<PAGE>
SemiAnnual Report
T.RowePrice
- -----------
Adjustable Rate U.S.
Government Fund
November 30, 1994
FOR YIELD, PRICE, LAST TRANSACTION,
AND CURRENT BALANCE, 24 HOURS,
7 DAYS A WEEK, CALL:
1-800-638-2587 toll free
625-7676 Baltimore area
FOR ASSISTANCE WITH YOUR EXISTING
FUND ACCOUNT, CALL:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
T. ROWE PRICE
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for distri-bution only to shareholders and to others
who have received a copy of the prospectus of the T. Rowe Price Adjustable
Rate U.S. Government Fund.
[logo]
<PAGE>
Fellow Shareholders
Against a background of strong economic growth and further tightening by the
Federal Reserve, interest rates continued to rise during the six months ended
November 30. Short-term rates were propelled higher by the Fed's fifth and
sixth increases this year in the federal funds target rate. Long-term rates,
which had fluctuated in a fairly narrow range earlier in the summer, resumed
rising as various indicators confirmed the economy's strong growth. The
steepest increases during the last six months have occurred among shorter
maturities.
Your Fund's yield has risen in tandem with the one-year Treasury bill,
shown in the chart below. Normally, the Fund's yield is above the Treasury
bill rate, since coupons on adjustable rate mortgages (ARMs) reset at a
designated spread above a benchmark (such as the one-year bill rate). This
temporary reversal in yield relationships reflects the mechanics of the
adjustment process. ARM coupons reset with a built in lag of about three
months behind current yields. Since short-term rates have been rising
continuously, ARM rates have been trailing even after they have reset. This
yield gap has been exacerbated by "caps" that limit the amount a mortgage's
face or "coupon" rate can adjust each year-usually only one or two percentage
points up or down. As short-term rates begin to level off, ARMs should close
the gap and gradually regain their yield superiority.
[chart]
Yield Comparison
Line graph shows yields on 1-year Treasury bill and Adjustable Rate U.S.
Government Fund from 5/31/94 through 11/30/94
The market environment for ARM securities remained difficult. As we have
discussed in previous reports, ARM prices are under pressure from an
unfavorable supply and demand situation. Heavy refinancings earlier in the
year by homeowners seeking lower mortgage rates created a large supply of
ARMs. At the same time, investment demand contracted due in part to cash
outflows from mutual funds that emphasize these securities.
PERFORMANCE AND STRATEGY REVIEW
Very few fixed-income investments other than money market securities provided
positive returns for the last six months. Nevertheless, your Fund managed a
very small positive return for this period, as income of $0.12 per share more
than offset the $0.11 price decline. For the quarter, however, income did not
wholly offset the drop in share price, resulting in a slight negative return.
For both periods, your Fund's performance was better than that of the average
fund in its Lipper category.
Performance Comparison
Periods Ended 11/30/94
3 Months 6 Months
---------------------
Adjustable Rate U.S.
Government Fund -0.37% 0.16%
Lipper Average of Adjustable
Rate Mortgage Funds -1.24 -0.80
- ----------------------------------------------------
<PAGE>
Our strategy remained unchanged during the quarter as we focused on
minimizing volatility while maintaining an attractive income level. We
continued to pare our holdings of GNMA ARMs, now less than 2% of net assets,
for two reasons. First, their relatively longer effective maturities make them
more vulnerable to interest rate risk, and, second, their rate-adjustment caps
allow only one percentage point increases. Your Fund's credit quality remained
high, with more than three-quarters of total assets invested in U.S.
Government or agency securities.
OUTLOOK
The Fed is likely to continue raising the federal funds rate in the coming
months until it sees that economic growth is slowing to the long-term trend
rate of about 2.5%. So far the main impact of higher rates has been on
residential and business construction activity, while the rest of the economy
has not been materially affected. In fact, real GDP growth in the third
quarter was revised from 3.4% to 3.9%.
Money market rates can be expected to climb in step with increases in fed
funds rates, but we look for longer-term bond yields to plateau around current
levels. As the yield advantage provided by longer-term (and riskier)
maturities continues to narrow, we would expect short-term maturities,
including ARMs, to attract more investors, such as commercial banks.
Nevertheless, the market's fundamentals are not likely to improve markedly
until cash flows pick up for mutual funds that invest in this market.
The past 12 months were rough for virtually all fixed-income investors
except those holding money market securities. We believe the worst is behind
us, but foresee a period of further adjustment to the new higher rate
environment.
Respectfully submitted,
s/Peter Van Dyke
Peter Van Dyke
President and Chairman of the
Investment Advisory Committee
December 20, 1994
<PAGE>
Statistical Highlights
T. Rowe Price Adjustable Rate U.S. Government Fund / November 30, 1994
Key Statistics
Periods
Dividend Yield* Ended 11/30/94
- ----------------------------------- --------------
3 Months 5.53%
6 Months 5.15
Dividend Per Share
- -----------------------------------
3 Months $0.06
6 Months 0.12
Change in Price Per Share
- -----------------------------------
3 Months (From $4.62 to $4.54) -$0.08
6 Months (From $4.65 to $4.54) -0.11
- --------------------------------------------------
*Dividends earned and reinvested for the periods indicated are annualized and
divided by the average daily net asset values per share for the same period.
Quality Diversification
Percent of Net Assets
TRPA Quality Rating* 8/31/94 11/30/94
- -------------------------------------------
1 84% 82%
2 16 18
3 0 0
4 0 0
- -------------------------------------------
Weighted Average 1.2 1.2
- -------------------------------------------
*On a scale of 1 to 10, with Grade 1 representing highest quality.
Sector Diversification*
Percent of Net Assets
8/31/94 11/30/94
------- --------
FNMA Adjustable
Rate Mortgages 46% 46%
Non-Government Adjustable
Rate Mortgages 16 18
FHLMC Adjustable
Rate Mortgages 14 17
Other Government
Agencies 7 5
Non-Government Fixed
Rate Mortgages 4 5
GNMA Fixed Rate
Mortgages 2 3
- --------------------------------------------
*Sectors representing at least 20% of net assets on 11/30/94.
Index Diversification
Percent of
ARM Securities
8/31/94 11/30/94
------- --------
11th District Cost of
Funds Index (COFI) 27% 31%
1-Year Constant
Maturity Treasury (CMT) 53 46
6-Month Treasury Bill 17 20
1-Month London Interbank
Offered Rate 3 3
- --------------------------------------------
100% 100%
- --------------------------------------------
<PAGE>
Statement of Net Assets (Amounts in thousands)
T. Rowe Price Adjustable Rate U.S. Government Fund / November 30, 1994
(Unaudited)
U.S. Government Agency ARM/1/---65.0%
Face
Amount Value
---------- --------
Federal Home Loan Mortgage,
1 Year CMT, resets annually, 5.366 - 5.605%,
2/1/17 - 12/1/18.............................. $2,156 $2,121
7.044%, 5/1/20.................................. 985 984
resets semi-annually, 6.089 - 6.581%, 11/1/18 -
7/1/29.......................................... 12,800 12,652
COFI, resets annually, 5.869%, 4/1/18............... 804 803
resets monthly, 5.00 - 5.195%, 8/1/15 - 1/1/30.... 3,996 3,891
resets semi-annually, 5.085%, 6/1/29.............. 1,488 1,424
Federal National Mortgage Assn.,
1 Year CMT, resets annually, 5.200 - 5.847%,
4/1/14 - 5/1/28............................... 6,278 6,128
6.000 - 6.405%, 5/1/16 - 11/1/29................ 10,318 10,171
6.724 - 6.912%, 8/1/14 - 10/1/21................ 4,932 4,824
7.118 - 7.600%, 12/1/13 - 10/1/21............... 2,675 2,630
resets semi-annually, 6.251 - 6.771%, 10/1/18 -
10/1/19....................................... 1,967 1,938
7.017 - 7.551%, 5/1/ - 7/1/20................... 4,979 4,968
COFI, resets monthly, 5.104 - 5.490%, 12/1/16 -
5/1/31........................................ 4,527 4,400
5.749%, 12/1/17................................. 3,248 3,151
6.817%, 10/1/14................................. 11 11
resets semi-annually, 4.875 - 5.429%, 8/1/17 -
11/1/20......................................... 1,915 1,840
6 month CD Index, resets semi-annually, 6.732%,
11/1/21......................................... 224 223
6 month LIBOR, resets semi-annually, 5.913%, 5/1/21. 1,513 1,534
6 month T-Bill Index, resets semi-annually, 6.042 -
6.485%, 1/1/16 - 9/1/26......................... 15,571 15,878
6.519 - 6.917%, 9/1/00 - 2/1/25................... 3,197 3,265
Government National Mortgage Assn.,
1 Year CMT, resets annually, 5.125 - 6.50%,
12/20/20 - 2/20/23.............................. 2,559 2,443
- --------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY ARM (COST---$89,378) 85,279
Stripped Mortgage Securities---0.7%
Federal Home Loan Mortgage, Principal Only, Zero
Coupon, 2/15/24..................................... 1,463 814
Federal National Mortgage Assn., Interest Only, 8.50%,
4/1/22**............................................ 308 111
- --------------------------------------------------------------------------
TOTAL STRIPPED MORTGAGE SECURITIES (COST---$1,552) 925
U.S. Government Agency Floating Rate Notes/1/---2.5%
Federal Home Loan Mortgage, resets monthly, 5.537%,
3/15/23............................................. 997 928
Federal National Mortgage Assn., resets monthly,
5.662%, 3/25/08..................................... 2,467 2,309
- --------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY FLOATING RATE NOTES
(COST---$3,471) 3,237
Non-Government Agency ARM/1/---18.6%
Resolution Trust Corp., MPC,
COFI, resets annually, 5.173%, 1/25/27.............. 1,819 1,760
resets semi-annually, 5.024%, 7/27/20............. 3,865 3,706
5.047%, 2/25/21................................. 3,736 3,636
1 Year CMT, resets annually, 5.224%, 11/15/20....... 2,838 2,669
6.993%, 12/25/20.................................. 650 637
6 month T-Bill Index, resets monthly, 6.993%,
4/25/21......................................... 1,150 1,167
Ryland Mercury Savings Trust, MPC, COFI, resets
semi-annually, 5.597%, 5/20/18...................... 768 749
Ryland Mortgage Securities, American Home Funding,
MPC, COFI, resets monthly, 6.003%, 3/25/17.......... 948 929
Salomon Brothers Mortgage Securities, MPC, COFI,
resets semi-annually, 5.456%, 8/25/18............... 1,350 1,316
Salomon Brothers Mortgage Securities VII, MPC, COFI,
resets monthly, 5.204%, 11/25/20.................... 6,722 6,654
Western Federal Savings And Loan, MPC, COFI, resets
semi-annually, 5.408%, 5/25/18...................... 1,124 1,090
- --------------------------------------------------------------------------
TOTAL NON-GOVERNMENT AGENCY ARM (COST---$25,220) 24,313
Non-Government Agency CMO---2.8%
Citicorp Mortgage Securities, 6.00%, 3/25/22
(Cost---$4,178)..................................... 4,146 3,709
Other Asset-Backed Securities---2.2%
HFC Home Equity Loan, 4.75%, 5/20/08 (Cost---$2,995).. 3,001 2,867
U.S. Government Guaranteed Obligations---2.7%
Government National Mortgage Assn., 11.50%, 3/15/10 -
12/15/15 (Cost---$3,593)............................ 3,184 3,546
U.S. Government Obligations---5.1%
Federal Home Loan Bank Discount Notes, 5.65%, 12/1/94
(Cost---$6,704)..................................... 6,705 6,704
- --------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES - 99.6%
(COST - $137,091)................................... $130,580
- --------------------------------------------------------------------------
Other Assets Less Liabilities - 0.4% ................. 588
--------
NET ASSETS CONSISTING OF:
Accumulated net investment income - net of
distributions ...................................... $ 120
Accumulated realized gains/losses - net of
distributions ...................................... (20,916)
Net unrealized loss................................... (6,511)
Paid-in-capital applicable to 28,922,644 shares of
$0.01 par value capital stock outstanding;
1,000,000,000 shares authorized..................... 158,475
----------
NET ASSETS - 100.0% .................................. $131,168
--------
--------
NET ASSET VALUE PER SHARE............................. $4.54
--------
--------
- --------------------------------------------------------------------------
/1/ Rates disclosed are as of November 30, 1994
**For Interest Only securities, face amount represents notional principal, on
which the Fund receives interest.
ARM - Adjustable Rate Mortgages
CMO - Collateralized Mortgage Obligation
MPC - Mortgage Pass-through Certificates
The Adjustable Rate Mortgage securities are reset periodically based on the
following indices:
COFI - Cost of Funds Index in the Eleventh Federal Reserve district.
CMT - Constant Maturity U.S. Treasury Index.
6 Month CD Index - 6 Month Certificate of Deposit Index.
6 Month LIBOR - 6 Month London Interbank Offered Rate Index.
6 Month Treasury Bill Index - 6 Month Treasury Bill discount rate index.
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of Operations
T. Rowe Price Adjustable Rate U.S. Government Fund / Six Months Ended November
30, 1994 (Unaudited)
Amounts in
Thousands
-----------------
INVESTMENT INCOME
Interest income........................................... $4,573
--------
Expenses
Investment management fees.............................. $178
Shareholder servicing fees & expenses................... 130
Custodian and accounting fees & expenses................ 59
Registration fees & expenses............................ 24
Legal & auditing fees................................... 14
Prospectus & shareholder reports........................ 12
Proxy & annual meeting expenses......................... 9
Directors' fees & expenses.............................. 4
Miscellaneous expenses.................................. 10
--------
Total expenses.......................................... 440
--------
Net investment income..................................... 4,133
REALIZED AND UNREALIZED LOSS
Net realized loss......................................... (1,651)
Change in net unrealized gain or loss..................... (2,401)
--------
Net loss ................................................. (4,052)
--------
INCREASE IN NET ASSETS FROM OPERATIONS.................... $81
--------
--------
- -----------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of Changes in Net Assets
T. Rowe Price Adjustable Rate U.S. Government Fund (Unaudited)
Three
Months
Six Ended
Months May 31, Year
Ended 1994 Ended
Nov. 30, [double Feb. 28,
1994 dagger] 1994
--------------- --------------- ---------------
Amounts in Thousands
-----------------------------------------------
INCREASE (DECREASE)
IN NET ASSETS
Operations
Net investment income....... $4,133 $2,428 $15,586
Net realized loss........... (1,651) (954) (3,117)
Change in net unrealized gain
or loss................... (2,401) (3,465) (2,319)
--------------- --------------- ---------------
Increase (decrease) in net
assets from operations.... 81 (1,991) 10,150
--------------- --------------- ---------------
Distributions to shareholders
Net investment income....... (4,088) (2,355) (11,303)
Tax return of capital....... - - (4,132)
--------------- --------------- ---------------
Decrease in net assets
from distributions to
shareholders.............. (4,088) (2,355) (15,435)
--------------- --------------- ---------------
Capital share transactions/1/
Sold........................ 11,943 15,975 86,042
Distributions reinvested ... 3,269 1,885 13,827
Redeemed ................... (67,554) (51,151) (345,878)
--------------- --------------- ---------------
Decrease in net assets from
capital share
transactions.............. (52,342) (33,291) (246,009)
--------------- --------------- ---------------
Total decrease................ (56,349) (37,637) (251,294)
NET ASSETS
Beginning of period......... 187,517 225,154 476,448
--------------- --------------- ---------------
End of period............... $131,168 $187,517 $225,154
--------------- --------------- ---------------
--------------- --------------- ---------------
- ------------------------------------------------------------------------------
/1/Share transactions
Sold........................ 2,586 shs. 3,396 shs. 17,922 shs.
Distributions reinvested ... 711 402 2,877
Redeemed ................... (14,670) (10,875) (71,987)
--------------- --------------- ---------------
Decrease in shares
outstanding............... (11,373) shs. (7,077) shs. (51,188) shs.
--------------- --------------- ---------------
--------------- --------------- ---------------
- ------------------------------------------------------------------------------
[double dagger]The Fund's fiscal year-end was changed to May 31.
The accompanying notes are an integral part of these financial statements.
<PAGE>
Notes to Financial Statements
T. Rowe Price Adjustable Rate U.S. Government Fund / November 30, 1994
(Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Adjustable Rate U. S. Government Fund (the Fund) is registered
under the Investment Company Act of 1940 as a diversified, open-end management
investment company.
A) Security valuation - Debt securities are generally traded in the
over-the-counter market. Investments in securities with remaining maturities
of one year or more are stated at fair value as furnished by dealers who make
markets in such securities or by an independent pricing service, which
considers yield or price of bonds of comparable quality, coupon, maturity, and
type, as well as prices quoted by dealers who make markets in such securities.
Securities with remaining maturities less than one year are stated at fair
value which is determined by using a matrix system that establishes a value
for each security based on money market yields.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by, or under the supervision of, the officers of
the Fund, as authorized by the Board of Directors.
B) Premiums and Discounts - Except for mortgage-backed securities, premiums
and discounts on debt securities are amortized for both financial and tax
reporting purposes.
C) Other - Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on an identified cost basis. Distributions to shareholders are
recorded by the Fund on the ex-dividend date. Income and capital gain
distributions are determined in accordance with federal income tax regulations
which may differ from generally accepted accounting principles.
NOTE 2 - PORTFOLIO TRANSACTIONS
Purchases and sales of U.S. Government securities, other than short-term
securities, aggregated $1,975,000 and $51,409,000 respectively, for the six
months ended November 30, 1994.
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the Fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income. The Fund has unused realized capital loss carryforwards
for federal income tax purposes of $18,984,000 at May 31, 1994, which expire
in 2000 through 2002.
At November 30, 1994, the aggregate cost of investments for federal income
tax and financial reporting purposes was $137,091,000 and net unrealized loss
aggregated $6,511,000, of which $24,000 related to appreciated investments and
$6,535,000 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, computed daily and paid monthly, consisting of an Individual Fund Fee
equal to 0.10% of average daily net assets and a Group Fee. The Group Fee is
based on the combined assets of certain mutual funds sponsored by the Manager
or Rowe Price-Fleming International, Inc. (the Group). The Group Fee rate
ranges from 0.48% for the first $1 billion of assets to 0.31% for assets in
excess of $34 billion. The effective annual Group Fee rate at November 30,
1994, and for the six months then ended was 0.34%. The Fund pays a pro rata
portion of the Group Fee based on the ratio of the Fund's net assets to those
of the Group.
Under the terms of the investment management agreement, the Manager is
required to bear any expenses through May 31, 1996, which would cause the
Fund's ratio of expenses to average net assets to exceed 0.70%. The limitation
will be phased-in as follows: 0.50% on March 1, 1994, 0.60% on September 1,
1994 and 0.70% on March 1, 1995. Thereafter, the Fund is required to reimburse
the Manager for these expenses, provided average net assets have grown or
expenses have declined sufficiently so as not to cause the Fund's ratio of
expenses to average net assets to exceed 0.70% in any month, and that no such
reimbursement shall be made to the Manager after May 31, 1998. Pursuant to
this agreement, $181,000 of management fees were not accrued by the Fund for
the six months ended November 30, 1994. Pursuant to a previous agreement,
unaccrued fees of $1,068,000 remain subject to reimbursement through December
31, 1995.
<PAGE>
T. Rowe Price Services, Inc. (TRPS) and Retirement Plan Services, Inc.
(RPS) are wholly owned subsidiaries of the Manager. TRPS provides transfer and
dividend disbursing agent functions and shareholder services for all accounts.
RPS provides subaccounting and recordkeeping services for certain retirement
accounts invested in the Fund. The Manager, under a separate agreement,
calculates the daily share price and maintains the financial records of the
Fund. For the six months ended November 30, 1994, the Fund incurred fees
totalling approximately $153,000 for these services provided by related
parties. At November 30, 1994, investment management and service fees payable
were $61,000.
<PAGE>
Financial Highlights
T. Rowe Price Adjustable Rate U.S. Government Fund (Unaudited)
<TABLE>
<CAPTION>
For a share outstanding throughout each period
-----------------------------------------------------
Three
Months Sept. 30,
Six ended 1991
Months May 31, Year ended (Commencement of
ended 1994 ----------------- Operations) to
Nov. 30, [double Feb. 28, Feb. 28, Feb. 29,
1994 dagger] 1994 1993 1992
-------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD............................................ $4.65 $4.75 $4.83 $4.97 $5.00
-------- -------- -------- -------- -----------------
Investment Activities
Net investment income........................................ 0.12* 0.06* 0.23* 0.29* 0.16*
Net realized and unrealized loss............................. (0.11) (0.11) (0.08) (0.13) (0.03)
-------- -------- -------- -------- -----------------
Total from Investment Activities............................. 0.01 (0.05) 0.15 0.16 0.13
-------- -------- -------- -------- -----------------
Distributions
Net investment income........................................ (0.12) (0.05) (0.17) (0.28) (0.16)
Tax return of capital........................................ - - (0.06) (0.02) -
-------- -------- -------- -------- -----------------
Total Distributions.......................................... (0.12) (0.05) (0.23) (0.30) (0.16)
-------- -------- -------- -------- -----------------
NET ASSET VALUE, END OF PERIOD................................. $4.54 $4.65 $4.75 $4.83 $4.97
-------- -------- -------- -------- -----------------
-------- -------- -------- -------- -----------------
- ---------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Total Return................................................... 0.16% (0.97)% 3.11% 3.33% 2.58%
Ratio of Expenses to Average Net Assets........................ 0.55% 0.50% 0.40%* 0.25%* 0.00%
[dagger] [dagger] [dagger]*
* *
Ratio of Net Investment Income to Average Net Assets........... 5.12% 4.69% 4.78% 5.96% 7.45%
[dagger] [dagger] [dagger]
Portfolio Turnover Rate........................................ 2.6% 27.6% 70.4% 110.8% 98.4%
[dagger] [dagger] [dagger]
Net Assets, End of Period (in thousands)....................... $131,168 $187,517 $225,154 $476,448 $342,939
- ---------------------------------------------------------------------------------------------------------------------
<FN>
[double dagger] The Fund's fiscal year-end was changed to May 31.
[dagger] Annualized.
* The manager agreed to bear all expenses of the Fund through June 30, 1992.
Excludes expenses in excess of a 0.20% voluntary expense limitation in
effect July 1, 1992, through July 31, 1992, and a 0.30% voluntary expense
limitation in effect August 1, 1992, through August 31, 1992, and a 0.40%
voluntary expense limitation in effect September 1, 1992, through February
28, 1994, and a 0.50% voluntary expense limitation in effect March 1, 1994,
through August 31, 1994, and a 0.60% voluntary expense limitation in effect
September 1, 1994 through February 28, 1995.
</TABLE>