Annual Report - Financial Statements
T. Rowe Price
Tax-Free Insured Intermediate Bond Fund
February 28, 1997
Portfolio Highlights
SECTOR Diversification
Percent of Percent of
Net Assets Net Assets
8/31/96 2/28/97
_____________________________________________________
Tax-Free Insured Intermediate Fund
Dedicated Tax Revenue 17% 17%
Air and Sea Transportation
Revenue 11 12
Solid Waste Revenue 13 12
Water and Sewer Revenue 5 8
General Obligation - Local 7 8
General Obligation - State 9 7
Nuclear Revenue 6 7
Prerefunded Bonds 7 6
Lease Revenue 5 5
Housing Finance Revenue 1 4
Electric Revenue 6 4
Hospital Revenue 3 4
Industrial and Pollution
Control Revenue 2 2
All Others 9 3
Other Assets Less Liabilities -1 1
_______________________________________________________
Total 100% 100%
T. Rowe Price Tax-Free Insured Intermediate Bond Fund
Financial Highlights
For a share outstanding throughout each period
Year 11/30/92
Ended to
2/28/97 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 0.48* 0.48* 0.46* 0.48* 0.13*
Net
realized
and
unrealized
gain
(loss) (0.04) 0.49 (0.20) 0.09 0.55
Total from
investment
activities 0.44 0.97 0.26 0.57 0.68
Distributions
Net
investment
income (0.48) (0.48) (0.46) (0.48) (0.13)
Net realized
gain - - (0.03) (0.06) -
Total
distribu-
tions (0.48) (0.48) (0.49) (0.54) (0.13)
NET ASSET VALUE
End of
period $ 10.80 $ 10.84 $ 10.35 $ 10.58 $ 10.55
Ratios/Supplemental Data
Total return 4.19%* 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 4.47%* 4.52%* 4.53%* 4.45%* 5.08%!*
Portfolio
turnover
rate 76.8% 63.8% 170.8% 74.8% 65.3%!
Net assets,
end of
period(in
thousands) $ 99,176 $ 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
February 28, 1997
Statement of Net Assets
Par Value
In thousands
ARIZONA 4.3%
Arizona Transportation
Board, Maricopa County,
Excise Tax
5.60%, 7/1/02
(AMBAC Insured) $ 2,000 $ 2,103
Phoenix, Airport, 5.65%,
7/1/01 (MBIA Insured) 2,000 2,097
Pima County, Water
Improvement Dist.
5.90%, 1/1/04
(FGIC Insured) 75 80
Total Arizona (Cost $4,191) 4,280
CALIFORNIA 1.7%
California Public Works
Board, Dept. of
Corrections
6.00%, 11/1/05
(MBIA Insured) 1,550 1,682
Total California (Cost $1,576) 1,682
COLORADO 7.3%
Denver City and County
Airport
6.25%, 11/15/06
(MBIA Insured) * 2,500 2,712
Northern Colorado Water
Dist., Water Conservation
6.05%, 12/1/04
(AMBAC Insured) 4,185 4,565
Total Colorado (Cost $7,075) 7,277
CONNECTICUT 2.6%
Connecticut Special
Assessment, Unemployment
Compensation
5.50%, 5/15/00
(AMBAC Insured) 2,500 2,596
Total Connecticut (Cost $2,568) 2,596
DISTRICT OF COLUMBIA 0.6%
Washington D.C. Metropolitan
Airport Auth.
6.625%, 10/1/12
(MBIA Insured) * 500 542
Total District of Columbia
(Cost $544) 542
FLORIDA 6.0%
Dade County, Resource
Recovery Fac.
6.00%, 10/1/06
(AMBAC Insured) * 3,000 3,195
First Florida Gov't.
Fin. Corp.
VRDN (Currently 3.25%)
(MBIA Insured) $ 100 $ 100
Florida Division of
Bond Fin., Dept. of
Environmental
Preservation
6.00%, 7/1/05
(MBIA Insured) 2,000 2,172
St. Lucie County, PCR,
Florida Power and Light Co.
VRDN (Currently 3.45%) 500 500
Total Florida (Cost $5,840) 5,967
GEORGIA 1.0%
Chatham County Hosp. Auth.,
Memorial Medical Center
5.25%, 1/1/16
(AMBAC Insured) 1,000 955
Total Georgia (Cost $951) 955
HAWAII 3.9%
Hawaii, Airport, 6.70%,
7/1/05 (MBIA Insured) * 3,000 3,288
Maui County, GO, 6.00%,
12/15/05 (FGIC Insured) 500 543
Total Hawaii (Cost $3,707) 3,831
ILLINOIS 5.7%
Chicago, GO, 5.75%, 1/1/05
(AMBAC Insured) 3,500 3,694
Chicago-O'Hare Int'l. Airport
Int'l. Terminal
7.50%, 1/1/05
(MBIA Insured) * 1,180 1,282
7.50%, 1/1/05
(MBIA Insured)
(Prerefunded 1/1/00!)* 570 627
Total Illinois (Cost $5,466) 5,603
KENTUCKY 1.0%
Carroll County, Solid Waste
Disposal Fac., Kentucky
Utilities
VRDN (Currently 3.55%) * 1,000 1,000
Total Kentucky (Cost $1,000) 1,000
LOUISIANA 0.3%
Saint Charles Parish, PCR,
Shell Oil
VRDN (Currently 3.55%) * $ 300 $ 300
Total Louisiana (Cost $300) 300
MARYLAND 13.0%
Maryland, GO, 5.00%, 3/1/02 3,000 3,084
Maryland CDA
Single Family
5.40%, 4/1/03 1,070 1,100
5.70%, 4/1/06 1,000 1,033
Maryland HHEFA, Univ. of
Maryland Medical System
6.50%, 7/1/21
(FGIC Insured)
(Prerefunded 7/1/01!) 1,500 1,623
Northeast Maryland Waste
Disposal Auth.
Montgomery County Resources
6.30%, 7/1/16
(MBIA Insured) * 2,000 2,087
Southwest Resource
Recovery Fac.
7.10%, 1/1/03
(MBIA Insured) 3,500 3,918
Total Maryland (Cost $12,560) 12,845
MASSACHUSETTS 2.8%
Massachusetts, GO, 6.30%,
11/1/05 (FGIC Insured) 1,250 1,377
Massachusetts Municipal
Wholesale Electric Co.
6.375%, 7/1/01
(MBIA Insured) 1,325 1,426
Total Massachusetts (Cost $2,629) 2,803
MICHIGAN 4.4%
Greater Detroit Resource
Recovery Auth.
6.25%, 12/13/05
(AMBAC Insured) 2,000 2,189
Michigan Building Auth., Lease
6.25%, 10/1/03
(AMBAC Insured) 2,000 2,187
Total Michigan (Cost $4,210) 4,376
MINNESOTA 1.1%
Minneapolis and St. Paul
Metropolitan Airports
Commission, GO
6.40%, 1/1/06 * $ 1,000 $ 1,073
Total Minnesota (Cost $1,027) 1,073
MISSISSIPPI 0.1%
Jackson County Industrial
Sewage Fac., Chevron
VRDN (Currently 3.55%) * 100 100
Total Mississippi (Cost $100) 100
MISSOURI 0.5%
Missouri HEFA, Washington Univ.,
VRDN (Currently 3.45%) 500 500
Total Missouri (Cost $500) 500
NEW JERSEY 5.3%
New Jersey Transportation
Trust Fund Auth.
5.00%, 6/15/04 3,500 3,566
6.25%, 6/15/03 (MBIA Insured) 1,500 1,636
Total New Jersey (Cost $5,109) 5,202
NEW YORK 4.8%
Metropolitan Transportation
Auth.
6.25%, 7/1/05
(MBIA Insured) 1,420 1,551
New York City, GO, 5.10%,
8/1/06 (AMBAC Insured) 2,095 2,106
New York State Thruway Auth.,
Highway and Bridge Trust
6.00%, 4/1/05
(MBIA Insured) 1,000 1,079
Total New York (Cost $4,640) 4,736
NORTH CAROLINA 4.5%
North Carolina Municipal Power
Agency, Catawba Electric
6.00%, 1/1/04
(MBIA Insured) 4,200 4,488
Total North Carolina
(Cost $4,343) 4,488
OHIO 2.7%
Cuyahoga County, Univ. Hosp.
6.00%, 1/15/03
(MBIA Insured) $ 2,530 $ 2,711
Total Ohio (Cost $2,666) 2,711
PENNSYLVANIA 2.6%
Pennsylvania, GO, 5.375%,
11/15/03 (FGIC Insured) 2,500 2,619
Total Pennsylvania (Cost $2,564) 2,619
PUERTO RICO 1.1%
Puerto Rico Highway and
Transportation Auth.
6.25%, 7/1/07
(MBIA Insured) 1,000 1,114
Total Puerto Rico (Cost $1,089) 1,114
SOUTH CAROLINA 1.7%
Orangeburg County, South
Carolina Electric and Gas
VRDN (Currently 3.60%) * 600 600
South Carolina Public
Service Auth., Santee Cooper
6.50%, 7/1/24
(AMBAC Insured)
(Prerefunded 7/1/02!) 1,000 1,113
Total South Carolina
(Cost $1,631) 1,713
TENNESSEE 0.7%
Memphis-Shelby County
Airport Auth.
6.25%, 2/15/11
(MBIA Insured) * ** 700 733
Total Tennessee (Cost $732) 733
TEXAS 9.5%
Dallas, GO, 6.125%, 2/15/05
(Prerefunded 2/15/03!) 1,000 1,082
Dallas-Fort Worth Regional
Airport
7.75%, 11/1/03
(FGIC Insured) 1,000 1,174
Harris County, Toll Road
6.50%, 8/15/17
(AMBAC Insured)
(Prerefunded 8/15/02!) 1,500 1,671
Houston, Water and Sewer,
7.00%, 12/1/03
(AMBAC Insured) $ 2,650 $ 3,014
San Antonio, Water, 6.40%,
5/15/05 (FGIC Insured) 150 163
Texas Dept. of Housing and
Community Affairs
Single Family Mortgage
5.75%, 3/1/10
(MBIA Insured) 2,245 2,276
Total Texas (Cost $8,919) 9,380
VERMONT 0.4%
Vermont Ed. and Health
Buildings Fin. Agency
Medical Center Hosp.
of Vermont
7.35%, 9/1/13
(FGIC Insured) 350 372
Total Vermont (Cost $350) 372
VIRGINIA 4.5%
Riverside Regional Jail Auth.,
5.60%, 7/1/06
(MBIA Insured) 1,100 1,159
Virginia Ed. Loan Auth.,
Student Loan Program
5.80%, 3/1/05
(Escrowed to Maturity)* 980 1,043
Virginia Transportation
Board Northern Virginia
Transportation Dist.
5.80%, 5/15/03 1,425 1,517
5.80%, 5/15/04 695 741
Total Virginia (Cost $4,218) 4,460
WASHINGTON 3.2%
Tacoma
Electric Systems
5.90%, 1/1/05
(FGIC Insured) 1,000 1,066
6.00%, 1/1/06
(FGIC Insured) 2,000 2,146
Total Washington
(Cost $3,104) 3,212
WYOMING 1.9%
Lincoln County, PCR, Exxon,
VRDN (Currently 3.50%) * 1,900 1,900
Total Wyoming (Cost $1,900) 1,900
Value
In thousands
Total Investments in Securities
99.2% of Net Assets (Cost $95,509) $ 98,370
Other Assets Less Liabilities 806
NET ASSETS $ 99,176
_________
Net Assets Consist of:
Accumulated net investment
income - net of distributions $ 46
Accumulated net realized
gain/loss - net of distributions (299)
Net unrealized gain (loss) 2,861
Paid-in-capital applicable to
9,184,940 shares of $0.01 par
value capital stock
outstanding; 1,000,000,000
shares authorized 96,568
NET ASSETS $ 99,176
_________
NET ASSET VALUE PER SHARE $ 10.80
_________
* Interest subject to alternative minimum tax
** When-issued security
! Used in determining portfolio maturity
AMBAC AMBAC Indemnity Corp.
CDA Community Development Administration
FGIC Financial Guaranty Insurance Company
GO General Obligation
HEFA Health & Educational Facility Authority
HHEFA Health & Higher Educational Facility Authority
MBIA Municipal Bond Investors Assurance Corp.
PCR Pollution Control Revenue
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
Statement of Operations
In thousands
Year
Ended
2/28/97
Investment Income
Interest income $ 4,829
Expenses
Investment management 315
Shareholder servicing 120
Custody and accounting 99
Registration 35
Legal and audit 12
Prospectus and shareholder reports 9
Directors 7
Miscellaneous 16
Total expenses 613
Net investment income 4,216
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 875
Futures 23
Net realized gain (loss) 898
Change in net unrealized
gain or loss on securities (1,210)
Net realized and unrealized gain (loss) (312)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 3,904
_________
The accompanying notes are an integral part of these financial
statements.
T. Rowe Price Tax-Free Insured Intermediate Bond Fund
Statement of Changes in Net Assets
In thousands
Year
Ended
2/28/97 2/29/96
Increase (Decrease) in Net Assets
Operations
Net investment income $ 4,216 $ 4,002
Net realized gain (loss) 898 1,280
Change in net unrealized
gain or loss (1,210) 2,770
Increase (decrease) in
net assets from
operations 3,904 8,052
Distributions to shareholders
Net investment income (4,216) (4,002)
Capital share transactions*
Shares sold 23,710 20,792
Distributions reinvested 3,177 2,988
Shares redeemed (19,552) (19,194)
Increase (decrease) in
net assets from capital
share transactions 7,335 4,586
Net Assets
Increase (decrease) during
period 7,023 8,636
Beginning of period 92,153 83,517
End of period $99,176 $92,153
___________________
*Share information
Shares sold 2,219 1,955
Distributions reinvested 297 280
Shares redeemed (1,832) (1,803)
Increase (decrease) in
shares outstanding 684 432
The accompanying notes are an integral part of these financial
statements.
T. Rowe Price Tax-Free Insured Intermediate Bond Fund
February 28, 1997
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 $69,959,000 and $69,582,000,
respectively, for the year ended February 28, 1997.
Note 3 - Federal Income Taxes
No provision for federal income taxes is required since the fund
intends to continue to qualify as a regulated investment company
and distribute all of its income. The fund has unused realized
capital loss carryforwards for federal income tax purposes of
$213,000, which expires in 2003. Capital loss carryforwards
utilized in fiscal 1997 amounted to $866,000. The fund intends
to retain gains realized in future periods that may be offset by
available capital loss carryforwards.
In order for the fund's capital accounts and distributions to
shareholders to reflect the tax character of certain
transactions, the following reclassifications were made during
the year ended February 28, 1997. The results of operations and
net assets were not affected by the reclassifications.
Undistributed net investment income $ 11,000
Undistributed net realized gain (1,000)
Paid-in-capital (10,000)
At February 28, 1997, the aggregate cost of investments for
federal income tax and financial reporting purposes was
$95,509,000, and net unrealized gain aggregated $2,861,000, of
which $2,862,000 related to appreciated investments and $1,000
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 $25,000 was payable at
February 28, 1997. 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 February 28,
1997, and for the year then ended, the effective annual group
fee rate was 0.33%. The fund pays a pro-rata share of the group
fee based on the ratio of its net assets to those of the group.
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, $43,000 of
management fees were not accrued by the fund for the year ended
February 28, 1997. 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 $157,000 for the year ended February 28, 1997, of
which $15,000 was payable at period-end.
T. Rowe Price Tax-Free Insured Intermediate Bond Fund
Report of Independent Accountants
To the Shareholders and Board of Directors
of T. Rowe Price Tax-Free Insured Intermediate Bond Fund, Inc.
We have audited the accompanying statement of net assets of
T.Rowe Price Tax-Free Insured Intermediate Bond Fund, Inc. as of
February 28, 1997, and the related statement of operations for
the year then ended, the statement of changes in net assets for
each of the two years in the period then ended, and the
financial highlights for each of the four years in the period
then ended and for the period November 30, 1992 (commencement of
operations), to February 28, 1993. These financial statements
and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements and financial highlights are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of
investments owned as of February 28, 1997, by correspondence
with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial
highlights referred to above present fairly, in all material
respects, the financial position of T. Rowe Price Tax-Free
Insured Intermediate Bond Fund, Inc. as of February 28, 1997,
the results of its operations, the changes in its net assets,
and financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
March 19, 1997
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(registered trademark):
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
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
http://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 Tax-Free Insured Intermediate Bond Fund.
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.
RPRTTII 2/28/97
THE SHAREHOLDER LETTER AND REPORT FOR THE COMBINED TAX-FREE
FUNDS IS ATTACHED HERE BY ACCESSING THE FOLLOWING:
Annual Report
Tax-Free
Funds
February 28, 1997
T. Rowe Price
Report Highlights
o Interest rates ended the fiscal year slightly higher than a year ago,
resulting in moderate returns for municipal bond investors.
o Municipal bonds outperformed Treasuries during most of the year.
o All five funds generated greater returns than their peer group averages
during the year ended February 28.
o Your funds relied to a great extent on credit research and sector
selection to enhance returns. Tax-exempt high-yield securities were
particularly good performers.
o With the economy showing ongoing strength and the Federal Reserve
indicating a bias toward tighter monetary policy, our outlook is
somewhat cautious for the coming months.
Fellow Shareholders
The municipal bond market and your funds generated moderate returns during
the fiscal year ended February 28, 1997. Interest rates fluctuated during the
year and ended slightly higher than where they started at the end of last
February. The U.S. economy was characterized by modest wage inflation with
low unemployment, prompting the Federal Reserve to leave monetary policy
unchanged since January 1996.
MARKET ENVIRONMENT
Much of the movement in interest rates reflected the market's anticipation
of action or inaction by the Federal Reserve. The fiscal year began with
interest rates rising due to signs of both stronger growth and the
realization that balanced budget legislation would not be passed in 1996. As
market expectations for a tightening in monetary policy grew throughout the
first half, rates continued to increase. The long-term Treasury bond yield
remained in a trading range between 6.75% and 7.20% during the third quarter.
Intermediate and long-term rates then reversed course and fell through
November as it became evident that the economy was slowing in the third
quarter and the Federal Reserve was not going to raise rates. Another uptick
in rates took place late in 1996 as investors once again perceived strength
in the economy and anticipated possible tightening by the Federal Reserve.
Chart 1 - Municipal Bond and Yield Notes line chart
In the municipal market, rates came full circle over the year, rising about
45 basis points (100 basis points equal one percent) during the first six
months before settling slightly above year-ago levels. Long-term high-grade
general obligation bonds yielded 5.50% on February 28, 1997, versus 5.75% on
August 31, 1996, and 5.45% a year ago. Five-year high-grade bonds were 20
basis points higher in yield than in February 1996. One-year note rates
traded within a 70-basis-point range during the year, ending at 3.70%
compared with 3.25% a year ago.
Municipals provided higher returns than long-term Treasuries throughout most
of the fiscal year, as concerns regarding tax reform and flat tax legislation
diminished. As a result, long-term municipal yields were 81% of the yield on
comparable Treasuries on February 28, a level that benefits investors in
brackets above 19%, whereas a year ago with the ratio at 87%, investors in
brackets upwards of 13% benefited from municipals.
Lower-quality bonds performed well as the spread between their yields and
those of higher-rated bonds narrowed, resulting in good price appreciation.
The narrowing yield spread between different quality bonds reflected a solid
economy with no immediate concern about recession and also the growing number
of insured bonds in the market, which shrunk the supply of higher-yielding
bonds.
New issuance in both the long- and short-term markets increased in 1996 for
the first time since 1993, reflecting healthier state and local economies,
a backlog of borrowing needs, and less resistance from the voters to new
bond-financed projects. The increased supply was well received by investors
after two years of declining issuance.
TAX-EXEMPT MONEY FUND
Our longer maturity strategy resulted in attractive returns, helping your
fund outperform its peer group during both the 6- and 12-month periods ended
February 28, 1997.
Chart 2- Performance Comparison
Periods Ended 2/28/976 Months 12 Months
____________________________________________________________
Tax-Exempt Money Fund1.51% 3.05%
Lipper Tax-Exempt Money
Market Funds Average1.45 2.91
Despite last year's stable monetary policy, the yields of 6- and 12-month
municipal notes managed to vacillate in a range of 70 basis points. At the
end of the fiscal year, yields of 1- to 30-day maturities were little changed
from a year ago, but yields on 60-day to 1-year maturities were 20 to 50
basis points higher.
Your fund ended the fiscal year with a weighted average maturity of 58 days,
shorter than the 65 days of a year earlier and 66 days at the end of August.
By comparison, the weighted average maturity for our peer group at the end
of February was only 46 days. Lending support to our modestly longer maturity
posture was the robust demand generated by cash inflows to tax-exempt money
funds, which expanded to a record $147 billion. An additional $12 billion in
new cash inflows more than offset a $5 billion increase in the supply of new
issues.
We emphasized longer maturities throughout the year, since we felt reasonably
confident that the Federal Reserve would wait for more concrete evidence of
rising inflation before raising the federal funds rate. We took advantage of
the upwardly sloping yield curve by concentrating more on 6- and 12-month
municipal notes, which provided an average of 40 basis points more yield than
shorter maturities. We also reduced the percentage of variable rate
securities in the portfolio. We will carefully consider recent remarks by
Chairman Greenspan about a possible preemptive move against inflation (see
the Outlook section) as we set our maturity strategy in coming months.
TAX-FREE SHORT-INTERMEDIATE FUND
Duration management and credit research helped your fund outperform the
average for similar funds during both the 6- and 12- month periods ended
February 28.
Chart 3- Performance Comparison
Periods Ended 2/28/97 6 Months 12 Months
_____________________________________________________
Tax-Free Short-
Intermediate Fund 3.13% 4.02%
Lipper Short-Intermediate
Debt Funds Average 3.07 3.72
The threat of higher short-term interest rates early in the year prompted us
to keep duration (a measure of a fund's sensitivity to changes in interest
rates) around 2.6 years, near the short end of our usual range. However, as
we moved into the third quarter, signs of slower growth began to emerge,
causing yields on five-year maturities to fall from 4.65% in early September
to 4.15% in early December. We extended the fund's duration to about 3.0
years, gaining some but not all of the price appreciation in the rally.
Recently, we reduced duration to 2.8 years because of the decreasing
likelihood of further increases in bond prices.
While our timing on duration was modestly successful, we were able to enhance
performance with credit research and sector selection. The prolonged strength
of the economy improved the financial condition of many municipal issuers.
Last year, Standard & Poor's upgraded credit ratings on more than three times
as many issues as it downgraded. As a result, lower-rated securities
outperformed higher-rated AAA issues, narrowing the yield differential
between them. We had positioned the fund to take advantage of this phenomenon
in both 1995 and 1996 by increasing fund exposure to lower-rated states such
as Massachusetts, Louisiana, New York, and Pennsylvania. We also purchased
financially sound hospital revenue bonds, which we think will benefit from
demographic changes.
Two sectors we continued to underweight are municipally owned electric
utilities and housing bonds. In many cases, municipal utilities sell
high-cost nuclear power, and deregulation of the industry should allow
low-cost providers to compete more effectively. As a result, many local
utilities were downgraded last year by Moody's and Standard & Poor's.
We avoided short-term housing bonds primarily because of their structure, not
because of creditworthiness. Housing bonds are issued at par, while we prefer
higher-yielding bonds at premium prices. If interest rates should rise, the
prices of short-term par bonds tend to fall faster than bonds trading at a
premium with the same duration.
TAX-FREE INSURED INTERMEDIATE BOND FUND
A combination of higher yield, credit management, and a lower fund expense
ratio enabled your fund to match the average return of similar funds over the
six-month period and slightly surpass it over 12 months.
Chart 4- Performance Comparison
Periods Ended 2/28/97 6 Months 12 Months
_____________________________________________________
Tax-Free Insured
Intermediate Bond Fund 4.00% 4.19%
Lipper Intermediate
Municipal Debt Funds Average 3.98 4.14
Interest rates over the past 12 months have been confined to a relatively
tighter trading range than in recent years. Yields on 10-year AAA-rated
securities ranged between 4.65% and 5.30% since early March, a 65-basis-point
range compared with 100 basis points a year ago and 155 two years earlier.
The recent tighter range limited returns that could be reaped from duration
management, which generated mixed results over the 6- and 12-month periods.
In the first half, our short posture contributed positively to performance
as interest rates moved higher. We gave back some of these gains in the
second half, as rates turned lower in September while we remained slightly
cautious.
Lower volatility rendered credit research and sector selection increasingly
important in our effort to outperform our peer group. We focused on
undervalued securities within the insured market. Even though two different
issues may carry insurance from the same company, the marketplace sometimes
values them differently. For instance, Denver International Airport is rated
BBB by Moody's and Standard & Poor's. While insurance earns the bonds a AAA
rating from both agencies, the marketplace usually values bonds lower,
according to their underlying rating. Early in the year we increased the
fund's exposure to the Denver Airport bonds because we believed they
represented good value versus other insured bonds.
TAX-FREE INCOME FUND
Overall, it was a year of modest returns for long-term bonds. In this
environment, your fund matched the average performance of its peer group
during the past six months and exceeded it over the year.
Chart 5- Performance Comparison
Periods Ended 2/28/97 6 Months 12 Months
_____________________________________________________
Tax-Free Income Fund 4.80% 4.81%
Lipper General Municipal
Debt Funds Average 4.79 4.51
During much of the year, we kept the fund's duration within a narrow range.
We felt that interest rates were likely to fluctuate more modestly than
during the two prior years, providing few opportunities for aggressive shifts
in strategy. As a result, the fund's duration remained close to 7.5 years for
most of 1996. We increased it slightly in the third quarter but then returned
to a more conservative position near the end of the fiscal year.
With municipal yields flirting with their lows of the past two decades, we
felt there was little chance of a strong rise in bond prices and further rate
declines. Therefore, we focused more on enhancing the portfolio's yield where
we could. This strategy included holding on to older, higher-yielding bonds
and identifying suitable high-yield securities, which performed well in 1996.
Going forward, the opportunity for further price appreciation from
lower-quality bonds seems limited, leading us to be more selective in
considering them.
Bonds insured by third parties began to look more attractive as the amount
of insured new issues rose during the year. Twelve months ago, the yields of
insured municipal bonds were only 10 to 15 basis points higher than those of
high-quality general obligation bonds; by year-end this spread was closer to
25 basis points, making the yields on insured bonds relatively appealing.
We will continue to focus on income enhancement, maintain duration closer to
the low end of our neutral range, and wait for opportunities to extend
maturities. The municipal market's stronger performance relative to taxable
securities during the first two months of the year, combined with a growing
new issues calendar for March, suggests that we will be able to invest at
higher yield levels in coming months.
TAX-FREE HIGH YIELD FUND
The Tax-Free High Yield Fund outperformed its peer group over both the fiscal
year and the most recent six-month period. It has exceeded the average
performance of similar funds for the past nine fiscal years.
Chart 6- Performance Comparison
Periods Ended 2/28/97 6 Months 12 Months
_____________________________________________________
Tax-Free High Yield Fund 5.37% 6.22%
Lipper High Yield Municipal
Debt Funds Average 4.98 5.27
Opportunistic credit selection dominated fund performance last year,
enhancing returns in three important ways. First, several individual holdings
boosted fund returns by outperforming the market because of improved credit
standing and refinancings. Key issues in this category included
investor-owned utility and hospital revenue bonds. Second, the selective sale
of securities and avoidance of certain sectors, such as specialized solid
waste and paper recycling bonds, meant we were able to avoid significant
credit problems. Finally, the fund was a beneficiary of yet another year of
narrowing yield spreads, with lower-quality bonds significantly outperforming
many higher-quality issues.
Your fund's concentration in below-investment-grade holdings fell steadily
last year, from 28% to 23% of net assets. This move reflected a combination
of factors, including ratings upgrades, refinancings, and a continuing
selective approach when considering new issues. However, positions in the BBB
category rose slightly to 34% of net assets. Absent a recession or a large
market sell-off, we expect yield differences between securities of different
credit ratings to remain tight. Another factor contributing to the narrow
yield spreads was the increasing market share of bond insurance, shrinking
the supply of uninsured lower-rated bonds. As a result, we are being
selective in our purchases of lower-quality bonds and do not expect a
material change in your fund's average credit quality, which was BBB+ at the
end of February.
Chart 7- Quality Diversification pie
We managed duration and the weighted average maturity within a narrow range,
with duration remaining between 7.0 and 7.4 years. Your fund was slightly
defensive versus its peer group early in the year, which was a plus in a down
market. We lengthened maturities modestly during much of the second half,
maintaining a weighted average maturity of 19 years and a cash level of about
3%. At the end of February, your fund could be characterized as being fairly
neutral versus its peer group.
OUTLOOK
The economy is in its sixth year of expansion, and while it has exhibited few
signs of inflationary pressure, the Federal Reserve remains on alert. Fed
chairman Alan Greenspan stated in recent testimony to the Senate Banking
Committee that the Fed cannot rule out a preemptive tightening in monetary
policy before signs of actual higher inflation become evident.
We expect economic growth and inflation to remain moderate throughout the
rest of 1997, with no evidence of recession visible to date. Consumer and
business sentiment remain high, inventories are not excessive, and
availability of credit is ample. The Federal Reserve, as indicated, could
push the fed funds rate higher to keep prices in check, but we believe any
increase will be small since short-term rates are well above the recent trend
rate of inflation. This was not the case in 1994, when the Fed was forced to
move aggressively.
The supply of municipal bonds should increase over the near term, possibly
exerting some downward pressure on bond prices if demand does not increase
commensurately. Given our expectation that interest rates will move in a
relatively narrow channel, we would regard higher rates as an opportunity to
provide additional yield in the funds. Overall, however, we do not expect to
see a significant move in bond prices in the months ahead. As in the past
year, the returns from municipal securities should come primarily from
income.
Respectfully submitted,
Mary J. Miller
Director
Municipal Bond Department
March 21, 1997
T. Rowe Price Tax-Free Funds
Portfolio Highlights
KEY STATISTICS
8/31/96 2/28/97
Tax-Exempt Money Fund
_____________________________________________________
Price Per Share $ 1.00 $ 1.00
Dividends Per Share!
For 6 months 0.015 0.015
For 12 months 0.031 0.030
Dividend Yield
(7-Day Compound) * 3.06% 3.02%
Weighted Average
Maturity (days) 66 58
Weighted Average Quality ** First Tier First Tier
Tax-Free Short-Intermediate Fund
_____________________________________________________
Price Per Share $ 5.30 $ 5.35
Dividends Per Share!
For 6 months 0.12 0.11
For 12 months 0.23 0.23
Dividend Yield *
For 6 months 4.32% 4.37%
For 12 months 4.40 4.39
Weighted Average Maturity
(years) 3.2 3.6
Weighted Average Effective
Duration (years) 2.6 2.8
Weighted Average Quality *** AA AA
(continued on next page)
T. Rowe Price Tax-Free Funds
Portfolio Highlights
Key statistics
8/31/96 2/28/97
Tax-Free Insured Intermediate Bond Fund
_____________________________________________________
Price Per Share $ 10.62$ 10.80
Dividends Per Share!
For 6 months 0.24 0.24
For 12 months 0.48 0.48
Dividend Yield *
For 6 months 4.44% 4.58%
For 12 months 4.51 4.56
Weighted Average
Maturity (years) 7.7 7.4
Weighted Average Effective
Duration (years) 5.6 5.3
Weighted Average Quality *** AA AA
Tax-Free Income Fund
Price Per Share $ 9.40 $ 9.59
Dividends Per Share!
For 6 months 0.26 0.26
For 12 months 0.52 0.52
Dividend Yield *
For 6 months 5.44% 5.48%
For 12 months 5.52 5.54
Weighted Average
Maturity (years) 17.0 17.0
Weighted Average Effective
Duration (years) 7.5 7.7
Weighted Average Quality *** AA- AA-
Key statistics
8/31/962/28/97
Tax-Free High Yield Fund
_____________________________________________________
Price Per Share $ 11.84 $ 12.12
Dividends Per Share!
For 6 months 0.35 0.35
For 12 months 0.71 0.70
Dividend Yield *
For 6 months 5.92% 5.94%
For 12 months 6.05 6.02
Weighted Average
Maturity (years) 19.4 19.1
Weighted Average Effective
Duration (years) 7.1 7.2
Weighted Average Quality *** BBB+ BBB+
! Taxability of dividends: 100% of the dividends paid for the 12 months
ended 2/28/97 were exempt from federal income tax.
* 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 8 - Tax Exempt Money Fund line chart
Chart 9 - Tax-Free Short-Intermediate Fund line chart
Chart 10 - Tax-Free Insured Intermediate Bond Fund line chart
Chart 11 - Tax-Free Income Fund line chart
Chart 12 - Tax-Free High Yield Fund line chart
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.
Periods Ended Since Incep-
2/28/97 1 5 10 Incep- tion
Year Years Years tion Date
_________________________________________________________
Tax-Exempt Money 3.05% 2.70% 3.77% - 4/8/81
Tax-Free Short-
Intermediate 4.02 4.94 5.13 - 12/23/83
Tax-Free Insured
Intermediate Bond 4.19 - - 6.76% 11/30/92
Tax-Free Income 4.81 7.38 6.40 - 10/26/76
Tax-Free High Yield 6.22 7.82 7.60 - 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,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(registered trademark):
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
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
http://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 Tax-Free Funds.
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.
RPRTTFF 2/28/97
Chart 1- yield line chart showing 30-year AAA GO, 5-year AAA GO, and 1-year
MIG1 note from 2/29/96 through 2/28/97
Chart 7 - quality diversification pie chart showing AAA 4%, AA 26%, A 13%,
BBB 34%, and BB and Below 23% on 2/28/97
Chart 8 - Tax Exempt Money Fund line chart showing the cumulative growth of
$10,000 invested in the TEM Fund 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.
Chart 9 - Tax-Free Short-Intermediate Fund line chart showing the cumulative
growth of $10,000 invested in the TEM Fund 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.
Chart 10 - Tax-Free Insured Intermediate Bond Fund line chart showing the
cumulative growth of $10,000 invested in the TEM Fund 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.
Chart 11 - Tax-Free Income Fund line chart showing the cumulative growth of
$10,000 invested in the TEM Fund 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.
Chart 12 - Tax-Free High Yield Fund line chart showing the cumulative growth
of $10,000 invested in the TEM Fund 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.
