Report - Financial Statements
T. Rowe Price
Tax-Free Insured Intermediate Bond Fund
August 31, 1996
Portfolio Highlights
Sector Diversification
Percent of Percent of
Net Assets Net Assets
2/29/96 8/31/96
Dedicated Tax Revenue 13% 17%
Solid Waste Revenue 4 13
Air and Sea Transportation Revenue 9 11
General Obligation - State 5 9
General Obligation - Local 9 7
Prerefunded Bonds 23 7
Nuclear Revenue 3 6
Electric Revenue 6 6
Lease Revenue 6 5
Water and Sewer Revenue 7 5
Ground Transportation Revenue 5 4
Hospital Revenue 1 3
Escrowed to Maturity 1 3
Educational Revenue 9 3
All Others 2 2
Other Assets Less Liabilities -3 -1
Total 100% 100%
T. Rowe Price Tax-Free Insured Intermediate Bond Fund
Unaudited
Financial Highlights For a share outstanding throughout each period
6 Months Year 11/30/92
Ended Ended to
8/31/96 2/29/96 2/28/95 2/28/94 2/28/93
NET ASSET VALUE
Beginning of period $10.84 $ 10.35 $ 10.58 $ 10.55 $10.00
Investment activities
Net investment income 0.24* 0.48* 0.46* 0.48* 0.13*
Net realized and
unrealized gain (loss) (0.22) 0.49 (0.20) 0.09 0.55
Total from
investment activities 0.02 0.97 0.26 0.57 0.68
Distributions
Net investment income (0.24) (0.48) (0.46) (0.48) (0.13)
Net realized gain - - (0.03) (0.06) -
Total distributions (0.24) (0.48) (0.49) (0.54) (0.13)
NET ASSET VALUE
End of period $10.62 $ 10.84 $ 10.35 $ 10.58 $10.55
Ratios/Supplemental Data
Total return 0.19%* 9.57%* 2.65%* 5.49%* 6.81%*
Ratio of expenses to
average net assets 0.65%*! 0.65%* 0.65%* 0.33%* 0.00%*!
Ratio of net investment
income to average
net assets 4.40%*! 4.52%* 4.53%* 4.45%* 5.08%*!
Portfolio turnover rate 86.6%! 63.8% 170.8% 74.8% 65.3%!
Net assets, end of period
(in thousands) $94,589 $92,153 $83,517 $99,162 $37,960
* The manager agreed to bear all expenses of the Fund through 6/30/93.
Excludes expenses in excess of a 0.20% voluntary expense limitation in effect
7/1/93 through 7/31/93, a 0.30% voluntary expense limitation in effect 8/1/93
through 8/31/93, a 0.40% voluntary expense limitation in effect 9/1/93 through
9/30/93, a 0.50% voluntary expense limitation in effect 10/1/93 through
2/28/94, and a 0.65% voluntary expense limitation in effect 3/1/94 through
2/29/98.
! Annualized.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Free Insured Intermediate Bond Fund
Unaudited August 31, 1996
Statement of Net Assets Par Value
In thousands
ARIZONA 4.5%
Arizona Transportation Board, Maricopa County, Excise Tax
5.60%, 7/1/02 (AMBAC Insured) $ 2,000 $ 2,085
Phoenix, Airport, 5.65%, 7/1/01 (MBIA Insured) 2,000 2,085
Pima County, Water Improvement Dist.
5.90%, 1/1/04 (FGIC Insured) 75 79
Total Arizona (Cost $4,202) 4,249
ARKANSAS 1.2%
North Little Rock, Electric System,
6.10%, 7/1/02 (MBIA Insured) 1,035 1,102
Total Arkansas (Cost $1,109) 1,102
CALIFORNIA 3.0%
California Public Works Board, Dept. of Corrections
6.00%, 11/1/05 (MBIA Insured) 1,550 1,660
Coronado CDA, Coronado Community Dev., 5.60%, 9/1/10 1,165 1,154
Total California (Cost $2,721) 2,814
COLORADO 2.8%
Denver City and County, Airport
6.25%, 11/15/06 (MBIA Insured) * 2,500 2,643
Total Colorado (Cost $2,635) 2,643
DISTRICT OF COLUMBIA 0.6%
Washington D.C. Metropolitan Airport Auth.
6.625%, 10/1/12 (MBIA Insured) * 500 530
Total District of Columbia (Cost $546) 530
FLORIDA 9.4%
Dade County, Resource Recovery Fac.
6.00%, 10/1/06 (AMBAC Insured) * 3,000 3,133
Florida Bond Fin. Dept.,
Dept. of Environmental Preservation
6.00%, 7/1/05 (MBIA Insured) 4,000 4,274
Indian Trace Community Dev. Dist., Water Management
5.50%, 5/1/07 (MBIA Insured) $ 1,500 $ 1,523
Total Florida (Cost $8,864) 8,930
GEORGIA 2.7%
De Kalb Private Hosp. Auth., Emory Univ.,
5.25%, 11/1/02 2,500 2,569
Total Georgia (Cost $2,580) 2,569
HAWAII 4.0%
Hawaii, Airport, 6.70%, 7/1/05 (MBIA Insured) * 3,000 3,249
Maui County, GO, 6.00%, 12/15/05 (FGIC Insured) 500 534
Total Hawaii (Cost $3,721) 3,783
ILLINOIS 5.9%
Chicago, GO, 5.75%, 1/1/05 (AMBAC Insured) 3,500 3,641
Chicago-O'Hare Int'l. Airport
Int'l. Terminal
7.50%, 1/1/05 (MBIA Insured)
(Prerefunded 1/1/00!) 570 628
7.50%, 1/1/05 (MBIA Insured) * 1,180 1,281
Total Illinois (Cost $5,482) 5,550
INDIANA 1.1%
Petersburg Solid Waste Disposal
Indianapolis Power and Light Company
VRDN (Currently 3.50%) * 1,000 1,000
Total Indiana (Cost $1,000) 1,000
LOUISIANA 0.5%
Plaquemines Parish, British Petroleum Co.
VRDN (Currently 4.00%) * 500 500
Total Louisiana (Cost $500) 500
MARYLAND 8.8%
Maryland CDA, Single Family, 5.70%, 4/1/06 $ 1,000 $ 1,019
Maryland HHEFA, Univ. of Maryland Medical System
6.50%, 7/1/21 (FGIC Insured)
(Prerefunded 7/1/01!) 1,250 1,348
Northeast Maryland Waste Disposal
Southwest Resource Recovery Fac.
7.10%, 1/1/03 (MBIA Insured) 3,500 3,873
Montgomery County Resources
6.30%, 7/1/16 (MBIA Insured) 2,000 2,046
Total Maryland (Cost $8,140) 8,286
MASSACHUSETTS 2.9%
Massachusetts, GO, 6.30%, 11/1/05 (FGIC Insured) 1,250 1,360
Massachusetts Municipal Wholesale Electric Co.
6.375%, 7/1/01 (MBIA Insured) 1,325 1,418
Total Massachusetts (Cost $2,634) 2,778
MICHIGAN 4.5%
Greater Detroit Resource Recovery Auth.
6.25%, 12/13/05 (AMBAC Insured) 2,000 2,150
Michigan Building Auth., Lease
6.25%, 10/1/03 (AMBAC Insured) 2,000 2,159
Total Michigan (Cost $4,220) 4,309
MINNESOTA 1.1%
Minneapolis and St. Paul
Metropolitan Airports Commission, GO
6.40%, 1/1/06 * 1,000 1,060
Total Minnesota (Cost $1,029) 1,060
MISSISSIPPI 1.1%
Jackson County Industrial Sewage Fac., Chevron
VRDN (Currently 3.95%) * 1,000 1,000
Total Mississippi (Cost $1,000) 1,000
NEW JERSEY 2.9%
New Jersey Economic Dev. Auth., Market Transition Fac.
5.70%, 7/1/05 (MBIA Insured) $ 1,050 $ 1,096
New Jersey Transportation Trust Fund Auth.
6.25%, 6/15/03 (MBIA Insured) 1,500 1,622
Total New Jersey (Cost $2,644) 2,718
NEW YORK 2.7%
Metropolitan Transportation Auth.
6.25%, 7/1/05 (MBIA Insured) 1,420 1,537
New York State Thruway Auth., Highway and Bridge Trust
6.00%, 4/1/05 (MBIA Insured) 1,000 1,065
Total New York (Cost $2,551) 2,602
NORTH CAROLINA 4.7%
North Carolina Municipal Power Agency, Catawba Electric
6.00%, 1/1/04 (MBIA Insured) 4,200 4,423
Total North Carolina (Cost $4,348) 4,423
OHIO 4.7%
Cleveland, Waterworks, 6.50%, 1/1/21 (AMBAC Insured)
(Prerefunded 1/1/02!) 500 549
Cuyahoga County, Univ. Hosp.
6.00%, 1/15/03 (MBIA Insured) 2,530 2,679
Ohio Water Dev. Auth., Pure Water
5.50%, 6/1/01 (MBIA Insured) 1,175 1,214
Total Ohio (Cost $4,452) 4,442
PENNSYLVANIA 4.8%
Pennsylvania, GO, 5.375%, 11/15/03 (FGIC Insured) 2,500 2,580
Pennsylvania Intergovernmental Cooperative Auth.
Philadelphia Funding, 6.00%, 6/15/00
(FGIC Insured)
(Escrowed to Maturity) 1,900 1,994
Total Pennsylvania (Cost $4,521) 4,574
PUERTO RICO 2.2%
Puerto Rico Commonwealth, GO
5.50%, 7/1/01 (MBIA Insured) $ 1,000 $ 1,041
Puerto Rico Highway and Transportation Auth.
6.25%, 7/1/07 (MBIA Insured) 1,000 1,091
Total Puerto Rico (Cost $2,118) 2,132
SOUTH CAROLINA 1.2%
South Carolina Public Service Auth., Santee Cooper
6.50%, 7/1/24 (AMBAC Insured)
(Prerefunded 7/1/02!) 1,000 1,103
Total South Carolina (Cost $1,032) 1,103
TEXAS 7.4%
Dallas, GO, 6.125%, 2/15/05 (Prerefunded 2/15/03!) 1,000 1,068
Dallas-Fort Worth Regional Airport
7.75%, 11/1/03 (FGIC Insured) 1,000 1,166
Harris County, Toll Roads, 6.50%, 8/15/17 (AMBAC Insured)
(Prerefunded 8/15/02!) 1,500 1,657
Houston, Water and Sewer,
7.00%, 12/1/03 (AMBAC Insured) 2,650 2,982
San Antonio, Water, 6.40%, 5/15/05 (FGIC Insured) 150 162
Total Texas (Cost $6,695) 7,035
VERMONT 0.4%
Vermont Ed. and Health Buildings Fin. Agency
Medical Center Hosp. of Vermont
7.35%, 9/1/13 (FGIC Insured) 350 364
Total Vermont (Cost $350) 364
VIRGINIA 8.0%
Alexandria IDA, Ogden Martin, VRDN (Currently 3.90%) * 800 800
Chesapeake Bay Bridge and Tunnel Dist.
5.30%, 7/1/03 (FGIC Insured) 2,335 2,389
Riverside Regional Jail Auth.,
5.60%, 7/1/06 (MBIA Insured) $ 1,100 $ 1,138
Virginia Ed. Loan Auth., Student Loan Program
5.80%, 3/1/05 (Escrowed to Maturity)* 980 1,020
Virginia Transportation Board
Northern Virginia Transportation Dist.
5.80%, 5/15/03 1,425 1,500
5.80%, 5/15/04 695 732
Total Virginia (Cost $7,352) 7,579
WASHINGTON 6.9%
Tacoma
Electric
5.90%, 1/1/05 (FGIC Insured) 1,000 1,050
6.00%, 1/1/06 (FGIC Insured) 2,000 2,109
Washington, GO, 7.00%, 8/1/02 3,000 3,330
Total Washington (Cost $6,411) 6,489
WEST VIRGINIA 1.2%
Berkeley County Board of Ed., GO
5.75%, 6/1/04 (FGIC Insured) 1,090 1,146
Total West Virginia (Cost $1,150) 1,146
Total Investments in Securities
101.2% of Net Assets (Cost $94,007) $ 95,710
Other Assets Less Liabilities (1,121)
NET ASSETS $ 94,589
Net Assets Consist of:
Accumulated net investment income - net of distributions $ 35
Accumulated net realized gain/loss - net of distributions (712)
Net unrealized gain (loss) 1,703
Paid-in-capital applicable to 8,905,078 shares of $0.01 par
value capital stock outstanding; 1,000,000,000 shares authorized 93,563
NET ASSETS $ 94,589
NET ASSET VALUE PER SHARE $ 10.62
* Interest subject to alternative minimum tax
! Used in determining portfolio maturity
AMBAC AMBAC Indemnity Corp.
CDA Community Development Administration
FGIC Financial Guaranty Insurance Company
GO General Obligation
HHEFA Health & Higher Educational Facility Authority
IDA Industrial Development Authority
MBIA Municipal Bond Investors Assurance Corp.
VRDN Variable Rate Demand Note
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Free Insured Intermediate Bond Fund
Unaudited
Statement of Operations
In thousands
6 Months
Ended
8/31/96
Investment Income
Income
Interest income $ 2,344
Expenses
Investment management 150
Shareholder servicing 60
Custody and accounting 50
Registration 20
Legal and audit 7
Prospectus and shareholder reports 4
Directors 3
Miscellaneous 8
Total expenses 302
Net investment income 2,042
Realized and Unrealized Gain/Loss
Net realized gain (loss) on
Securities 462
Futures 22
Net realized gain (loss) 484
Change in net unrealized gain or loss on securities (2,367)
Net realized and unrealized gain (loss) (1,883)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 159
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Free Insured Intermediate Bond Fund
Unaudited
Statement of Changes in Net Assets
In thousands
6 months Year
Ended Ended
8/31/96 2/29/96
Increase (Decrease) in Net Assets
Operations
Net investment income $ 2,042 $ 4,002
Net realized gain (loss) 484 1,280
Change in net unrealized gain or loss (2,367) 2,770
Increase (decrease) in net assets from operations 159 8,052
Distributions to shareholders
Net investment income (2,042) (4,002)
Capital share transactions*
Shares sold 12,745 20,792
Distributions reinvested 1,543 2,988
Shares redeemed (9,969) (19,194)
Increase (decrease) in net assets from capital
share transactions 4,319 4,586
Net Assets
Increase (decrease) during period 2,436 8,636
Beginning of period 92,153 83,517
End of period $ 94,589 $ 92,153
*Share information
Shares sold 1,199 1,955
Distributions reinvested 145 280
Shares redeemed (940) (1,803)
Increase (decrease) in shares outstanding 404 432
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Tax-Free Insured Intermediate Bond Fund
Unaudited August 31, 1996
Notes to Financial Statements
Note 1 - Significant Accounting Policies
T. Rowe Price Tax-Free Insured Intermediate Bond 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 November 30, 1992.
Valuation Debt securities are generally traded in the over-the-counter market.
Investments in securities 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.
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 original issue discounts on municipal
securities are amortized for both financial reporting and tax purposes. Market
discounts are recognized upon disposition of the security as gain or loss for
financial reporting purposes and as ordinary income for tax purposes.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on the identified cost basis. Distributions to shareholders are
recorded by the fund on the ex-dividend date. Income and capital gain
distributions are determined in accordance with federal income tax regulations
and may differ from those determined in accordance with generally accepted
accounting principles.
Note 2 - Investment Transactions
Purchases and sales of portfolio securities, other than short-term securities,
aggregated $38,430,000 and $37,658,000, respectively, for the six months ended
August 31, 1996.
Note 3 - Federal Income Taxes
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of
its income. The fund has unused realized capital loss carryforwards for
federal income tax purposes of $1,079,000, which expires in 2003. The fund
intends to retain gains realized in future periods that may be offset by
available capital loss carryforwards.
At August 31, 1996, the aggregate cost of investments for federal income tax
and financial reporting purposes was $94,007,000, and net unrealized gain
aggregated $1,703,000, of which $1,781,000 related to appreciated investments
and $78,000 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 $26,000 was payable at August 31, 1996. The fee is computed
daily and paid monthly, and consists of an individual fund fee equal to 0.05%
of average daily net assets and a group fee. The group fee is based on the
combined assets of certain mutual funds sponsored by the manager or Rowe
Price-Fleming International, Inc. (the group). The group fee rate ranges from
0.48% for the first $1 billion of assets to 0.305% for assets in excess of $50
billion. At August 31, 1996, and for the six months 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.
Under the terms of the investment management agreement, the manager is
required to bear any expenses through February 28, 1998, which would cause the
fund's ratio of expenses to average net assets to exceed 0.65%. Thereafter,
through February 29, 2000, the fund is required to reimburse the manager for
these expenses, provided that average net assets have grown or expenses have
declined sufficiently to allow reimbursement without causing the fund's ratio
of expenses to average net assets to exceed 0.65%. Pursuant to this agreement,
$27,000 of management fees were not accrued by the fund for the six months
ended August 31, 1996. Additionally, $209,000 of unaccrued management fees
related to a previous expense limitation are subject to reimbursement through
February 28, 1998.
In addition, the fund has entered into agreements with the manager and a
wholly owned subsidiary 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. The fund incurred expenses pursuant to
these related party agreements totaling approximately $80,000 for the six
months ended August 31, 1996, of which $15,000 was payable at period-end.
T. Rowe Price
Investment Services And Information
Knowledgeable Service Representatives
By Phone Shareholder service representatives are available from 8 a.m. to 10
p.m ET Monday through Friday and from 8:30 a.m. to 5 p.m. ET on weekends. Call
1-800-225-5132 to speak directly with a representative who will be able to
assist you with your accounts.
In Person Visit one of our investor center locations to meet with a
representative who will be able to assist you with your accounts. While there,
you can drop off applications or obtain prospectuses and other literature.
Automated 24-Hour Services
Tele*Access(registered trademark) Call 1-800-638-2587 to obtain information
such as account balance, date and amount of your last transaction, latest
dividend payment, and fund prices and yields. Additionally, you have the
ability to request prospectuses, statements, and account and tax forms;
reorder checks; and initiate purchase, redemption, and exchange orders for
identically registered accounts.
T. Rowe Price OnLine Through a personal computer via dial-up modem, you can
replicate all the services available on Tele*Access(registered trademark) plus
conduct transactions in your Discount Brokerage and Variable Annuity Accounts.
Account Services
Checking Write checks for $500 or more on any money market and most bond fund
accounts (except the High Yield and Emerging Markets Bond Fund).
Automatic Investing Build your account over time by investing directly from
your bank account or paycheck with Automatic Asset Builder. Additionally,
Automatic Exchange enables you to set up systematic investments from one fund
account into another, such as from a money fund into a stock fund. A low, $50
minimum makes it easy to get started.
Automatic Withdrawal If you need money from your fund account on a regular
basis, you can establish scheduled, automatic redemptions.
Dividend and Capital Gains Payment Options Reinvest all or some of your
distributions, or take them in cash. We give you maximum flexibility and
convenience.
DISCOUNT BROKERAGE*
Investments Available You can trade stocks, bonds, options, precious metals,
and other securities at a savings over regular commission rates.
To Open an Account Call a shareholder service representative for more
information.
Investment Information
Combined Statement A comprehensive overview of your T. Rowe Price accounts is
provided. The summary page gives you earnings by tax category, provides total
portfolio value, and lists your investments by type - stock, bond, and money
market. Detail pages itemize account transactions by fund.
Shareholder Reports Portfolio managers review the performance of the funds in
plain language and discuss T. Rowe Price's economic outlook.
The T. Rowe Price Report This is a quarterly newsletter with relevant
articles on market trends, personal financial planning, and T. Rowe Price's
economic perspective.
Performance Update This quarterly report reviews recent market developments
and provides comprehensive performance information for every T. Rowe Price
fund.
Insights This library of information includes reports on mutual fund tax
issues, investment strategies, and financial markets.
Detailed Investment Guides Our widely acclaimed Asset Mix Worksheet, College
Planning Kit, Retirees Financial Guide, and Retirement Planning Kit (also
available on disk for PC use) can help you determine and reach your investment
goals.
*A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
For yield, price, last transaction, and current balance, 24 hours, 7 days a
week, call:
1-800-638-2587 toll free
For assistance with your existing fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
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
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10th Floor
Tampa, FL 33607
T. Rowe Price
100 East Pratt Street
Baltimore, Maryland 21202
http://www.troweprice.com
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 Tax-Free
Insured Intermediate Bond Fund.
T. Rowe Price Investment Services, Inc., Distributor RPRTTII 8/31/96
THE SHAREHOLDER LETTER AND REPORT FOR THE COMBINED TAX-FREE FUNDS IS ATTACHED
HERE BY ACCESSING THE FOLLOWING:
Semiannual Report
Tax-Free Funds
August 31, 1996
T. Rowe Price
Report Highlights
o The last six months saw the bond market give back the gains of the prior
six months as the economy grew stronger and expectations of further
easing by the Federal Reserve evaporated.
o The collapse of tax reform proposals helped municipals outperform the
taxable market.
o Most of the increase in interest rates took place during the first three
months of 1996. Since then, interest rates in the intermediate and long
end of the market have moved in a trading range. Very short-term rates
declined over the past year.
o All five funds generated greater returns than their peer group averages
during the 6- and 12-month periods ended August 31, despite the negative
environment so far this year.
o The Fed may tighten monetary policy in the next few months. We expect to
manage these portfolios with a cautious outlook on municipal bond
prices, focusing on improving income when we can.
Fellow Shareholders
The last six months saw the fixed income markets give back the gains realized
during the prior six months, as the economy strengthened and market
expectations of further easing by the Federal Reserve evaporated. The
municipal market declined less than the taxable market after the issue of tax
reform faded. While six-month returns were extremely modest, we are pleased to
report that all of the funds discussed here outperformed their peer group
averages during the 6- and 12-month periods ended August 31, 1996.
MARKET ENVIRONMENT
The economy regained strength in 1996 after slowing in 1995, with only a
modest pickup in inflation. Stronger growth alone was enough to reverse
expectations of any further Federal Reserve easing after two interest rate
cuts in the second half of 1995 and one earlier this year. While the Fed has
not yet tightened in 1996, it adopted a bias toward tightening in July. Market
rates moved up in anticipation of tighter monetary policy.
Most of the adjustment in interest rates occurred in the first quarter of
1996. The 30-year Treasury bond, which reached the 6% level at the end of
1995, backed up to 6.75% in the first quarter and has since traded within a
range of approximately 6.75% to 7.25%.
Chart 1 - Municipal Bond and Note Yields line chart
In the municipal market, rates rose roughly 50 basis points (100 basis points
equal one percent) from the lowest point reached in early 1996, but nowhere
near the high levels of late 1994. Long-term high-grade general obligation
bonds yielded 5.75% on August 31, 1996, versus 5.45% six months ago and 5.85%
a year ago. Five-year high-grade bonds were 25 basis points higher in yield
than in August 1995. Very short-term rates (less than 90 days) moved lower
over the past year, while one-year rates ended the last 12 months unchanged at
3.9% but 65 basis points higher than six months ago. The net result over the
past six months was a higher and flatter yield curve.
All was not doom and gloom in the municipal bond market over the past six
months. The fading of tax reform concerns caused the municipal market to
outperform taxable markets by a wide margin. As rates approached and then
exceeded 6%, strong retail demand for municipals provided support for the
market. During the summer of 1995, long-term municipal yields equaled 90% or
more of comparable taxable yields; this year, yields moved down to 81% of
taxable alternatives, allowing the municipal market to regain the ground it
lost.
Consistent with this environment, money market and short-term bond funds
provided the best overall returns for the past six months, while longer-term
funds provided the best returns over the 12-month period. High-yield funds
performed well over both periods as quality spreads narrowed, providing
additional price appreciation while their higher coupons cushioned them in the
market downturn.
For the first time since 1993 municipal issuance is rising, running 18% ahead
of 1995 levels through August. This coincides with a peaking last year in the
calling away of bonds issued at the higher interest rate levels of the 1980s,
possibly pointing to a better balance of supply and demand going forward.
Tax-Exempt Money Fund
The short-term yield curve steepened noticeably during the reporting period.
For the past six months, one-year securities averaged 40 basis points more
than overnight securities, providing us with an incentive to extend
maturities.
Tax-exempt money fund assets throughout the industry grew slightly since last
February but are up a significant 10% over year-ago levels. New issuance
declined modestly over the same period.
Performance Comparison chart
Periods Ended 8/31/96 6 Months 12 Months
Tax-Exempt Money Fund 1.52% 3.16%
Lipper Tax-Exempt Money
Market Funds Average 1.45 3.05
Regarding portfolio strategy, our weighted average maturity was 66 days on
August 31, little changed from the 65-day maturity at fiscal year-end.
However, this was longer than the average 57-day maturity of our peer group,
and we maintained a longer average maturity throughout the entire six-month
period due to the steepening yield curve and good balance between supply and
demand. This longer weighted average maturity helped fund performance in the
rate environment that has prevailed in recent months. Your fund outperformed
its peer group average during both the 6- and 12-month periods ended August
31, as shown in the table.
Tax-Free Short-Intermediate Fund
After extending the fund's duration (a measure of interest rate sensitivity)
last year to take advantage of falling rates, we began positioning the
portfolio for a rising rate environment in early 1996. Consequently, both the
weighted average maturity and duration of the portfolio were almost six months
shorter at the end of August than at the end of February. We increased our
weighting in bonds and notes maturing in under one year, which have less price
sensitivity, and lowered our holdings of bonds with 5- to 10-year maturities
from 21% to 11% of assets. At the same time, we tried to take advantage of
trading opportunities by lengthening and shortening maturities modestly each
time the market moved to temporarily undervalued or overvalued positions.
Performance Comparison
Periods Ended 8/31/96 6 Months 12 Months
Tax-Free Short-
Intermediate Fund 0.87% 3.84%
Lipper Short-Intermediate
Debt Funds Average 0.64 3.33
We also used higher-yielding securities to offset shorter durations and
preserve the portfolio's level of income. This strategy helped performance as
quality spreads narrowed and higher coupons cushioned the portfolio. The
fund's overall credit quality, which remained at AA as measured by T. Rowe
Price's ratings, is still quite strong.
These interest rate and credit strategies enabled your fund to outperform its
benchmark for both the 6- and 12-month periods ended August 31, as can be seen
in the table on page 3.
Tax-Free Insured Intermediate Bond Fund
We extended the fund's duration during the second half of 1995 as interest
rates declined, then maintained a slightly defensive posture at the beginning
of 1996 when rates began to rise again. Since March, we have managed the
portfolio to take advantage of the interest rate trading range, lengthening or
shortening duration around a neutral benchmark. The fund ended the six-month
period with a weighted average maturity of 7.7 years and a duration of 5.6
years, about where duration was at the end of February.
Performance Comparison chart
Periods Ended 8/31/96 6 Months 12 Months
Tax-Free Insured
Intermediate Bond Fund 0.19% 3.96%
Lipper Intermediate
Municipal Debt Funds Average 0.13 3.89
We also took steps to increase holdings in higher-yielding sectors of the
insured market. With insured municipal issuance running 40% above 1995 levels
in a rising and volatile rate environment, prices of insured bonds came under
pressure from time to time. We took advantage of an excellent opportunity to
increase positions in more yield-sensitive sectors of the insured market,
specifically hospital, solid waste disposal, and nuclear revenue bonds (see
the Sector Diversification table following this letter).
Your fund's performance surpassed that of the average for its peer group for
both the 6- and 12-month periods ended August 31, as shown in the table.
Tax-Free Income Fund
We began the last six months in an aggressive posture following the strong
market at the close of 1995, but reduced our exposure to rising interest rates
significantly from April to June. Over the most recent four months, we moved
the fund's duration from more than 8.0 years to below 7.5 years.
Performance Comparison chart
Periods Ended 8/31/96 6 Months 12 Months
Tax-Free Income Fund 0.01% 5.45%
Lipper General Municipal
Debt Funds Average -0.29 4.68
We accomplished this by selling longer-term bonds and reinvesting the proceeds
in maturities under 10 years, and by focusing on higher-coupon bonds with
defensive characteristics. On August 31, the fund's weighted average maturity
and duration were at the low end of their range for the past year and below
their peer group averages.
In developing our strategy, we elected to sell some of the low-coupon
long-term bonds that performed so well at the end of 1995, and maintained our
allocation to noncallable bonds since we believe the positive performance they
can provide during a rally is worth preserving for another day. We emphasized
states with high income tax rates in our portfolio, as they enjoy steady
demand even in rising rate environments.
The fund's duration moves paid off in terms of performance: we outpaced the
peer group average for both the six-month and one-year periods ended August
31, as shown in the table. The net asset value of the fund was essentially
unchanged from a year ago, with income providing all of the return.
Tax-Free High Yield Fund
The municipal high-yield market performed well over the past six and 12 months
thanks to continuing strong demand and relatively light new issuance. These
factors resulted in narrowing credit quality spreads for over a year - meaning
that yields tightened between higher- and lower-quality bonds.
We began the last six months with a somewhat defensive market stance, enabling
the fund to outperform its peer group as interest rates rose. For the rest of
the period, we maintained a more neutral posture. The fund's duration remained
in a range between 7.0 and 7.3 years. Cash levels averaged about 5%, and the
weighted average maturity hovered around 19 years.
Lower-quality bonds became less attractive to us as yield spreads narrowed. As
a result, we allowed the fund's exposure to below-investment-grade bonds to
drift to 25% of net assets from 30% over the past year. We are always
searching for high-yield opportunities, but in general we do not expect to
materially increase our exposure to lower-quality bonds in the near future.
The fund's average credit quality has been stable at BBB+ for almost a year.
Chart 2 - Quality Diversification pie chart
Performance Comparison chart
Periods Ended 8/31/96 6 Months 12 Months
Tax-Free High Yield Fund 0.81% 5.83%
Lipper High Yield Municipal
Debt Funds Average 0.28 5.43
At present, our market outlook is cautious as recent data suggest a rate of
economic growth stronger than the Federal Reserve might like. Absent an
unexpectedly large issuance of lower-quality bonds, we believe the municipal
high-yield market will maintain its present narrow spreads versus higher-
quality bonds. We are pleased to report that the various strategy moves
outlined above enabled your fund to outperform its peer group averages for
both the 6- and 12-month periods ended August 31, 1996, as shown in the table.
Outlook
The last six months have seen a major change in the outlook for the economy,
causing a shift in the shape and level of the municipal yield curve. The risk
of an overheating economy has grown, and the Fed will likely nudge rates
higher to cool things down in coming months. The current expansion is now over
five years old, roughly twice the length of an average expansion prior to
1982. However, old age is not a cause for an expansion to end. There is no
reason why the current expansion could not continue if interest rates are high
enough to restrain inflation, yet low enough to keep unemployment at bay.
Little has changed from a year ago in terms of interest rate levels, but much
has changed about market psychology. A year ago, this market was consumed with
worries about the impact of tax reform proposals on municipal bonds, and it
was convinced the economy was slowing down. Today, tax reform is on the back
burner and the economy has picked up steam.
As mentioned, we believe the Fed is likely to raise short-term rates, a move
that is at least partly discounted by the market. Municipal securities have
performed well this year in relation to their taxable counterparts, resulting
in lower yield relationships (as a percent of taxable yields) that will be
difficult to improve upon. An expected pickup in supply again after a quiet
summer may also put some pressure on the municipal market.
For these reasons, we expect to continue managing the funds with a cautious
perspective on interest rates, trying to add performance value both through
credit research and by taking advantage of trading ranges.
Respectfully submitted,
William T. Reynolds
Director
Fixed Income Division
Mary J. Miller
Director
Municipal Bond Department
September 20, 1996
Keeping Taxes To A Minimum
As the saying goes, it's not what you earn but what you keep that counts. The
ability to provide tax-exempt income is the chief appeal of municipal bond
funds, and investors in higher tax brackets often find these funds
advantageous. Some funds invest in securities that offer the triple benefit of
being free from federal, state, and local taxes.
Investors should remember, however, that the total return on most municipal
bond funds may not be entirely tax-free. To avoid federal income taxes,
municipal funds must distribute all of their capital gains to shareholders
each year. These distributions are fully taxable. On infrequent occasions,
municipal funds may also purchase securities whose income is taxable, if
permitted by the prospectus.
Therefore, to judge accurately how well a fund minimizes taxes, investors
should focus not just on income but on the gain or loss from the sale of
securities, since both components make up total return. A fund's overall tax
efficiency - the percentage of its return that actually winds up in
shareholders' pockets - is calculated by dividing its after-tax total return
by its pretax total return. For example, an optimum tax efficiency of 100%
would indicate that these two returns were equal - the shareholders paid no
taxes. In reality, most municipal funds fall somewhat below this level due
primarily to taxable capital gain distributions.
At T. Rowe Price, our main goal in managing municipal bond portfolios is to
provide competitive total return performance. At the same time, we strive to
minimize capital gain distributions and other factors that would saddle our
shareholders with taxes. "We don't allow tax considerations to drive our
portfolio management, but we remain sensitive to taxes in our overall approach
to management," says Mary J. Miller, Director of T. Rowe Price's Municipal
Bond Department.
Inevitably, there are times when market conditions necessitate the sale of a
security despite the tax consequences. However, we are generally able to
offset capital gains with losses incurred on the sale of other securities.
Under Internal Revenue Service rules, losses can be carried for up to eight
years to offset gains. "Our goal is to minimize capital gains by offsetting
them with losses, so there would be no taxable event to the shareholder," says
Ms. Miller.
While not intentionally pursuing losses, T. Rowe Price aims to take advantage
of them when they occur. For instance, when municipal bond prices have reached
a cyclical low, we may sell some securities that are trading below our
purchase price and reinvest the proceeds in higher-yielding securities. That
strategy enhances the fund's income and also provides a tax loss that can be
employed anytime in the following eight years to offset capital gains.
According to a report from Morningstar,* the Tax-Free Insured Intermediate
Bond Fund had an average tax efficiency rating of 98.1% during the three years
ended August 31, 1996; the figures for the other funds cover the five-year
period ended August 31 and are as follows: Tax-Free Short-Intermediate 100%;
Tax-Free Income 97.9%; and Tax-Free High Yield 96.7%. (Money funds are
presumed to be 100% efficient.) While our foremost goal is to provide
competitive total returns, we will continue to do our best to limit the amount
of money you have to surrender to the IRS.
*Although data are gathered from reliable sources, completeness and accuracy
cannot be guaranteed.
T. Rowe Price Tax-Free Funds
Portfolio Highlights
KEY STATISTICS
2/29/96 8/31/96
Tax-Exempt Money Fund
Price Per Share $1.00 $1.00
Dividends Per Share
For 6 months 0.016 0.015
For 12 months 0.033 0.031
Dividend Yield
(7-Day Compound) * 2.95% 3.06%
Weighted Average Maturity (days) 65 66
Weighted Average Quality ** First Tier First Tier
Tax-Free Short-Intermediate Fund
Price Per Share $5.37 $5.30
Dividends Per Share
For 6 months 0.11 0.12
For 12 months 0.23 0.23
Dividend Yield *
For 6 months 4.38% 4.32%
For 12 months 4.47 4.40
Weighted Average Maturity
(years) 3.6 3.2
Weighted Average Effective
Duration (years) 3.0 2.6
Weighted Average Quality *** AA AA
Tax-Free Insured Intermediate Bond Fund
Price Per Share $10.84 $10.62
Dividends Per Share
For 6 months 0.24 0.24
For 12 months 0.48 0.48
Dividend Yield *
For 6 months 4.48% 4.44%
For 12 months 4.61 4.51
Weighted Average Maturity
(years) 7.2 7.7
Weighted Average Effective Duration
(years) 5.5 5.6
Weighted Average Quality *** AA AA
Tax-Free Income Fund
Price Per Share $9.66 $9.40
Dividends Per Share
For 6 months 0.26 0.26
For 12 months 0.52 0.52
Dividend Yield *
For 6 months 5.45% 5.44%
For 12 months 5.62 5.52
Weighted Average Maturity
(years) 18.1 17.0
Weighted Average Effective Duration
(years) 8.3 7.5
Weighted Average Quality *** AA- AA-
Tax-Free High Yield Fund
Price Per Share $12.10 $11.84
Dividends Per Share
For 6 months 0.36 0.35
For 12 months 0.72 0.71
Dividend Yield *
For 6 months 6.00% 5.92%
For 12 months 6.22 6.05
Weighted Average Maturity
(years) 20.0 19.4
Weighted Average Effective Duration
(years) 7.2 7.1
Weighted Average Quality *** BBB+ BBB+
* 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.
** All securities purchased in the money fund are rated in the two highest
categories (tiers) as established by national rating agencies or, if
unrated, are deemed of comparable quality by T. Rowe Price.
*** Based on T. Rowe Price research.
T. Rowe Price Tax-Free Funds
Performance Comparison
These charts show the value of a hypothetical $10,000 investment in each fund
over the past 10 fiscal year periods or since inception (for funds lacking
10-year records). The result is compared with a broad-based average or index.
The index return does not reflect expenses, which have been deducted from the
fund's return.
Chart 3, 4, 5, 6, and 7 (SEC charts): Tax-Exempt Money Fund, Tax-Free Insured
Intermediate Bond Fund, Tax-Free Insured Intermediate Bond Fund, Tax-Free
Income Fund, Tax-Free High Yield Fund
Average Annual Compound Total Return
This table shows how each fund would have performed each year if its actual
(or cumulative) returns for the periods shown had been earned at a constant
rate.
Since Inception
Periods Ended 8/31/96 1 Year 5 Years 10 Years Inception Date
Tax-Exempt Money 3.16% 2.74% 3.82% - 4/8/81
Tax-Free
Short-Intermediate 3.84 5.08 5.32 - 12/23/83
Tax-Free Insured
Intermediate Bond 3.96 - - 6.57% 11/30/92
Tax-Free Income 5.45 7.47 6.56 - 10/26/76
Tax-Free High Yield 5.83 7.71 7.86 - 3/1/85
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original
purchase.
For yield, price, last transaction, and current balance, 24 hours, 7 days a
week, call:
1-800-638-2587 toll free
For assistance with your existing fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
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
100 East Pratt Street
Baltimore, Maryland 21202
http://www.troweprice.com
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 Tax-Free
Funds.
T. Rowe Price Investment Services, Inc., Distributor RPRTTFF 8/31/96
APPENDIX
Chart 1 - Municipal Bond and Note Yields chart showing 30-year AAA GO, 5-year
AAA GO, and 1-year MIG1 note from 8/31/95 through 8/31/96.
Chart 2 - Quality Diversification pie chart showing quality diversification of
AAA 4%, AA 22%, A 18%, BBB 31%, and BB and Below 25% on 8/31/96
Charts 3, 4, 5, 6, and 7 - SEC graphs:
line charts showing the cumulative growth of $10,000 invested in the TEM,
TSTI, TFII, TFI, and TFH Funds over the past 10 years (or "from inception" for
funds lacking 10-year histories) compared with $10,000 invested in a
broad-based index or average over the same period.
