213
Shares redeemed (331,111) (352,730)
..........................
Increase (decrease) in net assets from capital
share transactions 64,651 120,239
..........................
Net Assets
Increase (decrease) during period 76,368 68,459
Beginning of period 1,634,362 1,565,903
..........................
End of period $ 1,710,730 $1,634,362
--------------------------
*Share information
Shares sold 36,821 43,673
Distributions reinvested 8,164 8,680
Shares redeemed (37,672) (39,188)
..........................
Increase (decrease) in shares outstanding 7,313 13,165
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
T. Rowe Price New Income Fund
- --------------------------------------------------------------------------------
May 31, 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.
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. Dividends and distributions to
shareholders are recorded by the fund on the ex-dividend date. Income and
capital gain
15
<PAGE>
T. Rowe Price New Income Fund
- --------------------------------------------------------------------------------
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 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 May 31, 1997, the value of securities on loan was
$366,242,000. 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 $396,601,000 and $426,395,000,
respectively, for the year ended May 31, 1997. Purchases and sales of U.S.
government securities aggregated $997,253,000 and $1,037,964,000, respectively,
for the year ended May 31, 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 May 31, 1997, the fund had no unused realized capital loss
carryforwards for federal income tax purposes. Capital loss carryforwards
utilized in 1997 amounted to $2,377,000.
16
<PAGE>
T. Rowe Price New Income Fund
- --------------------------------------------------------------------------------
At May 31, 1997, the aggregate cost of investments for federal income tax and
financial reporting purposes was $1,691,925,000, and net unrealized gain
aggregated $7,328,000, of which $22,159,000 related to appreciated investments
and $14,831,000 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 $689,000 was payable at May 31, 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
May 31, 1997, and for the year then ended, the effective annual group fee rate
was 0.33%. 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 $3,494,000 for the year ended May 31, 1997, of which $254,000 was
payable at period-end.
17
<PAGE>
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, 1997, 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, 1997 by
correspondence with the custodian and, where appropriate, the application of
alternative auditing procedures for unsettled security transactions, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
June 18, 1997
18
<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*Access(R) 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.
19
<PAGE>
T. Rowe Price Mutual Funds
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STOCK FUNDS BOND FUNDS
...................... ............................ ........................
<S> <C> <C>
Domestic Domestic Taxable International/Global
Balanced Corporate Income Global Government Bond
Blue Chip Growth GNMA Emerging Markets Bond
Capital Appreciation High Yield International Bond
Capital Opportunity New Income
Dividend Growth Short-Term Bond MONEY MARKET FUNDS
Equity Income Short-Term U.S. Government .......................
Equity Index Spectrum Income Taxable
Financial Services Summit GNMA Prime Reserve
Growth & Income Summit Limited-Term Bond Summit Cash Reserves
Growth Stock U.S. Treasury Intermediate U.S. Treasury Money
Health Sciences U.S. Treasury Long-Term
Mid-Cap Growth Tax-Free
Mid-Cap Value Domestic Tax-Free California Tax-Free Money
New America Growth California Tax-Free Bond New York Tax-Free Money
New Era Florida Insured Summit Municipal
New Horizons* Intermediate Tax-Free Money Market
Science & Technology Georgia Tax-Free Bond Tax-Exempt Money
Small-Cap Stock** Maryland Short-Term
Small-Cap Value* Tax-Free Bond BLENDED ASSET FUNDS
Spectrum Growth Maryland Tax-Free Bond ........................
Value New Jersey Tax-Free Bond Personal Strategy Income
New York Tax-Free Bond Personal Strategy Balanced
International/Global Summit Municipal Income Personal Strategy Growth
Emerging Markets Stock Summit Municipal Intermediate
European Stock Tax-Free High Yield T. ROWE PRICE NO-LOAD
Global Stock Tax-Free Income VARIABLE ANNUITY
International Discovery Tax-Free Insured ..........................
International Stock Intermediate Bond Equity Income Portfolio
Japan Tax-Free Short-Intermediate International Stock Portfolio
Latin America Virginia Short-Term Limited-Term Bond Portfolio
New Asia Tax-Free Bond Mid-Cap Growth Portfolio
Spectrum International Virginia Tax-Free Bond New America Growth Portfolio
Personal Strategy Balanced
Portfolio
Prime Reserve Portfolio
</TABLE>
*Closed to new investors.
**Formerly the OTC Fund.
Please call for a prospectus. Read it carefully before you invest or send money.
The T. Rowe Price No-Load Variable Annuity [#V6021] is issued by Security
Benefit Life Insurance Company. In New York, it [#FSB201(11-96)] is issued by
First Security Benefit Life Insurance Company of New York, White Plains, NY.
T. Rowe Price refers to the underlying portfolios' investment managers and the
distributors, T. Rowe Price Investment Services, Inc.; T. Rowe Price Insurance
Agency, Inc.; and T. Rowe Price Insurance Agency of Texas, Inc. The Security
Benefit Group of Companies and the T. Rowe Price companies are not affiliated.
The variable annuity may not be available in all states. The contract has
limitations. Call a representative for costs and complete details of the
coverage.
20
<PAGE>
T. Rowe Price Discount Brokerage
- --------------------------------------------------------------------------------
Discount Brokerage
A Division of T. Rowe Price Investment Services, Inc., Member NASD/SIPC
This low-cost service gives you the opportunity to easily consolidate
all your investments with one company. Through T. Rowe Price Discount
Brokerage, you can buy and sell individual securities--stocks, bonds,
options, and others--at considerable commission savings over full-
service brokers.* We also provide a wide range of services, including:
Automated Telephone and Computer Services You can enter trades, access
quotes, and review account information 24 hours a day, seven days a
week. Any trades executed through these programs save you an additional
10% on commissions.**
Investor Information A variety of informative reports, such as our
Brokerage Insights series, S&P Market Month newsletter, and select stock
reports, can help you better evaluate economic trends and investment
opportunities.
Dividend Reinvestment Service Virtually all stocks held in customer
accounts are eligible for this service, free of charge.
*Based on a February 1997 telephone survey that compared our commission
rates on stock transactions of various sizes with those of other full-
service and discount brokerages. Commission rates will vary based on
size and nature of trades. Services vary by firm. For additional
information concerning our commission rates and services, call 1-800-
638-5660.
**Discount applies to our current commission schedule; subject to our $35
minimum commission.
21
<PAGE>
For yield, price, last transaction, Investor Centers:
current balance, or to conduct 101 East Lombard St.
transactions, 24 hours, 7 days Baltimore, MD 21202
a week, call Tele*Access(R):
1-800-638-2587 toll free T. Rowe Price
Financial Center
For assistance 10090 Red Run Blvd.
with your existing Owings Mills, MD 21117
fund account, call:
Shareholder Service Center Farragut Square
1-800-225-5132 toll free 900 17th Street, N.W.
410-625-6500 Baltimore area Washington, D.C. 20006
To open a Discount Brokerage
account or obtain information, ARCO Tower
call: 1-800-638-5660 toll free 31st Floor
515 South Flower St.
Internet address: Los Angeles, CA 90071
www.troweprice.com
4200 West Cypress St.
T. Rowe Price Associates 10th Floor
100 East Pratt Street Tampa, FL 33607
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(R).
[LOGO OF T. ROWE PRICE APPEARS HERE]
T. Rowe Price Investment Services, Inc., Distributor. F43-050 5/31/97
