PAGE 1
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SMC
Invest With Confidence
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
PROSSMUNI 3/1/96
Prospectus
T. Rowe Price
Summit Municipal Funds
T. Rowe Price
Summit Municipal Funds, Inc.
March 1, 1996
_____________________________________________________________________________
A choice of municipal bond and money market funds for investors seeking
tax-exempt income.
Invest With Confidence(registered trademark)
T. Rowe Price
Facts at a Glance
Investment Goals
Money fund. Preservation of capital, liquidity, and the highest level of
income consistent with these goals.
Bond funds. Highest level of income consistent with each fund's prescribed
investment program.
As with all mutual funds, these funds may not achieve their goals.
Strategy and Risk/Reward
Municipal Money Market Fund. Invests exclusively in high-quality municipal
securities whose income is exempt from federal income taxes. Average maturity
will not exceed 90 days. Your investment in the fund is neither insured nor
guaranteed by the U.S. government, and there is no assurance the fund will be
able to maintain a stable net asset value of $1.00 per share.
Risk/Reward: Lowest.
Municipal Intermediate Fund. Invests primarily in investment-grade municipal
bonds whose income is exempt from federal income taxes. Average effective
maturity will range between 5 and 10 years.
Risk/Reward: Higher income than the Municipal Money Market Fund with lower
potential share price fluctuation and income than the Municipal Income Fund.
Municipal Income Fund. Invests primarily in long-term investment-grade
municipal bonds whose income is exempt from federal income taxes. Average
maturity is expected to be 15 years or longer.
Risk/Reward: Higher income than the Municipal Intermediate Fund but also
greater potential price fluctuation.
Investor Profile. Investors who can benefit from tax-exempt income because of
their tax bracket and can also meet the $25,000 initial purchase requirement.
A significant portion of each fund's income will have to be included in the
alternative minimum tax computation; however, relatively few taxpayers are
required to pay this tax. Not appropriate for tax-deferred retirement plans.
Fees and Charges. 100% no load. No fees or charges to buy or sell shares or to
reinvest dividends; no 12b-1 marketing fees; free telephone exchange.
Investment Manager. Founded in 1937 by the late Thomas Rowe Price, Jr., T.
Rowe Price Associates, Inc. ("T. Rowe Price") and its affiliates managed over
$75 billion for over three and a half million individual and institutional
investor accounts as of December 31, 1995.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
T. Rowe Price
Summit Municipal Funds, Inc.
March 1, 1996
Prospectus
Contents
_____________________________________________________________________________
1
_____________________________________________________________________________
About the Funds
_____________________________________________________________________________
Transaction and Fund Expenses 2
_____________________________________________________________________________
Financial Highlights 3
_____________________________________________________________________________
Fund, Market, and Risk
Characteristics 4
_____________________________________________________________________________
2
_____________________________________________________________________________
About Your Account
_____________________________________________________________________________
Pricing Shares and
Receiving Sale Proceeds 11
Distributions and Taxes 12
_____________________________________________________________________________
Transaction Procedures
and Special Requirements 14
_____________________________________________________________________________
3
_____________________________________________________________________________
More About the Funds
_____________________________________________________________________________
Organization and Management 16
_____________________________________________________________________________
Understanding Performance
Information 17
_____________________________________________________________________________
Investment Policies
and Practices 18
_____________________________________________________________________________
4
_____________________________________________________________________________
Investing With T. Rowe Price
_____________________________________________________________________________
Account Requirements and
Transaction Information 26
_____________________________________________________________________________
Opening a New Account 26
_____________________________________________________________________________
Purchasing Additional Shares 27
_____________________________________________________________________________
Exchanging and Redeeming 27
_____________________________________________________________________________
Shareholder Services 28
_____________________________________________________________________________
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
funds, dated March 1, 1996, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a
free copy, call 1-800-977-1577.
1 About the Funds
Transaction and Fund Expenses
_____________________________________________________________________________
EXPENSE RATIOS FOR THE SUMMIT FUNDS ARE SUBSTANTIALLY BELOW THEIR INDUSTRY
AVERAGES.
Each T. Rowe Price Summit Fund has a single, all-inclusive fee covering
investment management and operating expenses. This fee will not fluctuate. In
contrast, most mutual funds have a fixed management fee plus a fee for
operating expenses that varies according to a number of factors. (See "How are
fund expenses determined?" under "Organization and Management.")
In Table 1 below, "Shareholder Transaction Expenses," shows that you pay no
sales charges. All the money you invest in a fund goes to work for you,
subject to the fees explained below. "Annual Fund Expenses" shows how much it
will cost to operate each fund for a year, based on 1995 fiscal year expenses.
These are costs you pay indirectly, because they are deducted from each fund's
total assets before the daily share price is calculated and before dividends
and other distributions are made. In other words, you will not see these
expenses on your account statement.
_____________________________________________________________________________
LIKE ALL T. ROWE PRICE FUNDS, THE SUMMIT FUNDS ARE 100% NO LOAD.
Shareholder Transaction Expenses
Money Market Intermediate Income
Sales charge "load"
on purchases None None None
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Sales charge "load"
on reinvested dividends None None None
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Redemption fees None None None
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Exchange fees None None None
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Annual Fund Expenses Percentage of Fiscal 1995 Average Net Assets
Money Market Intermediate Income
_____________________________________________________________________________
Management fee* 0.45% 0.50% 0.50%
_____________________________________________________________________________
Marketing fees (12b-1) None None None
_____________________________________________________________________________
Other expenses* 0.00% 0.00% 0.00%
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Total fund expenses* 0.45% 0.50% 0.50%
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*The management fee includes operating expenses.
Note: The funds charge a $5 fee for wire redemptions under $5,000, subject to
change without notice.
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Table 1
o Hypothetical example: Assume you invest $1,000, the fund returns 5%
annually, expense ratios remain as listed previously, and you close your
account at the end of the time periods shown. Your expenses would be:
_____________________________________________________________________________
THE TABLE AT RIGHT IS JUST AN EXAMPLE; ACTUAL EXPENSES CAN BE HIGHER OR LOWER
THAN THOSE SHOWN.
1 year 3 years 5 years 10 years
_____________________________________________________________________________
Municipal Money $5 $14 $25 $57
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Municipal Intermediate 5 16 28 63
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Municipal Income 5 16 28 63
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Table 2
Financial Highlights
The following table provides information about each fund's financial history.
It is based on a single share outstanding throughout each fiscal year. The
table is part of each fund's financial statements which are included in each
fund's annual report and incorporated by reference into the Statement of
Additional Information. This document is available to shareholders upon
request. The financial statements in the annual report have been audited by
Coopers & Lybrand L.L.P., independent accountants, whose unqualified report
covers the periods shown.
<TABLE>
<CAPTION>
___________________________________________________________________________________________________________
Investment Activities Distributions End of Period
Net Ratio
Realized of Net
and Total Ratio Invest-
Per- Net Unreal- Return of Ex- ment
iod Asset Net ized Total Net (Incl- penses Income
End- Value, In- Gain From Net Net Asset udes Net to to Port-
ed, Begin- vest (Loss) Invest- Invest- Real- Value, Rein- Assets Aver- Aver- folio
Oct- ning ment on ment ment ized Total End vested ($ age age Turn-
ober of In- Invest- Activi- In- Gain Distri- of Divi- Thou- Net Net over
31 Period come ments ties come (Loss) butions Period dends) sands) Assets Assets Rate
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market
Fund
1994a $1.000 $0.023 - $0.023 $(0.023) - $(0.023) $1.000 2.35% $42,592 0.45%b 2.56%b -
1995 1.000 0.035 - 0.035 (0.035) - (0.035) 1.000 3.53% 77,958 0.45% 3.48% -
Intermediate
Fund
1994a $10.00 $0.43 $(0.41) $0.02 $(0.43) - $(0.43) $9.59 0.18% $13,309 0.50%b 4.50%b 157.5%b
1995 9.59 0.48 0.58 1.06 (0.48) - (0.48) 10.17 11.39% 22,145 0.50% 4.93% 86.1%
Income Fund
1994a $10.00 $0.50 $(0.92) $(0.42) $(0.50) - $(0.50) $9.08 (4.38%) $ 6,453 0.50%b 5.23%b 161.1%b
1995 9.08 0.54 0.76 1.30 (0.54) - (0.54) 9.84 14.68% 11,108 0.50% 5.68%b 73.7%
___________________________________________________________________________________________________________
a For the period October 29, 1993 (commencement of operations) to October 31, 1994
b Annualized
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Table 3
Fund, Market, and Risk Characteristics: What to Expect
To help you decide which of the T. Rowe Price Summit Funds may be appropriate
for you, this section takes a closer look at their special benefits, the fixed
income markets in which they invest, as well as their investment objectives
and approach.
_____________________________________________________________________________
INVESTING IN THE T. ROWE PRICE SUMMIT FUNDS OFFERS SOME SPECIAL BENEFITS.
How do I benefit from investing in the T. Rowe Price Summit Funds?
You gain the advantages of funds that are tailored specifically to the needs
of self-directed individuals with substantial assets to invest in fixed income
securities. The funds offer such investors three key benefits:
o Access to professionally managed, diversified portfolios of municipal
securities.
o A low-cost structure that translates into higher returns, all else being
equal.
o Services designed to help you manage your investments more effectively
and efficiently.
How do the funds achieve their low-cost advantage?
The advantage reflects their more favorable ratio of expenses to assets. The
$25,000 initial purchase requirement means that the average account balance in
each Summit Fund is high. Since shareholder recordkeeping costs - a
substantial portion of fund expenses - are basically the same for all sizes of
accounts, a fund with larger account balances can spread the expenses over
more investment dollars, achieving a low overall expense ratio. Expenses are
deducted from fund assets before dividends are paid, as explained on the
previous page, so lower costs result in higher dividends for Summit
shareholders.
What services can I expect to be available?
Unlike some mutual funds, low costs do not mean any reduction in service for
Summit Fund investors. On the contrary, you will not only receive the wide
range of services available to all T. Rowe Price shareholders, but also have
access to a special group of fixed income service representatives and timely
market information to help you manage your accounts.
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FOR MORE DETAILED DESCRIPTIONS OF EACH FUND'S SECURITIES, SEE "INVESTMENT
POLICIES AND PRACTICES."
What is each Summit Fund's objective and investment program?
Municipal Money Market Fund. The fund's objectives are preservation of
capital, liquidity, and consistent with these the highest possible current
income exempt from federal income taxes. The fund's yield will fluctuate in
response to changes in interest rates. Unlike most bank accounts or
certificates of deposit, the fund is not insured or guaranteed by the U.S.
government.
All securities purchased will have ratings in the two highest categories
established by nationally recognized rating agencies or, if unrated, will be
of equivalent quality as determined by T. Rowe Price. The fund will purchase
money market securities with maturities of 13 months or less, and its
dollar-weighted average maturity will not exceed 90 days.
Municipal Intermediate Fund. The fund's objective is to provide the highest
possible income exempt from federal income taxes consistent with moderate
price fluctuation. There is no limit on the maturity of individual securities,
but the fund's dollar-weighted average effective maturity is expected to range
between 5 and 10 years. Targeting effective maturity provides additional
flexibility in portfolio management but, all else being equal, could result in
higher volatility than would be true of a fund targeting a stated maturity or
maturity range.
The fund will consist primarily of investment-grade municipal bonds rated from
AAA to BBB by a nationally recognized rating agency or, if unrated, the
equivalent as determined by T. Rowe Price. In an effort to enhance yield, up
to 10% of total assets may be invested in below-investment-grade bonds,
including those with the lowest rating.
Municipal Income Fund. The fund's objective is to provide a high level of
income exempt from federal income taxes. The fund will invest primarily in
long-term, investment-grade municipal bonds rated from AAA to BBB by a
nationally recognized rating agency or, if unrated, the equivalent as
determined by T. Rowe Price. The fund may purchase securities of any maturity,
and its dollar-weighted average maturity is expected to be 15 years or longer.
In an effort to enhance income, up to 20% of assets may be invested in
below-investment-grade securities, including those with the lowest rating. The
fund may be suitable for investors who are comfortable with a higher level of
principal fluctuation than is characteristic of either shorter-term bond funds
or long-term funds investing exclusively in investment-grade bonds.
How does each fund's credit quality relate to its investment objective?
Investing exclusively in high-quality securities, helps the Money Market Fund
pursue its primary goal - safety of principal. To secure a higher income with
only moderate principal fluctuation, the Intermediate Fund invests at least
90% of assets in investment-grade securities which provide a wider range of
income opportunities with some additional credit risk. In keeping with its
higher risk/reward profile, the Income Fund invests at least 80% of assets in
investment-grade securities and may also seek to enhance income through a
maximum position of 20% in below-investment-grade bonds, including those with
the lowest rating. Like all portfolio holdings, these securities are subject
to rigorous credit research conducted by T. Rowe Price analysts. (For further
discussion, see "Investment Policies and Practices - High Yield Investing.")
_____________________________________________________________________________
THE SHARE PRICE AND YIELD OF THE INTERMEDIATE AND INCOME FUNDS WILL FLUCTUATE
WITH CHANGING MARKET CONDITIONS AND INTEREST RATE LEVELS. WHEN YOU SELL YOUR
SHARES, YOU MAY LOSE MONEY. THE YIELD OF THE MONEY FUND WILL FLUCTUATE, BUT
ITS SHARE PRICE IS MANAGED TO MAINTAIN A $1.00 PRICE PER SHARE.
What are the main risks of investing in municipal bond and money market funds?
Since they are managed to maintain a $1.00 share price, money market funds
should have little risk of principal loss. However, the potential for
realizing a loss of principal in a bond or money market fund could derive
from:
o Interest rate or market risk: the decline in the prices of fixed income
securities and funds that may accompany a rise in the overall level of
interest rates (please see Table 5). A sharp and unexpected rise in
interest rates could cause a money fund's price to drop below a dollar.
However, the extremely short-term securities held in money market
portfolios - a means of achieving an overall fund objective of principal
safety - reduces their potential for price fluctuation.
o Credit risk: the chance that any of a fund's holdings will have its
credit rating downgraded or will default (fail to make scheduled
interest and principal payments), potentially reducing the fund's income
level and share price. Money funds invest in very high-rated securities,
thus reducing this risk.
o Political risk: the chance that a significant restructuring of federal
income tax rates, or even serious discussion on the topic in Congress,
could cause municipal bond prices to fall. The demand for municipal
bonds is strongly influenced by the value of tax-exempt income to
investors. Broadly lower tax rates could reduce the advantage of owning
municipal bonds.
o Geographical: the chance of price declines resulting from developments
in a single state.
How does the portfolio manager try to reduce risk?
Consistent with each fund's objective, the portfolio manager actively seeks to
reduce risk and increase total return. Risk management tools include:
o Diversification of assets to reduce the impact of a single holding on a
fund's net asset value.
o Thorough credit research by our own analysts.
o Adjustment of a fund's duration to reduce the negative impact of rising
interest rates or to take advantage of the benefits of falling rates.
What are derivatives and can these funds invest in them?
The term derivative is used to describe financial instruments whose value is
derived from an underlying security (e.g., a stock or bond) or a market
benchmark (e.g., an interest rate index). Many types of investments
representing a wide range of potential risks and rewards fall under the
"derivatives" umbrella - from conventional instruments such as callable bonds,
futures, and options, to more exotic investments such as stripped mortgage
securities and structured notes. While the term "derivative" has only recently
become widely known among the investing public, derivatives have in fact been
employed by investment managers for many years.
Each fund will invest in derivatives only if the expected risks and rewards
are consistent with its objective, policies, and overall risk profile as
described in this prospectus. The money fund does not invest in high-risk,
highly leveraged derivatives. The other funds limit their use of derivatives
to situations in which they may enable the fund to accomplish the following:
increase yield; hedge against a decline in principal value; invest in eligible
asset classes with greater efficiency and lower cost than is possible through
direct investment; or adjust the fund's duration.
These funds will not invest in any high-risk, highly leveraged derivative
instrument that is expected to cause the price volatility of the portfolio to
be meaningfully different from that of 1) an intermediate-term
investment-grade bond for the Intermediate Fund; or, 2) a long-term
investment-grade bond for the Income Fund.
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BEFORE CHOOSING A FUND, YOU MAY WISH TO REVIEW THESE CHARACTERISTICS OF
MUNICIPAL SECURITIES.
Who issues municipal securities?
State and local governments and governmental authorities sell notes and bonds
(usually called "municipals") to pay for public projects and services.
Who buys municipal securities?
Individuals are the primary investors, and a principal way they invest is
through mutual funds. Prices of municipals may be affected by major changes in
cash flows of money into or out of municipal funds. For example, substantial
and sustained redemptions from municipal bond funds could result in lower
prices for these securities.
What is "tax-free" about municipal bonds and bond funds?
The regular income dividends you receive from the fund are exempt from regular
federal income taxes. In addition, your state may not tax that portion of the
fund's income earned on the state's own obligations (if any). However, capital
gains distributed by the funds are taxable to you. (See "Useful Information on
Distributions and Taxes" for details.)
_____________________________________________________________________________
MUNICIPAL SECURITIES ARE ALSO CALLED "TAX-EXEMPTS" BECAUSE THE INTEREST INCOME
THEY PROVIDE IS USUALLY EXEMPT FROM FEDERAL INCOME TAXES.
Is interest income from municipal issues always exempt from federal taxes?
No. For example, since 1986, income from so-called "private activity"
municipals has been subject to the federal alternative minimum tax (AMT). For
instance, some bonds financing airports, stadiums, and student loan programs
fall into this category. Shareholders subject to the AMT must include income
derived from private activity bonds in their AMT calculation. Relatively few
taxpayers are required to pay the tax. The funds will seek to invest a
significant portion of their assets in municipals subject to the AMT in order
to enhance yield. The portion of income subject to the AMT will be reported
annually to shareholders. (Please see "Distributions and Taxes - Taxes on Fund
Distributions.")
Why are yields on municipals usually below those on otherwise comparable
taxable securities?
Since the income provided by most municipals is exempt from federal taxation,
investors are willing to accept lower yields on a municipal bond than on an
otherwise similar (in quality and maturity) taxable bond.
_____________________________________________________________________________
HERE'S SOME INFORMATION TO HELP YOU CHOOSE THE FUND THAT'S RIGHT FOR YOU.
How can I tell if a tax-exempt or a taxable income fund is more suitable for
me?
The primary factor is your expected federal income tax rate. The higher your
tax bracket, the more likely tax-exempts will be appropriate. If the after-tax
yield on a taxable bond or money market is less than a municipal fund's
tax-exempt yield, then your income will be higher in the municipal fund. To
find what a taxable fund would have to yield to equal the yield on a municipal
bond, divide the municipal bond's yield by one minus your tax rate. For quick
reference, the table below shows a range of taxable-equivalent yields.
If your federal A tax-free yield of
tax rate is: 2% 3% 4% 5% 6%
equals a taxable yield of:
_____________________________________________________________________________
28% 2.8 4.2 5.6 6.9 8.3
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31% 2.9 4.3 5.8 7.2 8.7
_____________________________________________________________________________
36% 3.1 4.7 6.3 7.8 9.4
_____________________________________________________________________________
39.6% 3.3 5.0 6.6 8.3 9.9
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Table 4
What are the major differences between money market and bond funds?
o Price: Bond funds have a fluctuating share price. Money market funds are
managed to maintain a stable share price.
o Maturity: Short- and intermediate-term bond funds have longer average
maturities (from 1 to 10 years) than money market funds (90 days or
less). Longer-term bond funds have the longest average maturities (10
years or more).
o Income: Short- and intermediate-term bond funds typically offer more
income than money market funds and less income than longer-term bond
funds.
_____________________________________________________________________________
YOU MAY WANT TO REVIEW SOME FUNDAMENTALS THAT APPLY TO ALL FIXED INCOME
INVESTMENTS.
Is a fund's yield fixed or will it vary?
It will vary. The yield is calculated every day by dividing a fund's net
income per share, expressed at annual rates, by the share price. Since both
income and share price will fluctuate, a fund's yield will also vary.
(Although money fund prices are stable, income is variable.)
Is a fund's "yield" the same thing as the "total return"?
Not for bond funds. The total return reported for a fund is the result of
reinvested distributions (income and capital gains) and the change in share
price for a given time period. Income is always a positive contributor to
total return and can enhance a rise in share price or serve as an offset to a
drop in share price. Since money funds are managed to maintain a stable share
price, their yield and total return should be the same.
What is "credit quality" and how does it affect a fund's yield?
Credit quality refers to a bond issuer's expected ability to make all required
interest and principal payments in a timely manner. Because highly rated
issuers represent less risk, they can borrow at lower interest rates than less
creditworthy issuers. Therefore, a fund investing in high credit-quality
securities should have a lower yield than an otherwise comparable fund
investing in lower credit-quality securities.
What is meant by a bond fund's "maturity"?
Every bond has a stated maturity date when the issuer must repay the
security's entire principal value to the investor. Some types of bonds may
also have an "effective maturity" that is shorter than the stated date. For
example, many bonds are "callable," meaning their principal can be repaid
before their stated maturity dates on (or after) specified call dates. Bonds
are most likely to be called when interest rates are falling, because the
issuer wants to refinance at a lower rate. In such an environment, a bond's
"effective maturity" is calculated using its nearest call date.
A bond mutual fund has no maturity in the strict sense of the word, but does
have an average maturity and an average effective maturity. This number is an
average of the stated or effective maturities of the underlying bonds, with
each bond's maturity "weighted" by the percentage of fund assets it
represents. Funds that target effective maturities would use the effective
(rather than stated) maturities of the underlying instruments when computing
the average. Targeting effective maturity provides additional flexibility in
portfolio management but, all else being equal, could result in higher
volatility than a fund targeting a stated maturity or maturity range.
What is a bond fund's "duration"?
Duration is a calculation that seeks to measure the price sensitivity of a
bond or a bond fund to changes in interest rates. It measures bond price
sensitivity to interest rate changes more accurately than maturity because it
takes into account the time value of cash flows generated over the bond's
life. Future interest and principal payments are discounted to reflect their
present value and then are multiplied by the number of years they will be
received to produce a value that is expressed in years, i.e., the duration.
Effective duration takes into account call features and sinking fund payments
that may shorten a bond's life.
Since duration can also be computed for bond funds, you can estimate the
effect of interest rates on a fund's share price. Simply multiply the fund's
duration (available for T. Rowe Price bond funds in our shareholder reports)
by an expected change in interest rates. For example, the price of a bond fund
with a duration of five years would be expected to fall approximately 5% if
rates rose by one percentage point.
_____________________________________________________________________________
IN GENERAL, THE LONGER A BOND'S MATURITY, THE GREATER THE PRICE INCREASE OR
DECREASE IN RESPONSE TO A GIVEN CHANGE IN INTEREST RATES, AS SHOWN IN THE
TABLE AT RIGHT.
How is a municipal's price affected by changes in interest rates?
When interest rates rise, a bond's price usually falls, and vice versa.
How Interest Rates Affect Bond Prices
Bond
Maturity Coupon Price Per $1,000 of a Municipal Bond if Interest
Rates:
Increase Decrease
1% 2% 1% 2%
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1 Year 3.25% $990 $981 $1,010 $1,020
_____________________________________________________________________________
5 Years 4.00 956 915 1,046 1,095
_____________________________________________________________________________
10 Years 4.50 924 855 1,084 1,176
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20 Years 5.20 886 790 1,134 1,294
_____________________________________________________________________________
30 Years 5.25 865 757 1,169 1,381
_____________________________________________________________________________
Table 5 Coupons reflect yields on AAA-rated municipals as of January 31,
1996. This is an illustration and does not represent expected
yields or share price changes of any T. Rowe Price fund.
Do money market securities react to changes in interest rates?
Yes. As interest rates change, the prices of money market securities
fluctuate, but changes are usually small because of their very short
maturities. Investments are typically held until maturity in a money fund to
help it maintain a $1.00 share price.
_____________________________________________________________________________
THE FUND OR FUNDS YOU SELECT SHOULD NOT BE RELIED UPON AS A COMPLETE
INVESTMENT PROGRAM, NOR BE USED FOR SHORT-TERM TRADING PURPOSES.
How can I decide which fund is most appropriate for me?
Review your own financial objectives, time horizon, and risk tolerance. Use
Table 6, which summarizes the funds' main characteristics, to help choose a
fund (or funds) for your particular needs. For example, only the money fund
provides principal stability, which makes it a good choice for money you may
need for contingencies. However, if you are investing for the highest possible
tax-free income and can tolerate some price fluctuation, you should consider a
longer-term bond fund.
Differences Among Funds
Fund Income Risk of Expected Credit Quality
Share Price Average Categories
Fluctuation Maturity
_____________________________________________________________________________
Municipal
Money Lower Stable No more than
90 days Two highest
_____________________________________________________________________________
Municipal
Inter-
mediate Moderate Moderate 5 to 10 Primarily four
years highest
_____________________________________________________________________________
Municipal
Income Higher Higher 15 years Primarily four
and longer highest
_____________________________________________________________________________
Table 6
_____________________________________________________________________________
EACH FUND CAN INVEST WITHOUT LIMIT IN SECURITIES WHOSE INCOME IS SUBJECT TO
THE ALTERNATIVE MINIMUM TAX. A SIGNIFICANT PORTION OF EACH FUND'S ASSETS IS
EXPECTED TO BE INVESTED IN SUCH SECURITIES.
Is there other information I need to review before making a decision?
Be sure to review the "Investment Policies and Practices" section which
discusses the following: Types of Portfolio Securities (municipal securities,
private activity bonds, municipal lease obligations, securities with puts or
other demand features, securities with credit enhancements, synthetic or
derivative securities, private placements, and high-yield/high-risk
securities); and Types of Management Practices (cash position, when-issued
securities and forwards, interest rate futures, borrowing money and
transferring assets, portfolio turnover, taxable money market securities, and
sector concentration).
2 About Your Account
Pricing Shares and Receiving Sale Proceeds
Here are some procedures you should know when investing in the fund.
_____________________________________________________________________________
THE VARIOUS WAYS YOU CAN BUY, SELL, AND EXCHANGE SHARES ARE EXPLAINED AT THE
END OF THIS PROSPECTUS AND ON THE NEW ACCOUNT FORM. THESE PROCEDURES MAY
DIFFER FOR INSTITUTIONAL ACCOUNTS.
How and when shares are priced
Bond and money funds. The share price (also called "net asset value" or NAV
per share) for each fund is calculated at 4 p.m. ET each day the New York
Stock Exchange is open for business. To calculate the NAV, a fund's assets are
valued and totaled, liabilities are subtracted, and the balance, called net
assets, is divided by the number of shares outstanding. Amortized cost is used
to value money fund securities.
How your purchase, sale, or exchange price is determined
If we receive your request in correct form before 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the New
York Stock Exchange closes at a time other than 4 p.m. ET.
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WHEN FILLING OUT THE NEW ACCOUNT FORM, YOU MAY WISH TO GIVE YOURSELF THE
WIDEST RANGE OF OPTIONS FOR RECEIVING PROCEEDS FROM A SALE.
How you can receive the proceeds from a sale
If your request is received by 4 p.m. ET in correct form, proceeds are usually
sent on the next business day. Proceeds can be sent to you by mail, or to your
bank account by ACH transfer or bank wire. Proceeds sent by ACH transfer
should be credited the second day after the sale. ACH (Automated Clearing
House) is an automated method of initiating payments from and receiving
payments in your financial institution account. ACH is a payment system
supported by over 20,000 banks, savings banks, and credit unions, which
electronically exchanges the transactions primarily through the Federal
Reserve Banks. Proceeds sent by bank wire should be credited to your account
the next business day.
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IF FOR SOME REASON WE CANNOT ACCEPT YOUR REQUEST TO SELL SHARES, WE WILL
CONTACT YOU.
Exception:
o Under certain circumstances and when deemed to be in the fund's best
interests, your proceeds may not be sent for up to five business days
after receiving your sale or exchange request. If you were exchanging
into a bond or money fund, your new investment would not begin to earn
dividends until the sixth business day.
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ALL NET INVESTMENT INCOME AND REALIZED CAPITAL GAINS ARE DISTRIBUTED TO
SHAREHOLDERS.
Useful Information on Distributions and Taxes
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding; that
is, you receive income dividends and capital gain distributions on a rising
number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office cannot deliver your check, or if your
check remains uncashed for six months, a fund reserves the right to reinvest
your distribution check in your account at the then current NAV and to
reinvest all subsequent distributions in shares of the fund.
Income dividends
o Bond funds declare income dividends daily at 4 p.m. ET to shareholders
of record at that time provided payment has been received on the
previous business day.
o Money funds declare income dividends daily to shareholders of record as
of 12:00 noon ET on that day. Wire purchase orders received before 12:00
noon ET receive the dividend for that day. Other purchase orders receive
the dividend for the next business day after receipt.
o Bond and money funds pay dividends on the first business day of each
month.
o Bond and money fund shares will earn dividends through the date of
redemption; also, shares redeemed on a Friday or prior to a holiday will
continue to earn dividends until the next business day. Generally, if
you redeem all of your shares at any time during the month, you will
also receive all dividends earned through the date of redemption in the
same check. When you redeem only a portion of your shares, all dividends
accrued on those shares will be reinvested, or paid in cash, on the next
dividend payment date.
Capital gains
o A capital gain or loss is the difference between the purchase and sale
price of a security.
o If a fund has net capital gains for the year (after subtracting any
capital losses), they are usually declared and paid in December to
shareholders of record on a specified date that month. If a second
distribution is necessary, it is usually declared and paid during the
first quarter of the following year.
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YOU WILL BE SENT TIMELY INFORMATION FOR YOUR TAX FILING NEEDS.
Tax Information
Although the regular monthly income dividends you receive from the funds are
expected to be exempt from regular federal income taxes, you need to be aware
of the possible tax consequences when:
o You sell fund shares, including an exchange from one fund to another; or
o The fund makes a short- and/or long-term capital gain distribution to
your account.
Due to 1993 tax legislation, a portion of the capital gains realized on the
sale of market discount bonds with maturities beyond one year may be treated
as ordinary income and cannot be offset by other capital losses. Therefore, to
the extent the fund invests in these securities, the likelihood of a taxable
gain distribution will be increased.
Note: You must report your total tax-exempt income on IRS Form 1040. The IRS
uses this information to help determine the tax status of any Social Security
payments you may have received during the year.
Taxes on fund redemptions. When you sell shares in any fund, you may realize a
gain or loss. An exchange from one fund to another is still a sale for tax
purposes. If you realize a loss on the sale or exchange of fund shares held
six months or less, your capital loss is reduced by the tax-exempt dividends
received on those shares.
In January, you will be sent Form 1099-B, indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For accounts opened new or by exchange in 1983 or
later we will provide you with the gain or loss of the shares you sold during
the year, based on the "average cost" method. This information is not reported
to the IRS, and you do not have to use it. You may calculate the cost basis
using other methods acceptable to the IRS, such as "specific identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction (except for systematic purchases and redemptions)
and a year-end statement detailing all your transactions in each fund account
during the year.
_____________________________________________________________________________
CAPITAL GAIN DISTRIBUTIONS ARE TAXABLE WHETHER REINVESTED IN ADDITIONAL SHARES
OR RECEIVED IN CASH.
Taxes on fund distributions. In January, the funds will send you Form 1099-DIV
indicating the tax status of any capital gain distribution made to you. This
information will also be reported to the IRS. All capital gain distributions
are taxable to you for the year in which they are paid. The only exception is
that dividends declared during the last three months of the year and paid in
January are taxed as though they were paid by December 31. Dividends are
expected to be tax-exempt.
Short-term capital gains are taxable as ordinary income and long-term gains
are taxable at the applicable long-term gain rate. The gain is long- or
short-term depending on how long the fund held the securities, not how long
you held shares in the fund. If you realize a loss on the sale or exchange of
fund shares held six months or less, your short-term loss recognized is
reclassified to long-term to the extent of any long-term capital gain
distribution received.
Shareholders who are subject to the alternative minimum tax (AMT) must include
income generated by certain "private activity" bonds in their AMT computation.
The portion of your fund's income which should be included in your AMT
calculation, if any, will be reported to you in January.
Tax effect of buying shares before a capital gain distribution. If you buy
shares shortly before or on the "record date" - the date that establishes you
as the person to receive the upcoming distribution - you will receive, in the
form of a taxable distribution, a portion of the money you just invested.
Therefore, you may also wish to find out a fund's record date(s) before
investing. Of course, a fund's share price may, at any time, reflect
undistributed capital gains or unrealized appreciation.
Note: For shareholders who receive Social Security benefits, the receipt of
tax-exempt interest may increase the portion of benefits that are subject to
tax.
Transaction Procedures and Special Requirements
_____________________________________________________________________________
FOLLOWING THESE PROCEDURES HELPS ASSURE TIMELY AND ACCURATE TRANSACTIONS.
Purchase Conditions
Nonpayment. If your payment is not received or you pay with a check or ACH
transfer that does not clear, your purchase will be canceled. You will be
responsible for any losses or expenses incurred by the fund or transfer agent,
and the fund can redeem shares you own in this or another identically
registered T. Rowe Price fund as reimbursement. The fund and its agents have
the right to reject or cancel any purchase, exchange, or redemption due to
nonpayment.
U.S. dollars. All purchases must be paid for in U.S. dollars; checks must be
drawn on U.S. banks.
Sale (Redemption) Conditions
10-day hold. If you sell shares that you just purchased and paid by check or
ACH transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. If your redemption request was sent by mail or mailgram,
proceeds will be mailed no later than the seventh calendar day following
receipt unless the check or ACH transfer has not cleared. If, during the
clearing period, we receive a check drawn against your bond or money market
account, it will be returned marked "uncollected." (The 10-day hold does not
apply to the following: purchases paid for by bank wire; cashier's, certified,
or treasurer's checks; or automatic purchases through your paycheck.)
Telephone, Tele*Access(registered trademark), and PC*Access(registered
trademark) transactions. These exchange and redemption services are
established automatically when you sign the New Account Form unless you check
the box which states that you do not want these services. Each fund uses
reasonable procedures (including shareholder identity verification) to confirm
that instructions given by telephone are genuine and is not liable for acting
on these instructions. If these procedures are not followed, it is the opinion
of certain regulatory agencies that a fund may be liable for any losses that
may result from acting on the instructions given. A confirmation is sent
promptly after the telephone transaction. All conversations are recorded.
Redemptions over $250,000. Large sales can adversely affect a portfolio
manager's ability to implement a fund's investment strategy by causing the
premature sale of securities that would otherwise be held. If, in any 90-day
period, you redeem (sell) more than $250,000, or your sale amounts to more
than 1% of the fund's net assets, the fund has the right to delay sending your
proceeds for up to five business days after receiving your request, or to pay
the difference between the redemption amount and the lesser of the two
previously mentioned figures with securities from the fund.
_____________________________________________________________________________
T. ROWE PRICE MAY BAR EXCESSIVE TRADERS FROM PURCHASING SHARES.
Excessive Trading
Frequent trades involving either substantial fund assets, or a substantial
portion of your account or accounts controlled by you, can disrupt management
of a fund and raise its expenses. We define "excessive trading" as exceeding
one purchase and sale involving the same fund within any 120-day period.
For example, you are in fund A. You can move substantial assets from fund A to
fund B, and, within the next 120 days, sell your shares in fund B to return to
fund A or move to fund C.
If you exceed the number of trades described above, you may be barred
indefinitely from further purchases of T. Rowe Price funds.
Three types of transactions are exempt from excessive trading guidelines: 1)
trades solely between money market funds; 2) redemptions that are not part of
exchanges; and 3) systematic purchases or redemptions (see "Shareholder
Services").
Keeping Your Account Open
Due to the relatively high cost to a fund of maintaining small accounts, we
ask you to maintain an account balance of at least $10,000. If your balance is
below $10,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.
_____________________________________________________________________________
A SIGNATURE GUARANTEE IS DESIGNED TO PROTECT YOU AND THE T. ROWE PRICE FUNDS
FROM FRAUD BY VERIFYING YOUR SIGNATURE.
Signature Guarantees
You may need to have your signature guaranteed in certain situations, such as:
o Written requests 1) to redeem over $50,000 or 2) to wire redemption
proceeds.
o Remitting redemption proceeds to any person, address, or bank account
not on record.
o Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name/ownership) from yours.
o Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker/dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
3 More About the Funds
Organization and Management
_____________________________________________________________________________
SHAREHOLDERS BENEFIT FROM T. ROWE PRICE'S 59 YEARS OF INVESTMENT MANAGEMENT
EXPERIENCE.
How are the funds organized?
The funds are "diversified, open-end investment companies," or mutual funds,
and were incorporated in Maryland in 1993. Mutual funds pool money received
from shareholders and invest it to try to achieve specified objectives.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
o Receive a proportional interest in the fund's income and capital gain
distributions;
o Cast one vote per share on certain fund matters, including the election
of fund directors/ trustees, changes in fundamental policies, or
approval of changes in a fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The funds are not required to hold annual meetings and do not intend to do so
except when certain matters, such as a change in a fund's fundamental
policies, are to be decided. In addition, shareholders representing at least
10% of all eligible votes may call a special meeting if they wish for the
purpose of voting on the removal of any fund director(s)/trustee(s). If a
meeting is held and you cannot attend, you can vote by proxy. Before the
meeting, the fund will send you proxy materials that explain the issues to be
decided and include a voting card for you to mail back.
_____________________________________________________________________________
ALL DECISIONS REGARDING THE PURCHASE AND SALE OF FUND INVESTMENTS ARE MADE BY
T. ROWE PRICE - SPECIFICALLY BY THE FUNDS' PORTFOLIO MANAGERS.
Who runs each fund?
General Oversight. The funds are governed by a Board of Directors that meets
regularly to review the funds' investments, performance, expenses, and other
business affairs. The Board elects the funds' officers. The policy of the
funds is that a majority of Board members will be independent of T. Rowe
Price.
Portfolio Management. Each fund has an Investment Advisory Committee composed
of the following members:
Municipal Money Market Fund. Patrice L. Berchtenbreiter, Chairman, Patricia S.
Deford, Joseph K. Lynagh, Mary J. Miller, William T. Reynolds, and Theodore E.
Robson. The Committee Chairman has day-to-day responsibility for managing the
fund and works with the Committee in developing and executing the fund's
investment program. Ms. Berchtenbreiter joined T. Rowe Price in 1972 and has
been managing investments since 1986.
Municipal Intermediate Fund. Mary J. Miller, Chairman, Janet G. Albright,
Patricia S. Deford, Charles B. Hill, Konstantine B. Mallas, Laura L. McAree,
and William T. Reynolds. Mr. Hill has day-to-day responsibility for managing
the fund and works with the Committee Chairman and the remaining members of
the Committee in developing and executing the fund's investment program. Ms.
Miller joined T. Rowe Price in 1983 and has been managing investments since
1987. Mr. Hill joined T. Rowe Price in 1991 and has been managing investments
since 1986.
Municipal Income Fund. William T. Reynolds, Chairman, Michael P. Buckley,
Patricia S. Deford, Charles B. Hill, Mary J. Miller, Konstantine B. Mallas,
Hugh D. McGuirk, William F. Snider, Jr., and C. Stephen Wolfe II. The
Committee Chairman has day-to-day responsibility for managing the fund and
works with the Committee in developing and executing the fund's investment
program. Mr. Reynolds joined T. Rowe Price in 1981 and has been managing
investments since 1978.
Marketing. T. Rowe Price Investment Services, Inc., a wholly owned subsidiary
of T. Rowe Price, distributes (sells) shares of these and all other T. Rowe
Price funds.
Shareholder Services. T. Rowe Price Services, Inc., another wholly owned
subsidiary, acts as the funds' transfer and dividend disbursing agent and
provides shareholder and administrative services. Services for certain types
of retirement plans are provided by T. Rowe Price Retirement Plan Services,
Inc., also a wholly owned subsidiary. The address for each is 100 East Pratt
St., Baltimore, MD 21202.
How are fund expenses determined?
Under the management agreement, all expenses of the funds will be paid by T.
Rowe Price, except interest, taxes, brokerage commissions, directors' fees and
expenses (including counsel fees and expenses) and extraordinary expenses. The
Board of Directors of the funds reserves the right to impose additional fees
against shareholder accounts to defray expenses which would otherwise be paid
by T. Rowe Price under the management agreement. The Board does not anticipate
levying such charges; such a fee, if charged, may be retained by the fund or
paid to T. Rowe Price.
The Management Fee. Each fund pays T. Rowe Price an annual all-inclusive fee
based on its average daily net assets. The funds calculate and accrue the fee
daily. (See "Transaction and Fund Expenses.")
_____________________________________________________________________________
TOTAL RETURN IS THE MOST WIDELY USED PERFORMANCE MEASURE. DETAILED PERFORMANCE
INFORMATION IS INCLUDED IN THE FUNDS' ANNUAL AND SEMIANNUAL SHAREHOLDER
REPORTS AND IN THE QUARTERLY PERFORMANCE UPDATE.
Understanding Performance Information
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive from
us, in our newsletter, The Price Report, in Insights articles, in T. Rowe
Price advertisements, and in the media.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share price
and assumes that all dividends and capital gains (if any) paid during the
period were reinvested in additional shares. Including reinvested
distributions means that total return numbers include the effect of
compounding, i.e., you receive income and capital gain distributions on a
rising number of shares.
Advertisements for a fund may include cumulative or compound average annual
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
Cumulative Total Return
This is the actual rate of return on an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated between the beginning and the end of the period specified.
Average Annual Total Return
This is always hypothetical. Working backward from the actual cumulative
return, it tells you what constant year-by-year return would have produced the
actual, cumulative return. By smoothing out all the variations in annual
performance, it gives you an idea of the investment's annual contribution to
your portfolio provided you held it for the entire period in question.
_____________________________________________________________________________
YOU WILL SEE FREQUENT REFERENCES TO A FUND'S YIELD IN OUR REPORTS, IN
ADVERTISEMENTS, IN MEDIA STORIES, AND SO ON.
Yield
The current or "dividend yield" on a fund or any investment tells you the
relationship between the investment's current level of annual income and its
price on a particular day. The dividend yield reflects the actual income paid
to shareholders for a given period, annualized, and divided by the average
price during the given period. For example, a fund providing $5 of annual
income per share and a price of $50 has a current yield of 10%. Yields can be
calculated for any time period.
The money fund may advertise a "current yield," reflecting the latest
seven-day income annualized, or an "effective yield," which assumes the income
has been reinvested in the fund.
For the bond funds, the advertised or "SEC yield" is found by determining the
net income per share (as defined by the SEC) earned by the fund during a
30-day base period and dividing this amount by the per share price on the last
day of the base period. The SEC yield may differ from the dividend yield.
_____________________________________________________________________________
FUND MANAGERS HAVE CONSIDERABLE LEEWAY IN CHOOSING INVESTMENT STRATEGIES AND
SELECTING SECURITIES THEY BELIEVE WILL HELP THE FUND ACHIEVE ITS OBJECTIVE.
Investment Policies and Practices
This section takes a detailed look at some of the types of securities each
fund may hold in its portfolio and the various kinds of investment practices
that may be used in day-to-day portfolio management. The funds' investment
program is subject to further restrictions and risks described in the
"Statement of Additional Information."
Shareholder approval is required to substantively change a fund's objective
and certain investment restrictions noted in the following section as
"fundamental policies." The managers also follow certain "operating policies"
that can be changed without shareholder approval. However, significant changes
are discussed with shareholders in fund reports. The funds adhere to
applicable investment restrictions and policies at the time they make an
investment. A later change in circumstances will not require the sale of an
investment if it was proper at the time it was made.
_____________________________________________________________________________
IN PURCHASING MUNICIPALS, THE FUNDS RELY ON THE OPINION OF THE ISSUER'S BOND
COUNSEL REGARDING THE TAX-EXEMPT STATUS OF THE INVESTMENT.
Each fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in the prospectus. For
instance, the Municipal Intermediate Fund is not permitted to invest more than
10% of total assets in residual interest bonds. While these restrictions
provide a useful level of detail about a fund's investment program, investors
should not view them as an accurate gauge of the potential risk of such
investments. For example, in a given period, a 5% investment in residual
interest bonds could have significantly more than a 5% impact on the Municipal
Intermediate Fund's share price. The net effect of a particular investment
depends on its volatility and the size of its overall return in relation to
the performance of all the fund's other investments.
Changes in a fund's holdings, the fund's performance, and the contribution of
various investments are discussed in the shareholder reports sent to you.
Types of Portfolio Securities
In seeking to meet its investment objective, each fund may invest in any type
of security or instrument whose yield, credit quality, and maturity
characteristics are consistent with the fund's investment program. For the
bond funds, but not the money fund, these investments may include potentially
high-risk derivatives. The following pages describe the principal types of
portfolio securities and investment management practices of each fund.
Fundamental policy: A fund will not purchase a security if, as a result, with
respect to 75% of its total assets, more than 5% of its total assets would be
invested in securities of a single issuer or more than 10% of the voting
securities of the issuer would be held by a fund. These limitations do not
apply to a fund's purchases of securities issued or guaranteed by the U.S.
government, its agencies, or instrumentalities.
Municipal Securities. Each fund's assets are invested primarily in various
tax-free municipal debt securities. The issuers have a contractual obligation
to pay interest at a stated rate on specific dates and to repay principal (the
bond's face value) on a specified date or dates. An issuer may have the right
to redeem or "call" a bond before maturity, and the fund may have to reinvest
the proceeds at lower rates.
There are two broad categories of municipal bonds. General obligation bonds
are backed by the issuer's "full faith and credit," that is, its full taxing
and revenue raising power. Revenue bonds usually rely exclusively on a
specific revenue source, such as charges for water and sewer service, to
generate money for debt service.
Private Activity Bonds. While income from most municipals is exempt from
federal income taxes, the income from certain types of so-called private
activity bonds (a type of revenue bond) may be subject to the alternative
minimum tax (AMT). However, only persons subject to the AMT pay this tax.
Private activity bonds may be issued for purposes such as housing or airports
or to benefit a private company. (Being subject to the AMT does not mean the
investor necessarily pays this tax. For further information, please see
"Distributions and Taxes.")
Operating policy: Each fund may invest without limit in bonds subject to the
AMT.
In addition to general obligation and revenue bonds, the funds' investments
may include, but are not limited to, the following types of securities:
Municipal Lease Obligations. A lease is not a full faith and credit obligation
of the issuer and is usually backed only by the borrowing government's
unsecured pledge to make annual appropriations for lease payments. There have
been challenges to the legality of lease financing in numerous states and,
from time to time, certain municipalities have considered not appropriating
money for lease payments. In deciding whether to purchase a lease obligation,
the funds would assess the financial condition of the borrower, the merits of
the project, the level of public support for the project, and the legislative
history of lease financing in the state. These securities may be less readily
marketable than other municipals. The funds may also purchase unrated lease
obligations. Based on information supplied by T. Rowe Price, the funds' Board
of Directors will periodically review the credit quality of nonrated leases
and assess the likelihood of their being canceled.
Operating policy: Each fund may invest no more than 20% of its total assets in
lease obligations.
Securities With "Puts" or Other Demand Features. Some longer-term municipals
give the investor the right to "put" or sell the security at par (face value)
within a specified number of days following the investor's request - usually
one to seven days. This demand feature enhances a security's liquidity by
shortening its effective maturity and enables it to trade at a price equal to
or very close to par. If the demand feature were terminated prior to being
exercised, the funds would hold the longer-term security.
Securities With Credit Enhancements.
o Letters of Credit. Letters of credit are issued by a third party,
usually a bank, to enhance liquidity and ensure repayment of principal
and any accrued interest if the underlying municipal security should
default.
_____________________________________________________________________________
T. ROWE PRICE PERIODICALLY REVIEWS THE CREDIT QUALITY OF THE INSURER.
o Municipal Bond Insurance. This insurance, which is usually purchased by
the bond issuer from a private, nongovernmental insurance company,
provides an unconditional and irrevocable guarantee that the insured
bond's principal and interest will be paid when due. Insurance does not
guarantee the price of the bond or the share price of any fund. The
credit rating of an insured bond reflects the credit rating of the
insurer, based on its claims-paying ability.
The obligation of a municipal bond insurance company to pay a claim
extends over the life of each insured bond. Although defaults on insured
municipal bonds have been low to date and municipal bond insurers have
met their claims, there is no assurance this will continue. A higher
than expected default rate could strain the insurer's loss reserves and
adversely affect its ability to pay claims to bondholders, such as the
funds. The number of municipal bond insurers is relatively small, and
not all of them have the highest rating.
o Standby Purchase Agreements. A Standby Purchase Agreement (SBPA) is a
liquidity facility provided to pay the purchase price of bonds that
cannot be remarketed. The obligation of the liquidity provider (usually
a bank) is only to advance funds to purchase tendered bonds that cannot
be remarketed and does not cover principal or interest under any other
circumstances. The liquidity provider's obligations under the SBPA are
usually subject to numerous conditions, including the continued
creditworthiness of the underlying borrower.
Synthetic or Derivative Securities. These securities are created from existing
municipal bonds:
o Residual Interest Bonds (Intermediate and Income Funds). The income
stream provided by an underlying bond is divided to create two
securities, one short-term and one long-term. The interest rate on the
short-term component is reset by an index or auction process normally
every 7 to 35 days. After income is paid on the short-term securities at
current rates, the residual income goes to the long-term securities.
Therefore, rising short-term interest rates result in lower income for
the longer-term portion, and vice versa. The longer-term bonds can be
very volatile and may be less liquid than other municipals of comparable
maturity.
Operating policy: Each fund will not invest more than 10% of its total assets
in residual interest bonds.
o Participation Interests. This term covers various types of securities
created by converting fixed rate bonds into short-term, variable rate
certificates. These securities have been developed in the secondary
market to meet demand for short-term, tax-exempt securities. The funds
will invest only in securities deemed tax-exempt by a nationally
recognized bond counsel, but there is no guarantee the interest will be
exempt because the IRS has not issued a definitive ruling.
Operating policy: Each fund will not invest more than 10% of its total assets
in participation interests. Standard variable rate notes are not subject to
this restriction.
o Embedded Interest Rate Swaps and Caps (Intermediate and Income Funds).
In a fixed rate, long-term municipal bond with an interest rate swap
attached to it, the bondholder usually receives the bond's fixed coupon
payment as well as a variable rate payment that represents the
difference between a fixed rate for the term of the swap (which is
typically shorter than the bond it is attached to) and a variable rate
short-term municipal index. The bondholder receives excess income when
short-term rates remain below the fixed interest rate swap rate. If
short-term rates rise above the fixed income swap rate, the bondholder's
income is reduced. At the end of the interest rate swap term, the bond
reverts to a single fixed coupon payment. Embedded interest rate swaps
enhance yields but also increase interest rate risk.
An embedded interest rate cap allows the bondholder to receive payments
whenever short-term rates rise above a level established at the time of
purchase. They normally are used to hedge against rising short-term interest
rates.
Both instruments may be volatile and of limited liquidity and their use may
adversely affect a fund's total return.
Operating policy: Each fund will not invest more than 10% of its total assets
in embedded interest rate swaps and caps.
Private Placements. The funds may seek to enhance their yield through the
purchase of private placements. These securities are sold through private
negotiations, usually to institutions or mutual funds, and may have resale
restrictions. Their yields are usually higher than comparable public
securities to compensate the investor for their limited marketability.
Operating policy: A fund may not invest more than 15% (10% for the Money
Market Fund) of its net assets in illiquid securities, including unmarketable
private placements.
High-Yield/High-Risk Investing (Intermediate and Income Funds). The total
return and yield of lower-quality (high-yield/high-risk) bonds, commonly
referred to as "junk" bonds, can be expected to fluctuate more than the total
return and yield of higher-quality bonds. Junk bonds are regarded as
predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments. Successful investment in
lower-medium- and low-quality bonds involves greater investment risk and is
highly dependent on T. Rowe Price's credit analysis. A real or perceived
economic downturn or higher interest rates could cause a decline in high-yield
bond prices, by lessening the ability of issuers to make principal and
interest payments. These bonds are often thinly traded and can be more
difficult to sell and value accurately than high-quality bonds. Because
objective pricing data may be less available, judgment may play a greater role
in the valuation process. In addition, the entire junk bond market can
experience sudden and sharp price swings due to a variety of factors,
including changes in economic forecasts, stock market activity, large or
sustained sales by major investors, a high-profile default, or just a change
in the market's psychology. This type of volatility is usually associated more
with stocks than bonds, but junk bond investors should be prepared for it.
Operating policy: The Intermediate Fund may invest up to 10% of total assets
in below-investment-grade bonds, including those with the lowest rating, and
the Income Fund may invest up to 20% of assets in such securities, including
those with the lowest rating.
_____________________________________________________________________________
CASH RESERVES PROVIDE FLEXIBILITY AND SERVE AS A SHORT-TERM DEFENSE DURING
PERIODS OF UNUSUAL MARKET VOLATILITY.
Types of Management Practices
Cash Reserves (Intermediate and Income Funds). Each fund will hold a certain
portion of its assets in short-term, tax-exempt money market securities
maturing in one year or less. The reserve position: provides flexibility in
meeting redemptions, expenses, and the timing of new investments; can help in
structuring a fund's weighted average maturity; and serves as a short-term
defense during periods of unusual market volatility. Each fund's cash reserve
position will be composed of short-term, investment-grade securities including
tax-exempt commercial paper, municipal notes, and short-term maturity bonds.
Some of these securities may have adjustable, variable, or floating rates.
When-Issued Securities (all funds) and Forwards (Intermediate and Income
Funds). New issues of municipals are often sold on a "when-issued" basis, that
is, delivery and payment take place 15-45 days after the buyer has agreed to
the purchase. Some bonds, called "forwards," have longer-than-standard
settlement dates, in some cases exceeding one to three years. When buying
these securities, each fund identifies cash or high-grade marketable
securities held by its custodian equal in value to its commitment for these
securities. The funds do not earn interest on when-issued and forward
securities until settlement, and the value of the securities may fluctuate
between purchase and settlement. Municipal "forwards" typically carry a
substantial yield premium to compensate the buyer for their greater interest
rate, credit, and liquidity risks.
Interest Rate Futures (Intermediate and Income Funds). Futures (a type of
potentially high-risk derivative) are often used to manage risk, because they
enable the investor to buy or sell an asset in the future at an agreed upon
price. Specifically, the funds may use futures (and options on futures) to
hedge against a potentially unfavorable change in interest rates and
to adjust their exposure to the municipal bond market; to protect portfolio
value; in an effort to enhance income; and to adjust the portfolios' duration.
The use of futures for hedging and non-hedging purposes may not always be
successful. Their prices can be highly volatile, using them could lower a
fund's total return, and the potential loss from their use could exceed a
fund's initial investment in such contracts.
Operating policy: Initial margin deposits on futures and premiums on options
used for non-hedging purposes will not equal more than 5% of a fund's net
asset value.
Borrowing Money and Transferring Assets. Each fund can borrow money from banks
as a temporary measure for emergency purposes, to facilitate redemption
requests, or for other purposes consistent with the funds' investment
objectives and programs. Such borrowings may be collateralized with fund
assets, subject to restrictions.
Fundamental policy: Borrowings may not exceed 331/3% of total fund assets.
Operating policy: Each fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 331/3% of a fund's total
assets. A fund may not purchase additional securities when borrowings exceed
5% of total assets.
Portfolio Turnover (Intermediate and Income Funds). Each fund generally
purchases securities with the intention of holding them for investment;
however, when market conditions or other circumstances warrant, securities may
be purchased and sold without regard to the length of time held. Due to the
nature of each fund's investment program, a fund's portfolio turnover rate may
exceed 100%. Although the funds do not expect to generate any taxable income,
a high turnover rate may increase transaction costs and may affect taxes paid
by shareholders to the extent short-term gains are distributed. The annualized
portfolio turnover rates for the Intermediate and Income Funds for the fiscal
year ended October 31, 1994, were 157.5% and 161.1%, respectively, and for the
fiscal year ended October 31, 1995, were 86.1% and 73.7%, respectively.
Taxable Securities. During periods of abnormal market conditions, the funds
are permitted to purchase securities whose interest is taxable by the federal
government. The Money Fund can purchase U.S. government securities maturing in
25 months or less.
Operating policy: The funds may invest without limit in high-quality,
short-term taxable securities for temporary, defensive purposes.
Sector Concentration. It is possible that each fund could have a considerable
amount of assets (25% or more) in securities that would tend to respond
similarly to particular economic or political developments. An example would
be securities of issuers related to a single industry, such as health care or
nuclear energy.
Operating policy: Each fund will not invest more than 25% of total assets in
any single state or in industrial development bonds of projects in the same
industry (such as solid waste, nuclear utility, or airlines). Bonds which are
refunded with escrowed U.S. government securities are not subject to the 25%
limitation.
Credit Quality Considerations. The credit quality of most bond issues is
evaluated by rating agencies such as Moody's and Standard & Poor's. Credit
quality refers to the issuer's ability to meet all required interest and
principal payments. The highest ratings are assigned to issuers perceived to
be the best credit risks. T. Rowe Price research analysts also evaluate all
portfolio holdings of each fund, including those rated by outside agencies.
The lower the rating on a bond, the higher the yield, other things being
equal.
Table 7 shows the rating scale used by the major rating agencies. T. Rowe
Price considers publicly available ratings, but emphasizes its own credit
analysis when selecting investments.
Ratings of Municipal Debt Securities
Moody's Standard & Fitch Investors Definition
Investors Poor's Service, Inc.
Service, Corpor-
Inc. ation
_____________________________________________________________________________
Long-Term Aaa AAA AAA Highest quality
Aa AA AA High quality
A A A Upper medium grade
Baa BBB BBB Medium grade
Ba BB BB Speculative
B B B Highly speculative
Caa CCC, CC CCC, CC Vulnerable to default
Ca C C Default is imminent
C D DDD,DD,D Probably in default
Moody's S&P Fitch
_____________________________________________________________________________
Short- MIG1/ Best SP1+ Very strong F-1+ Exceptionally
Term VMIG1 quality quality strong quality
SP1 Strong grade F-1 Very strong quality
_____________________________________________________________________________
MIG2/ High SP2 Satisfactory
VMIG2 quality grade F-2 Good credit quality
_____________________________________________________________________________
MIG3/ Favorable
VMIG3 quality F-3 Fair credit quality
_____________________________________________________________________________
MIG4/ Adequate SP3 Speculative
VMIG4 quality grade F-S Weak credit quality
_____________________________________________________________________________
Commer- P-1 Superior A-1+ Extremely F-1+ Exceptionally
cial quality strong quality strong quality
Paper A-1 Strong quality F-1 Very strong quality
_____________________________________________________________________________
P-2 Strong Satisfactory
quality A-2 quality F-2 Good credit quality
_____________________________________________________________________________
P-3 Acceptable
quality A-3 Adequate quality F-3 Fair credit quality
B Speculative
quality F-S Weak credit quality
C Doubtful quality
_____________________________________________________________________________
Table 7
Explanation of Quality Ratings
Bond
Rating Explanation
_____________________________________________________________________________
Moody's
Investors Aaa Highest quality, smallest degree of investment risk.
_____________________________________________________________________________
Service, Inc. Aa High quality; together with Aaa bonds, they compose
the high-grade bond group.
_____________________________________________________________________________
A Upper-medium-grade obligations; many favorable
investment attributes.
_____________________________________________________________________________
Baa Medium-grade obligations; neither highly protected
nor poorly secured. Interest and principal appear
adequate for the present but certain protective
elements may be lacking or may be unreliable over
any great length of time.
_____________________________________________________________________________
Ba More uncertain, with speculative elements.
Protection of interest and principal payments not
well safeguarded during good and bad times.
_____________________________________________________________________________
B Lack characteristics of desirable investment;
potentially low assurance of timely interest and
principal payments or maintenance of other contract
terms over time.
_____________________________________________________________________________
Caa Poor standing, may be in default; elements of danger
with respect to principal or interest payments.
_____________________________________________________________________________
Ca Speculative in a high degree; could be in default or
have other marked shortcomings.
_____________________________________________________________________________
C Lowest rated; extremely poor prospects of ever
attaining investment standing.
_____________________________________________________________________________
Standard & Poor's AAA Highest rating; extremely strong capacity to pay
principal and interest.
_____________________________________________________________________________
Corporation AA High quality; very strong capacity to pay principal
and interest.
_____________________________________________________________________________
A Strong capacity to pay principal and interest;
somewhat more susceptible to the adverse effects of
changing circumstances and economic conditions.
_____________________________________________________________________________
BBB Adequate capacity to pay principal and interest;
normally exhibit adequate protection parameters, but
adverse economic conditions or changing
circumstances more likely to lead to a weakened
capacity to pay principal and interest than for
higher-rated bonds.
_____________________________________________________________________________
BB, B, Predominantly speculative with respect to the
issuer's capacity to meet required interest and
CCC, CC principal payments. BB-lowest degree of speculation;
CC-the highest degree of speculation. Quality and
protective characteristics outweighed by large
uncertainties or major risk exposure to adverse
conditions.
_____________________________________________________________________________
D In default.
_____________________________________________________________________________
Fitch Investors
Service, Inc. AAA Highest quality; obligor has exceptionally strong
ability to pay interest and repay principal, which
is unlikely to be affected by reasonably foreseeable
events.
_____________________________________________________________________________
AA Very high quality; obligor's ability to pay interest
and repay principal is very strong. Because bonds
rated in the AAA and AA categories are not
significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is
generally rated F-1+.
_____________________________________________________________________________
A High quality; obligor's ability to pay interest and
repay principal is considered to be strong, but may
be more vulnerable to adverse changes in economic
conditions and circumstances than higher-rated
bonds.
_____________________________________________________________________________
BBB Satisfactory credit quality; obligor's ability to
pay interest and repay principal is considered
adequate. Unfavorable changes in economic conditions
and circumstances are more likely to adversely
affect these bonds and impair timely payment. The
likelihood that the ratings of these bonds will fall
below investment grade is higher than for
higher-rated bonds.
_____________________________________________________________________________
BB, Not investment grade; predominantly speculative with
respect to the issuer's capacity to repay
CCC, interest and repay principal in accordance with the
terms of the obligation for bond issues not in
CC, C default. BB is the least speculative. C is the most
speculative.
_____________________________________________________________________________
Table 8
4 Investing With T. Rowe Price
Account Requirements and Transaction Information
_____________________________________________________________________________
ALWAYS VERIFY YOUR TRANSACTIONS BY CAREFULLY REVIEWING THE CONFIRMATION WE
SEND YOU. PLEASE REPORT ANY DISCREPANCIES TO SHAREHOLDER SERVICES PROMPTLY.
Tax Identification Number
We must have your correct Social Security or corporate tax identification
number on a signed New Account Form or W-9 Form. Otherwise, federal law
requires the funds to withhold a percentage (currently 31%) of your dividends,
capital gain distributions, and redemptions, and may subject you to an IRS
fine. If this information is not received within 60 days after your account is
established, your account may be redeemed, priced at the NAV on the date
of redemption.
Unless you request otherwise, one shareholder report will be mailed to
multiple account owners with the same tax identification number and same zip
code and to shareholders who have requested that their account be combined
with someone else's for financial reporting.
_____________________________________________________________________________
T. ROWE PRICE
TRUST COMPANY
1-800-492-7670
1-410-625-6585
Institutional Accounts
Transaction procedures in the following sections may not apply to
institutional accounts. For institutional account procedures, please call your
designated account manager or service representative.
Opening a New Account: $25,000 minimum initial investment
Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name
and account type would have to be identical.)
_____________________________________________________________________________
REGULAR MAIL
T. ROWE PRICE
ACCOUNT SERVICES
P.O. BOX 17300
BALTIMORE, MD
21298-9353
By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check together with the New Account Form to the
address at left. We do not accept third party checks to open new accounts.
_____________________________________________________________________________
MAILGRAM, EXPRESS, REGISTERED, OR CERTIFIED MAIL
T. ROWE PRICE
ACCOUNT SERVICES
10090 RED RUN BLVD.
OWINGS MILLS, MD 21117
By Wire
o Call Investor Services for an account number and give the following wire
address to your bank:
Morgan Guaranty Trust Co. of New York
ABA 021000238
T. Rowe Price [fund name]
AC-00153938
account name(s) and account number
o Complete a New Account Form and mail it to one of the appropriate
addresses listed on the left.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received.
By Exchange
Call Shareholder Services or use Tele*Access or PC*Access (see "Automated
Services" under "Shareholder Services"). The new account will have the same
registration as the account from which you are exchanging. Services for the
new account may be carried over by telephone request if preauthorized on the
existing account. (See explanation of "Excessive Trading" under "Transaction
Procedures.")
In Person
Drop off your New Account Form at any of the locations listed on the cover and
obtain a receipt.
Purchasing Additional Shares: $1,000 minimum purchase; $100 minimum for
Automatic Asset Builder
By ACH Transfer
Use Tele*Access, PC*Access, or call Investor Services if you have established
electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address in "Opening a New Account."
_____________________________________________________________________________
REGULAR MAIL
T. ROWE PRICE FUNDS
ACCOUNT SERVICES
P.O. BOX 89000
BALTIMORE, MD
21289-1500
(FOR MAILGRAMS, EXPRESS, REGISTERED, OR CERTIFIED MAIL, SEE PREVIOUS SECTION.)
By Mail
o Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
o Mail the check to us at the address shown at left with either a fund
reinvestment slip or a note indicating the fund you want to buy and your
fund account number.
o Remember to provide your account number and the fund name on your check.
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
Exchanging and Redeeming Shares
By Phone
Call Shareholder Services. If you find our phones busy during unusually
volatile markets, please consider placing your order by Tele*Access, PC*Access
(if you have previously authorized telephone services), mailgram, or by
express mail. For exchange policies, please see "Transaction Procedures and
Special Requirements - Excessive Trading."
Redemption proceeds can be mailed to your account address, sent by ACH
transfer, or wired to your bank (provided your bank information is already on
file). For charges, see "Electronic Transfers - By Wire" under "Shareholder
Services."
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please
mail to the appropriate address below. T. Rowe Price requires the signatures
of all owners exactly as registered, and possibly a signature guarantee (see
"Transaction Procedures and Special Requirements - Signature Guarantees").
Mailgram, Express, Registered, or Certified Mail:
T. Rowe Price Account Services
10090 Red Run Boulevard
Owings Mills, MD 21117
Regular Mail:
T. Rowe Price Account Services
P.O. Box 17300
Baltimore, MD 21289-0200
Rights Reserved by the Fund
The fund and its agents reserve the right to waive or lower investment
minimums; to accept initial purchases by telephone or mailgram; to cancel or
rescind any purchase or exchange (for example, if an account has been
restricted due to excessive trading or fraud) upon notice to the shareholder
within five business days of the trade or if the written confirmation has not
been received by the shareholder, whichever is sooner; to freeze any account
and suspend account services when notice has been received of a dispute
between the registered or beneficial account owners or there is reason to
believe a fraudulent transaction may occur; to otherwise modify the conditions
of purchase and any services at any time; or to act on instructions believed
to be genuine.
Shareholder Services
______________________________________________________________________________
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically and others you must authorize on the New Account Form.
By signing up for services on the New Account Form rather than later on, you
avoid having to complete a separate form and obtain a signature guarantee.
This section reviews some of the principal services currently offered. Our
Services Guide contains detailed descriptions of these and other services.
_____________________________________________________________________________
INVESTOR SERVICES
1-800-977-1577
If you are a new T. Rowe Price investor, you will receive a Services Guide
with our Welcome Kit.
Note: Corporate and other entity accounts require an original or certified
resolution to establish services and to redeem by mail. For more information,
call Investor Services.
Retirement Plans
We offer a wide range of plans for individuals and institutions, including
large and small businesses: IRAs, SEP-IRAs, Keoghs (profit sharing, money
purchase pension), 401(k), and 403(b)(7). For information on IRAs, call
Investor Services. For information on all other retirement plans, please call
our Trust Company at 1-800-492-7670.
Exchange Service
You can move money from one account to an existing identically registered
account, or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax-free fund
are limited to investors living in states where the funds are registered.)
Some of the T. Rowe Price funds may impose a redemption fee of .50% to 2%,
payable to such funds, on shares held for less than one year, or in some
funds, six months.
_____________________________________________________________________________
TELE*ACCESS
1-800-638-2587
1-410-625-7676
Automated Services
Tele*Access. 24-hour service via a toll-free number provides information on
fund yields and prices, dividends, account balances, and your latest
transaction as well as the ability to request prospectuses, account and tax
forms, duplicate statements, checks, and to initiate purchase, redemption, and
exchange orders in your accounts (see "Electronic Transfers" below).
PC*Access. 24-hour service via a dial-up modem provides the same information
as Tele*Access, but on a personal computer. Please call Investor Services for
an information guide.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.
Electronic Transfers
By ACH. With no charges to pay, you can initiate a purchase or redemption for
as little as $100 or as much as $100,000 between your bank account and fund
account using the ACH network. Enter instructions via Tele*Access, PC*Access,
or call Shareholder Services.
By Wire. Electronic transfers can also be conducted via bank wire. There is
currently a $5 fee for wire redemptions under $5,000, and your bank may charge
for incoming or outgoing wire transfers regardless of size.
Checkwriting (Not available for equity funds, or the High Yield Fund or
Emerging Markets Bond Fund)
You may write an unlimited number of free checks on any money market fund, and
most bond funds, with a minimum of $500 per check. Keep in mind, however, that
a check results in a redemption; a check written on a bond fund will create a
taxable event which you and we must report to the IRS.
Automatic Investing ($100 minimum)
You can invest automatically in several different ways, including:
o Automatic Asset Builder. You instruct us to move $100 or more from your
bank account, or you can instruct your employer to send all or a portion
of your paycheck to the fund or funds you designate.
Note: If you are moving money from your bank account, and if the date
you select for your transactions falls on a Sunday or a Monday which is
a holiday, your order will be priced on the second business day
following this date.
o Automatic Exchange. You can set up systematic investments from one fund
account into another, such as from a money fund into a stock fund.
_____________________________________________________________________________
DISCOUNT BROKERAGE IS A DIVISION OF T. ROWE PRICE INVESTMENT SERVICES, INC.
Discount Brokerage
You can trade stocks, bonds, options, precious metals, and other securities at
a savings over regular commission rates. Call Investor Services for
information.
Note: If you buy or sell T. Rowe Price funds through anyone other than T. Rowe
Price, such as broker-dealers or banks, you may be charged transaction or
service fees by those institutions. No such fees are charged by T. Rowe Price
Investment Services or the fund for transactions conducted directly with the
fund.
________________________________________________________________________
DESCRIPTION OF SIGNIFICANT DIFFERENCES BETWEEN EDGAR FILING
AND PRINTED COPY
Information appearing in all capital letters before a paragraph in the Edgar
filing will appear, in the printed copy, as call-outs in the left margin.
PAGE 2
STATEMENT OF ADDITIONAL INFORMATION
T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC.
T. Rowe Price Summit Municipal Money Market Fund
T. Rowe Price Summit Municipal Intermediate-Term Fund
T. Rowe Price Summit Municipal Income Fund
(the "Funds")
This Statement of Additional Information is not a
prospectus but should be read in conjunction with the Funds'
prospectus dated March 1, 1996, which may be obtained from
T. Rowe Price Investment Services, Inc., 100 East Pratt Street,
Baltimore, Maryland 21202.
If you would like a prospectus for a Fund of which you are
not a shareholder, please call 1-800-638-5660. A prospectus with
more complete information, including management fees and expenses
will be sent to you. Please read it carefully before you invest
or send money.
The date of this Statement of Additional Information is
March 1, 1996.
PAGE 3
TABLE OF CONTENTS
Page Page
Capital Stock . . . . . . . . Options . . . . . . . . .
Code of Ethics . . . . . . . Participation Interests .
Custodian . . . . . . . . . . Portfolio Management
Determination of Maturity Practices . . . . . . . .
of Securities . . . . . . . Portfolio Transactions . .
Distributor for Funds . . . . Pricing of Securities . .
Dividends . . . . . . . . . . Principal Holders of
Federal and State Securities . . . . . . .
Regulation of Shares . . . . Ratings of Commercial
Forwards . . . . . . . . . . Paper . . . . . . . . . .
Futures Contracts . . . . . . Ratings of Municipal Debt
Independent Accountants . . . Securities . . . . . . .
Investment Management Ratings of Municipal Notes
Services . . . . . . . . . . and Variable Rate
Investment in Taxable Money Securities . . . . . . .
Market Securities . . . . . Residual Interest
Investment Objectives and Bonds . . . . . . . . . .
Policies . . . . . . . . . . Risk Factors . . . . . . .
Investment Performance . . . Tax-Exempt vs. Taxable
Investment Programs . . . . . Yields . . . . . . . . .
Legal Counsel . . . . . . . . Tax Status . . . . . . . .
Management of Funds . . . . . Variable and Floating
Municipal Securities . . . . Rate Securities . . . . .
Net Asset Value Per When-Issued Securities . .
Share . . . . . . . . . . . Yield Information . . . .
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of the
Fund's investment objectives and policies discussed in the
prospectus. The Funds will not make a material change in their
investment objectives without obtaining shareholder approval.
Unless otherwise specified, the investment programs and
restrictions of the Funds are not fundamental policies. Each
Fund's operating policies are subject to change by its Board of
Directors without shareholder approval. However, shareholders
will be notified of a material change in an operating policy.
Each Fund's fundamental policies may not be changed without the
approval of at least a majority of the outstanding shares of the
Fund or, if it is less, 67% of the shares represented at a
meeting of shareholders at which the holders of 50% or more of
the shares are represented.
PAGE 4
Throughout this Statement of Additional Information, the
"Fund" is intended to refer to each Fund listed on the cover
page, unless otherwise indicated.
RISK FACTORS
All Funds
Municipal Securities
The Funds are designed for investors who, because of their
tax bracket, can benefit from investment in municipal bonds whose
income is exempt from federal taxes. The Funds are not
appropriate for qualified retirement plans where income is
already tax deferred.
There can be no assurance that the Funds will achieve their
investment objectives. Yields on municipal securities are
dependent on a variety of factors, including the general
conditions of the money market and the municipal bond market, the
size of a particular offering, the maturity of the obligation,
and the rating of the issue. Municipal securities with longer
maturities tend to produce higher yields and are generally
subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities and lower
yields. The market prices of municipal securities usually vary,
depending upon available yields. An increase in interest rates
will generally reduce the value of portfolio investments, and a
decline in interest rates will generally increase the value of
portfolio investments. The ability of all the Funds to achieve
their investment objectives is also dependent on the continuing
ability of the issuers of municipal securities in which the Funds
invest to meet their obligations for the payment of interest and
principal when due. The ratings of Moody's, S&P, and Fitch
represent their opinions as to the quality of municipal
securities which they undertake to rate. Ratings are not
absolute standards of quality; consequently, municipal securities
with the same maturity, coupon, and rating may have different
yields. There are variations in municipal securities, both
within a particular classification and between classifications,
depending on numerous factors. It should also be pointed out
that, unlike other types of investments, municipal securities
have traditionally not been subject to regulation by, or
registration with, the SEC, although there have been proposals
which would provide for regulation in the future.
PAGE 5
The federal bankruptcy statutes relating to the debts of
political subdivisions and authorities of states of the United
States provide that, in certain circumstances, such subdivisions
or authorities may be authorized to initiate bankruptcy
proceedings without prior notice to or consent of creditors,
which proceedings could result in material and adverse changes in
the rights of holders of their obligations.
Proposals have been introduced in Congress to restrict or
eliminate the federal income tax exemption for interest on
municipal securities, and similar proposals may be introduced in
the future. Some of the past proposals would have applied to
interest on municipal securities issued before the date of
enactment, which would have adversely affected their value to a
material degree. If such a proposal were enacted, the
availability of municipal securities for investment by the Funds
and the value of a Fund's portfolio would be affected and, in
such an event, a Fund would reevaluate its investment objectives
and policies.
Although the banks and securities dealers with which the
Fund will transact business will be banks and securities dealers
that T. Rowe Price Associates, Inc. ("T. Rowe Price") believes to
be financially sound, there can be no assurance that they will be
able to honor their obligations to the Fund with respect to such
securities.
Municipal Bond Insurance. All of the Funds may purchase
insured bonds from time to time. Municipal bond insurance
provides an unconditional and irrevocable guarantee that the
insured bond's principal and interest will be paid when due. The
guarantee is purchased from a private, non-governmental insurance
company.
There are two types of insured securities that may be
purchased by the Funds, bonds carrying either (1) new issue
insurance or (2) secondary insurance. New issue insurance is
purchased by the issuer of a bond in order to improve the bond's
credit rating. By meeting the insurer's standards and paying an
insurance premium based on the bond's principal value, the issuer
is able to obtain a higher credit rating for the bond. Once
purchased, municipal bond insurance cannot be cancelled, and the
protection it affords continues as long as the bonds are
outstanding and the insurer remains solvent.
The Funds may also purchase bonds which carry secondary
insurance purchased by an investor after a bond's original
PAGE 6
issuance. Such policies insure a security for the remainder of
its term. Generally, the Funds expect that portfolio bonds
carrying secondary insurance will have been insured by a prior
investor. However, the Funds may, on occasion, purchase
secondary insurance on their own behalf.
Each of the municipal bond insurance companies has
established reserves to cover estimated losses. Both the method
of establishing these reserves and the amount of the reserves
vary from company to company. The risk that a municipal bond
insurance company may experience a claim extends over the life of
each insured bond. Municipal bond insurance companies are
obligated to pay a bond's interest and principal when due if the
issuing entity defaults on the insured bond. Although defaults
on insured municipal bonds have been low to date, there is no
assurance this low rate will continue in the future. A higher
than expected default rate could deplete loss reserves and
adversely affect the ability of a municipal bond insurer to pay
claims to holders of insured bonds, such as the Fund.
Reference is also made to the sections entitled "Types of
Securities," and "Portfolio Management Practices," for
discussions of the risks associated with the investments and
practices described therein as they apply to each Fund.
Money Fund
The Fund will limit its purchases of portfolio instruments
to those U.S. dollar-denominated securities which the Fund's
Board of Directors determines present minimal credit risk, and
which are Eligible Securities as defined in Rule 2a-7 under the
Investment Company Act of 1940 (1940 Act). Eligible Securities
are generally securities which have been rated (or whose issuer
has been rated or whose issuer has comparable securities rated)
in one of the two highest rating categories by nationally
recognized statistical rating organizations or, in the case of
any instrument that is not so rated, is of comparable high
quality as determined by T. Rowe Price pursuant to written
guidelines established in accordance with Rule 2a-7 under the
Investment Company Act of 1940 under the supervision of the
Fund's Board of Directors. In addition, the Funds may treat
variable and floating rate instruments with demand features as
short-term securities pursuant to Rule 2a-7 under the 1940 Act.
There can be no assurance that the Money Fund will achieve
its investment objectives or be able to maintain its net asset
value per share at $1.00. The price stability and liquidity of
PAGE 7
the Money Fund may not be equal to that of a taxable money market
fund which exclusively invests in short-term taxable money market
securities. The taxable money market is a broader and more
liquid market with a greater number of investors, issuers, and
market makers than the short-term municipal securities market.
The weighted average maturity of the Fund varies: the shorter
the average maturity of a portfolio, the less its price will be
impacted by interest rate fluctuations.
Intermediate and Income Funds
Because of their investment policies, the Intermediate and
Income Funds may not be suitable or appropriate for all
investors. The Funds are designed for investors who wish to
invest long-term funds for income, and who would benefit, because
of their tax bracket, from receiving income that is exempt from
federal income taxes. The Intermediate and Income Funds'
investment programs permit the purchase of investment grade
securities that do not meet the high quality standards of the
Money Fund. Since investors generally perceive that there are
greater risks associated with investment in lower quality
securities, the yields from such securities normally exceed those
obtainable from higher quality securities. In addition, the
principal value of long term lower-rated securities generally
will fluctuate more widely than higher quality securities. Lower
quality investments entail a higher risk of default--that is, the
nonpayment of interest and principal by the issuer than higher
quality investments. The value of the portfolio securities of
the Intermediate and Income Funds will fluctuate based upon
market conditions. Although these Funds seek to reduce credit
risk by investing in a diversified portfolio, such
diversification does not eliminate all risk. These Funds are
also not intended to provide a vehicle for short-term trading
purposes.
Special Risks of High Yield Investing (Intermediate and
Income Funds). Low quality bonds, commonly referred to as "junk
bonds" are regarded as predominantly speculative with respect to
the issuer's continuing ability to meet principal and interest
payments. Because investment in low and lower-medium quality
bonds involves greater investment risk, to the extent the Funds
invest in such bonds, achievement of their investment objectives
will be more dependent on T. Rowe Price's credit analysis than
would be the case if the Fund were investing in higher quality
bonds. High yield bonds may be more susceptible to real or
perceived adverse economic conditions than investment grade
bonds. A projection of an economic downturn, or higher interest
PAGE 8
rates, for example, could cause a decline in high yield bond
prices because the advent of such events could lessen the ability
of highly leverage issuers to make principal and interest
payments on their debt securities. In addition, the secondary
trading market for high yield bonds may be less liquid than the
market for higher grade bonds, which can adversely affect the
ability of a Fund to dispose of its portfolio securities. Bonds
for which there is only a "thin" market can be more difficult to
value inasmuch as objective pricing data may be less available
and judgment may play a greater role in the valuation
process.
Reference is also made to the sections entitled "Types of
Securities" and "Portfolio Management Practices" for discussions
of the risks associated with the investments and practices
described therein.
INVESTMENT PROGRAMS
(Throughout the discussion on Investments, the term "the Fund" is
intended to refer to each of the Funds eligible to invest in the
security or engage in the practice being described)
Type of Securities
Municipal Securities
Subject to the investment objectives and programs described
in the prospectus and the additional investment restrictions
described in this Statement of Additional Information, each
Fund's portfolio may consist of any combination of the various
types of municipal securities described below or other types of
municipal securities that may be developed. The amount of each
Fund's assets invested in any particular type of municipal
security can be expected to vary.
The term "municipal securities" means obligations issued by
or on behalf of states, territories, and possessions of the
United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities, as well as certain
other persons and entities, the interest from which is exempt
from federal income tax. In determining the tax-exempt status of
a municipal security, the Fund relies on the opinion of the
issuer's bond counsel at the time of the issuance of the
security. However, it is possible this opinion could be
PAGE 9
overturned, and as a result, the interest received by the Fund
from such a security might not be exempt from federal income tax.
Municipal securities are classified by maturity as notes,
bonds, or adjustable rate securities.
Municipal Notes. Municipal notes generally are used to provide
for short-term operating or capital needs and generally have
maturities of one year or less. Municipal notes include:
Tax Anticipation Notes. Tax anticipation notes are issued
to finance working capital needs of municipalities.
Generally, they are issued in anticipation of various
seasonal tax revenue, such as income, property, use and
business taxes, and are payable from these specific future
taxes.
Revenue Anticipation Notes. Revenue anticipation notes are
issued in expectation of receipt of other types of revenue,
such as federal or state revenues available under the
revenue sharing or grant programs.
Bond Anticipation Notes. Bond anticipation notes are issued
to provide interim financing until long-term financing can
be arranged. In most cases, the long-term bonds then
provide the money for the repayment of the notes.
Tax-Exempt Commercial Paper. Tax-exempt commercial paper is
a short-term obligation with a stated maturity of 270 days
or less. It is issued by state and local governments or
their agencies to finance seasonal working capital needs or
as short-term financing in anticipation of longer term
financing.
Municipal Bonds. Municipal bonds, which meet longer term capital
needs and generally have maturities of more than one year when
issued, have two principal classifications: general obligation
bonds and revenue bonds. Two additional categories of potential
purchases are lease revenue bonds and pre-refunded/escrowed to
maturity bonds. Another type of municipal bond is referred to as
an Industrial Development Bond.
General Obligation Bonds. Issuers of general obligation
bonds include states, counties, cities, towns, and special
districts. The proceeds of these obligations are used to
fund a wide range of public projects, including construction
or improvement of schools, public buildings, highways and
PAGE 10
roads, and general projects not supported by user fees or
specifically identified revenues. The basic security behind
general obligation bonds is the issuer's pledge of its full
faith and credit and taxing power for the payment of
principal and interest. The taxes that can be levied for
the payment of debt service may be limited or unlimited as
to the rate or amount of special assessments. In many cases
voter approval is required before an issuer may sell this
type of bond.
Revenue Bonds. The principal security for a revenue bond is
generally the net revenues derived from a particular
facility, or enterprise, or in some cases, the proceeds of a
special charge or other pledged revenue source. Revenue
bonds are issued to finance a wide variety of capital
projects including: electric, gas, water and sewer systems;
highways, bridges, and tunnels; port and airport facilities;
colleges and universities; and hospitals. Revenue bonds are
sometimes used to finance various privately operated
facilities provided they meet certain tests established for
tax-exempt status.
Although the principal security behind these bonds may
vary, many provide additional security in the form of a
mortgage or debt service reserve fund. Some authorities
provide further security in the form of the state's ability
(without obligation) to make up deficiencies in the debt
service reserve fund. Revenue bonds usually do not require
prior voter approval before they may be issued.
Lease Revenue Bonds. Municipal borrowers may also finance
capital improvements or purchases with tax-exempt leases.
The security for a lease is generally the borrower's pledge
to make annual appropriations for lease payments. The lease
payment is treated as an operating expense subject to
appropriation risk and not a full faith and credit
obligation of the issuer. Lease revenue bonds are generally
considered less secure than a general obligation or revenue
bond and often do not include a debt service reserve fund.
To the extent the Fund's Board determines such securities
are illiquid, they will be subject to the Fund's limit on
illiquid securities. There have also been certain legal
challenges to the use of lease revenue bonds in various
states.
The liquidity of such securities will be determined based on
a variety of factors which may include, among others: (1)
PAGE 11
the frequency of trades and quotes for the obligation; (2)
the number of dealers willing to purchase or sell the
security and the number of other potential buyers; (3) the
willingness of dealers to undertake to make a market in the
security; (4) the nature of the marketplace trades,
including, the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer;
and (5) the rating assigned to the obligation by an
established rating agency or T. Rowe Price.
Pre-refunded/Escrowed to Maturity Bonds. Certain municipal
bonds have been refunded with a later bond issue from the
same issuer. The proceeds from the later issue are used to
defease the original issue. In many cases the original
issue cannot be redeemed or repaid until the first call date
or original maturity date. In these cases, the refunding
bond proceeds typically are used to buy U.S. Treasury
securities that are held in an escrow account until the
original call date or maturity date. The original bonds
then become "pre-refunded" or "escrowed to maturity" and are
considered as high quality investments. While still tax-
exempt, the security is the proceeds of the escrow account.
To the extent permitted by the Securities and Exchange
Commission and the Internal Revenue Service, a Fund's
investment in such securities refunded with U.S. Treasury
securities will, for purposes of diversification rules
applicable to the Fund, be considered as an investment in
the U.S. Treasury securities.
Private Activity Bonds. Under current tax law all municipal
debt is divided broadly into two groups: governmental
purpose bonds and private activity bonds. Governmental
purpose bonds are issued to finance traditional public
purpose projects such as public buildings and roads.
Private activity bonds may be issued by a state or local
government or public authority but principally benefit
private users and are considered taxable unless a specific
exemption is provided.
The tax code currently provides exemptions for certain
private activity bonds such as not-for-profit hospital
bonds, small-issue industrial development revenue bonds and
mortgage subsidy bonds, which may still be issued as tax-
exempt bonds. Some, but not all, private activity bonds are
subject to alternative minimum tax.
PAGE 12
Industrial Development Bonds. Industrial development bonds
are considered Municipal Bonds if the interest paid is
exempt from federal income tax. They are issued by or on
behalf of public authorities to raise money to finance
various privately operated facilities for business and
manufacturing, housing, sports, and pollution control.
These bonds are also used to finance public facilities such
as airports, mass transit systems, ports, and parking. The
payment of the principal and interest on such bonds is
dependent solely on the ability of the facility's user to
meet its financial obligations and the pledge, if any, of
real and personal property so financed as security for such
payment.
Adjustable Rate Securities. Municipal securities may be
issued with adjustable interest rates that are reset
periodically by pre-determined formulas or indexes in order
to minimize movements in the principal value of the
investment. Such securities may have long-term maturities,
but may be treated as a short-term investment under certain
conditions. Generally, as interest rates decrease or
increase, the potential for capital appreciation or
depreciation on these securities is less than for fixed-rate
obligations. These securities may take the following forms:
Variable Rate Securities. Variable rate instruments
Are those whose terms provide for the adjustment of
their interest rates on set dates and which, upon such
adjustment, can reasonably be expected to have a market
value that approximates its par value. Subject to the
provisions of Rule 2a-7 under the Investment Company
Act of 1940, (1) a variable rate instrument, the
principal amount of which is scheduled to be paid in
397 days or less, is deemed to have a maturity equal to
the period remaining until the next readjustment of the
interest; (2) a variable rate instrument which is
subject to a demand feature which entitles the
purchaser to receive the principal amount of the
underlying security or securities either (i) upon
notice of usually 30 days, or (ii), at specified
intervals not exceeding 397 days and upon no more than
30 days notice is deemed to have a maturity equal to
the longer of the period remaining until the next
readjustment of the interest rate or the period
remaining until the principal amount can be recovered
PAGE 13
through demand; and (3) an instrument that is issued or
guaranteed by the U.S. government or any agency thereof
which has a variable rate of interest readjusted no
less frequently than every 762 days may be deemed to
have a maturity equal to the period remaining until the
next readjustment of the interest rate. Should the
provisions of Rule 2a-7 change, the Funds will
determine the maturity of these securities in
accordance with the amended provisions of such rule.
Floating Rate Securities. Floating rate instruments are
those whose terms provide for the adjustment of their
interest rates whenever a specified interest rate changes
and which, at any time, can reasonably be expected to have a
market value that approximates its par value. Subject to
the provisions of Rule 2a-7 under the Investment Company Act
of 1940, (1) the maturity of a floating rate instrument is
deemed to be the period remaining until the date (noted on
the face of the instrument) on which the principal amount
must be paid, or in the case of an instrument called for
redemption, the date on which the redemption payment must be
made; and (2) floating rate instruments with demand features
are deemed to have a maturity equal to the period remaining
until the principal amount can be recovered through demand.
Should the provisions of Rule 2a-7 change, the Funds will
determine the maturity of these securities in accordance
with the amended provisions of such rule.
Put Option Bonds. Long-term obligations with maturities
longer than one year may provide purchasers an optional or
mandatory tender of the security at par value at
predetermined intervals, often ranging from one month to
several years (e.g., a 30-year bond with a five-year tender
period). These instruments are deemed to have a maturity
equal to the period remaining to the put date.
Residual Interest Bonds (These are a type of
potentially high-risk derivative.)(Intermediate and
Income Funds). The Funds may purchase municipal bond
issues that are structured as two-part, residual
interest bond and variable rate security offerings.
The issuer is obligated only to pay a fixed amount of
tax-free income that is to be divided among the holders
of the two securities. The interest rate for the
holders of the variable rate securities will be
determined by an index or auction process held
PAGE 14
approximately every 7 to 35 days while the bond holders
will receive all interest paid by the issuer minus the
amount given to the variable rate security holders and
a nominal auction fee. Therefore, the coupon of the
residual interest bonds, and thus the income received,
will move inversely with respect to short-term, 7 to 35
day tax-exempt interest rates. There is no assurance
that the auction will be successful and that the
variable rate security will provide short-term
liquidity. The issuer is not obligated to provide such
liquidity. In general, these securities offer a
significant yield advantage over standard municipal
securities, due to the uncertainty of the shape of the
yield curve (i.e., short term versus long term rates)
and consequent income flows.
Unlike many adjustable rate securities, residual
interest bonds are not necessarily expected to trade at
par and in fact present significant market risks. In
certain market environments, residual interest bonds
may carry substantial premiums or be at deep discounts.
This is a relatively new product in the municipal
market with limited liquidity to date.
Participation Interests. The Funds may purchase from
third parties participation interests in all or part of
specific holdings of municipal securities. The
purchase may take different forms: in the case of
short-term securities, the participation may be backed
by a liquidity facility that allows the interest to be
sold back to the third party (such as a trust, broker
or bank) for a predetermined price of par at stated
intervals. The seller may receive a fee from the Funds
in connection with the arrangement.
In the case of longer term bonds, the Intermediate
and Income Funds may purchase interests in a pool of
municipal bonds or a single municipal bond or lease
without the right to sell the interest back to the
third party.
The Funds will not purchase participation interests
unless a satisfactory opinion of counsel or ruling of
the Internal Revenue Service has been issued that the
PAGE 15
interest earned from the municipal securities on which
the Funds holds participation interests is exempt from
federal income tax to the Funds. However, there is no
guarantee the IRS would treat such interest income as
tax-exempt.
Embedded Interest Rate Swaps and Caps (Intermediate and
Income Funds). In a fixed-rate, long-term municipal
bond with an interest rate swap attached to it, the
bondholder usually receives the bond's fixed-coupon
payment as well as a variable rate payment that
represents the difference between a fixed rate for the
term of the swap (which is typically shorter than the
bond it is attached to) and a variable rate short-term
municipal index. The bondholder receives excess income
when short-term rates remain below the fixed interest
rate swap rate. If short-term rates rise above the
fixed-income swap rate, the bondholder's income is
reduced. At the end of the interest rate swap term, the
bond reverts to a single fixed-coupon payment.
Embedded interest rate swaps enhance yields, but also
increase interest rate risk.
An embedded interest rate cap allows the bondholder
to receive payments whenever short-term rates rise
above a level established at the time of purchase.
They normally are used to hedge against rising short-
term interest rates.
Both instruments may be volatile and of limited
liquidity and their use may adversely affect a fund's
total return.
Each Fund will not invest more than 5% of its total
assets in these instruments.
The Funds may invest in other types of derivative
instruments as they become available.
There are, of course, other types of municipal securities
that are, or may become, available, and the Funds reserve the
right to invest in them.
For the purpose of the Funds' investment restrictions, the
identification of the "issuer" of municipal securities which are
PAGE 16
not general obligation bonds is made by the Funds' investment
manager, T. Rowe Price, on the basis of the characteristics of
the obligation as described above, the most significant of which
is the source of funds for the payment of principal and interest
on such securities.
When-Issued Securities
New issues of municipal securities are often offered on a
when-issued basis; that is, delivery and payment for the
securities normally takes place 15 to 45 days or more after the
date of the commitment to purchase. The payment obligation and
the interest rate that will be received on the securities are
each fixed at the time the buyer enters into the commitment. A
Fund will only make a commitment to purchase such securities with
the intention of actually acquiring the securities. However, a
Fund may sell these securities before the settlement date if it
is deemed advisable as a matter of investment strategy. Each
Fund will maintain cash and/or high-grade marketable debt
securities with its custodian bank equal in value to commitments
for when-issued securities. Such securities either will mature
or, if necessary, be sold on or before the settlement date.
Securities purchased on a when-issued basis and the securities
held in a Fund's portfolio are subject to changes in market value
based upon the public perception of the creditworthiness of the
issuer and changes in the level of interest rates (which will
generally result in similar changes in value; i.e., both
experiencing appreciation when interest rates decline and
depreciation when interest rates rise). Therefore, to the extent
a Fund remains fully invested or almost fully invested at the
same time that it has purchased securities on a when-issued
basis, there will be greater fluctuations in its net asset value
than if it solely set aside cash to pay for when-issued
securities. In the case of the Money Fund, this could increase
the possibility that the market value of the Fund's assets could
vary from $1.00 per share. In addition, there will be a greater
potential for the realization of capital gains, which are not
exempt from federal income tax. When the time comes to pay for
when-issued securities, a Fund will meet its obligations from
then-available cash flow, sale of securities or, although it
would not normally expect to do so, from sale of the when-issued
securities themselves (which may have a value greater or less
than the payment obligation). The policies described in this
paragraph are not fundamental and may be changed by a Fund upon
notice to its shareholders.
Forwards
PAGE 17
(Intermediate and Income Funds)
The Funds may purchase bonds on a when-issued basis with
longer than standard settlement dates, in some cases exceeding
one to two years. In such cases, the Funds must execute a
receipt evidencing the obligation to purchase the bond on the
specified issue date, and must segregate cash internally to meet
that forward commitment. Municipal "forwards" typically carry a
substantial yield premium to compensate the buyer for the risks
associated with a long when-issued period, including: shifts in
market interest rates that could materially impact the principal
value of the bond, deterioration in the credit quality of the
issuer, loss of alternative investment options during the when-
issued period, changes in tax law or issuer actions that would
affect the exempt interest status of the bonds and prevent
delivery, failure of the issuer to complete various steps
required to issue the bonds, and limited liquidity for the buyer
to sell the escrow receipts during the when-issued period.
Investment in Taxable Money Market Securities
Although the Funds expect to be solely invested in municipal
securities, for temporary defensive purposes they may elect to
invest in the taxable money market securities listed below
(without limitation) when such action is deemed to be in the best
interests of shareholders. The interest earned on these money
market securities is not exempt from federal income tax and may
be taxable to shareholders as ordinary income.
U.S. Government Obligations - direct obligations of the
government and its agencies and instrumentalities;
U.S. Government Agency Securities - obligations issued
or guaranteed by U.S. government sponsored enterprises, federal
agencies, and international institutions. Some of these
securities are supported by the full faith and credit of the U.S.
Treasury; others are supported by the right of the issuer; and
the remainder are supported only by the credit of the
instrumentality;
Bank Obligations - certificates of deposit, bankers'
acceptances, and other short-term obligations of U.S. and
Canadian banks and their foreign branches;
Commercial Paper - paper rated A-2 or better by S&P,
Prime-2 or better by Moody's, or F-2 or better by Fitch, or, if
PAGE 18
not rated, is issued by a corporation having an outstanding debt
issue rated A or better by Moody's, S&P or Fitch and, with
respect to the Money Fund, is of equivalent investment quality as
determined by the Board of Directors; and
Short-Term Corporate Debt Securities - short-term
corporate debt securities rated at least AA by S&P, Moody's or
Fitch.
Determination of Maturity of Money Market Securities
The Money Fund may only purchase securities which at the
time of investment have remaining maturities of 397 calendar days
or less. The other Funds may also purchase money-market
securities. In determining the maturity of money market
securities, Funds will follow the provisions of Rule 2a-7 under
the Investment Company Act of 1940.
Futures Contracts
Futures contracts are a type of potentially high-risk
derivative.
Intermediate and Income Funds
Transactions in Futures
The Fund may enter into interest rate futures contracts
("futures" or "futures contracts"). Interest rate futures
contracts may be used as a hedge against changes in prevailing
levels of interest rates in order to establish more definitely
the effective return on securities held or intended to be
acquired by the Fund. The Fund could sell interest rate futures
as an offset against the effect of expected increases in interest
rates and purchase such futures as an offset against the effect
of expected declines in interest rates. Futures can also be used
as an efficient means of regulating a Fund's exposure to the
market.
The Fund will enter into futures contracts which are traded
on national futures exchanges and are standardized as to maturity
date and underlying financial instrument. A public market exists
in futures contracts covering various taxable fixed income
securities as well as municipal bonds. Futures exchanges and
trading in the United States are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission
("CFTC"). Although techniques other than the sale and purchase
PAGE 19
of futures contracts could be used for the above-referenced
purposes, futures contracts offer an effective and relatively low
cost means of implementing the Fund's objectives in these areas.
Regulatory Limitations
The Fund will engage in futures contracts and options
thereon only for bona fide hedging, yield enhancement, and risk
management purposes, in each case in accordance with rules and
regulations of the CFTC and applicable state law.
The Fund may not purchase or sell futures contracts or
related options if, with respect to positions which do not
quality as bona fide hedging under applicable CFTC rules, the sum
of the amounts of initial margin deposits and premiums paid on
those positions would exceed 5% of the net asset value of the
Fund after taking into account unrealized profits and unrealized
losses on any such contracts it has entered into; provided,
however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in
calculating the 5% limitation. For purposes of this policy,
options on futures contracts traded on a commodities exchange
will be considered "related options." This policy may be
modified by the Board of Directors without a shareholder vote and
does not limit the percentage of the Fund's assets at risk to 5%.
In accordance with the rules of the State of California, the
Fund will apply the above 5% test without excluding the value of
initial margin and premiums paid for bona fide hedging purposes.
The Fund's use of futures will not result in leverage.
Therefore, to the extent necessary, in instances involving the
purchase of futures contracts or the writing of calls or put
options thereon by the Fund, an amount of cash, U.S. government
securities or other liquid, high-grade debt obligations, equal to
the market value of the futures contracts and options thereon
(less any related margin deposits), will be identified in an
account with the Fund's custodian to cover the position, or
alternative cover (such as owning an offsetting position) will be
employed. Assets used as cover or held in an identified account
cannot be sold while the position in the corresponding option or
future is open, unless they are replaced with similar assets. As
a result, the commitment of a large portion of a Fund's assets to
cover or identified accounts could impede portfolio management or
the Fund's ability to meet redemption requests or other current
obligations.
PAGE 20
If the CFTC or other regulatory authorities adopt different
(including less stringent) or additional restrictions, the Fund
would comply with such new restrictions.
Trading in Futures Contracts
A futures contract provides for the future sale by one party
and purchase by another party of a specified amount of a specific
financial instrument (e.g., units of a debt security) for a
specified price, date, time and place designated at the time the
contract is made. Brokerage fees are incurred when a futures
contract is bought or sold and margin deposits must be
maintained. Entering into a contract to buy is commonly referred
to as buying or purchasing a contract or holding a long position.
Entering into a contract to sell is commonly referred to as
selling a contract or holding a short position.
It is possible that the Fund's hedging activities will occur
primarily through the use of municipal bond index futures
contracts since the uniqueness of that index contract should
better correlate with the Fund's portfolio and thereby be more
effective. However, there may be times when it is deemed in the
best interest of shareholders to engage in the use of Treasury
bond futures, and the Fund reserves to right to use Treasury bond
futures at any time. Use of these futures could occur, as an
example, when both the Treasury bond contract and municipal bond
index futures contract are correlating well with municipal bond
prices, but the Treasury bond contract is trading at a more
advantageous price making the hedge less expensive with the
Treasury bond contract than would be obtained with the municipal
bond index futures contract. The Fund's activity in futures
contracts generally will be limited to municipal bond index
futures contracts and Treasury bond and note contracts.
Unlike when the Fund purchases or sells a security, no price
would be paid or received by the Fund upon the purchase or sale
of a futures contract. Upon entering into a futures contract,
and to maintain the Fund's open positions in futures contracts,
the Fund would be required to deposit with its custodian in a
segregated account in the name of the futures broker an amount of
cash, U.S. government securities, suitable money market
instruments, or liquid, high-grade debt securities, known as
"initial margin." The margin required for a particular futures
contract is set by the exchange on which the contract is traded,
and may be significantly modified from time to time by the
exchange during the term of the contract. Futures contracts are
PAGE 21
customarily purchased and sold on margins that may range upward
from less than 5% of the value of the contract being traded.
If the price of an open futures contract changes (by
increase in the case of a sale or by decrease in the case of a
purchase) so that the loss on the futures contract reaches a
point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin.
However, if the value of a position increases because of
favorable price changes in the futures contract so that the
margin deposit exceeds the required margin, the broker will pay
the excess to the Fund.
These subsequent payments, called "variation margin," to and
from the futures broker, are made on a daily basis as the price
of the underlying assets fluctuate making the long and short
positions in the futures contract more or less valuable, a
process known as "marking to the market." The Fund expects to
earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require
actual future delivery of and payment for the underlying
instruments, in practice most futures contracts are usually
closed out before the delivery date. Closing out an open futures
contract sale or purchase is effected by entering into an
offsetting futures contract purchase or sale, respectively, for
the same aggregate amount of the identical securities and the
same delivery date. If the offsetting purchase price is less
than the original sale price, the Fund realizes a gain; if it is
more, the Fund realizes a loss. Conversely, if the offsetting
sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The
transaction costs must also be included in these calculations.
There can be no assurance, however, that the Fund will be able to
enter into an offsetting transaction with respect to a particular
futures contract at a particular time. If the Fund is not able
to enter into an offsetting transaction, the Fund will continue
to be required to maintain the margin deposits on the futures
contract.
As an example of an offsetting transaction in which the
underlying instrument is not delivered, the contractual
obligations arising from the sale of one contract of September
municipal bond index futures on an exchange may be fulfilled at
any time before delivery of the contract is required (i.e., on a
specified date in September, the "delivery month") by the
purchase of one contract of September municipal bond index
PAGE 22
futures on the same exchange. In such instance, the difference
between the price at which the futures contract was sold and the
price paid for the offsetting purchase, after allowance for
transaction costs, represents the profit or loss to the Fund.
Special Risks of Transactions in Futures Contracts
Volatility and Leverage. The prices of futures contracts
are volatile and are influenced, among other things, by actual
and anticipated changes in the market and interest rates, which
in turn are affected by fiscal and monetary policies and national
and international political and economic events.
Most United States futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that
the price of a futures contract may vary either up or down from
the previous day's settlement price at the end of a trading
session. Once the daily limit has been reached in a particular
type of futures contract, no trades may be made on that day at a
price beyond that limit. The daily limit governs only price
movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting
some futures traders to substantial losses.
Because of the low margin deposits required, futures trading
involves an extremely high degree of leverage. As a result, a
relatively small price movement in a futures contract may result
in immediate and substantial loss, as well as gain, to the
investor. For example, if at the time of purchase, 10% of the
value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract
would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then
closed out. A 15% decrease would result in a loss equal to 150%
of the original margin deposit, if the contract were closed out.
Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract.
However, the Fund would presumably have sustained comparable
losses if, instead of the futures contract, it had invested in
the underlying financial instrument and sold it after the
decline. Furthermore, in the case of a futures contract
purchase, in order to be certain that the Fund has sufficient
PAGE 23
assets to satisfy its obligations under a futures contract, the
Fund earmarks to the futures contract money market instruments
equal in value to the current value of the underlying instrument
less the margin deposit.
Liquidity. The Fund may elect to close some or all of its
futures positions at any time prior to their expiration. The
Fund would do so to reduce exposure represented by long futures
positions or short futures positions. The Fund may close its
positions by taking opposite positions which would operate to
terminate the Fund's position in the futures contracts. Final
determinations of variation margin would then be made, additional
cash would be required to be paid by or released to the Fund, and
the Fund would realize a loss or a gain.
Futures contracts may be closed out only on the exchange or
board of trade where the contracts were initially traded.
Although the Fund intends to purchase or sell futures contracts
only on exchanges or boards of trade where there appears to be an
active market, there is no assurance that a liquid market on an
exchange or board of trade will exist for any particular contract
at any particular time. In such event, it might not be possible
to close a futures contract, and in the event of adverse price
movements, the Fund would continue to be required to make daily
cash payments of variation margin. However, in the event futures
contracts have been used to hedge the underlying instruments, the
Fund would continue to hold the underlying instruments subject to
the hedge until the futures contracts could be terminated. In
such circumstances, an increase in the price of underlying
instruments, if any, might partially or completely offset losses
on the futures contract. However, as described below, there is
no guarantee that the price of the underlying instruments will,
in fact, correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures
contract.
Hedging Risk. A decision of whether, when, and how to hedge
involves skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of unexpected market
behavior, market or interest rate trends. There are several
risks in connection with the use by the Fund of futures contracts
as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures
contracts and movements in the prices of the underlying
instruments which are the subject of the hedge. T. Rowe Price
will, however, attempt to reduce this risk by entering into
futures contracts whose movements, in its judgment, will have a
PAGE 24
significant correlation with movements in the prices of the
Fund's underlying instruments sought to be hedged.
Successful use of futures contracts by the Fund for hedging
purposes is also subject to T. Rowe Price's ability to correctly
predict movements in the direction of the market. It is possible
that, when the Fund has sold futures to hedge its portfolio
against a decline in the market, the index, indices, or
instruments underlying futures are written might advance and the
value of the underlying instruments held in the Fund's portfolio
might decline. If this were to occur, the Fund would lose money
on the futures and also would experience a decline in value in
its underlying instruments. However, while this might occur to a
certain degree, T. Rowe Price believes that over time the value
of the Fund's portfolio will tend to move in the same direction
as the market indices used to hedge the portfolios. It is also
possible that if the Fund were to hedge against the possibility
of a decline in the market (adversely affecting the underlying
instruments held in its portfolio) and prices instead increased,
the Fund would lose part or all of the benefit of increased value
of those underlying instruments that it has hedged, because it
would have offsetting losses in its futures positions. In
addition, in such situations, if the Fund had insufficient cash,
it might have to sell underlying instruments to meet daily
variation margin requirements. Such sales of underlying
instruments might be, but would not necessarily be, at increased
prices (which would reflect the rising market). The Fund might
have to sell underlying instruments at a time when it would be
disadvantageous to do so.
In addition to the possibility that there might be an
imperfect correlation, or no correlation at all, between price
movements in the futures contracts and the portion of the
portfolio being hedged, the price movements of futures contracts
might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First,
all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors might close
futures contracts through offsetting transactions, which could
distort the normal relationship between the underlying
instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements
in the securities markets, and as a result the futures market
might attract more speculators than the securities markets do.
Increased participation by speculators in the futures market
might also cause temporary price distortions. Due to the
PAGE 25
possibility of price distortion in the futures market and also
because of the imperfect correlation between price movements in
the underlying instruments and movements in the prices of futures
contracts, even a correct forecast of general market trends by T.
Rowe Price might not result in a successful hedging transaction
over a very short time period.
Options on Futures Contracts
The Fund might trade in municipal bond index option futures
or similar options on futures developed in the future. In
addition, the Fund may also trade in options on futures contracts
on U.S. government securities and any U.S. government securities
futures index contract which might be developed. In the opinion
of T. Rowe Price, there is a high degree of correlation in the
interest rate, and price movements of U.S. government securities
and municipal securities. However, the U.S. government
securities market and municipal securities markets are
independent and may not move in tandem at any point in time.
The Fund will purchase put options on futures contracts to
hedge its portfolio of municipal securities against the risk of
rising interest rates, and the consequent decline in the prices
of the municipal securities it owns. The Funds will also write
call options on futures contracts as a hedge against a modest
decline in prices of the municipal securities held in the Fund's
portfolio. If the futures price at expiration of a written call
option is below the exercise price, the Fund will retain the full
amount of the option premium, thereby partially hedging against
any decline that may have occurred in the Fund's holdings of debt
securities. If the futures price when the option is exercised is
above the exercise price, however, the Fund will incur a loss,
which may be wholly or partially offset by the increase of the
value of the securities in the Fund's portfolio which were being
hedged.
Writing a put option on a futures contract serves as a
partial hedge against an increase in the value of securities the
Fund intends to acquire. If the futures price at expiration of
the option is above the exercise price, the Fund will retain the
full amount of the option premium which provides a partial hedge
against any increase that may have occurred in the price of the
debt securities the Fund intends to acquire. If the futures
price when the option is exercised is below the exercise price,
however, the Fund will incur a loss, which may be wholly or
partially offset by the decrease in the price of the securities
the Fund intends to acquire.
PAGE 26
Options on futures are similar to options on underlying
instruments except that options on futures give the purchaser the
right, in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase
or sell the futures contract, at a specified exercise price at
any time during the period of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the
option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market
price of the futures contract, at exercise, exceeds (in the case
of a call) or is less than (in the case of a put) the exercise
price of the option on the futures contract. Purchasers of
options who fail to exercise their options prior to the exercise
date suffer a loss of the premium paid.
From time to time a single order to purchase or sell futures
contracts (or options thereon) may be made on behalf of the Fund
and other T. Rowe Price Funds. Such aggregated orders would be
allocated among the Fund and the other T. Rowe Price Funds in a
fair and non-discriminatory manner.
Special Risks of Transactions in Options on Futures Contracts
The risks described under "Special Risks of Transactions on
Futures Contracts" are substantially the same as the risks of
using options on futures. In addition, where the Fund seeks to
close out an option position by writing or buying an offsetting
option covering the same index, underlying instrument or contract
and having the same exercise price and expiration date, its
ability to establish and close out positions on such options will
be subject to the maintenance of a liquid secondary market.
Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient
trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or
series of options, or underlying instruments; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that
PAGE 27
exchange (or in the class or series of options) would cease to
exist, although outstanding options on the exchange that had been
issued by a clearing corporation as a result of trades on that
exchange would continue to be exercisable in accordance with
their terms. There is no assurance that higher than anticipated
trading activity or other unforeseen events might not, at times,
render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by
an exchange of special procedures which may interfere with the
timely execution of customers' orders. In the event no such
market exists for a particular contract in which the Fund
maintains a position, in the case of a written option, the Fund
would have to wait to sell the underlying securities or futures
positions until the option expires or is exercised. The Fund
would be required to maintain margin deposits on payments until
the contract is closed. Options on futures are treated for
accounting purposes in the same way as the analogous option on
securities are treated.
In addition, the correlation between movements in the price
of options on futures contracts and movements in the price of the
securities hedged can only be approximate. This risk is
significantly increased when an option on a U.S. government
securities future or an option on a municipal securities index
future is used to hedge a municipal bond portfolio. Another risk
is that the movements in the price of options on futures
contracts may not move inversely with changes in interest rates.
If the Fund has written a call option on a futures contract and
the value of the call increases by more than the increase in the
value of the securities held as cover, the Fund may realize a
loss on the call which is not completely offset by the
appreciation in the price of the securities held as cover and the
premium received for writing the call.
The successful use of options on futures contracts requires
special expertise and techniques different from those involved in
portfolio securities transactions. A decision of whether, when
and how to hedge involves skill and judgment, and even a well-
conceived hedge may be unsuccessful to some degree because of
unexpected market behavior or interest rate trends. During
periods when municipal securities market prices are appreciating,
the Fund may experience poorer overall performance than if it had
not entered into any options on futures contracts.
General Considerations
PAGE 28
Transactions by the Fund in options on futures will be
subject to limitations established by each of the exchanges,
boards of trade or other trading facilities governing the maximum
number of options in each class which may be written or purchased
by a single investor or group of investors acting in concert,
regardless of whether the options are written on the same or
different exchanges, boards of trade or other trading facilities
or are held or written in one or more accounts or through one or
more brokers. Thus, the number of contracts which the Fund may
write or purchase may be affected by contracts written or
purchased by other investment advisory clients of T. Rowe Price.
An exchange, board of trade or other trading facility may order
the liquidations of positions found to be in excess of these
limits, and it may impose certain other sanctions.
Additional Futures and Options Contracts
Although the Funds have no current intention of engaging in
futures or options transactions other than those described above,
they reserve the right to do so. Such futures and options
trading might involve risks which differ from those involved in
the futures and options described above.
Federal Tax Treatment of Futures Contracts
Although the Fund invests almost exclusively in securities
which generate income which is exempt from federal income taxes,
the instruments described above are not exempt from such taxes.
Therefore, use of the investment techniques described above could
result in taxable income to shareholders of the Fund.
Generally, the Fund is required, for federal income tax
purposes, to recognize as income for each taxable year its net
unrealized gains and losses on futures contracts as of the end of
the year as well as those actually realized during the year.
Gain or loss recognized with respect to a futures contract will
generally be 60% long-term capital gain or loss and 40% short-
term capital gain or loss, without regard to the holding period
of the contract.
Futures contracts which are intended to hedge against a
change in the value of securities may be classified as "mixed
straddles," in which case the recognition of losses may be
deferred to a later year. In addition, sales of such futures
contracts on securities may affect the holding period of the
hedged security and, consequently, the nature of the gain or loss
on such security on disposition.
PAGE 29
In order for the Fund to continue to qualify for federal
income tax treatment as a regulated investment company, at least
90% of its gross income for a taxable year must be derived from
qualifying income; i.e., dividends, interest, income derived from
loans of securities, and gains from the sale of securities.
Gains realized on the sale or other disposition of securities,
including futures contracts on securities held for less than
three months, must be limited to less than 30% of the Fund's
annual gross income. In order to avoid realizing excessive gains
on securities held less than three months, the Fund may be
required to defer the closing out of futures contracts beyond the
time when it would otherwise be advantageous to do so. It is
anticipated that unrealized gains on futures contracts, which
have been open for less than three months as of the end of the
Fund's fiscal year and which are recognized for tax purposes,
will not be considered gains on securities held less than three
months for purposes of the 30% test.
The Fund will distribute to shareholders annually any net
gains which have been recognized for federal income tax purposes
from futures transactions (including unrealized gains at the end
of the Fund's fiscal year). Such distributions will be combined
with distributions of ordinary income or capital gains realized
on the Fund's other investments. Shareholders will be advised of
the nature of the payments. The Fund's ability to enter into
transactions in options on futures contracts may be limited by
the Internal Revenue Code's requirements for qualification as a
regulated investment company.
Options on Securities
Options are type of potentially high-risk derivative.
Intermediate and Income Funds
The Funds have no current intention of investing in options
on securities, although they reserve the right to do so.
Appropriate disclosure would be added to the Funds' prospectus
and Statement of Additional Information when and if the Funds
decide to invest in options.
INVESTMENT RESTRICTIONS
All Funds
Fundamental policies may not be changed without the approval
of the lesser of (1) 67% of a Fund's shares present at a meeting
PAGE 30
of shareholders if the holders of more than 50% of the
outstanding shares are present in person or by proxy or (2) more
than 50% of a Fund's outstanding shares. Other restrictions in
the form of operating policies are subject to change by a Fund's
Board of Directors without shareholder approval. Any investment
restriction which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by,
an acquisition of securities or assets of, or borrowings by, a
Fund.
Fundamental Policies
As a matter of fundamental policy, the Funds may not:
(1) Borrowing. Borrow money except that the Fund may
(i) borrow for non-leveraging, temporary or
emergency purposes and (ii) engage in reverse
repurchase agreements and make other investments
or engage in other transactions, which may involve
a borrowing, in a manner consistent with the
Fund's investment objective and program, provided
that the combination of (i) and (ii) shall not
exceed 33 1/3% of the value of the Fund's total
assets (including the amount borrowed) less
liabilities (other than borrowings) or such other
percentage permitted by law. Any borrowings which
come to exceed this amount will be reduced in
accordance with applicable law. The Fund may
borrow from banks, other Price Funds or other
persons to the extent permitted by applicable law;
(2) Commodities. Purchase or sell physical
commodities; except that the Funds (other than the
Money Fund) may enter into futures contracts and
options thereon;
(3) Equity Securities. Purchase equity securities, or
securities convertible into equity securities;
(4) Industry Concentration. Purchase the securities
of any issuer if, as a result, more than 25% of
the value of the Fund's total assets would be
invested in the securities of issuers having their
principal business activities in the same
industry;
PAGE 31
(5) Loans. Make loans, although the Fund may (i) lend
portfolio securities and participate in an
interfund lending program with other Price Funds
provided that no such loan may be made if, as a
result, the aggregate of such loans would exceed
33 1/3% of the value of the Fund's total assets;
(ii) purchase money market securities and enter
into repurchase agreements; and (iii) acquire
publicly-distributed or privately-placed debt
securities and purchase debt;
(6) Percent Limit on Assets Invested in Any One
Issuer. Purchase a security if, as a result, with
respect to 75% of the value of its total assets,
more than 5% of the value of the Fund's total
assets would be invested in the securities of a
single issuer, except securities issued or
guaranteed by the U.S. Government or any of its
agencies or instrumentalities;
(7) Percent Limit on Share Ownership of Any One
Issuer. Purchase a security if, as a result, with
respect to 75% of the value of the Fund's total
assets, more than 10% of the outstanding voting
securities of any issuer would be held by the Fund
(other than obligations issued or guaranteed by
the U.S. Government, its agencies or
instrumentalities);
(8) Real Estate. Purchase or sell real estate,
including limited partnership interest therein,
unless acquired as a result, of ownership of
securities or other instruments (but this shall
not prevent the Fund from investing in securities
or other instruments backed by real estate or
securities of companies engaged in the real estate
business);
(9) Senior Securities. Issue senior securities except
in compliance with the Investment Company Act of
1940;
(10) Taxable Securities. During periods of normal
market conditions, purchase any security if, as a
result, less than 80% of the Fund's income would
be exempt from federal income tax. The income
PAGE 32
included under the 80% test doesn't include income
from securities subject to the alternative minimum
tax (AMT); or
(11) Underwriting. Underwrite securities issued by
other persons, except to the extent that the Fund
may be deemed to be an underwriter within the
meaning of the Securities Act of 1933 in
connection with the purchase and sale of its
portfolio securities in the ordinary course of
pursuing its investment program.
NOTES
The following Notes should be read in
connection with the above-described fundamental
policies. The Notes are not fundamental
policies.
With respect to investment restrictions (1) and
(5), the Funds will not borrow from or lend to any
other T. Rowe Price Fund unless they apply for and
receive an exemptive order from the SEC or the SEC
issues rules permitting such transactions. The
Funds have no current intention of engaging in any
such activity and there is no assurance the SEC
would grant any order requested by the Funds or
promulgate any rules allowing the transactions.
With respect to investment restriction (1), the
Money Fund has no current intention of engaging in
any borrowing transactions.
With respect to investment restriction (2), the
Funds do not consider hybrid instruments as
commodities.
With respect to investment restriction (4), U.S.,
state or local governments, or related agencies or
instrumentalities, are not considered an industry.
Industrial development bonds issued by
nongovernmental users are not considered municipal
securities for purposes of this exception.
For purposes of investment restriction (6), the Fund
will treat bonds which are refunded with escrowed U.S.
government securities as U.S. government securities.
PAGE 33
Operating Policies
As a matter of operating policy, the Funds may not:
(1) Borrowing. The Funds will not purchase additional
securities when money borrowed exceeds 5% of its
total assets.
(2) Control of Portfolio Companies. Invest in
companies for the purpose of exercising management
or control;
(3) Equity Securities. Purchase any equity security
or security convertible into an equity security
provided that the Fund (other than the Money Fund)
may invest up to 10% of its total assets in equity
securities which pay tax-exempt dividends and
which are otherwise consistent with the Fund's
investment objective and, further provided, that
the Money Fund may invest up to 10% of its total
assets in equity securities of other tax-free
open-end money market funds;
(4) Futures Contracts. Purchase a futures contract or
an option thereon if, with respect to positions in
futures or options on futures which do not
represent bona fide hedging, the aggregate initial
margin and premiums on such positions would exceed
5% of the Fund's net asset value;
(5) Illiquid Securities. Purchase illiquid securities
if as a result, more than 15% (10% for the Money
Fund) of its net assets would be invested in such
securities, provided that the Fund will not invest
more than 10% of its total assets in restricted
securities;
(6) Investment Companies. Purchase securities of
open-end or closed-end investment companies except
in compliance with the Investment Company Act of
1940 and applicable state law provided that, the
Money Fund may only purchase the securities of
other tax-free open-end money market investment
companies;
(7) Margin. Purchase securities on margin, except (i)
PAGE 34
for use of short-term credit necessary for
clearance of purchases of portfolio securities and
(ii) it may make margin deposits in connection
with futures contracts or other permissible
investments;
(8) Mortgaging. Mortgage, pledge, hypothecate or, in
any manner, transfer any security owned by the
Fund as security for indebtedness except as may be
necessary in connection with permissible
borrowings or investments and then such
mortgaging, pledging or hypothecating may not
exceed 33 1/3% of the Fund's total assets at the
time of borrowing or investment;
(9) Oil and Gas Programs. Purchase participations or
other direct interests in, or enter into leases
with respect to, oil, gas, or other mineral
exploration or development programs;
(10) Options, Etc. Invest in puts, calls, straddles,
spreads, or any combination thereof, except to the
extent permitted by the prospectus and Statement
of Additional Information;
(11) Ownership of Portfolio Securities by Officers and
Directors. Purchase or retain the securities of
any issuer if, those officers and directors of the
Fund, and of its investment manager, who each own
beneficially more than 0.5% of the outstanding
securities of such issuer, together own
beneficially more than 5% of such securities.
(12) Short Sales. Effect short sales of securities;
(13) Unseasoned Issuers. Purchase a security (other
than obligations issued or guaranteed by the U.S.,
any foreign, state or local government, their
agencies or instrumentalities) if, as a result,
more than 5% of the value of the Fund's total
assets would be invested in the securities issuers
which at the time of purchase had been in
operation for less than three years (for this
purpose, the period of operation of any issuer
shall include the period of operation of any
predecessor or unconditional guarantor of such
PAGE 35
issuer). This restriction does not apply to
securities of pooled investment vehicles or
mortgage or asset-backed securities; or
(14) Warrants. Invest in warrants, if, as a result
thereof, more than 2% of the value of the net
assets of the Fund would be invested in warrants
which are not listed on the New York Stock
Exchange, the American Stock Exchange, or a
recognized foreign exchange, or more than 5% of
the value of the net assets of the Fund would be
invested in warrants whether or not so listed.
For purposes of these percentage limitations, the
warrants will be valued at the lower of cost or
market and warrants acquired by the Funds in units
or attached to securities may be deemed to be
without value.
With respect to investment restriction (6), the Funds
have no current intention of purchasing the securities
of other investment companies. Duplicate fees could
result from any such purchases.
For purposes of investment restriction (13), the Funds
will not consider industrial development bonds issued by
nongovernmental users as municipal securities.
Notwithstanding anything in the above fundamental and
operating restrictions to the contrary, each Fund may invest all
of its assets in a single investment company or a series thereof
in connection with a "master-feeder" arrangement. Such an
investment would be made where the Fund (a "Feeder"), and one or
more other funds with the same investment objective and program
as the Fund, sought to accomplish its investment objective and
program by investing all of its assets in the shares of another
investment company (the "Master"). The Master would, in turn,
have the same investment objective and program as the Fund. The
Fund would invest in this manner in an effort to achieve the
economies of scale associated with having a Master fund make
investments in portfolio companies on behalf of a number of
Feeder funds.
RATINGS OF MUNICIPAL DEBT SECURITIES
Moody's Investors Service, Inc.
PAGE 36
Aaa - Bonds rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk.
Aa - Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds.
A - Bonds rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations.
Baa - Bonds rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds rated Ba are judged to have speculative elements:
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterize
bonds in this class.
B - Bonds rated B generally lack the characteristics of a
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with
respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked short-comings.
C - Lowest-rated; extremely poor prospects of ever attaining
investment standing.
Standard & Poor's Corporation
AAA - This is the highest rating assigned by Standard & Poor's to
a debt obligation and indicates an extremely strong capacity to
pay principal and interest.
AA - Debt rated AA has a very strong capacity to pay principal
and interest and differs from highest rated issues only in a
small degree.
A - Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity
to pay principal and interest. Whereas they normally exhibit
PAGE 37
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC, and CC are regarded on
balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal. BB
indicates the lowest degree of speculation and CC the highest
degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse
conditions.
D - In default.
Fitch Investors Service, Inc.
AAA - Bonds rated AAA are considered to be investment grade and
of the highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA - Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest
and repay principal is very strong, although not quite as strong
as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rate
F-1+.
A - Bonds rated A are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB - Bonds rated BBB are considered to be investment grade and
of satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
BB, B, CCC, CC, and C are regarded on balance as predominantly
speculative with respect to the issuer's capacity to repay
interest and repay principal in accordance with the terms of the
obligation for bond issues not in default. BB indicates the
lowest degree of speculation and C the highest degree of
speculation. The rating takes into consideration special
features of the issue, its relationship to other obligations of
PAGE 38
the issuer, and the current and prospective financial condition
and operating performance of the issuer.
RATINGS OF MUNICIPAL NOTES AND VARIABLE RATE SECURITIES
MOODY'S INVESTORS SERVICE, INC. VMIG1/MIG-1: the best
quality. VMIG2/MIG-2: high quality, with margins of protection
ample though not so large as in the preceding group. VMIG3/MIG-
3: favorable quality, with all security elements accounted for,
but lacking the undeniable strength of the preceding grades.
Market access for refinancing, in particular, is likely to be
less well established. VMIG4/MIG4: adequate quality but there is
specific risk.
STANDARD & POOR'S CORPORATION. SP-1: very strong or strong
capacity to pay principal and interest. Those issues determined
to possess overwhelming safety characteristics will be given a
plus (+) designation. SP-2: satisfactory capacity to pay
interest and principal. SP-3: speculative capacity to pay
principal and interest.
FITCH INVESTORS SERVICE. F-1+: exceptionally strong credit
quality, strongest degree of assurance for timely payment. F-1:
Very strong credit quality. F-2: Good credit quality, having a
satisfactory degree of assurance for timely payment. F-3: Fair
credit quality, assurance for timely payment is adequate but
adverse changes could cause the securities to be rated below
investment grade. F-5: Weak credit quality, having
characteristics suggesting a minimal degree of assurance for
timely payment.
RATINGS OF COMMERCIAL PAPER
MOODY'S INVESTORS SERVICES, INC. P-1: superior capacity
for repayment. P-2: strong capacity for repayment. P-3:
acceptable capacity for repayment of short-term promissory
obligations.
STANDARD & POOR'S CORPORATION. A-1: highest category,
degree of safety regarding timely payment is strong. Those
issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation. A-
2: satisfactory capacity to pay principal and interest. A-3:
adequate capacity for timely payment, but are vulnerable to
adverse effects of changes in circumstances than higher rated
PAGE 39
issues. B and C: speculative capacity to pay principal and
interest.
FITCH INVESTORS SERVICE. F-1+: exceptionally strong credit
quality, strongest degree of assurance for timely payment. F-1:
Very strong credit quality. F-2: Good credit quality, having a
satisfactory degree of assurance for timely payment. F-3: Fair
credit quality, assurance for timely payment is adequate but
adverse changes could cause the securities to be rated below
investment grade. F-5: Weak credit quality, having
characteristics suggesting a minimal degree of assurance for
timely payment.
MANAGEMENT OF FUNDS
The officers and directors of each of the Funds are listed
below. Unless otherwise noted, the address of each is 100 East
Pratt Street, Baltimore, Maryland 21202. Except as indicated,
each has been an employee of T. Rowe Price for more than five
years. In the list below, the Funds' directors who are
considered "interested persons" of T. Rowe Price as defined under
Section 2(a)(19) of the Investment Company Act of 1940 are noted
with an asterisk (*). These directors are referred to as inside
directors by virtue of their officership, directorship, and/or
employment with T. Rowe Price.
ROBERT P. BLACK, Director--Retired; formerly President, Federal
Reserve Bank of Richmond; Address: 10 Dahlgren Road, Richmond,
Virginia 23233
CALVIN W. BURNETT, PH.D., Director--President, Coppin State
College; Board of Directors, McDonogh School, Inc. and Provident
Bank of Maryland; Past President, Baltimore Area Council Boy
Scouts of America; Vice President, Board of Directors, The
Walters Art Gallery; Address: 2000 North Warwick Avenue,
Baltimore, Maryland 21216
*GEORGE J. COLLINS, Chairman of the Board--President, Chief
Executive Officer and Managing Director, T. Rowe Price; Director,
Price-Fleming, T. Rowe Price Retirement Plan Services, Inc. and
T. Rowe Price Trust Company; Chartered Investment Counselor
ANTHONY W. DEERING, Director--Director, President and Chief
Executive Officer, The Rouse Company, real estate developers,
Columbia, Maryland; Advisory Director, Kleinwort, Benson (North
America) Corporation, a registered broker-dealer; Address: 10275
Little Patuxent Parkway, Columbia, Maryland 21044
F. PIERCE LINAWEAVER, Director--President, F. Pierce Linaweaver &
Associates, Inc., Consulting Environmental & Civil Engineer(s);
PAGE 40
formerly (1987-1991) Executive Vice President, EA Engineering,
Science, and Technology, Inc., and (1987-1990) President, EA
Engineering, Inc., Baltimore, Maryland; Address: The Legg Mason
Tower, 111 South Calvert Street, Suite 2700, Baltimore, Maryland
21202
*WILLIAM T. REYNOLDS, President and Director--Managing Director,
T. Rowe Price
*JAMES S. RIEPE, Vice President and Director--Managing Director
and Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Services, Inc. and T. Rowe Price Retirement Plan Services, Inc.;
President and Director, T. Rowe Price Investment Services, Inc.;
President and Trust Officer, T. Rowe Price Trust Company;
Director, Price-Fleming and Rhone-Poulenc Rorer, Inc.
JOHN G. SCHREIBER, Director--President, Schreiber Investments,
Inc., a real estate investment company; Director, AMLI
Residential Properties Trust; Partner, Blackstone Real Estate
Partners, L.P.; Director and formerly (12/70-12/90) Executive
Vice President, JMB Realty Corporation, a national real estate
investment manager and developer; Director, Urban Shopping
Centers, Inc.; Address: 1115 East Illinois Road, Lake Forest,
Illinois 60045
PATRICE L. BERCHTENBREITER, Executive Vice President--Vice
President, T. Rowe Price
MICHAEL P. BUCKLEY, Vice President--Vice President, T. Rowe Price
MARY J. MILLER, Executive Vice President--Managing Director, T.
Rowe Price
PATRICIA S. DEFORD, Vice President--Vice President, T. Rowe Price
CHARLES B. HILL, Vice President--Assistant Vice President, T.
Rowe Price; formerly (9/86-11/91) managed municipal bonds at
Riggs National Bank, Washington, D.C.
CHARLES O. HOLLAND, Vice President--Vice President, T. Rowe Price
HENRY H. HOPKINS, Vice President--Vice President, Price-Fleming
and T. Rowe Price Retirement Plan Services, Inc.; Managing
Director, T. Rowe Price; Vice President and Director, T. Rowe
Price Investment Services, Inc., T. Rowe Price Services, Inc. and
T. Rowe Price Trust Company
KONSTANTINE B. MALLAS, Vice President--Assistant Vice President,
T. Rowe Price
LAURA L. McAREE, Vice President--Assistant Vice President, T.
Rowe Price; formerly (4/90-11/90) trader, Boeing Company,
Seattle, Washington and (8/87-3/90) financial analyst, Harvard
Management Company, Boston, Massachusetts
THEORDORE E. ROBSON, Vice President--Assistant Vice President,
T. Rowe Price
WILLIAM F. SNIDER, JR., Assistant Vice President--Employee, T.
Rowe Price
PAGE 41
C. STEPHEN WOLFE, II, Vice President--Vice President, T. Rowe
Price
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
CARMEN F. DEYESU, Treasurer--Vice President, T. Rowe Price, T.
Rowe Price Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, Controller--Vice President, T. Rowe Price and
T. Rowe Price Trust Company
ROGER L. FIERY, III, Assistant Vice President--Vice President, T.
Rowe Price and Price-Fleming
JOSEPH K. LYNAGH, Assistant Vice President--Employee, T. Rowe
Price
HUGH D. McGUIRK, Assistant Vice President--Assistant Vice
President, T. Rowe Price
EDWARD T. SCHNEIDER, Assistant Vice President--Vice President, T.
Rowe Price
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T.
Rowe Price
PATRICIA S. BUTCHER, Assistant Secretary--Assistant Vice
President, T. Rowe Price and T. Rowe Price Investment Services,
Inc.
COMPENSATION TABLE
_________________________________________________________________
Pension or Total Compensation
Aggregate Retirement from Fund and
Name of Compensation Benefits Fund Complex
Person, from Fund Accrued as Paid to
Position Expenses(a)Part of Fund(b) Directors(c)
_________________________________________________________________
Summit Municipal Money Market
Robert P. Black, $883 N/A $56,000
Director
Calvin W. Burnett, 883 N/A 56,000
PH.D, Director
Anthony W. Deering, 883 N/A 68,250
Director
F. Pierce Linaweaver, 883 N/A 56,000
Director
John G. Schreiber, 883 N/A 56,000
Director
PAGE 42
George J. Collins, -- N/A --
Chairman of the Board(d)
William T. Reynolds, -- N/A --
Director(d)
James S. Riepe, -- N/A --
Director(d)
Summit Municipal Intermediate
Robert P. Black, $805 N/A $56,000
Director
Calvin W. Burnett, 805 N/A 56,000
PH.D, Director
Anthony W. Deering, 805 N/A 68,250
Director
F. Pierce Linaweaver, 805 N/A 56,000
Director
John G. Schreiber, 805 N/A 56,000
Director
George J. Collins, -- N/A --
Chairman of the Board(d)
William T. Reynolds, -- N/A --
Director(d)
James S. Riepe, -- N/A --
Director(d)
Summit Municipal Income
Robert P. Black, $791 N/A $52,667
Director
Calvin W. Burnett, 791 N/A 55,583
PH.D, Director
Anthony W. Deering, 791 N/A 66,333
Director
F. Pierce Linaweaver, 791 N/A 55,583
PAGE 43
Director
John G. Schreiber, 791 N/A 55,667
Director
George J. Collins, -- N/A --
Chairman of the Board(d)
William T. Reynolds, -- N/A --
Director(d)
James S. Riepe, -- N/A --
Director(d)
(a) Amounts in this Column are for the period November 1, 1994
through October 31, 1995.
(b) Not applicable. The Fund does not pay pension or retirement
benefits to officers or directors/trustees of the Fund.
(c) Amounts in this column are for calendar year 1995. The T.
Rowe Price complex was composed of 72 funds at December 31,
1995.
(d) Any director/trustee of the Fund who is an officer or
employee of T. Rowe Price receives no remuneration from the
Fund.
The Funds' Executive Committee, comprised of Messrs.
Collins, Reynolds, and Riepe, has been authorized by its
respective Board of Directors to exercise all powers of the Board
to manage the Funds in the intervals between meetings of the
Board, except the powers prohibited by statute from being
delegated.
PRINCIPAL HOLDERS OF SECURITIES
As of the date of the prospectus, the officers and directors
of the Funds, as a group, owned less than 1% of the outstanding
shares of each Fund.
As of January 31, 1996, Robert M. Nicoud, 4009
Greenbrier, Dallas, Texas 75225-5406, beneficially owned more
than 5% of the outstanding shares of the Summit Municipal Income
Fund.
INVESTMENT MANAGEMENT SERVICES
PAGE 44
Services Provided by T. Rowe Price
Under the Management Agreement with the Corporation relating
to each Fund, T. Rowe Price provides each Fund with discretionary
investment services. Specifically, T. Rowe Price is responsible
for supervising and directing the investments of each Fund in
accordance with its investment objectives, programs, and
restrictions as provided in the prospectus and this Statement of
Additional Information. T. Rowe Price is also responsible for
effecting all security transactions on behalf of each Fund,
including the allocation of principal business and portfolio
brokerage and the negotiation of commissions. In addition to
these services, T. Rowe Price provides each Fund with certain
corporate administrative services, including: maintaining the
Fund's corporate existence, corporate records, and registering
and qualifying the Fund's shares under federal and state laws;
monitoring the financial, accounting, and administrative
functions of each Fund; maintaining liaison with the agents
employed by each Fund such as the Fund's custodian and transfer
agent; assisting each Fund in the coordination of such agents'
activities; and permitting T. Rowe Price's employees to serve as
officers, directors, and committee members of each Fund without
cost to the Fund.
Each Fund's Management Agreement also provides that T. Rowe
Price, its directors, officers, employees, and certain other
persons performing specific functions for the Fund will only be
liable to the Fund for losses resulting from willful misfeasance,
bad faith, gross negligence, or reckless disregard of duty.
Management Fee
Each Fund pays T. Rowe Price an annual all-inclusive fee
(the "Fee") of: 0.45% for the Money Fund; and 0.50% for both the
Intermediate and the Income Funds. The Fee is paid monthly to T.
Rowe Price on the first business day of the next succeeding
calendar month and is the sum of the daily fee accruals for each
month. The daily fee accrual for any particular day is
calculated by multiplying the fraction of one (1) over the number
of calendar days in the year by the appropriate Fee and
multiplying this product by the net assets of the Fund for that
day, as determined in accordance with the Funds' prospectus as of
the close of business on the previous business day on which the
Fund was open for business.
The Management Agreement between each Fund and T. Rowe Price
provides that T. Rowe Price will pay all expenses of each Fund's
PAGE 45
operations, except interest, taxes, brokerage commissions, and
other charges incident to the purchase, sale or lending of the
Fund's portfolio securities, directors' fees and expenses
(including counsel fees and expenses) and such non-recurring or
extraordinary expenses that may arise, including the costs of
actions, suits or proceedings to which the Fund is a party and
the expenses the Fund may incur as a result of its obligation to
provide indemnification to its officers, directors and agents.
However, the Board of Directors for the Funds reserves the right
to impose additional fees against shareholder accounts to defray
expenses which would otherwise be paid by T. Rowe Price under the
management agreement. The Board does not anticipate levying such
charges; such a fee, if charged, may be retained by the Fund or
paid to T. Rowe Price.
DISTRIBUTOR FOR FUNDS
T. Rowe Price Investment Services, Inc. ("Investment
Services"), a Maryland corporation formed in 1980 as a wholly-
owned subsidiary of T. Rowe Price, serves as the distributor of
the Funds. Investment Services is registered as a broker-dealer
under the Securities Exchange Act of 1934 and is a member of the
National Association of Securities Dealers, Inc. The offering of
each Fund's shares is continuous.
Investment Services is located at the same address as the
Funds and T. Rowe Price--100 East Pratt Street, Baltimore,
Maryland 21202.
Investment Services serves as distributor to the Funds
pursuant to individual Underwriting Agreements ("Underwriting
Agreements"), which provide that Investment Services will pay all
fees and expenses in connection with: registering and qualifying
the Fund's shares under the various state "blue sky" laws;
preparing, setting in type, printing, and mailing its
prospectuses and reports to shareholders; issuing its shares,
including expenses of confirming purchase orders; printing and
distributing prospectuses and reports for use in offering and
selling shares for each Fund; preparing, setting in type,
printing, and mailing all sales literature and advertising;
Investment Services' federal and state registrations as a
broker-dealer; and offering and selling shares for each Fund.
The Underwriting Agreements provide that the Fund is responsible
for interest, taxes and such non-recurring or extraordinary
expenses that may arise, including the costs of actions, suits or
proceedings to which the Fund is a party and the expenses the
PAGE 46
Fund may incur as a result of its obligation to provide
indemnification to Investment Services. Investment Services'
expenses are paid by T. Rowe Price.
Investment Services acts as the agent of the Funds in
connection with the sale of their shares in all states in which
the shares are qualified and in which Investment Services is
qualified as a broker-dealer. Under the Underwriting Agreement,
Investment Services accepts orders for Fund shares at net asset
value. No sales charges are paid by investors or the Funds.
CUSTODIAN
State Street Bank and Trust Company is the custodian for
each Fund's securities and cash, but it does not participate in
the Funds' investment decisions. The Funds have authorized State
Street Bank to deposit certain portfolio securities in central
depository systems as allowed by federal law. In addition, the
Funds are authorized to maintain certain of their securities, in
particular, variable rate demand notes, in uncertificated form,
in the proprietary deposit systems of various dealers in
municipal securities. State Street Bank's main office is 225
Franklin Street, Boston, Massachusetts 02107.
CODE OF ETHICS
The Funds' investment adviser (T. Rowe Price) has a written
Code of Ethics which requires all employees to obtain prior
clearance before engaging in any personal securities
transactions. In addition, all employees must report their
personal securities transactions within ten days of their
execution. Employees will not be permitted to effect
transactions in a security: If there are pending client orders in
the security; the security has been purchased or sold by a client
within seven calendar days; the security is being considered for
purchase for a client; a change has occurred in T. Rowe Price's
rating of the security within five days; or the security is
subject to internal trading restrictions. Any material violation
of the Code of Ethics is reported to the Board of the Fund. The
Board also reviews the administration of the Code of Ethics on an
annual basis.
PORTFOLIO TRANSACTIONS
PAGE 47
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio
securities on behalf of the Fund are made by T. Rowe Price. T.
Rowe Price is also responsible for implementing these decisions,
including the negotiation of commissions and the allocation of
portfolio brokerage and principal business. The Fund's purchases
and sales of portfolio securities are normally done on a
principal basis and do not involve the payment of a commission
although they may involve the designation of selling concessions.
That part of the discussion below relating solely to brokerage
commissions would not normally apply to the Funds. However, it
is included because T. Rowe Price does manage a significant
number of common stock portfolios which do engage in agency
transactions and pay commissions and because some research and
services resulting from the payment of such commissions may
benefit the Funds.
How Brokers and Dealers are Selected
Fixed Income Securities
Fixed income securities are generally purchased from the
issuer or a primary market-maker acting as principal for the
securities on a net basis, with no brokerage commission being
paid by the client, although the price usually includes an
undisclosed compensation. Transactions placed through dealers
serving as primary market-makers reflect the spread between the
bid and asked prices. Securities may also be purchased from
underwriters at prices which include underwriting fees.
T. Rowe Price may effect principal transactions on behalf of
the Funds with a broker or dealer who furnishes brokerage and/or
research services, designate any such broker or dealer to receive
selling concessions, discounts or other allowances, or otherwise
deal with any such broker or dealer in connection with the
acquisition of securities in underwritings. Each Fund may
receive brokerage and research services in connection with such
designations in fixed price underwritings.
How Evaluations are Made of the Overall Reasonableness of
Brokerage Commissions Paid
On a continuing basis, T. Rowe Price seeks to determine what
levels of commission rates are reasonable in the marketplace for
transactions executed on behalf of the Fund. In evaluating the
reasonableness of commission rates, T. Rowe Price considers: (a)
PAGE 48
historical commission rates, both before and since rates have
been fully negotiable; (b) rates which other institutional
investors are paying, based on available public information; (c)
rates quoted by brokers and dealers; (d) the size of a particular
transaction, in terms of the number of shares, dollar amount, and
number of clients involved; (e) the complexity of a particular
transaction in terms of both execution and settlement; (f) the
level and type of business done with a particular firm over a
period of time; and (g) the extent to which the broker or dealer
has capital at risk in the transaction.
Description of Research Services Received from Brokers and
Dealers
T. Rowe Price receives a wide range of research services
from brokers and dealers. These services include information on
the economy, industries, groups of securities, individual
companies, statistical information, accounting and tax law
interpretations, political developments, legal developments
affecting portfolio securities, technical market action, pricing
and appraisal services, credit analysis, risk measurement
analysis, performance analysis and analysis of corporate
responsibility issues. These services provide both domestic and
international perspective. Research services are received
primarily in the form of written reports, computer generated
services, telephone contacts and personal meetings with security
analysts. In addition, such services may be provided in the form
of meetings arranged with corporate and industry spokespersons,
economists, academicians and government representatives. In some
cases, research services are generated by third parties but are
provided to T. Rowe Price by or through broker-dealers.
Research services received from brokers and dealers are
supplemental to T. Rowe Price's own research effort and, when
utilized, are subject to internal analysis before being
incorporated by T. Rowe Price into its investment process. As a
practical matter, it would not be possible for T. Rowe Price to
generate all of the information presently provided by brokers and
dealers. T. Rowe Price pays cash for certain research services
received from external sources. T. Rowe Price also allocates
brokerage for research services which are available for cash.
While receipt of research services from brokerage firms has not
reduced T. Rowe Price's normal research activities, the expenses
of T. Rowe Price could be materially increased if it attempted to
generate such additional information through its own staff. To
the extent that research services of value are provided by
PAGE 49
brokers or dealers, T. Rowe Price may be relieved of expenses
which it might otherwise bear.
T. Rowe Price has a policy of not allocating brokerage
business in return for products or services other than brokerage
or research services. In accordance with the provisions of
Section 28(e) of the Securities Exchange Act of 1934, T. Rowe
Price may from time to time receive services and products which
serve both research and non-research functions. In such event,
T. Rowe Price makes a good faith determination of the anticipated
research and non-research use of the product or service and
allocates brokerage only with respect to the research component.
Commissions to Brokers who Furnish Research Services
Certain brokers and dealers who provide quality brokerage
and execution services also furnish research services to T. Rowe
Price. With regard to the payment of brokerage commissions, T.
Rowe Price has adopted a brokerage allocation policy embodying
the concepts of Section 28(e) of the Securities Exchange Act of
1934, which permits an investment adviser to cause an account to
pay commission rates in excess of those another broker or dealer
would have charged for effecting the same transaction, if the
adviser determines in good faith that the commission paid is
reasonable in relation to the value of the brokerage and research
services provided. The determination may be viewed in terms of
either the particular transaction involved or the overall
responsibilities of the adviser with respect to the accounts over
which it exercises investment discretion. Accordingly, while T.
Rowe Price cannot readily determine the extent to which
commission rates or net prices charged by broker-dealers reflect
the value of their research services, T. Rowe Price would expect
to assess the reasonableness of commissions in light of the total
brokerage and research services provided by each particular
broker. T. Rowe Price may receive research, as defined in
Section 28(e), in connection with selling concessions and
designations in fixed price offerings in which the Funds
participate.
Internal Allocation Procedures
T. Rowe Price has a policy of not precommitting a specific
amount of business to any broker or dealer over any specific time
period. Historically, the majority of brokerage placement has
been determined by the needs of a specific transaction such as
market-making, availability of a buyer or seller of a particular
security, or specialized execution skills. However, T. Rowe
PAGE 50
Price does have an internal brokerage allocation procedure for
that portion of its discretionary client brokerage business where
special needs do not exist, or where the business may be
allocated among several brokers or dealers which are able to meet
the needs of the transaction.
Each year, T. Rowe Price assesses the contribution of the
brokerage and research services provided by brokers or dealers,
and attempts to allocate a portion of its brokerage business in
response to these assessments. Research analysts, counselors,
various investment committees, and the Trading Department each
seek to evaluate the brokerage and research services they receive
from brokers or dealers and make judgments as to the level of
business which would recognize such services. In addition,
brokers or dealers sometimes suggest a level of business they
would like to receive in return for the various brokerage and
research services they provide. Actual brokerage received by any
firm may be less than the suggested allocations but can, and
often does, exceed the suggestions, because the total business is
allocated on the basis of all the considerations described above.
In no case is a broker or dealer excluded from receiving business
from T. Rowe Price because it has not been identified as
providing research services.
Miscellaneous
T. Rowe Price's brokerage allocation policy is consistently
applied to all its fully discretionary accounts, which represent
a substantial majority of all assets under management. Research
services furnished by brokers or dealers through which T. Rowe
Price effects securities transactions may be used in servicing
all accounts (including non-Fund accounts) managed by T. Rowe
Price. Conversely, research services received from brokers and
dealers which execute transactions for the Fund are not
necessarily used by T. Rowe Price exclusively in connection with
the management of the Fund.
From time to time, orders for clients may be placed through
a computerized transaction network.
The Fund does not allocate business to any broker-dealer on
the basis of its sales of the Fund's shares. However, this does
not mean that broker-dealers who purchase Fund shares for their
clients will not receive business from the Fund.
Some of T. Rowe Price's other clients have investment
objectives and programs similar to those of the Fund. T. Rowe
PAGE 51
Price may occasionally make recommendations to other clients
which result in their purchasing or selling securities
simultaneously with the Fund. As a result, the demand for
securities being purchased or the supply of securities being sold
may increase, and this could have an adverse effect on the price
of those securities. It is T. Rowe Price's policy not to favor
one client over another in making recommendations or in placing
orders. T. Rowe Price frequently follows the practice of
grouping orders of various clients for execution which generally
results in lower commission rates being attained. In certain
cases, where the aggregate order is executed in a series of
transactions at various prices on a given day, each participating
client's proportionate share of such order reflects the average
price paid or received with respect to the total order. T. Rowe
Price has established a general investment policy that it will
ordinarily not make additional purchases of a common stock of a
company for its clients (including the T. Rowe Price Funds) if,
as a result of such purchases, 10% or more of the outstanding
common stock of such company would be held by its clients in the
aggregate.
To the extent possible, T. Rowe Price intends to recapture
solicitation fees paid in connection with tender offers through
T. Rowe Price Investment Services, Inc., the Fund's distributor.
At the present time, T. Rowe Price does not recapture commissions
or underwriting discounts or selling group concessions in
connection with taxable securities acquired in underwritten
offerings. T. Rowe Price does, however, attempt to negotiate
elimination of all or a portion of the selling-group concession
or underwriting discount when purchasing tax-exempt municipal
securities on behalf of its clients in underwritten offerings.
Other
The Funds engaged in portfolio transactions involving
broker-dealers in the following amounts for the fiscal years
ended October 31, 1995, and October 31, 1994:
1995 1994
Money Fund $330,593,000 $193,850,000
Intermediate Fund 87,334,000 85,115,000
Income Fund 40,533,000 44,995,000
The following amounts consisted of principal transactions as
to which the Funds have no knowledge of the profits or losses
PAGE 52
realized by the respective broker-dealers for the fiscal years
ended October 31, 1995, and October 31, 1994:
1995 1994
Money Fund ---- ----
Intermediate Fund $714,000 $3,270,000
Income Fund 2,585,000 3,841,000
The following amounts involved trades with brokers acting as
agents or underwriters, in which such brokers received total
commissions, including discounts received in connection with
underwritings for the fiscal years ended October 31, 1995, and
October 31, 1994:
1995 1994
Money Fund ---- ----
Intermediate Fund $5,000 $17,000
Income Fund 19,000 27,000
Of all such portfolio transactions, none were placed with
firms which provided research, statistical, or other services to
T. Rowe Price in connection with the management of the Funds, or
in some cases, to the Funds.
The portfolio turnover rates of the Intermediate and Income
Funds for the fiscal years ended October 31, 1995, and October
31, 1994, were: 157.5% and 161.1%, respectively.
1995 1994
Intermediate Fund 86.1% 157.5%
Income Fund 73.7% 161.1%
PRICING OF SECURITIES
Fixed income securities are generally traded in the over-
the-counter market. With the exception of the Money Market Fund,
investments in securities are stated at fair value using a bid-
side valuation 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 held by the Money Market Fund are
valued at amortized cost.
PAGE 53
There are a number of pricing services available, and the
Directors of the Funds, on the basis of ongoing evaluation of
these services, may use or may discontinue the use of any pricing
service in whole or in part.
Securities or other assets for which the above valuation
procedures are deemed not to reflect fair value will be appraised
at prices deemed best to reflect their fair value. Such
determinations will be made in good faith by or under the
supervision of officers of each Fund as authorized by the Board
of Directors.
Maintenance of Money Fund's Net Asset Value Per Share at $1.00
It is the policy of the Fund to attempt to maintain a net
asset value of $1.00 per share by using the amortized cost method
of valuation permitted by Rule 2a-7 under the Investment Company
Act of 1940. Under this method, securities are valued by
reference to the Fund's acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than
by reference to their market value. Under Rule 2a-7:
(a) The Board of Directors must establish written
procedures reasonably designed, taking into account
current market conditions and the fund's investment
objectives, to stabilize the Fund's net asset value per
share, as computed for the purpose of distribution,
redemption and repurchase, at a single value;
(b) The Fund must (i) maintain a dollar-weighted
average portfolio maturity appropriate to its objective
of maintaining a stable price per share, (ii) not
purchase any instrument with a remaining maturity
greater than 397 days and (iii) maintain a
dollar-weighted average portfolio maturity of 90 days
or less;
(c) The Fund must limit its purchase of portfolio
instruments, including repurchase agreements, to those
U.S. dollar-denominated instruments which the Fund's
Board of Directors determines present minimal credit
risks, and which are eligible securities as defined by
Rule 2a-7 (eligible Securities are generally securities
which have been rated or whose issuer has been rated or
whose issuer has comparable securities rated in one of
the two highest rating categories by nationally
PAGE 54
recognized statistical rating organizations or, in the
case of any instrument that is not so rated, is of
comparable quality as determined by procedures adopted
by the Fund's Board of Directors); and
(d) The Board of Directors must determine that (i) it
is in the best interest of the Fund and its
shareholders to maintain a stable net asset value per
share under the amortized cost method; and (ii) the
Fund will continue to use the amortized cost method
only so long as the Board of Directors believes that it
fairly reflects the market based net asset value per
share.
Although the Fund believes that it will be able to maintain
its net asset value at $1.00 per share under most conditions,
there can be no absolute assurance that it will be able to do so
on a continuous basis. If the Fund's net asset value per share
declined, or was expected to decline, below $1.00 (rounded to the
nearest one cent), the Board of Directors of the Fund might
temporarily reduce or suspend dividend payments in an effort to
maintain the net asset value at $1.00 per share. As a result of
such reduction or suspension of dividends, an investor would
receive less income during a given period than if such a
reduction or suspension had not taken place. Such action could
result in an investor receiving no dividend for the period during
which he holds his shares and in his receiving, upon redemption,
a price per share lower than that which he paid. On the other
hand, if the Fund's net asset value per share were to increase,
or were anticipated to increase above $1.00 (rounded to the
nearest one cent), the Board of Directors of the Fund might
supplement dividends in an effort to maintain the net asset value
at $1.00 per share.
NET ASSET VALUE PER SHARE
The purchase and redemption price of the Funds' shares is
equal to the Funds' net asset value per share or share price.
Each Fund determines its net asset value per share by subtracting
the Funds' liabilities (including accrued expenses and dividends
payable) from its total assets (the market value of the
securities the Fund holds plus cash and other assets, including
income accrued but not yet received) and dividing the result by
the total number of shares outstanding. The net asset value per
share of each Fund is calculated as of the close of trading on
the New York Stock Exchange ("NYSE") every day the NYSE is open
PAGE 55
for trading. The net asset value of the Money Fund is also
calculated as of 12:00 noon (Eastern time) every day the NYSE is
open for trading. The NYSE is closed on the following days: New
Year's Day, Washington's Birthday, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Determination of net asset value (and the offering, sale
redemption and repurchase of shares) for a Fund may be suspended
at times (a) during which the NYSE is closed, other than
customary weekend and holiday closings, (b) during which trading
on the NYSE is restricted, (c) during which an emergency exists
as a result of which disposal by a Fund of securities owned by it
is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or
(d) during which a governmental body having jurisdiction over the
Fund may by order permit such a suspension for the protection of
the Fund's shareholders; provided that applicable rules and
regulations of the Securities and Exchange Commission (or any
succeeding governmental authority) shall govern as to whether the
conditions prescribed in (b), (c), or (d) exist.
DIVIDENDS
Unless you elect otherwise, the Fund's annual capital gain
distributions, if any, will be reinvested on the reinvestment
date using the NAV per share of that date. The reinvestment date
normally precedes the payment date by about 10 days although the
exact timing is subject to change.
TAX STATUS
Each Fund intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986,
as amended ("Code").
Dividends and distributions paid by any of the Funds are not
eligible for the dividends-received deduction for corporate
shareholders. For tax purposes, it does not make any difference
whether dividends and capital gain distributions are paid in cash
or in additional shares. Each Fund must declare dividends equal
to at least 90% of net tax-exempt income (as of its year-end) to
permit pass-through of tax-exempt income to shareholders, and 98%
of capital gains (as of October 31) in order to avoid a federal
excise tax and 100% of capital gains (as of its tax year-end) to
avoid federal income tax.
PAGE 56
At the time of your purchase, a Fund's net asset value
may reflect undistributed capital gains or net unrealized
appreciation of securities held by the Fund. A subsequent
distribution to you of such amounts, although constituting a
return of your investment, would be taxable as a capital gain
distribution. For federal income tax purposes, a Fund is
permitted to carry forward its net realized capital losses, if
any, for eight years and realize net capital gains up to the
amount of such losses without being required to pay taxes on, or
distribute such gains. On October 31, 1995, the books of each
Fund indicated that the Fund's aggregate net assets included:
Realized Capital Unrealized
Fund Gains/(Losses) Appreciation/(Depreciation)
Money $ (1,000) $ 12,000
Intermediate (329,000) 826,000
Income (308,000) 490,000
If, in any taxable year, the Funds should not qualify as
regulated investment companies under the Code: (i) each Fund
would be taxed at normal corporate rates on the entire amount of
its taxable income, if any, without deduction for dividends or
other distributions to shareholders; and (ii) each Fund's
distributions to the extent made out of the Fund's current or
accumulated earnings and profits would be taxable to shareholders
as ordinary dividends (regardless of whether they would otherwise
have been considered capital gain or tax-exempt dividends).
The Funds anticipate acquiring bonds after initial issuance
at a price less than the principal amount of such bonds ("market
discount bonds"). Gain on the disposition of such bonds is
treated as taxable ordinary income to the extent of accrued
market discount. Such gains cannot be offset by losses on the
sale of other securities but must be distributed to shareholders
annually and taxed as ordinary income.
Each year, the Funds will mail you information on the tax
status of dividends and distributions. The Funds anticipate that
substantially all of the dividends to be paid by each Fund will
be exempt from federal income taxes. If any portion of a Fund's
dividends is not exempt from federal income taxes, you will
receive a Form 1099 stating the taxable portion. The Funds will
also advise you of the percentage of your dividends, if any,
which should be included in the computation of alternative
minimum tax. Social security recipients who receive interest
PAGE 57
from tax-exempt securities may have to pay taxes on a portion of
their social security benefit.
Because the interest on municipal securities is tax exempt,
any interest on money you borrow that is directly or indirectly
used to purchase Fund shares is not deductible. (See Section
265(2) of the Internal Revenue Code.) Further, entities or
persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by industrial
development bonds should consult their tax advisers before
purchasing shares of a Fund. The income from such bonds may not
be tax exempt for such substantial users.
YIELD INFORMATION
Money Fund
The Fund's current and historical yield for a period is
calculated by dividing the net change in value of an account
(including all dividends accrued and dividends reinvested in
additional shares) by the account value at the beginning of the
period to obtain the base period return. This base period return
is divided by the number of days in the period then multiplied by
365 to arrive at the annualized yield for that period. The
Fund's annualized compound yield for such period is compounded by
dividing the base period return by the number of days in the
period, and compounding that figure over 365 days.
Intermediate and Income Funds
From time to time, a Fund may advertise a yield figure
calculated in the following manner:
An income factor is calculated for each security in the
portfolio based upon the security's market value at the beginning
of the period and yield as determined in conformity with
regulations of the Securities and Exchange Commission. The
income factors are then totalled for all securities in the
portfolio. Next, expenses of the Fund for the period net of
expected reimbursements are deducted from the income to arrive at
net income, which is then converted to a per-share amount by
dividing net income by the average number of shares outstanding
during the period. The net income per share is divided by the
net asset value on the last day of the period to produce a
monthly yield which is then annualized. A taxable equivalent
yield is calculated by dividing this yield by one minus the
PAGE 58
effective federal income tax rate. Quoted yield factors are for
comparison purposes only, and are not intended to indicate future
performance or forecast the dividend per share of the Fund.
The yield of each Fund calculated under the above-
described method for the month ended October 31, 1995 was:
Fund
Money 3.51%
Intermediate 4.48%
Income 5.63%
The tax equivalent yields for these funds for the same
period were 5.09% (Money Fund), 6.49% (Intermediate Fund), and
8.16% (Income Fund). This assumes a federal tax bracket of
31.0%. Assuming a federal tax bracket of 28.0%, the tax-
equivalent yields for the period would be 4.88% (Money Fund),
6.22% (Intermediate Fund), and 7.82% (Income Fund).
TAX-EXEMPT VS. TAXABLE YIELDS
From time to time, a Fund may also illustrate the effect of
tax equivalent yields using information such as that set forth on
the next page:
_________________________________________________________________
Your Taxable Income (1995)++ A Tax-Exempt Yield Of:
3% 4% 5% 6% 7%
Federal is Equivalent to a
Joint Return Single Return Tax Rates Taxable Yield of:
_________________________________________________________________
$39,000-$94,250 $23,350-$56,550 28.0 4.2 5.6 6.9 8.3 9.7
94,250-143,600 56,550-117,950 31.0 4.3 5.8 7.2 8.7 10.1
143,600-256,500 117,950-256,500 36.0 4.7 6.3 7.8 9.4 10.9
256,500 and above 256,500 and above 39.6 5.0 6.6 8.3 9.9 11.6
_________________________________________________________________
Your Taxable Income (1995)++ A Tax-Exempt Yield Of:
8% 9% 10% 11%
Federal is Equivalent to a
Joint Return Single Return Tax Rates Taxable Yield of:
_________________________________________________________________
$39,000-$94,250 $23,350-$56,550 28.0 11.1 12.5 13.9 15.3
94,250-143,600 56,550-117,950 31.0 11.6 13.0 14.5 15.9
143,600-256,500 117,950-256,500 36.0 12.5 14.1 15.6 17.2
256,500 and above 256,500 and above 39.6 13.2 14.9 16.6 18.2
PAGE 59
_________________________________________________________________
+ Net amount subject to federal income tax after deductions and
exemptions.
++ Federal rates may vary depending on family size and nature and
amount of itemized deductions.
INVESTMENT PERFORMANCE
Total Return Performance
Each Fund's calculation of total return performance includes
the reinvestment of all capital gain distributions and income
dividends for the period or periods indicated, without regard to
tax consequences to a shareholder in the Fund. Total return is
calculated as the percentage change between the beginning value
of a static account in the Fund and the ending value of that
account measured by the then current net asset value, including
all shares acquired through reinvestment of income and capital
gains dividends. The results shown are historical and should not
be considered indicative of the future performance of the Fund.
Each average annual compound rate of return is derived from the
cumulative performance of the Fund over the time period
specified. The annual compound rate of return for the Fund over
any other period of time will vary from the average.
Cumulative Performance Percentage Change
1 Yr. Since
Ended Inception
10/31/95 10/31/95
Money Fund 3.53% 5.97%
Intermediate Fund 11.39% 11.60%
Income Fund 14.68% 9.66%
Average Annual Compound Rates of Return
1 Yr. Since
Ended Inception
10/31/95 10/31/95
Money Fund 3.53% 2.93%
Intermediate Fund 11.39% 5.62%
PAGE 60
Income Fund 14.68% 4.71%
All Funds
Outside Sources of Information
From time to time, in reports and promotional literature,
the Funds' performance will be compared to (1) indices of broad
groups of managed and unmanaged securities considered to be
representative of or similar to Fund portfolio holdings (2) other
mutual funds, or (3) other measures of performance set forth in
publications such as:
Bond Buyer 20 - an estimation of the yield which would be
offered on 20-year general obligation bonds with a composite
rating of approximately "A." Published weekly by The Bond
Buyer, a trade paper of the municipal securities industry;
Shearson Lehman/American Express Municipal Bond Index - a
composite measure of the total return performance of the
municipal bond market. Based upon approximately 1500 bonds;
Lipper General Purpose Municipal Bond Avg. - an average of
municipal mutual funds which invest 60% or more of their
assets in the top four tax-exempt credit ratings;
Lipper Analytical Services, Inc. - a widely used independent
research firm which ranks mutual funds by overall
performance, investment objectives, and assets;
Lipper Intermediate Municipal Avg. - an average of municipal
mutual funds which restrict their holdings to bonds with
maturities between 5 and 10 years;
Lipper High-Yield Municipal Bond Avg. - an average of
municipal mutual funds which may utilize lower rated bonds
for 50% of their portfolio;
Donoghue's Tax-Exempt Money Fund Avg. - an average of
municipal money market funds as reported in Donoghue's Money
Fund Report, which tracks the performance of all money
market mutual funds;
PAGE 61
Prime General Obligations - bonds with maturities from 1-30
years which are secured by the full faith and credit of
issuers with taxing power;
MIG 1 - Moody's Investment Grade 1 - a short-term note with
a top quality rating from Moody's Investors Service, Inc.;
and
Morningstar, Inc. - a widely used independent research firm
which rates mutual funds by overall performance, investment
objectives, and assets.
Indices prepared by the research departments of such
financial organizations as Merrill Lynch, Pierce, Fenner & Smith,
Inc., will be used, as well as information provided by the
Federal Reserve Board.
Information reported in the Bank Rate Monitor, an
independent publication which tracks the performance of certain
bank products, such as money market deposit accounts and
certificates of deposit, will also be used. Bank certificates of
deposit differ from mutual funds in several ways: the interest
rate established by the sponsoring bank is fixed for the term of
a CD; there are penalties for early withdrawal from CDs; and the
principal on a CD is insured.
Performance rankings and ratings reported periodically in
national financial publications such as MONEY, FORBES, BUSINESS
WEEK, BARRON'S, etc. may also be used.
Other Features and Benefits
Each Fund is a member of the T. Rowe Price Family of Funds
and may help investors achieve various long-term investment
goals, such as saving for a down payment on a home or paying
college costs. To explain how a Fund could be used to assist
investors in planning for these goals and to illustrate basic
principles of investing, various worksheets and guides prepared
by T. Rowe Price and/or T. Rowe Price Investment Services, Inc.
may be made available. These currently include: the Asset Mix
Worksheet which is designed to show shareholders how to reduce
their investment risk by developing a diversified investment
plan; and the College Planning Guide which discusses various
aspects of financial planning to meet college expenses and
assists parents in projecting the costs of a college education
for their children; Tax Considerations for Investors discusses
the tax advantages of annuities and municipal bonds and how to
PAGE 62
assess whether they are suitable for your portfolio, reviews pros
and cons of placing assets in a gift to minors account, and
summarizes the benefits and types of tax-deferred retirement
plans currently available; Personal Strategy Planner simplifies
investment decision making by helping investors define personal
financial goals, establish length of time the investor intends to
invest, determine risk "comfort zone" and select a diversified
investment mix; and the How to Choose a Bond Fund guide which
discusses how to choose an appropriate bond fund for your
portfolio. From time to time, other worksheets and guides may be
made available as well. Of course, an investment in a Fund
cannot guarantee that such goals will be met.
To assist investors in understanding the different
returns and risk characteristics of various investments, the
aforementioned guides will include presentation of historical
returns of various investments using published indices. An
example of this is shown on the next page.
Historical Returns for Different Investments
Annualized returns for periods ended 12/31/95
50 years 20 years 10 years 5 years
Small-Company Stocks 13.79% 19.57% 11.90% 24.51%
Large-Company Stocks 11.94 14.59 14.84 16.57
Foreign Stocks N/A 15.14 13.95 9.71
Long-Term Corporate 5.75 10.54 11.25 12.07
Bonds
Intermediate-Term 5.87 9.69 9.08 8.81
U.S. Gov't. Bonds
Treasury Bills 4.80 7.28 5.55 4.29
U.S. Inflation 4.36 5.23 3.48 2.83
Sources: Ibbotson Associates, Morgan Stanley. Foreign stocks
reflect performance of The Morgan Stanley Capital International
EAFE Index, which includes some 1,000 companies representing the
stock markets of Europe, Australia, New Zealand, and the Far
East. This chart is for illustrative purposes only and should
PAGE 63
not be considered as performance for, or the annualized return
of, any T. Rowe Price Fund. Past performance does not guarantee
future results.
Also included will be various portfolios demonstrating how
these historical indices would have performed in various
combinations over a specified time period in terms of return. An
example of this is shown below.
Performance of Portfolios*
Asset Mix Average Annualized Value
Returns 20 Years of
Ended 12/31/95 $10,000
Investment
After Period
________________ __________________ ____________
Nominal Real Best Worst
Portfolio Growth Income Safety Return Return** Year Year
I. Low
Risk 40% 40% 20% 11.8% 6.5% 24.9% 0.1%$ 92,675
II. Moderate
Risk 60% 30% 10% 13.1% 7.9% 29.1% -1.8%$116,826
III. High
Risk 80% 20% 0% 14.3% 9.1% 33.4% -5.2%$145,611
Source: T. Rowe Price Associates; data supplied by Lehman
Brothers, Wilshire Associates, and Ibbotson Associates.
* Based on actual performance for the 20 years ended 1995 of
stocks (85% Wilshire 5000 and 15% Europe, Australia, Far East
[EAFE] Index), bonds (Lehman Brothers Aggregate Bond Index
from 1976-95) and 30-day Treasury bills from January 1976
through December 1995. Past performance does not guarantee
future results. Figures include changes in principal value
and reinvested dividends and assume the same asset mix is
maintained each year. This exhibit is for illustrative
purposes only and is not representative of the performance of
any T. Rowe Price fund.
** Based on inflation rate of 5.2% for the 20-year period ended
12/31/95.
Insights
PAGE 64
From time to time, Insights, a T. Rowe Price publication of
reports on specific investment topics and strategies, may be
included in the Fund's fulfillment kit. Such reports may include
information concerning: calculating taxable gains and losses on
mutual fund transactions, coping with stock market volatility,
benefiting from dollar cost averaging, understanding
international markets, investing in high-yield "junk" bonds,
growth stock investing, conservative stock investing, value
investing, investing in small companies, tax-free investing,
fixed income investing, investing in mortgage-backed securities,
as well as other topics and strategies.
Other Publications
From time to time, in newsletters and other publications
issued by T. Rowe Price Investment Services, Inc., reference may
be made to economic, financial and political developments in the
U.S. and abroad and their effect on securities prices. Such
discussions may take the form of commentary on these developments
by T. Rowe Price mutual fund portfolio managers and their views
and analysis on how such developments could affect investments in
mutual funds.
Redemptions in Kind
In the unlikely event a shareholder were to receive an in kind
redemption of portfolio securities of the Funds, brokerage fees
could be incurred by the shareholder in a subsequent sale of such
securities.
Issuance of Fund Shares for Securities
Transactions involving issuance of Fund shares for securities
or assets other than cash will be limited to (1) bona fide
reorganizations; (2) statutory mergers; or (3) other acquisitions
of portfolio securities that: (a) meet the investment objectives
and policies of the Funds; (b) are acquired for investment and
not for resale except in accordance with applicable law; (c) have
a value that is readily ascertainable via listing on or trading
in a recognized United States or international exchange or
market; and (d) are not illiquid.
CAPITAL STOCK
PAGE 65
The Charter of the T. Rowe Price Summit Municipal Funds, Inc.
(the "Corporation") authorizes its Board of Directors to classify
and reclassify any and all shares which are then unissued,
including unissued shares of capital stock into any number of
classes or series, each class or series consisting of such number
of shares and having such designations, such powers, preferences,
rights, qualifications, limitations, and restrictions, as shall
be determined by the Board subject to the Investment Company Act
and other applicable law. The shares of any such additional
classes or series might therefore differ from the shares of the
present class and series of capital stock and from each other as
to preferences, conversions or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or
terms or conditions of redemption, subject to applicable law, and
might thus be superior or inferior to the capital stock or to
other classes or series in various characteristics. The
Corporation's Board of Directors may increase or decrease the
aggregate number of shares of stock or the number of shares of
stock of any class or series that the Funds have authorized to
issue without shareholder approval.
Except to the extent that the Corporation's Board of Directors
might provide by resolution that holders of shares of a
particular class are entitled to vote as a class on specified
matters presented for a vote of the holders of all shares
entitled to vote on such matters, there would be no right of
class vote unless and to the extent that such a right might be
construed to exist under Maryland law. The Charter contains no
provision entitling the holders of the present class of capital
stock to a vote as a class on any matter. Accordingly, the
preferences, rights, and other characteristics attaching to any
class of shares, including the present class of capital stock,
might be altered or eliminated, or the class might be combined
with another class or classes, by action approved by the vote of
the holders of a majority of all the shares of all classes
entitled to be voted on the proposal, without any additional
right to vote as a class by the holders of the capital stock or
of another affected class or classes.
Shareholders are entitled to one vote for each full share held
(and fractional votes for fractional shares held) and will vote
in the election of or removal of directors (to the extent
hereinafter provided) and on other matters submitted to the vote
of shareholders. There will normally be no meetings of
shareholders for the purpose of electing directors unless and
until such time as less than a majority of the directors holding
PAGE 66
office have been elected by shareholders, at which time the
directors then in office will call a shareholders' meeting for
the election of directors. Except as set forth above, the
directors shall continue to hold office and may appoint successor
directors. Voting rights are not cumulative, so that the holders
of more than 50% of the shares voting in the election of
directors can, if they choose to do so, elect all the directors
of the Fund, in which event the holders of the remaining shares
will be unable to elect any person as a director. As set forth
in the By-Laws of the Corporation, a special meeting of
shareholders of the Corporation shall be called by the Secretary
of the Corporation on the written request of shareholders
entitled to cast at least 10% of all the votes of the Corporation
entitled to be cast at such meeting. Shareholders requesting
such a meeting must pay to the Corporation the reasonably
estimated costs of preparing and mailing the notice of the
meeting. The Corporation, however, will otherwise assist the
shareholders seeking to hold the special meeting in communicating
to the other shareholders of the Corporation to the extent
required by Section 16(c) of the Investment Company Act of 1940.
FEDERAL AND STATE REGISTRATION OF SHARES
Each Fund's shares are registered for sale under the
Securities Act of 1933, and the Fund or its shares are registered
under the laws of all states which require registration, as well
as the District of Columbia and Puerto Rico.
LEGAL COUNSEL
Shereff, Friedman, Hoffman, & Goodman LLP, whose address is
919 Third Avenue, New York, New York 10022, is legal counsel to
the Funds.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., 217 East Redwood Street,
Baltimore, Maryland 21202, are independent accountants to the
Funds. The financial statements of the Funds for the fiscal year
ended October 31, 1995, and the report of independent accountants
are included in the Fund's Annual Report on page __. A copy of
the Annual Report accompanies this Statement of Additional
Information. The following financial statements and the report
of independent accountants appearing in each Annual Report for
PAGE 67
the year ended October 31, 1995, are incorporated into this
Statement of Additional Information by reference:
MONEY
MARKET INTERMEDIATE INCOME
FUND FUND FUND
________ ___________ ___________
Report of Independent
Accountants 23 23 23
Statement of Net Assets,
October 31, 1995 7-10 11-14 15-18
Statement of Operations,
October 31, 1995 18 18 18
Statement of Changes in Net
Assets, year ended
October 31, 1995, and
October 29, 1993
(Commencement of Operations)
to October 31, 1994 19 19 19
Notes to Financial Statements,
October 31, 1995 20-21 20-21 20-21
Financial Highlights 22 22 22
</TABLE>
