- --------------------------------------------------------------------------------
T. Rowe Price
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Annual Report
New Income Fund
- --------------------------------------------------------------------------------
May 31, 1998
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REPORT HIGHLIGHTS
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New Income Fund
* The bond market environment was favorable for most of your fund's fiscal
year ended May 31, although interest rates declined more in the first half
than in the second.
* Among high-quality bonds, 30-year Treasury bonds posted the best six-month
returns, but corporates also performed well.
* The fund's 6- and 12-month returns of 3.92% and 10.84%, respectively, were
in line with its peer group but slightly lower than the Lehman Aggregate
Bond Index.
* We focused on income, reducing U.S. Treasury bonds and increasing holdings
of corporate bonds as the U.S. economy remained healthy.
* Our outlook for the bond market is positive, as we see little likelihood of
a tighter monetary policy unless inflationary pressures build
significantly.
<PAGE>
Fellow Shareholders
Fixed income investors continued to enjoy solid returns during the six months
ended May 31 against a backdrop of declining interest rates and low inflation.
Long-term Treasury bonds provided the highest returns, reflecting their extreme
sensitivity to interest rate changes, but corporate bonds also performed well as
the economy maintained its momentum. Mortgage-backed securities lagged as
homeowners took advantage of attractive mortgage rates to refinance their loans.
[Interest Rate Levels - a 3-line chart showing the 30-year Treasury Bond,
5- year Treasury Note and 1-year Treasury Bill yields from to 11/30/97 to
5/31/98.]
Market Environment
Interest rates fell approximately one percentage point over the past year,
with about one-quarter of the move occurring in the past six months. In recent
months, long-term rates declined more than short-term, causing the yield curve
to flatten. For instance, a year ago, the 30-year Treasury bond yield of 6.99%
was 113 basis points higher than the one-year Treasury bill yield, but on May 31
the difference was only 40 basis points (100 basis points equal one percent).
This means that any move to long maturities in the U.S. government market now
brings a relatively small pickup in income.
The performance of mortgage-backed securities was hindered by a sharp
increase in prepayments, reflected in the new high reached by the Mortgage
Bankers Association Refinancing Index in January. Rising property values, a
strong housing market, and attractive interest rates inspired many homeowners to
change the terms of their mortgages and perhaps their addresses, also.
The economy's consistent strength and momentum in recent years resulted in
some credit trends that interested us as portfolio managers. In particular,
credit rating agencies issued far more upgrades than downgrades for corporate
bonds in the BBB and BB+ sectors, which straddle the line between investment
grade (BBB) and noninvestment grade (BB). Prices of upgraded bonds rise as their
yields adjust lower. As you know, your fund's investment program was recently
amended to allow purchases of such "split-rated" bonds (up to 15% of total
assets), and we began to take advantage of that increased flexibility.
================================================================================
Performance Comparison
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Periods Ended 5/31/98 6 Months 12 Months
- --------------------------------------------------------------------------------
New Income Fund 3.92% 10.84%
Lehman Aggregate Bond Index 4.09 10.91
Lipper Average of Corporate
Bond Funds A-Rated 3.93 10.85
================================================================================
<PAGE>
Performance Review
Your fund provided solid returns for both the 6- and 12-month periods that
were in line with its Lipper peer group average. Returns were slightly lower
than those of the benchmark Lehman index, due in part to the greater exposure of
the index to long Treasury securities, which performed well. The fund's income
return was boosted in both periods by appreciation, as the share price rose from
$8.77 to $9.09 over the 12 months, but most of the gain belonged to the first
half of the fiscal year-June through November.
Strategy
The overall aim of our portfolio adjustments during the period was to lay
the groundwork for higher income in future months. Not only is this consistent
with the fund's goal as prescribed in the prospectus, but income has the
advantage of always contributing positively to total return. Toward this end, we
analyzed credit trends across a number of U.S. and foreign markets in search of
securities that fit our investment program but offered a yield advantage. This
led us to so-called Yankee bonds, which are issued by foreign companies but are
denominated in U.S. dollars and traded in the U.S. These bonds, representing 10
countries and a variety of industries, composed almost 15% of the portfolio at
the close of the period and are included in the "corporate bond" section of the
Security Diversification chart. We also took advantage of our new ability to buy
some corporate bonds that may carry both investment-grade and
noninvestment-grade ratings. As a result of this strategy, our holdings of
corporate bonds and asset-backed securities rose to 64% from 41% six months ago.
[A pie chart "Security Diversification" showing U.S. government and
agencies, 8%; mortgage-backed securities 27%; corporate bonds 64%, Other and
reserves 1%.]
We trimmed but otherwise maintained a significant commitment to
mortgage-backed securities because they offer high income and also high credit
quality. Our holdings here are issued by Ginnie Mae (GNMA), which is an agency
of the Department of Housing and Urban Development, and by the U.S.
government-sponsored agencies, Fannie Mae and Freddie Mac. Within this universe,
we look for securities backed by mortgages that should be less likely to be
prepaid, such as those over two years old or with low balances. We also
purchased CMOs (collateralized mortgage obligations) and asset-backed securities
that are structured so that they are protected from prepayments and still offer
attractive yields. And last, we largely eliminated our holdings of longer-term
Treasuries to redeploy the assets in higher-yielding corporates. Our holdings of
Tennessee Valley Authority securities and Fannie Mae debentures provide much the
same liquidity and high quality as Treasuries, but also higher income.
<PAGE>
Outlook
The economy remains in good shape. GDP was strong for the first quarter,
and unemployment is at an 18-year low of 4.3%. However, inventories are building
up, and we expect a slowing of growth in the second quarter. Asia's problems are
starting to affect the domestic market and should remain an issue for at least
the next two quarters, preventing our own economy from overheating and
forestalling a tightening of monetary policy by the Federal Reserve.
We expect stable interest rates but with a slightly downward drift as
inflation remains in check. In this environment, we believe mortgage prepayments
will remain fairly high but feel comfortable with our current strategy of
holding mortgage securities with some protection against prepayments. We will
continue to make use of our extensive in-house research resources to find debt
securities that will help us provide a high level of income while maintaining
the fund's overall investment-grade credit quality.
For the past year, bond investors and your fund have benefited from the
appreciation that accompanies falling rates. While we may see some more of this,
we believe returns in the coming months may be driven primarily by income and,
therefore, may be more modest than those of the past year.
Respectfully submitted,
/s/
Peter Van Dyke
President and Chairman of the Investment Advisory Committee
June 19, 1998
<PAGE>
T. Rowe Price New Income Fund
================================================================================
================================================================================
Portfolio Highlights
- --------------------------------------------------------------------------------
Key statistics
11/30/97 5/31/98
- --------------------------------------------------------------------------------
Price Per Share $9.06 $9.09
Dividends Per Share
For 6 months 0.29 0.28
For 12 months 0.58 0.57
Dividend Yield *
For 6 months 6.53% 6.25%
For 12 months 6.72 6.49
Weighted Average Maturity (years) 12.2 14.4
Weighted Average Effective Duration (years) 5.4 5.9
Weighted Average Quality ** AA A+
* 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.
================================================================================
<PAGE>
T. Rowe Price New Income Fund
================================================================================
================================================================================
Portfolio Highlights
- --------------------------------------------------------------------------------
SECTOR Diversification
Percent of Percent of
Net Assets Net Assets
11/30/97 5/31/98
- --------------------------------------------------------------------------------
Mortgage-Backed Securities 35% 27%
Banking 12 16
Finance and Credit 7 7
Fannie Mae-Debenture - 6
Asset-Backed - 6
Industrial 1 4
Petroleum - 3
Insurance 2 3
Investment Dealers 2 3
Cable Operators 2 3
Entertainment and Leisure - 2
Building and Real Estate 1 2
Media and Communications - 2
Savings and Loan - 2
All Other 35 14
Other Assets Less Liabilities 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 shown here]
================================================================================
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 5/31/98 1 Year 3 Years 5 Years 10 Years
New Income Fund 10.84% 7.37% 6.88% 8.47%
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>
<TABLE>
T. Rowe Price New Income Fund
====================================================================================================================================
For a share outstanding throughout each period
====================================================================================================================================
Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------------------
Year 3 Months++ Year
Ended Ended Ended
5/31/98 5/31/97 5/31/96 5/31/95 5/31/94 2/28/94
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period ...................... $ 8.77 $ 8.70 $ 8.97 $ 8.65 $ 9.12 $ 9.24
Investment activities
Net investment income .............. 0.57 0.58 0.60 0.58 0.14 0.54
Net realized and
unrealized gain (loss) ............. 0.36 0.07 (0.27) 0.34 (0.40) (0.05)
Total from
investment activities .............. 0.93 0.65 0.33 0.92 (0.26) 0.49
Distributions
Net investment income .............. (0.57) (0.58) (0.60) (0.58) (0.14) (0.54)
Net realized gain .................. (0.04) -- -- (0.02) (0.07) (0.07)
Total distributions ................ (0.61) (0.58) (0.60) (0.60) (0.21) (0.61)
NET ASSET VALUE
End of period ............................ $ 9.09 $ 8.77 $ 8.70 $ 8.97 $ 8.65 $ 9.12
Ratios/Supplemental Data
Total return^ ............................ 10.84% 7.70% 3.70% 11.13% (2.84)% 5.36%
Ratio of expenses to
average net assets ....................... 0.71% 0.74% 0.75% 0.78% 0.80%+ 0.82%
Ratio of net investment
income to average
net assets ............................... 6.31% 6.65% 6.66% 6.95% 6.43%+ 5.77%
Portfolio turnover rate .................. 147.3% 87.1% 35.5% 54.1% 91.5%+ 58.3%
Net assets, end of period
(in millions) ............................ $ 2,076 $ 1,711 $ 1,634 $ 1,566 $ 1,375 $ 1,458
<FN>
^ Total return reflects the rate that an investor would have earned on an investment in the fund during each period, assuming
reinvestment of all distributions.
+ Annualized.
++ The fund's fiscal year-end was changed to May 31.
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price New Income Fund
================================================================================
May 31, 1998
================================================================================
Statement of Net Assets
- --------------------------------------------------------------------------------
Par/Shares Value
In thousands
CORPORATE BONDS AND NOTES 58.6%
Automobiles and Related 0.7%
Hertz, 7.00%, 1/15/28 ....................................... $15,000 $14,860
14,860
Banking 15.9%
Ahmanson Capital Trust I, Cap. Securities, (144a)
8.36%, 12/1/26 .............................. 10,000 11,010
Banco Generale, Sr. Sub. Notes, (144a), 7.70%, 8/1/02 ....... 10,000 9,757
Banco Latinoamericano, (144a), 6.69%, 12/23/99 .............. 10,000 10,029
Banco Santiago, Sub. Notes, 7.00%, 7/18/07 .................. 10,000 9,764
Bank of Boston Capital Trust, Gtd. Notes, 8.25%, 12/15/26 ... 30,000 32,608
Bank of Oklahoma, 7.125%, 8/15/07 ........................... 12,000 12,606
Bank United, 8.875%, 5/1/07 ................................. 15,000 16,415
Bankboston, Sub. Notes, 6.50%, 12/19/07 ..................... 6,500 6,502
Banque Parabas, Sub. Notes, 6.875%, 3/1/09 .................. 15,000 15,153
Capital One Bank, Sr. Notes, 6.70%, 5/15/08 ................. 20,000 20,003
Den Danske Bank, (144a), VR, 7.40%, 6/15/10 ................. 10,000 10,593
FCNCB Capital Trust I, Gtd. Cap. Securities, (144a)
8.05%, 3/1/28 ............................... 12,000 12,343
First Empire Capital Trust I, Gtd. Bonds, 8.234%, 2/1/27 .... 10,000 10,935
Hubco Capital Trust I, 8.98%, 2/1/27 ........................ 7,000 7,787
IBJ Preferred Capital, (144a), 8.79%, 6/30/08 ............... 22,000 19,494
Mason Dixon Bancshares, Sr. Notes, 7.48%, 4/23/08+ .......... 20,000 19,962
MBNA Capital I, 8.278%, 12/1/26 ............................. 15,000 15,931
Mercantile Bankshares, Sr. Notes, (144a), 6.13%, 7/15/98+ ... 5,000 4,999
Merita Bank, Non-Cum. Step-Up Perpetual Cap. Securities
7.15%, 9/11/02 .............................. 11,000 11,156
Riggs National, 9.65%, 6/15/09 .............................. 10,000 12,051
SB Treasury, (144a), 9.40%, 6/30/08 ......................... 18,000 17,580
Skandinaviska Enskilda Banken
Step-Up Perpetual Sub. Notes, (144a)
6.50%, 12/4/03 .............................. 19,500 19,451
8.125%, 9/6/06 .............................. 10,000 10,787
Societe Generale, Step-Up Perpetual Sub. Notes, (144a)
7.85%, 4/30/07 .............................. 13,000 13,551
330,467
<PAGE>
Beverages 1.1%
Embotelladora Andina, 7.00%, 10/1/07 ........................ $10,000 $ 9,826
Panamerican Beverages, Sr. Notes, (144a), 7.25%, 7/1/09 ..... 13,000 12,993
22,819
Building Products 1.1%
Owens Corning, 7.70%, 5/1/08 ................................ 23,000 23,382
23,382
Building and Real Estate 2.2%
BRE Properties, 7.125%, 2/15/13 ............................. 10,000 9,950
Hospitality Properties Trust, Sr. Notes, 7.00%, 3/1/08 ...... 10,000 9,932
Simon Debartolo Group, 7.00%, 7/15/09 ....................... 10,000 10,031
Spieker Properties, 7.125%, 7/1/09 .......................... 14,700 14,999
44,912
Cable Operators 2.9%
Clear Channel, Deb., 7.25%, 10/15/27 ........................ 20,000 20,528
Comcast Cable Communications, 8.375%, 5/1/07 ................ 20,000 22,204
Cox Enterprises, 7.375%, 7/15/27 ............................ 17,000 18,205
60,937
Conglomerates 1.0%
Harcourt General, Sr. Deb., 7.20%, 8/1/27 ................... 20,000 20,106
20,106
Container 1.0%
Owens Illinois, Sr. Notes, 7.35%, 5/15/08 ................... 20,000 20,175
20,175
Electric Utilities 0.9%
Montana Power, 1st Mtg. Bonds, 8.25%, 2/1/07 ................ 5,000 5,587
Western Resources, 1st Mtg. Bonds, 6.875%, 8/1/04 ........... 12,000 12,246
17,833
Entertainment and Leisure 2.5%
Royal Caribbean Cruises, Sr. Notes, 6.75%, 3/15/08 .......... 20,000 19,933
Viacom, Sr. Notes, 7.75%, 6/1/05 ............................ 30,000 31,872
51,805
Finance and Credit 6.5%
CIT Capital Trust I, Gtd. Cap. Securities, 7.70%, 2/15/27 ... 10,000 10,786
Contifinancial
Sr. Notes
7.50%, 3/15/02 .............................. 20,000 20,002
8.125%, 4/1/08 .............................. 9,300 9,466
Fairfax Financial Holdings, 8.25%, 10/1/15 .................. 12,760 14,178
Hutchison Whampoa Finance, (144a), 6.95%, 8/1/07 ............ $18,000 $ 16,720
Jefferson Pilot Capital Trust, (144a), 8.14%, 1/15/46 ....... 10,000 10,790
MCN Financing, Gtd. Notes, (144a), 6.305%, 6/1/37 ........... 15,000 15,026
Safeco Capital Trust I, 8.072%, 7/15/37 ..................... 15,000 15,867
Trenwick Capital Trust I, Cap. Securities, 8.82%, 2/1/37 .... 10,500 11,582
Zurich Capital Trust, (144a), 8.376%, 6/1/37 ................ 10,000 11,052
135,469
<PAGE>
Food Processing 1.0%
Flowers Industries, 7.15%, 4/15/28 .......................... 20,000 20,232
20,232
Food and Tobacco 0.8%
Philip Morris, 7.65%, 7/1/08 ................................ 15,000 15,987
15,987
Health Care 1.0%
Beckman Instruments, Sr. Notes, (144a), 7.45%, 3/4/08 ....... 20,000 20,217
20,217
Industrials 3.5%
Celulosa Arauco Y Constitucion, (144a), 7.20%, 9/15/09 ...... 12,500 12,208
Oracle, Sr. Notes, 6.91%, 2/15/07 ........................... 10,000 10,229
WMX Tecnologies, Step-Up Notes, 8.00%, 4/30/04 .............. 10,000 10,691
YPF Sociedad Anonima
7.25%, 3/15/03 .............................. 20,000 19,756
7.75%, 8/27/07 .............................. 20,000 20,514
73,398
Insurance 3.3%
Hartford Life, 6.90%, 6/15/04 ............................... 14,850 15,333
Liberty Mutual Insurance, (144a), 8.20%, 5/4/07 ............. 12,000 13,449
Metropolitan Life Insurance, (144a), 7.80%, 11/1/25 ......... 16,850 18,715
Provident, Sr. Notes, 7.25%, 3/15/28 ........................ 20,000 20,454
67,951
Investment Dealers 3.2%
Goldman Sachs Group, (144a), 6.625%, 12/1/04 ................ 10,000 10,043
Jefferies Group, Sr. Notes, 7.50%, 8/15/07 .................. 10,000 10,400
Paine Webber Group
MTN
6.64%, 4/14/10 .............................. 25,000 24,875
6.72%, 4/1/08 ............................... 20,000 20,307
65,625
Media and Communications 1.8%
News America, (144a), 6.75%, 1/9/38 ......................... $25,500 $25,315
Time Warner, Sr. Notes, 9.125%, 1/15/13 ..................... 10,000 12,157
37,472
Oil Field Services 1.0%
R & B Falcon, Sr. Notes, (144a), 6.95%, 4/15/08 ............. 20,000 19,918
19,918
Petroleum 3.4%
PDV America, 7.875%, 8/1/03 ................................. 10,000 10,410
PDVSA Finance, (144a), 7.50%, 11/15/28 ...................... 20,000 20,094
Union Texas Petroleum, 7.00%, 4/15/08 ....................... 20,000 20,779
Woodside Finance, (144a), 6.60%, 4/15/08 .................... 20,000 19,798
71,081
<PAGE>
Savings and Loan 1.6%
CENFED Financial, Sr. Deb., (144a), 11.17%, 12/15/01 ........ 5,000 5,688
Greenpoint Capital Trust I, Gtd. Notes, 9.10%, 6/1/27 ....... 25,000 28,064
33,752
Specialty Chemicals 1.0%
Sociedad Quimira Y Minera, LCP, (144a), 7.70%, 9/15/06 ...... 20,000 20,738
20,738
Telephone 1.2%
MCI Communications, Sr. Notes, 6.50%, 4/15/10 ............... 10,000 9,929
Worldcom, 7.75%, 4/1/07 ..................................... 15,000 16,202
26,131
Total Corporate Bonds and Notes (Cost $1,198,429) ........... 1,215,267
ASSET-BACKED SECURITIES 5.7%
Auto-Backed 0.0%
Premier Auto Trust, 4.22%, 3/2/99 ........................... 274 273
273
Credit Card-Backed 1.0%
Capital One Master Trust, 6.356%, 6/15/11 ................... 20,000 20,118
20,118
Financial 1.0%
Saxon Asset Security Trust, 6.52%, 11/25/27 ................. 20,000 19,984
19,984
Home Equity Loans-Backed 3.1%
FURST Home Equity Loan Trust, 7.77%, 9/25/27 ................ 5,300 5,595
GE Capital Mortgage Services, 6.465%, 6/25/28 ............... $14,207 $14,384
Money Store Home Equity Trust
6.985%, 10/15/16 ............................ 6,000 6,114
7.91%, 5/15/24 .............................. 13,159 13,690
UCFC Home Equity Loan Trust
7.18%, 2/15/25 .............................. 7,000 7,167
7.22%, 6/15/28 .............................. 11,400 11,770
7.325%, 1/10/27 ............................. 5,000 5,066
63,786
Receivables-Backed 0.4%
Green Tree Financial, Sr. Sub. Certificates, 6.87%, 1/15/29.. 8,655 8,885
8,885
Whole Loans-Backed 0.2%
Amresco Residential Securities, 6.745%, 3/25/28 ............. 4,850 4,850
4,850
Total Asset-Backed Securities (Cost $117,584) ............... 117,896
<PAGE>
PREFERRED STOCKS 0.6%
Banking 0.2%
Silicon Valley Bancshares ................................... 120 2,970
2,970
Financial 0.4%
Pinto Totta International Finance, (144a), (Series A) ....... 9 8,828
8,828
Total Preferred Stocks (Cost $11,725) ....................... 11,798
U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 26.5%
U.S. Government Agency Asset-Backed 0.7%
Federal Home Loan Mortgage, REMIC
Government National Mortgage Assn. Collateral
5.15%, 8/25/12 .............................. 5,267 5,237
Federal National Mortgage Assn., REMIC, 7.50%, 8/17/17 ...... 8,946 9,385
14,622
U.S. Government Agency Obligations 7.7%
Federal Home Loan Mortgage
6.50%, 11/1/04 - 6/1/24 ..................... 10,094 10,093
7.00%, 2/1/24 - 6/1/25 ...................... 5,028 5,116
Federal Home Loan Mortgage
7.50%, 3/1 - 6/1/24 ......................... $ 7,678 $ 7,894
8.00%, 6/1/08 ............................... 76 78
9.00%, 3/1/21 - 5/1/22 ...................... 5,163 5,508
9.75%, 12/1/17 .............................. 1,728 1,886
10.50%, 2/1/01 - 8/1/20 ..................... 760 842
11.00%, 5/1/11 - 7/1/20 ..................... 392 444
11.50%, 6/1/01 .............................. 2 3
REMIC
5.50%, 10/15/20 ............................. 5,000 4,883
6.00%, 5/15/16 .............................. 3,362 3,356
6.50%, 7/15/11 - 6/15/23 .................... 31,663 32,007
7.00%, 8/15/09 - 9/15/24 .................... 40,600 41,117
7.50%, 2/15/06 .............................. 1,159 1,164
Federal National Mortgage Assn ..............................
6.00%, 3/1 - 5/1/28 ......................... 35,855 34,794
8.75%, 3/1/10 ............................... 11 12
10.50%, 7/1/09 - 4/1/22 ..................... 1,717 1,895
REMIC, 8.00%, 11/25/24 .............................. 8,233 8,761
159,853
<PAGE>
U.S. Government Guaranteed Obligations 18.1%
Government National Mortgage Assn ...........................
I
6.50%, 4/15/23 - 1/15/28 .................... 56,051 55,944
7.00%, 4/15/22 - 1/15/28 .................... 118,580 120,647
7.50%, 8/15/16 - 9/15/27 .................... 21,276 22,015
8.00%, 7/15/16 - 10/15/27 ................... 51,919 54,335
8.50%, 9/15/16 - 7/15/23 .................... 12,682 13,488
9.00%, 1/15/09 - 1/15/23 .................... 7,733 8,339
9.50%, 6/15/09 - 3/15/25 .................... 46,026 50,129
11.00%, 12/15/09 - 1/15/21 .................. 13,726 15,541
11.50%, 3/15/10 - 10/15/15 .................. 1,938 2,222
II
7.00%, 12/20/23 - 5/20/28 ................... 25,023 25,279
8.50%, 9/20/26 .............................. 105 111
9.00%, 6/20/16 - 5/20/22 .................... 5,494 5,886
GPM, I, 10.25%, 2/15/16 - 11/15/20 .................. 2,076 2,285
376,221
Total U.S. Government Mortgage-Backed Securities (Cost $538,183) 550,696
U.S. GOVERNMENT OBLIGATIONS 8.4%
U.S. Government Agency Obligations 7.4%
Federal National Mortgage Assn ..............................
5.625%, 3/15/01 ............................. $35,000 $ 34,918
5.75%, 2/15/08 .............................. 95,000 93,946
Tennessee Valley Auth .......................................
5.88%, 4/1/36 ............................... 20,000 20,822
6.235%, 7/15/45 ............................. 4,434 4,628
154,314
U.S. Treasury Obligations 1.0%
U.S. Treasury Inflation-Indexed Notes, 3.375%, 1/15/07 ...... 20,358 19,748
19,748
Total U.S. Government Obligations (Cost $174,096) .......... 174,062
MONEY MARKET FUNDS 0.4%
Reserve Investment Fund, 5.67% # ............................ 9,308 9,308
Total Money Market Funds (Cost $9,308) ..................... 9,308
<PAGE>
Total Investments in Securities
100.2% of Net Assets (Cost $2,049,325) ..................... $2,079,027
Other Assets Less Liabilities ............................... (3,437)
NET ASSETS .................................................. $2,075,590
Net Assets Consist of:
Accumulated net investment income -
net of distributions ........................................ $2,809
Accumulated net realized gain/loss -
net of distributions ........................................ 36,660
Net unrealized gain (loss) .................................. 29,702
Paid-in-capital applicable to 228,218,118
shares of $1.00 par value capital stock
outstanding; 300,000,000 shares authorized .................. 2,006,419
NET ASSETS .................................................. $2,075,590
NET ASSET VALUE PER SHARE ................................... $ 9.09
+ Private Placement
# Seven-day yield
GPM Graduated Payment Mortgage
MTN Medium Term Note
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 total of such securities at period-end amounts to
19.3% of net assets.
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price New Income Fund
================================================================================
================================================================================
Statement of Operations
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In thousands
Year
Ended
5/31/98
Investment Income
Interest and dividend income .................................... 134,123
Expenses
Investment management ..................................... 9,047
Shareholder servicing ..................................... 3,862
Custody and accounting .................................... 304
Prospectus and shareholder reports ........................ 158
Registration .............................................. 125
Legal and audit ........................................... 26
Directors ................................................. 20
Miscellaneous ............................................. 18
Total expenses ............................................ 13,560
Net investment income ........................................... 120,563
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities ................................................ 51,704
Futures ................................................... 249
Net realized gain (loss) .................................. 51,953
Change in net unrealized gain or loss on securities ............. 22,374
Net realized and unrealized gain (loss) ......................... 74,327
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS .......................................... $194,890
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price New Income Fund
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Statement of Changes in Net Assets
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In thousands
Year
Ended
5/31/98 5/31/97
Increase (Decrease) in Net Assets
Operations
Net investment income ........................... $ 120,563 $ 111,049
Net realized gain (loss) ........................ 51,953 4,730
Change in net unrealized gain or loss ........... 22,374 6,965
Increase (decrease) in net assets from operations 194,890 122,744
Distributions to shareholders
Net investment income ........................... (120,455) (111,027)
Net realized gain ............................... (8,527) --
Decrease in net assets from distributions ....... (128,982) (111,027)
Capital share transactions *
Shares sold ..................................... 525,602 323,914
Distributions reinvested ........................ 79,742 71,848
Shares redeemed ................................. (306,392) (331,111)
Increase (decrease) in net assets from capital
share transactions .............................. 298,952 64,651
Net Assets
Increase (decrease) during period ..................... 364,860 76,368
Beginning of period ................................... 1,710,730 1,634,362
End of period ......................................... $2,075,590 $1,710,730
*Share information
Shares sold ................................. 58,292 36,821
Distributions reinvested .................... 8,829 8,164
Shares redeemed ............................. (33,981) (37,672)
Increase (decrease) in shares outstanding ... 33,140 7,313
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price New Income Fund
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May 31, 1998
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Notes to Financial Statements
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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.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
fund, as authorized by the Board of 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.
<PAGE>
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.
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 receives cash and U.S. Treasury securities as
collateral against the loans. Cash collateral received is invested in a money
market pooled account by the fund's lending agent. Collateral is maintained over
the life of the loan in an amount not less than 100% of the value of loaned
securities. 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. At May 31, 1998, the value of loaned
securities was $9,617,000; aggregate collateral consisted of $10,033,000 in the
securities lending collateral pool.
OTHER Purchases and sales of portfolio securities, other than short-term
and U.S. government securities, aggregated $1,660,804,000 and $751,781,000,
respectively, for the year ended May 31, 1998. Purchases and sales of U.S.
government securities aggregated $1,491,287,000 and $1,933,645,000,
respectively, for the year ended May 31, 1998.
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends
to continue to qualify as a regulated investment company and distribute all of
its taxable income.
At May 31, 1998, the aggregate cost of investments for federal income tax
and financial reporting purposes was $2,049,325,000, and net unrealized gain
aggregated $29,702,000, of which $35,068,000 related to appreciated investments
and $5,366,000 to depreciated investments.
<PAGE>
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 $823,000 was payable at May 31, 1998. The fee is computed daily and
paid monthly, and consists of an individual fund fee equal to 0.15% of average
daily net assets and a group fee. The group fee is based on the combined assets
of certain mutual funds sponsored by the manager or Rowe Price-Fleming
International, Inc. (the group). The group fee rate ranges from 0.48% for the
first $1 billion of assets to 0.30% for assets in excess of $80 billion. At May
31, 1998, and for the year then ended, the effective annual group fee rate was
0.32%. The fund pays a pro-rata share of the group fee based on the ratio of its
net assets to those of the group.
In addition, the fund has entered into agreements with the manager and
two wholly owned subsidiaries of the manager, pursuant to which the fund
receives certain other services. The manager computes the daily share price and
maintains the financial records of the fund. T. Rowe Price Services, Inc., is
the fund's 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 $2,216,000 for the year ended
May 31, 1998, of which $181,000 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 34.3% of the outstanding shares of the New Income Fund at May 31,
1998. For the year then ended, the fund was allocated $1,371,000 of Spectrum
expenses, $132,000 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 year ended May 31, 1998, totaled $2,572,000
and are reflected as interest income in the accompanying Statement of
Operations.
<PAGE>
T. Rowe Price New Income Fund
================================================================================
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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, 1998, 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, 1998 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 17, 1998
<PAGE>
T. Rowe Price New Income Fund
================================================================================
================================================================================
Tax Information (Unaudited) for the Tax Year Ended 5/31/98
- --------------------------------------------------------------------------------
We are providing this information as required by the Internal Revenue
Code. The amounts shown may differ from those elsewhere in this report because
of differences between tax and financial reporting requirements.
The fund's distributions to shareholders included $8,527,000 from
long-term capital gains; of which $2,220,000 was subject to the 20% rate gains
category.
For corporate shareholders, $1,144,000 of the fund's distributed income
qualified for the dividends-received deduction.
================================================================================
<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 [Registration Mark] and
the T. Rowe Price Web site on the Internet. Address: www.troweprice.com
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 all your accounts with T. Rowe Price.
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 5/31/98
