PAGE 1
Prospectus for the T. Rowe Price Personal Strategy
Funds, Inc.,
dated July 29, 1994, revised to February 6, 1995 should
be
inserted here.
PROSPECTUS
To Open an Account
Investor Services
1-800-638-5660
1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields & Prices
Tele*Access (registered trademark)
1-800-638-2587
1-410-625-7676
24 hours, 7 days
Investor Centers
101 East Lombard St.
Baltimore, MD
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD
Farragut Square
900 17th St., N.W.
Washington, D.C.
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA
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.
T. ROWE PRICE
PERSONAL STRATEGY FUNDS
T. ROWE PRICE
PERSONAL STRATEGY FUNDS, INC.
JULY 29, 1994
REVISED TO FEBRUARY 6, 1995
A FAMILY OF FUNDS DIVERSIFIED ACROSS STOCKS, BONDS, AND MONEY MARKET
SECURITIES TO OFFER THREE LEVELS OF POTENTIAL RISK AND REWARD.
Facts at a Glance
Investment Goals Each of the three funds seeks the highest total return over
time consistent with its particular investment strategy and level of potential
risk. There is no assurance the funds will achieve their objectives.
Strategies and Risk/Reward Potential
Each fund will invest in a diversified portfolio of stocks, bonds, and money
market securities. The investment mix will be shifted gradually within
specified ranges for each fund according to the manager's outlook for the
economy and the financial markets.
Generally, the higher the fund's stock component, the greater the potential
return and risk of price decline.
Income Fund. To moderate price fluctuations, approximately 50% to 70% of
assets invested in bonds and money market securities with the balance in
stocks. Risk/Reward Potential: Lower risk and return than the other two funds.
Balanced Fund. For both appreciation and income, approximately 50% to 70% of
assets invested in stocks with the remainder in bonds and money market
securities. Risk/Reward Potential: Higher risk and return than the Income Fund
but less than the Growth Fund.
Growth Fund. For greater appreciation, approximately 70% to 90% of assets
invested in stocks, with the balance in bonds and money market securities.
Risk/Reward Potential: Highest expected risk and return of the three funds.
Investor Profile Individuals who seek to match their investment goals, time
horizon and risk tolerance with a single investment that diversifies across
several asset categories. Appropriate for both regular and tax-deferred
accounts, such as IRAs.
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 were
managing over $53 billion for approximately three million individual and
institutional investor accounts as of March 31, 1994.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EX-CHANGE 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
PERSONAL STRATEGY FUNDS, INC.
JULY 29, 1994
REVISED TO
FEBRUARY 6, 1995
PROSPECTUS
CONTENTS
_______________________________________________________________
1 About the Personal Strategy Funds
_______________________________________________________________
Transaction and Fund Expenses 2
_______________________________________________________________
Financial Highlights 3
_______________________________________________________________
Fund and Market Characteristics 4
_______________________________________________________________
2 About Your Account
_______________________________________________________________
Pricing Shares;
Receiving Sale Proceeds 9
_______________________________________________________________
Distributions and Taxes 10
Transaction Procedures and
Special Requirements 12
_______________________________________________________________
3 More About the Funds
_______________________________________________________________
Organization and Management 14
_______________________________________________________________
Understanding Fund Performance 16
_______________________________________________________________
Investment Policies and Practices 16
_______________________________________________________________
4 Investing With T. Rowe Price
_______________________________________________________________
Meeting Requirements
for New Accounts 24
_______________________________________________________________
Opening a New Account 24
_______________________________________________________________
Purchasing Additional Shares 25
_______________________________________________________________
Exchanging and Redeeming 25
_______________________________________________________________
Shareholder Services 26
_______________________________________________________________
THIS PROSPECTUS CONTAINS INFORMATION YOU SHOULD KNOW BEFORE INVESTING. PLEASE
KEEP IT FOR FUTURE REFERENCE. A STATEMENT OF ADDITIONAL INFORMATION ABOUT THE
FUNDS, DATED OCTOBER 1, 1994, HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION AND IS INCORPORATED BY REFERENCE IN THIS PROSPECTUS. TO OBTAIN A
FREE COPY, CALL 1-800-638-5660.
1 About The Personal Strategy Funds
1 ABOUT THE PERSONAL STRATEGY FUNDS
Transaction and Fund Expenses
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder. The first part of the table,
"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.
__________________________________________________________________________
LIKE ALL T. ROWE PRICE FUNDS, THE PERSONAL STRATEGY FUNDS ARE 100% NO LOAD.
Shareholder Transaction Expenses
Income Balanced Growth
__________________________________________________________________________
Sales charge "load" on purchases None None None
__________________________________________________________________________
Sales charge "load" on reinvested dividends None None None
__________________________________________________________________________
Redemption fees None None None
__________________________________________________________________________
Exchange fees None None None
__________________________________________________________________________
Percentage of Fiscal 1995 Average Net Assets Annual Fund Expenses
Income Balanced Growth
__________________________________________________________________________
Management fee (after reduction) 0.16%* 0.40%* 0.31%*
__________________________________________________________________________
Total other (Shareholder servicing,
custodial, auditing, etc.) 0.79% 0.65% 0.79%
__________________________________________________________________________
Marketing fees (12b-1) None None None
__________________________________________________________________________
Total fund expenses (after reduction) 0.95%* 1.05%* 1.10%*
__________________________________________________________________________
Note: The funds charge a $5.00 fee for wire redemptions under $5,000, subject
to change without notice.
*To limit each fund's expenses during its initial period of operations, T.
Rowe Price has agreed to waive its fees and bear any expenses through May 31,
1996, to the extent such fees or expenses would cause the Income, Balanced or
Growth Funds' ratio of expenses to average net assets to exceed 0.95%, 1.05%
and 1.10%, respectively. Fees waived or expenses paid or assumed under this
agreement are subject to reimbursement to T. Rowe Price by each fund whenever
the fund's expense ratio is below the previously stated ratio; however, no
reimbursement will be made after May 31, 1998, or if it would result in the
expense ratio exceeding the ratio as previously stated. Without this expense
limitation, it is estimated each fund's management fee and total expense ratio
for the first period of operation would be 0.49%, 0.59% and 0.64% and 1.28%,
1.24% and 1.43% for the Income, Balanced and Growth Funds, respectively.
Organizational expenses will be charged to the funds over a period not to
exceed 60 months.
__________________________________________________________________________
Table 1
The second half of the table, "Annual Fund Expenses," provides an estimate of
how much it will cost to operate each fund for a year, based on projected 1995
fiscal year expenses (and any expense limitations described above). These are
costs you pay indirectly, because they are deducted from the 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.
The main types of expenses, which all mutual funds may charge against fund
assets, are:
o A management fee: the percent of fund assets paid to the fund's
investment manager. Each fund's fee is comprised of a group fee,
discussed later, and an individual fund fee, as follows: Income 0.15%,
Balanced 0.25%, and Growth 0.30%.
o "Other" administrative expenses: primarily the servicing of shareholder
accounts, such as providing statements, reports, disbursing dividends,
as well as custodial services. For the period ending May 31, 1995, the
funds are expected to pay the fees shown in Table 2 to T. Rowe Price
Services, Inc. for transfer and dividend disbursing functions and
shareholder services; T. Rowe Price Retirement Plan Services, Inc. for
recordkeeping services for certain retirement plans; and T. Rowe Price
for fund accounting services.
__________________________________________________________________________
Service Fees Paid
Transfer Subaccounting Accounting
Agent Services
__________________________________________________________________________
Income $100,000 $25,000 $55,000
__________________________________________________________________________
Balanced $300,000 $50,000 $55,000
__________________________________________________________________________
Growth $250,000 $37,500 $55,000
__________________________________________________________________________
Table 2
o Marketing or distribution fees: an annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders.
T. Rowe Price funds do not levy 12b-1 fees.
For further details on fund expenses, please see "The Funds'
Organization and Management."
o Hypothetical example: Assume you invest $1,000, the fund returns 5%
annually, expense ratios remain as previously listed, 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.
__________________________________________________________________________
Fund 1 Year 3 Years
__________________________________________________________________________
Income $10 $30
__________________________________________________________________________
Balanced $11 $33
__________________________________________________________________________
Growth $11 $35
__________________________________________________________________________
Table 3
Financial Highlights
The following table provides information about each fund's financial history.
It is based on a single share outstanding for the period July 29, 1994
(commencement of operations) to November 30, 1994. The table is part of the
fund's financial statements which are included in the fund's semi-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 semi-annual report are unaudited for the period
shown.
<TABLE>
<CAPTION>
_________________________________________________________________________________________________________
Investment Activities Distributions
Net Net Realized Total
Period Asset Value Net and Unrealized from Net Net
Ended BeginningInvestment Gain (Loss) InvestmentInvestmentRealized Total
November 30 of Period Income of InvestmentsActivities Income Gain Distributions
_________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Income Fund
1994 $10.00 $0.17b $(0.23) $(0.06) $(0.08) -- --
Balanced Fund
1994 10.00 0.14b (0.17) (0.03) (0.07) -- --
Growth Fund
1994 10.00 0.11b (0.10) 0.01 -- -- --
_________________________________________________________________________________________________________
<CAPTION>
_________________________________________________________________________________________________________
Ratio Ratio of
Net Asset Total of Expenses Net Investment
Value, End Return (Includes Net to Average Income to Average Portfolio
of Period Reinvested Dividends)Assets Net Assets Net Assets Turnover Rate
_________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
$9.86 (0.61)% $5,167,485 0.95%ab 4.96%a 36.3%a
9.90 (0.31)% 7,708,382 1.05%ab 3.99%a 43.7%a
10.01 0.10% 5,516,580 1.10%ab 3.14%a 20.5%a
_________________________________________________________________________________________________________
<FN>
a Annualized.
b Excludes expenses in excess of a 0.95%, 1.05%, and 1.10% voluntary expense limitation in effect
through May 31, 1996.
_________________________________________________________________________________________________________
</FN>
</TABLE>
Table 4
Fund and Market Characteristics
__________________________________________________________________________
GENERALLY, THE GREATER THE PORTION OF TOTAL RETURN DERIVED FROM STOCKS, THE
HIGHER THE FUND'S POTENTIAL RETURN OVER TIME AND THE GREATER THE RISK OF PRICE
DECLINES.
This section takes a closer look at each fund's investment program as well as
some fundamentals of stock, bond, and money market investing.
What are the objectives of each portfolio?
o Income Fund: The objective is to seek the highest total return over time
consistent with a primary emphasis on income and a secondary emphasis on
capital appreciation. The fund pursues this objective by investing in a
diversified portfolio typically consisting of approximately 40% stocks,
40% bonds, and 20% money market securities. Under normal conditions,
allocations can vary by 10% above or below these ranges based on the fund
manager's outlook for the economy and the financial markets.
o Balanced Fund: The objective is to seek the highest total return over time
consistent with an emphasis on both capital appreciation and income. The
fund pursues this objective by investing in a diversified portfolio
typically consisting of approximately 60% stocks, 30% bonds, and 10% money
market securities. Under normal conditions, allocations can vary by 10%
above or below these ranges based on the fund manager's outlook for the
economy and the financial markets.
o Growth Fund: The objective is to seek the highest total return over time
consistent with a primary emphasis on capital appreciation; income is
expected to play a secondary role. The fund pursues this objective by
investing in a diversified portfolio typically consisting of approximately
80% stocks and 20% bonds and money market securities. Under normal
conditions, allocations can vary by 10% above or below these ranges, based
on the fund manager's outlook for the economy and the financial markets.
__________________________________________________________________________
UNDER UNUSUAL MARKET CONDITIONS, FOR TEMPORARY DEFENSIVE PURPOSES, EACH OF THE
FUNDS MAY INVEST IN MONEY MARKET SECURITIES WITHOUT LIMITATION.
Chart 1 - Personal Strategy Trust Fund Prospectus
__________________________________________________________________________
THE FUND MANAGER REGULARLY REVIEWS THE ASSET ALLOCATION AND MAY MAKE GRADUAL
CHANGES, WITHIN THE DEFINED RANGES, BASED ON THE OUTLOOK FOR THE ECONOMY,
INTEREST RATES, AND THE FINANCIAL MARKETS. THE FUNDS WILL NOT ATTEMPT TO TIME
SHORT-TERM MARKET MOVES.
What are the advantages of having three Personal Strategy funds instead of
just one?
To accommodate a wider range of investor preferences and time horizons than
would be possible with a single fund, these funds offer three different
combinations of the appreciation potential of common stocks, the greater
income of bonds and the stability of money market securities. These allocation
mixes represent three distinct levels of potential returns and investment
risk.
Generally, the potential for higher investment returns over time is
accompanied by higher investment risk-the risk of declines in the value of
your principal. Investors respond differently to this risk/reward trade-off;
some are comfortable with higher risk levels, while others are not. An
investor's time horizon should play a major role in the choice of investments.
A fundamental investment principle is that those with, for example, a 15-year
investment horizon can pursue a more aggressive investment program than those
with a 5-year horizon. Also, investors who seek a more aggressive approach at
a particular stage of their lives may prefer a more balanced or conservative
approach at another stage as their circumstances, investment horizon, or
investment objectives change.
What are the advantages of diversifying across stocks, bonds, and money market
securities?
Diversification is the investment equivalent of not putting all your eggs in
one basket. While there is no guarantee, a fund's overall volatility could be
reduced by spreading investments across several types of assets. Since prices
of stocks and bonds may respond differently to changes in economic conditions
and interest rate levels, a rise in bond prices, for example, could help
offset a fall in stock prices. Money market securities have a stabilizing
influence, since their price fluctuations are very small. In addition, the
steady income provided by bonds and money market securities contributes
positively to a portfolio's total return, cushioning the impact of any price
declines or enhancing price increases.
Diversification among asset classes is intended to reduce the risk associated
with investing in a single asset category; however, there is no guarantee the
strategy will always result in lower overall volatility for any of the funds.
__________________________________________________________________________
FOR A MORE DETAILED DISCUSSION OF THE FUNDS' INVESTMENTS AND THEIR RISK
FACTORS, PLEASE SEE "INVEST-MENT POLICIES AND PRACTICES."
What are the general characteristics and risk factors of these major asset
classes?
o Stocks represent ownership in a corporation. Common stock prices fluctuate
with changes in a company's current earnings and future prospects and with
overall stock market conditions. Stocks of many well-established
corporations offer the potential for appreciation and rising dividends.
While smaller companies usually reinvest earnings in their own growth and,
therefore, pay minimal or no dividends, they offer the possibility of even
greater appreciation if their businesses prosper and grow.
Historically, stocks have provided higher returns over time than bonds or
money market securities and, therefore, offer a way to invest for
long-term growth of capital. In addition, stock investments have provided
the greatest protection against the erosion of purchasing power caused by
inflation.
Share prices of even the best managed, most profitable corporations are
subject to market risk, which means their stock prices can decline. In
addition, swings in investor psychology and/or significant trading by
large institutional investors can result in price fluctuations. For this
reason, equity investors should have a long-term investment horizon and be
willing to wait out bear markets.
o Bonds are debt securities, meaning the issuer has a contractual obligation
to pay interest at a fixed rate on specified dates and to repay principal
(the bond's face value) upon maturity. Bonds have two main sources of
risk. Credit risk refers to the possibility that a bond's price may fall
due to a credit downgrade or "default," i.e., the issuer failing to make
an interest or principal payment. Interest rate risk refers to a bond's
price movement in response to changes in interest rates. When rates rise,
bond prices fall, and vice versa. Generally, the longer a bond's maturity,
the greater its potential price fluctuation.
The funds expect to invest primarily in bonds with investment-grade credit
ratings. However, the funds may also make investments in more volatile
below-investment-grade (or "junk") bonds, including bonds with the lowest
rating. Investment-grade securities include a range of securities from the
highest rated (AAA) to medium quality (BBB). Securities in the BBB
category may be more susceptible to price declines arising from adverse
economic conditions or changing circumstances. The securities at the lower
end of the BBB category have certain speculative characteristics. Prices
of junk bonds are usually more affected by adverse economic conditions or
a deterioration in the issuer's financial circumstances than by overall
changes in interest rates. To compensate investors for higher credit risk
exposure, such bonds usually provide higher income. Please see "High
Yield/High Risk Investing" for further information on these investments.
o Money market securities are debt obligations issued primarily by the U.S.
Government, Government agencies, and corporations. The high credit
ratings, short maturities, and high liquidity of the funds' money market
securities should minimize their credit and market risk. Their low risk is
usually accompanied by low potential returns relative to other
investments.
__________________________________________________________________________
FOR A DISCUSSION OF THE EFFECT OF CURRENCY EXCHANGE RATE FLUCTUATIONS AND
OTHER SPECIAL RISKS OF FOREIGN INVESTING, PLEASE SEE "INVESTMENT POLICIES AND
PRACTICES."
Why include foreign securities?
The funds may invest a portion of their assets in foreign securities. Foreign
stocks and bonds offer advantages to a portfolio but also represent additional
risk. The potential advantages are extra diversification and enhanced returns.
Since foreign stock and bond markets may move somewhat independently from
their U.S. counterparts, such investments could reduce a portfolio's
short-term price fluctuations while offering a way to participate in markets
that may generate attractive returns. Of course, if U.S. and foreign markets
move in the same direction, the positive or negative effect on a fund's share
price could be magnified. In addition, a significant decline in foreign
securities' prices could reduce the funds' returns.
How does the portfolio manager try to reduce risk and increase returns?
Consistent with each fund's objective, the managers of the Personal Strategy
Funds may employ the following risk management tools:
o broad diversification, as discussed previously, to reduce the impact of a
single holding or asset class on the fund's share price;
o gradual allocation changes among and within asset classes (stocks, bonds,
etc.) to take advantage of market opportunities and changing economic
conditions;
o thorough research of stocks, bonds, and other securities by our analysts
to find the most favorable investment opportunities.
How can I decide which fund is most appropriate for me?
Review your own financial objectives, investment time horizon, and risk
tolerance. Use Table 5 on the next page, which summarizes the funds' main
characteristics, to help choose a fund (or funds) for your particular needs.
o The Income Fund is designed for more conservative investors who value the
reduced volatility provided by substantial investments in income-producing
securities but also seek some capital growth. The fund will invest at
least 65% of its total assets in income-producing bonds and
dividend-paying common stocks.
o The Balanced Fund is intended for those seeking a middle-of-the-road
approach that emphasizes stocks for their higher capital appreciation
potential but retains a significant income component to temper volatility.
The fund will invest at least 25% of its total assets in senior fixed
income securities.
o The Growth Fund, with the greatest exposure to stocks, is designed for
more aggressive investors who can withstand the market's inevitable
setbacks to seek its potential long-term rewards. The fund will invest at
least 65% of its total assets in common stocks of companies whose earnings
or dividends are expected to increase.
To review some investing ground rules or to gain a more accurate picture of
your own investment objectives, we suggest you use the Investment Guide you
may have received with this prospectus, or call 1-800-638-5660 to request the
Guide.
__________________________________________________________________________
THE FUND OR FUNDS YOU SELECT SHOULD REFLECT YOUR INDIVIDUAL INVESTMENT GOALS,
BUT SHOULD NOT BE RELIED UPON FOR SHORT-TERM FINANCIAL NEEDS OR REPRESENT YOUR
COMPLETE INVESTMENT PROGRAM.
__________________________________________________________________________
Differences among funds
Asset Allocation
Fund Benchmarks Ranges Relative Risk/Reward
__________________________________________________________________________
Income 40% stocks 30 - 50% Lowest
40 bonds 30 - 50
20 money markets 10 - 30
__________________________________________________________________________
Balanced 60% stocks 50 - 70% Moderate
30 bonds 20 - 40
10 money markets 0 - 20
__________________________________________________________________________
Growth 80% stocks 70 - 90% Highest
20 bonds 10 - 30
__________________________________________________________________________
Table 5
Is there other information I need to review before making a decision?
Yes. Although the funds will invest primarily in common stocks, bonds, and
money market securities, they can also make other investments which have
additional and different risks. Be sure to review "Investment Policies and
Practices" in Section 3, which reviews the following topics: Types of
Securities in which the funds may invest including preferred stocks,
convertible securities and warrants, foreign securities, asset-backed
securities, mortgage-backed securities, hybrid instruments, zero coupon and
pay-in-kind bonds and private placements; and Types of Management
Practices-cash position, borrowing money and transferring assets, futures and
options, interest rate swaps, managing foreign currency risk, lending of
portfolio securities, when-issued securities and forward commitment contracts,
portfolio transactions, high-yield/high-risk investing and credit quality
considerations.
2 About Your Account
2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving Sale Proceeds
__________________________________________________________________________
THE VARIOUS WAYS YOU CAN BUY, SELL, AND EXCHANGE SHARES ARE EXPLAINED AT THE
END OF THIS PROSPECTUS AND ON THE NEW ACCOUNT FORM.
Here are some procedures you should know when investing in a fund.
How and when shares are priced
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 priced and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
__________________________________________________________________________
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 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 are priced 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.
__________________________________________________________________________
IF FOR SOME REASON WE CANNOT ACCEPT YOUR REQUEST TO SELL SHARES, WE WILL
CONTACT YOU.
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 bank wire should
be credited to your bank account the next business day, and 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 exchange the transactions primarily through the Federal Reserve
Banks.
Exception: 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 ex-change 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.
Useful Information on Distributions and Taxes
Dividends and other distributions
__________________________________________________________________________
THE FUNDS DISTRIBUTE ALL NET INVESTMENT INCOME AND REALIZED CAPITAL GAINS TO
SHAREHOLDERS.
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 interest and capital gain distributions on a rising number of
shares.
Dividends 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 The Balanced and Income Funds declare and pay dividends (if any)
quarterly.
o The Growth Fund declares and pays dividends (if any) annually.
o All or part of a fund's dividends will be eligible for the 70% deduction
for dividends received by corporations.
Capital gains
o A capital gain or loss is the difference between the purchase and sale
price of a security.
o If the 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.
__________________________________________________________________________
THE FUNDS SEND TIMELY INFORMATION FOR YOUR TAX FILING NEEDS.
Tax information
You need to be aware of the possible tax consequences when:
o the fund makes a distribution to your account, or
o you sell fund shares, including an exchange from one fund to another.
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.
In January, the funds will send you and the IRS Form 1099-B, indicating the
date and amount of each sale you made in the fund during the prior year. We
will also tell you the average cost of the shares you sold during the year.
Average cost 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)
you make and a year-end statement detailing all your transactions in each fund
account during the year.
__________________________________________________________________________
DISTRIBUTIONS ARE TAXABLE WHETHER REINVESTED IN ADDITIONAL SHARES OR RECEIVED
IN CASH.
Taxes on fund distributions. The following summary does not apply to
retirement accounts, such as IRAs, which are tax-deferred until you withdraw
money from them.
In January, the funds will send you and the IRS Form 1099-DIV indicating the
tax status of any dividend and capital gain distribution made to you. All
distributions made by these funds are taxable to you for the year in which
they were paid. The only exception is that distributions declared during the
last three months of the year and paid in January are taxed as though they
were paid by December 31. Dividends and distributions are taxable to you
regardless of whether they are taken in cash or reinvested. The funds will
send you any additional information you need to determine your taxes on fund
distributions, such as the portion of your dividend, if any, that may be
exempt from state income taxes.
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 capital gain distribution
received.
Distributions resulting from the sale of certain foreign currencies and debt
securities, to the extent of foreign exchange gains, are taxed as ordinary
income. If the fund pays nonrefundable taxes to foreign governments during
the year, the taxes will reduce the fund's dividends.
Tax effect of buying shares before a capital gain or quarterly dividend
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 wish to find out a fund's
record date(s) before investing. Of course, the fund's share price may reflect
undistributed capital gains or income and unrealized appreciation at any time.
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 cancelled. 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 for 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. (The 10-day hold
does not apply to purchases paid for by: bank wire; cashier's, certified, or
treasurer's checks; or automatic purchases through your paycheck.)
Telephone transactions. Telephone exchange and redemption are established
automatically when you sign the New Account Form unless you check the box
which states that you do not want these services. The fund uses reasonable
procedures (including shareholder identity verification) to confirm that
instructions given by telephone are genuine. 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.
All conversations are recorded, and a confirmation is sent within five
business days after the telephone transaction.
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.
Excessive Trading
__________________________________________________________________________
T. ROWE PRICE MAY BAR EXCESSIVE TRADERS FROM PURCHASING SHARES.
Frequent trades involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the 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 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 of maintaining small accounts, we ask you to
maintain an account balance of at least $1,000. If your balance is below
$1,000 for three months or longer, the fund has 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 FUND 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 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
3 MORE ABOUT THE FUNDS
The Funds' Organization and Management
__________________________________________________________________________
SHAREHOLDERS BENEFIT FROM T. ROWE PRICE'S 57 YEARS OF INVEST-MENT MANAGEMENT
EXPERIENCE.
How are the funds organized?
The T. Rowe Price Personal Strategy Funds, Inc., incorporated in Maryland in
1994, is a diversified, open-end investment company or mutual fund. Mutual
funds pool money received from shareholders and invest it to try to achieve
specific objectives.
What is meant by "shares"?
As with all mutual funds, investors purchase "shares" when they invest 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 a fund's income and capital gain
distributions;
o cast one vote per share on certain fund matters, including the election
of fund directors, changes in fundamental policies, or approval of
changes in a fund's management contract.
Does each fund have an annual shareholder meeting?
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). 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 ASSOCIATES- SPECIFICALLY BY THE FUNDS' PORTFOLIO MANAGERS.
Who runs the funds?
General Oversight. The funds are governed by a Board of Directors that meets
regularly to review the fund's investments, performance, expenses, and other
business affairs. The Board elects the funds' officers.
Portfolio Management. The funds' investments are guided by two committees. An
Asset Allocation Committee meets regularly to determine the asset allocation
of the three funds among stocks, bonds, and money market securities. Committee
members include Peter Van Dyke, Chairman, Stephen W. Boesel, Edmund M. Notzon,
William T. Reynolds, James S. Riepe, Charles P. Smith, and M. David Testa.
Day-to-day responsibility for managing the funds' investments lies with an
Investment Advisory Committee which includes Messrs. Boesel, John D.
Gillespie, Notzon, Testa and Van Dyke.
The Asset Allocation Committee has been acting in this role for T. Rowe Price
since 1990 and its members bring a wide range of investment experience to this
task. Members of the Invest-ment Advisory Committee responsible for making
day-to-day portfolio decisions for the funds are each experienced investment
managers. Mr. Van Dyke has been managing investments since joining T. Rowe
Price in 1985. Mr. Boesel has been managing investments since joining T. Rowe
Price in 1973. Mr. Gillespie joined T. Rowe Price in 1986 and has been
managing investments since 1989. Mr. Notzon joined T. Rowe Price in 1989 and
has been managing investments since 1991. Mr. Testa has been managing
investments since joining T. Rowe Price in 1972.
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?
The management agreement spells out the expenses to be paid by each fund. In
addition to the management fee, each fund pays for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.
The Management Fee.
This fee has two parts-an "individual fund fee" (discussed on page 3) which
reflects the fund's particular investment management costs, and a "group fee."
The group fee, which is designed to reflect the benefits of the shared
resources of the T. Rowe Price investment management complex, is calculated
monthly based on the net combined assets of all T. Rowe Price funds (except
Equity Index and both Spectrum Funds and any institutional or private label
mutual funds). The group fee schedule (shown below) is graduated, declining as
the asset total rises, so shareholders benefit from the overall growth in
mutual fund assets.
0.480% First $1 billion 0.370% Next $1 billion
0.330% Next $10 billion
0.450% Next $1 billion 0.360% Next $2 billion
0.320% Next $10 billion
0.420% Next $1 billion 0.350% Next $2 billion
0.310% Thereafter
0.390% Next $1 billion 0.340% Next $5 billion
Each fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the Price funds described above.
Based on combined Price funds' assets of approximately $35.5 billion at June
30, 1994, the Group Fee was 0.34%.
Understanding Performance Information
__________________________________________________________________________
TOTAL RETURN IS THE MOST WIDELY USED PERFORMANCE MEASURE. DETAILED PERFORMANCE
INFORMATION IS INCLUDED IN THE FUNDS' ANNUAL REPORTS AND QUARTERLY SHAREHOLDER
REPORTS.
This section should help you understand the terms used to describe the funds'
performance. You will come across them in shareholder reports you receive from
us four times a year, in our newsletters, "Insights" reports, 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 the 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.
Investment Policies and Practices
__________________________________________________________________________
FUND MANAGERS HAVE CONSIDERABLE LEEWAY IN CHOOSING INVESTMENT STRATEGIES AND
SELECTING SECURITIES THEY BELIEVE WILL HELP THE FUNDS ACHIEVE THEIR
OBJECTIVES.
This section takes a detailed look at some of the securities the funds may
hold in their portfolios and the various kinds of investment practices that
may be used in day-to-day portfolio management. The funds' investment programs
are subject to further restrictions and risks described in the Statement of
Additional Information. The funds adhere to applicable investment restrictions
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.
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"
which can be changed without shareholder approval. How-ever, significant
changes are discussed with shareholders in fund reports.
Types of Portfolio Securities
In seeking to meet their investment objectives, the funds may invest in any
type of security or instrument (including derivatives) whose investment
characteristics are consistent with the fund's investment program. These and
some of the other investment techniques the funds may use are described in the
following pages.
Fundamental policy: A fund will not purchase a security if, as a result, with
respect to 75% of the fund's total assets, more than 5% of its total assets
would be invested in securities of the issuer or more than 10% of the voting
securities of the issuer would be held by the fund.
Bonds. A bond is an interest-bearing security-an IOU-issued by companies or
governmental units. The issuer has 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. An issuer may have the right to redeem or "call" a bond
before maturity, and the investor may have to reinvest the proceeds at lower
market rates.
A bond's annual interest income, set by its coupon rate, is usually fixed for
the life of the bond. Its yield (income as a percent of current price) will
fluctuate to reflect changes in interest rate levels. A bond's price usually
rises when interest rates fall, and vice versa, so its yield stays current.
Bonds may be unsecured (backed by the issuer's general creditworthiness only)
or secured (also backed by specified collateral).
Certain bonds have interest rates that are adjusted periodically which tend to
minimize fluctuations of their principal value. The maturity of those
securities may be shortened under certain specified conditions.
Bonds may be designated as senior, junior, or subordinated obligations. Senior
obligations generally have the first claim on a corporation's earnings and
assets and, in the event of liquidation, are paid before junior or other debt.
Common and Preferred Stocks. Stocks represent shares of ownership in a
company. Generally, preferred stock has a specified dividend and ranks after
bonds and before common stocks in its claim on income for dividend payments
and on assets should the company be liquidated. After other claims are
satisfied, common stockholders participate in company profits on a pro rata
basis; profits may be paid out in dividends or reinvested in the company to
help it grow. Increases and decreases in earnings are usually reflected in a
company's stock price, so common stocks generally have the greatest
appreciation and depreciation potential of all corporate securities. While
most preferred stocks pay a dividend, the funds may purchase preferred stock
where the issuer has omitted, or is in danger of omitting, payment of its
dividend. Such investments would be made primarily for their capital
appreciation potential.
Convertible Securities and Warrants. The funds may invest in debt or preferred
equity securities convertible into or exchangeable for equity securities.
Traditionally, convertible securities have paid dividends or interest at rates
higher than common stocks but lower than non-convertible securities. They
generally participate in the appreciation or depreciation of the underlying
stock into which they are convertible, but to a lesser degree. In recent
years, convertibles have been developed which combine higher or lower current
income with options and other features. Warrants are options to buy a stated
number of shares of common stock at a specified price any time during the life
of the warrants (generally, two or more years).
Foreign Securities. The funds may invest in foreign securities. These include
non-dollar de-nominated securities traded outside of the U.S. and dollar
denominated securities traded in the U.S. (such as ADRs). Such investments
increase a portfolio's diversification and may enhance return, but they also
involve some special risks such as exposure to potentially adverse local
political and economic developments; nationalization and exchange controls;
potentially lower liquidity and higher volatility; possible problems arising
from accounting, disclosure, settlement, and regulatory practices that differ
from U.S. standards; and the chance that fluctuations in foreign exchange
rates will decrease the investment's value (favorable changes can increase its
value).
Operating policy: Each fund may invest up to 35% of its total assets in
foreign securities.
Asset-backed Securities. An underlying pool of assets, such as credit card or
automobile trade receivables or corporate loans or bonds, backs these bonds
and provides the interest and principal payments to investors. Credit quality
depends primarily on the quality of the underlying assets and the level of
credit support, if any, provided by the issuer. The underlying assets (i.e.,
loans) are subject to prepayments which can shorten the securities' weighted
average life and may lower their return. The value of these securities also
may change because of actual or perceived changes in the creditworthiness of
the originator, servicing agent, or of the financial institution providing the
credit support. There is no limit on the portion of the funds' fixed income
investments in these securities.
Mortgage-backed Securities. The funds may invest in a variety of
mortgage-backed securities. Mortgage lenders pool individual home mortgages
with similar characteristics to back a certificate or bond, which is sold to
investors such as the funds. Interest and principal payments generated by the
underlying mortgages are passed through to the investors. The "big three"
issuers are Government National Mortgage Association (GNMA), the Federal
National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage
Corporation (Freddie Mac). GNMA certificates are backed by the full faith and
credit of the U.S. Govern-ment, while others, such as Fannie Mae and Freddie
Mac certificates, are only supported by the ability to borrow from the U.S.
Treasury or supported only by the credit of the agency. Private mortgage
bankers and other institutions also issue mortgage-backed securities.
Mortgage securities are subject to scheduled and unscheduled principal
payments as homeowners pay down or prepay their mortgages. As these payments
are received, they must be reinvested when interest rates may be higher or
lower than on the original mortgage security. Therefore, mortgage securities
are not an effective means of locking in long-term interest rates. In
addition, when interest rates fall, the pace of mortgage prepayments picks up.
These refinanced mortgages are paid off at face value (par), causing a loss
for any investor who may have purchased the security at a price above par. In
such an environment, this risk limits the potential price appreciation of
these securities and can negatively affect a fund's net asset value. When
rates rise, however, mortgage-backed securities have historically experienced
smaller price declines than comparable quality bonds. There is no limit on the
portion of the funds' fixed income investments in these securities.
Additional mortgage-backed securities in which the funds may invest include:
o Collateralized Mortgage Obligations (CMOs). CMOs are debt securities
that are fully collateralized by a portfolio of mortgages or
mortgage-backed securities. All interest and principal payments from the
underlying mortgages are passed through to the CMOs in such a way as to
create more definite maturities than is the case with the underlying
mortgages. CMOs may pay fixed or variable rates of interest, and certain
CMOs have priority over others with respect to the receipt of
prepayments.
o Stripped Mortgage Securities. Stripped mortgage securities (a type of
derivative) are created by separating the interest and principal
payments generated by a pool of mortgage-backed securities or a CMO to
create additional classes of securities. Generally, one class receives
only interest payments (IOs) and one principal payments (POs). Unlike
GNMA securities and POs, the value of IOs tends to move in the same
direction as interest rates. The funds could use IOs as a hedge against
falling prepaying rates (interest rates are rising) and/or a bear market
environment. POs can be used as a hedge against rising prepayment rates
(interest rates are falling) and/or a bull market environment. IOs and
POs are acutely sensitive to interest rate changes and to the rate of
principal prepayments. A rapid or unexpected increase in prepayments can
severely depress the price of IOs, while a rapid or unexpected decrease
in prepayments could have the same effect on POs. These securities are
very volatile in price and may have lower liquidity than most other
mortgage-backed securities. Certain non-stripped CMOs may also exhibit
these qualities, especially those which pay variable rates of interest
which adjust inversely with and more rapidly than short-term interest
rates. There is no guarantee a fund's investment in CMOs, IOs or POs
will be successful, and a fund's total return could be adversely
affected as a result.
Operating policy: Each fund may invest up to 10% of its total assets in
stripped mortgage securities.
Hybrid Instruments. These instruments (a type of derivative) can combine the
characteristics of securities, futures and options. For example, the principal
amount or interest rate of a hybrid could be tied (positively or negatively)
to the price of some commodity, currency or securities index or another
interest rate (each a "benchmark"). Hybrids can be used as an efficient means
of pursuing a variety of investment goals, including currency hedging,
duration management and increased total return. Hybrids may not bear interest
or pay dividends. The value of a hybrid or its interest rate may be a multiple
of a benchmark and, as a result, may be leveraged and move (up or down) more
steeply and rapidly than the benchmark. These benchmarks
may be sensitive to economic and political events, such as commodity shortages
and currency devaluations, which cannot be readily foreseen by the purchaser
of a hybrid. Under certain conditions, the redemption value of a hybrid could
be zero. Hybrids can have volatile prices and limited liquidity. Thus, an
investment in a hybrid may entail significant market risks that are not
associated with a similar investment in a traditional, U.S. dollar-denominated
bond that has a fixed principal amount and pays a fixed rate or floating rate
of interest. The purchase of hybrids exposes the funds to the credit risk of
the issuer of the hybrid. These risks may cause significant fluctuations in
the net asset value of the funds. There is no assurance that a fund's
investment in hybrids will be successful.
Operating policy: Each fund may invest up to 10% of its total assets in hybrid
instruments.
Investment Funds. The funds may invest in other investment funds or companies,
primarily where such investments would be the only practical means of
investing in certain foreign countries. Such investments would result in the
funds paying additional or duplicative fees and expenses. The risks of such
investment would reflect the risks of investing in the types of securities in
which the investment funds or companies invest.
Operating policy: Each fund may invest up to 10% of its assets in other
investment funds and companies.
Zero Coupon Bonds and Pay-in-Kind Bonds. A zero coupon bond does not make cash
interest payments during the life of the bond. Instead, it is sold at a deep
discount to face value, and the interest consists of the gradual appreciation
in price as the bond approaches maturity. "Zeros" can be an attractive
financing method for issuers with near-term cash-flow problems. Pay-in-kind
(PIK) bonds pay interest in cash or additional securities, at the issuer's
option, for a specified period. Like zeros, they may help a corporation
economize on cash. PIK prices reflect the market value of the underlying debt
plus any accrued interest. Zeros and PIKS can be higher- or lower-quality
debt, and both are more volatile than coupon bonds.
Each fund is required to distribute to shareholders income imputed to any zero
or PIK investments. Such distributions could reduce a fund's reserve position.
Each fund may invest up to 10% of its total assets in zero coupon and
pay-in-kind bonds.
Private Placements (Restricted Securities). These securities are sold directly
to a small number of investors, usually institutions. Unlike public offerings,
such securities are not registered with the SEC. Although certain of these
securities may be readily sold, for example under Rule 144A, others may be
illiquid and their sale may involve substantial delays and additional costs.
Operating policy: Each fund will not invest more than 15% of its net assets in
illiquid securities and no more than 5% of its total assets in certain
restricted securities.
Types of Management Practices
Cash Position. Each fund will hold a certain portion of their assets in money
market securities, including repurchase agreements, in the two highest rating
categories, maturing in one year or less. For temporary, defensive purposes, a
fund may invest without limitation in such securities. This reserve position
provides flexibility in meeting redemptions, expenses, and the timing of new
investments, and serves as a short-term defense during periods of unusual
market volatility.
Borrowing Money and Transferring Assets. The funds can borrow money from banks
as a temporary measure for emergency purposes, to facilitate redemption
requests, or for other purposes consistent with the fund's investment
objectives and program. Such borrowings may be collateralized with fund
assets, subject to restrictions.
Fundamental policy: Borrowings may not exceed 331_3% of a fund's total assets.
Operating policies: 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.
Futures and Options. Futures (a type of 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. Options (another type of derivative) give the investor
the right, but not the obligation, to buy or sell an asset at a predetermined
price in the future. The funds may buy and sell futures contracts (and options
on such contracts) for a number of reasons including: to manage their exposure
to changes in interest rates, stock and bond prices, and foreign currencies;
as an efficient means of adjusting their overall exposure to certain markets;
and to adjust the portfolio's duration. The funds may purchase, sell, or write
call and put options on securities, financial indices, and foreign currencies.
Futures contracts and options may not always be successful hedges; their
prices can be highly volatile; using them could lower the fund's total return
and the potential loss from the use of futures can exceed the fund's initial
investment in such contracts.
Operating policies: Futures: Initial margin deposits and premiums on options
used for non-hedging purposes will not equal more than 5% of a fund's net
asset value. Options on securities: The total market value of securities
against which a fund has written call or put options may not exceed 25% of its
total assets. A fund will not commit more than 5% of its total assets to
premiums when purchasing call or put options.
Interest Rate Transactions. The funds may enter into various interest rate
transactions (a type of derivative investment) such as interest rate swaps and
the purchase or sale of interest rate caps, collars and floors, to preserve a
return or spread on a particular investment or portion of its portfolio, to
create synthetic securities, or to structure transactions designed for other
purposes.
Operating policy: Each fund will not invest more than 10% of its total assets
in interest rate transactions.
Managing Foreign Currency Risk. Investors in foreign securities may "hedge"
their exposure to potentially unfavorable currency changes by purchasing a
contract to exchange one currency for another on some future date at a
specified exchange rate. In certain circumstances, a "proxy currency" may be
substituted for the currency in which the investment is denominated, a
strategy known as "proxy hedging." Although foreign currency transactions will
be used primarily to protect a fund's foreign securities from adverse currency
movements relative to the dollar, they involve the risk that anticipated
currency movements will not occur and a fund's total return could be reduced.
Lending of Portfolio Securities. Like other mutual funds, the funds may lend
securities to broker-dealers, other institutions, or other persons to earn
additional income. The principal risk is the potential insolvency of the
broker-dealer or other borrower. In this event, the funds could experience
delays in recovering their securities and possibly capital losses.
Fundamental policy: The value of loaned securities may not exceed 331/3% of a
fund's total assets.
When-Issued Securities and Forward Commitment Contracts. The funds may
purchase securities on a when-issued or delayed delivery basis or may purchase
or sell securities on a forward commitment basis. There is no limit on the
portion of the funds' fixed income investments in these securities. The price
of these securities is fixed at the time of the commitment to buy, but
delivery and payment can take place a month or more later. During the interim
period, the market value of the securities can fluctuate, and no interest
accrues to the purchaser. At the time of delivery, the value of the securities
may be more or less than the purchase or sale price. To the extent each fund
remains fully or almost fully invested (in securities with a remaining
maturity of more than one year) at the same time it purchases these
securities, there will be greater fluctuations in the fund's net asset value
than if the fund did not purchase them.
Portfolio Transactions. The funds will not generally trade in securities
(either common stocks or bonds) for short-term profits, but, when
circumstances warrant, securities may be purchased and sold without regard to
the length of time held. The portfolio turnover rate for each of the Balanced,
Growth and Income Funds is not expected to exceed 40%.
High Yield/High Risk Investing. 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 low and lower-medium 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, because such events could lessen 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 Balanced, Growth and Income Funds may each invest up to
20%, 15% and 25%, respectively, of their total assets in below investment
grade or junk bonds.
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 the funds, including those rated by outside agencies.
The lower the rating on a bond, the higher the yield, other things being
equal.
Table 6 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 Corporate Debt Securities
Moody's Standard Fitch Definition
Investors & Poor's Investors
Service, Inc. Corporation Service, Inc.
__________________________________________________________________________
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 Low grade
______________________________________________________________
B B B Speculative
______________________________________________________________
Caa, Ca CCC, CC CCC, CC Sub-marginal
______________________________________________________________
Ca C C Income bond, no
interest paid
______________________________________________________________
C D DDD, DD, D Probably in default
______________________________________________________________
Moody's S&P Fitch
__________________________________________________________________________
Commercial P-1 Superior A-1+ Extremely F-1+ Exceptionally
quality strong strong
quality quality
Paper A-1 Strong F-1 Very strong
quality quality
______________________________________________________________
P-2 Strong A-2 Satisfactory F-2 Good credit
quality quality quality
______________________________________________________________
P-3 Acceptable A-3 Adequate F-3 Fair credit
quality quality quality
______________________________________________________________
B Speculative F-S Weak credit
quality quality
__________________________________________________________________________
Table 6
4 Investing with T. Rowe Price
4 INVESTING WITH T. ROWE PRICE
Meeting Requirements for New Accounts
__________________________________________________________________________
ALWAYS VERIFY YOUR TRANSACTIONS BY CAREFULLY REVIEWING THE CONFIRMATION WE
SEND YOU. PLEASE REPORT ANY DISCREPANCIES TO SHAREHOLDER SERVICES.
Tax Identification Number
We must have your correct social security or corporate tax identification
number and 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. You will also be prohibited from opening another account by exchange. 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.
Opening a New Account: $2,500 minimum initial investment; $1,000 for
retirement or gifts or transfers to minors (UGMA/UTMA) accounts
Account Registration
__________________________________________________________________________
REGULAR MAIL
T. ROWE PRICE
ACCOUNT SERVICES
P.O. BOX 17300
BALTIMORE, MD
21298-9353
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.)
By Mail
Please make your check payable to T. Rowe Price funds (otherwise it may be
returned) and send it together with the New Account Form to the address at
left.
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 use the wire address
below.
o Complete a New Account Form and mail it to one of the appropriate
addresses listed at left.
Note: Retirement plans cannot be opened by wire.
o Give the following wire address to your bank: Morgan Guaranty Trust Co.
of New York, ABA# 021000238, T. Rowe Price [fund name], AC-00153938.
Provide fund name, account name(s), and account number.
By Exchange
Call 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 LOCATIONS:
101 EAST LOMBARD ST.
BALTIMORE, MD
T. ROWE PRICE
FINANCIAL CENTER
10090 RED RUN BLVD.
OWINGS MILLS, MD
FARRAGUT SQUARE
900 17TH ST., N.W.
WASHINGTON, D.C.
Drop off your New Account Form at any of the locations listed at left and
obtain a receipt.
Note: The fund and its agents reserve the right to waive or lower investment
minimums; to accept initial purchases by telephone or mailgram; cancel or
rescind any purchase or exchange 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 (for example, if an account
has been restricted due to excessive trading or fraud); to otherwise modify
the conditions of purchase or any services at any time; or to act on any
instructions believed to be genuine.
ARCO TOWER
31ST FLOOR
515 SOUTH FLOWER ST.
LOS ANGELES, CA
Purchasing Additional Shares: $100 minimum purchase;
$50 minimum for retirement plans and Automatic Asset Builder;
$5,000 minimum for telephone purchases
By ACH Transfer
Use Tele*Access (registered trademark), PC*Access (registered trademark) 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
By Mail
o Provide your account number and the fund name on your check.
o Mail the check to us at the address shown at left either with a
reinvestment slip or a noteindicating the fund and account number in
which you wish to purchase shares.
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form ($50 minimum).
By Phone
Call Shareholder Services to lock in that day's closing price; payment is due
within five days ($5,000 minimum).
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 or
PC*Access (if you have previously authorized telephone services), or by
express mail or mailgram. 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. For charges, see "Electronic Transfers-By
Wire" on the next page.
__________________________________________________________________________
MAILGRAM, EXPRESS,
REGISTERED, OR
CERTIFIED MAIL
(SEE PAGE 24.)
By Mail
Provide account name(s) and numbers, fund name(s), and exchange or redemption
amount. For exchanges, mail to the appropriate address below or at left,
indicate the fund you are exchanging from and the fund(s) you are exchanging
into. 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").
Regular Mail
For Non-Retirement and IRA Accounts: For Employer-Sponsored Retirement
Accounts:
T. Rowe Price Account Services T. Rowe Price Trust Company
P.O. Box 89000 P.O. Box 89000
Baltimore, MD 21289-0220 Baltimore, MD 21289-0300
Note: Redemptions from retirement accounts, including IRAs, must be in
writing. Please call Shareholder Services to obtain an IRA Distribution
Request Form. For employer-sponsored retirement accounts, call Investor
Services or your plan administrator for instructions.
Shareholder Services
__________________________________________________________________________
INVESTOR SERVICES
1-800-638-5660
1-410-547-2308
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, 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.
__________________________________________________________________________
IF YOU ARE A NEW T. ROWE PRICE INVESTOR, YOU WILL RECEIVE A SERVICES GUIDE
WITH OUR WELCOME KIT.
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.
Note: Shares purchased by telephone may not be exchanged to another fund until
payment is received.
Automated Services
Tele*Access. 24-hour service via toll-free number provides information such as
yields, prices, dividends, account balances, and your latest transaction as
well as the ability to request prospectuses and account forms and initiate
purchase, redemption and exchange orders in your accounts (see "Electronic
Transfers" below).
PC*Access. 24-hour service via 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 four investor center locations.
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 $5.00 fee for wire redemptions under $5,000, and your bank may
charge for wire transfers regardless of size.
Automatic Investing ($50 minimum)
You can invest automatically in several different ways, including:
o Automatic Asset Builder. You instruct us to move $50 or more once a
month or less often 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.
o Automatic Exchange. Enables you to set up systematic investments from
one fund account into another, such as from a money fund into a stock
fund.
Discount Brokerage
You can trade stocks, bonds, options, precious metals and other securities at
a substantial 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.
APPENDIX A
(Three pie charts appear here as an illustration of the funds' investment
programs and risk profiles.)
Chart 1 - Personal Strategy Trust Fund Prospectus
____________________________________________________________________________
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 GNMA FUND
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PERSONAL STRATEGY FUNDS, INC.
Personal Strategy Balanced Fund
Personal Strategy Growth Fund
Personal Strategy Income Fund
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND,
INC.
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
(collectively the "Funds" and individually the
"Fund")
This Statement of Additional Information is not a
prospectus but should be read in conjunction with the
appropriate
Fund's prospectus dated October 1, 1994, amended to
March 31,
1995 (T. Rowe Price Short-Term U.S. Government Fund,
Inc.), 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.
The date of this Statement of Additional
Information is
October 1, 1994.
PAGE 3
TABLE OF CONTENTS
Page
Page
Asset-Backed Securities . 16 Lending of Portfolio
Capital Stock . . . . . . 84 Securities . . . . . .
26
Code of Ethics . . . . . 61 Management of Fund . .
50
Custodian . . . . . . . . 61 Mortgage-Related
Description of the Fund . 85 Securities . . . . . .
. 9
Distributor for Fund . . 60 Net Asset Value Per
Dividends and Distributions72 Share . . . . . . . .
72
Federal and State Options . . . . . . . .
29
Registration of Shares . 86 Portfolio Transactions
62
Foreign Currency Pricing of Securities .
69
Transactions . . . . . . 42 Principal Holders of
Foreign Futures and Options40 Securities . . . . . .
56
Futures Contracts . . . . 34 Ratings of Commercial
Hybrid Instruments . . . 22 Paper . . . . . . . .
89
Independent Accountants . 87 Ratings of Corporate
Illiquid or Restricted Debt Securities . . .
89
Securities . . . . . . . 25 Repurchase Agreements .
27
Investment Management Risk Factors . . . . .
. 3
Services . . . . . . . . 56 Tax Status . . . . . .
72
Investment Objectives Taxation of Foreign
and Policies . . . . . . . 2 Shareholders . . . . .
73
Investment Performance . 75 Warrants . . . . . . .
22
Investment Program . . . . 8 When-Issued Securities
and
Investment Restrictions . 44 Forward Commitment
Legal Counsel . . . . . . 86 Contracts . . . . . .
24
Yield Information . . .
74
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the
discussion of each
Fund's investment objectives and policies discussed in
each
Fund's 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 each
Board of
Directors/Trustees 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
PAGE 4
shares represented at a meeting of shareholders at
which the
holders of 50% or more of the shares are represented.
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
Debt Obligations
Yields on short, intermediate, and long-term
securities are
dependent on a variety of factors, including the
general
conditions of the money and bond markets, the size of a
particular offering, the maturity of the obligation,
and the
credit quality and rating of the issue. Debt
securities with
longer maturities tend to have 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 debt securities usually
vary,
depending upon available yields. An increase in
interest rates
will generally reduce the value of portfolio debt
securities, and
a decline in interest rates will generally increase the
value of
portfolio debt securities. The ability of the Fund to
achieve
its investment objective is also dependent on the
continuing
ability of the issuers of the debt securities in which
the Fund
invests to meet their obligations for the payment of
interest and
principal when due. Although the Fund seeks to reduce
risk by
portfolio diversification, credit analysis, and
attention to
trends in the economy, industries and financial
markets, such
efforts will not eliminate all risk. There can, of
course, be no
assurance that the Fund will achieve its investment
objective.
After purchase by the Fund, a debt security may
cease to be
rated or its rating may be reduced below the minimum
required for
purchase by the Fund. For the Prime Reserve and U.S.
Treasury
Money Funds, the procedures set forth in Rule 2a-7,
under the
Investment Company Act of 1940, may require the prompt
sale of
any such security. For the other Funds, neither event
will
require a sale of such security by the Fund. However,
T. Rowe
Price will consider such event in its determination of
whether
the Fund should continue to hold the security. To the
extent
that the ratings given by Moody's or S&P may change as
a result
of changes in such organizations or their rating
systems, the
PAGE 5
Fund will attempt to use comparable ratings as
standards for
investments in accordance with the investment policies
contained
in the prospectus. When purchasing unrated securities,
T. Rowe
Price, under the supervision of the Fund's Board of
Directors,
determines whether the unrated security is of a qualify
comparable to that which the Fund is allowed to
purchase.
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 the Fund.
All Funds (except Prime Reserve and U.S. Treasury Money
Funds)
Because of its investment policy, the Fund may or
may not be
suitable or appropriate for all investors. The Fund is
not a
money market fund and is not an appropriate investment
for those
whose primary objective is principal stability. The
value of the
portfolio securities of the Fund will fluctuate based
upon market
conditions. Although the Fund seeks to reduce risk by
investing
in a diversified portfolio, such diversification does
not
eliminate all risk. There can, of course, be no
assurance that
the Fund will achieve its investment objective.
Prime Reserve and U.S. Treasury Money Funds
There can be no assurance that the Funds will
achieve their
investment objectives or be able to maintain their net
asset
value per share at $1.00. The price of the Fund is not
guaranteed or insured by the U.S. Government and its
yield is not
fixed. An increase in interest rates could reduce the
value of
the Fund's portfolio investments, and a decline in
interest rates
could increase the value.
All Funds (except Prime Reserve and U.S. Treasury Money
Funds)
Mortgage securities differ from conventional bonds
in that
principal is paid back over the life of the security
rather than
at maturity. As a result, the holder of a mortgage
security
(i.e., the Fund) receives monthly scheduled payments of
principal
and interest, and may receive unscheduled principal
payments
representing prepayments on the underlying mortgages.
The
incidence of unscheduled principal prepayments is also
likely to
increase in mortgage pools owned by the Fund when
prevailing
mortgage loan rates fall below the mortgage rates of
the
securities underlying the individual pool. The effect
of such
prepayments in a falling rate environment is to (1)
cause the
PAGE 6
Fund to reinvest principal payments at the then lower
prevailing
interest rate, and (2) reduce the potential for capital
appreciation beyond the face amount of the security.
Conversely,
the Fund may realize a gain on prepayments of mortgage
pools
trading at a discount. Such prepayments will provide
an early
return of principal which may then be reinvested at the
then
higher prevailing interest rate.
The market value of adjustable rate mortgage
securities
("ARMs"), like other U.S. government securities, will
generally
vary inversely with changes in market interest rates,
declining
when interest rates rise and rising when interest rates
decline.
Because of their periodic adjustment feature, ARMs
should be more
sensitive to short-term interest rates than long-term
rates.
They should also display less volatility than long-term
mortgage
securities. Thus, while having less risk of a decline
during
periods of rapidly rising rates, ARMs may also have
less
potential for capital appreciation than other
investments of
comparable maturities. Interest rate caps on mortgages
underlying ARM securities may prevent income on the ARM
from
increasing to prevailing interest rate levels and cause
the
securities to decline in value. In addition, to the
extent ARMs
are purchased at a premium, mortgage foreclosures and
unscheduled
principal prepayments may result in some loss of the
holders'
principal investment to the extent of the premium paid.
On the
other hand, if ARMs are purchased at a discount, both a
scheduled
payment of principal and an unscheduled prepayment of
principal
will increase current and total returns and will
accelerate the
recognition of income which when distributed to
shareholders will
be taxable as ordinary income.
High Yield, New Income, Personal Strategy, and
Short-Term Bond
Funds
Risk Factors of Foreign Investing
There are special risks in foreign investing.
Certain of
these risks are inherent in any mutual fund investing
in foreign
securities while others relate more to the countries in
which the
Funds will invest. Many of the risks are more
pronounced for
investments in developing or emerging countries, such
as many of
the countries of Southeast Asia, Latin America, Eastern
Europe
and the Middle East. Although there is no universally
accepted
definition, a developing country is generally
considered to be a
country which is in the initial stages of its
industrialization
cycle with a per capita gross national product of less
than
$8,000.
PAGE 7
Political and Economic Factors. Individual
foreign
economies of certain countries may differ favorably or
unfavorably from the United States' economy in such
respects as
growth of gross national product, rate of inflation,
capital
reinvestment, resource self-sufficiency and balance of
payments
position. The internal politics of certain foreign
countries are
not as stable as in the United States. For example, in
1991, the
existing government in Thailand was overthrown in a
military
coup. In 1992, there were two military coup attempts
in
Venezuela and in 1992 the President of Brazil was
impeached. In
addition, significant external political risks
currently affect
some foreign countries. Both Taiwan and China still
claim
sovereignty of one another and there is a demilitarized
border
between North and South Korea.
Governments in certain foreign countries continue
to
participate to a significant degree, through ownership
interest
or regulation, in their respective economies. Action
by these
governments could have a significant effect on market
prices of
securities and payment of dividends. The economies of
many
foreign countries are heavily dependent upon
international trade
and are accordingly affected by protective trade
barriers and
economic conditions of their trading partners. The
enactment by
these trading partners of protectionist trade
legislation could
have a significant adverse effect upon the securities
markets of
such countries.
Currency Fluctuations. The Funds will invest in
securities
denominated in various currencies. Accordingly, a
change in the
value of any such currency against the U.S. dollar will
result in
a corresponding change in the U.S. dollar value of the
Funds'
assets denominated in that currency. Such changes will
also
affect the Funds' income. Generally, when a given
currency
appreciates against the dollar (the dollar weakens) the
value of
the Fund's securities denominated in that currency will
rise.
When a given currency depreciates against the dollar
(the dollar
strengthens) the value of the Funds' securities
denominated in
that currency would be expected to decline.
Investment and Repatriation of Restrictions.
Foreign
investment in the securities markets of certain foreign
countries
is restricted or controlled in varying degrees. These
restrictions may limit at times and preclude investment
in
certain of such countries and may increase the cost and
expenses
of the Funds. Investments by foreign investors are
subject to a
variety of restrictions in many developing countries.
These
PAGE 8
restrictions may take the form of prior governmental
approval,
limits on the amount or type of securities held by
foreigners,
and limits on the types of companies in which
foreigners may
invest. Additional or different restrictions may be
imposed at
any time by these or other countries in which the Funds
invest.
In addition, the repatriation of both investment income
and
capital from several foreign countries is restricted
and
controlled under certain regulations, including in some
cases the
need for certain government consents. For example,
capital
invested in Chile normally cannot be repatriated for
one year.
Market Characteristics. Foreign stock and bond
markets are
generally not as developed or efficient as, and may be
more
volatile than, those in the United States. While
growing in
volume, they usually have substantially less volume
than U.S.
markets and the Funds' portfolio securities may be less
liquid
and subject to more rapid and erratic price movements
than
securities of comparable U.S. companies. Equity
securities may
trade at price/earnings multiples higher than
comparable United
States securities and such levels may not be
sustainable. Fixed
commissions on foreign stock exchanges are generally
higher than
negotiated commissions on United States exchanges,
although the
Funds will endeavor to achieve the most favorable net
results on
their portfolio transactions. There is generally less
government
supervision and regulation of foreign stock exchanges,
brokers
and listed companies than in the United States.
Moreover,
settlement practices for transactions in foreign
markets may
differ from those in United States markets. Such
differences may
include delays beyond periods customary in the United
States and
practices, such as delivery of securities prior to
receipt of
payment, which increase the likelihood of a "failed
settlement."
Failed settlements can result in losses to a Fund.
Investment Funds. The Funds may invest in
investment funds
which have been authorized by the governments of
certain
countries specifically to permit foreign investment in
securities
of companies listed and traded on the stock exchanges
in these
respective countries. The Funds' investment in these
funds is
subject to the provisions of the 1940 Act. If the
Funds invest
in such investment funds, the Funds' shareholders will
bear not
only their proportionate share of the expenses of the
Funds
(including operating expenses and the fees of the
investment
manager), but also will bear indirectly similar
expenses of the
underlying investment funds. In addition, the
securities of
these investment funds may trade at a premium over
their net
asset value.
PAGE 9
Information and Supervision. There is generally
less
publicly available information about foreign companies
comparable
to reports and ratings that are published about
companies in the
United States. Foreign companies are also generally
not subject
to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to
those
applicable to United States companies. It also may be
more
difficult to keep currently informed of corporate
actions which
affect the prices of portfolio securities.
Taxes. The dividends and interest payable on
certain of the
Funds' foreign portfolio securities may be subject to
foreign
withholding taxes, thus reducing the net amount of
income
available for distribution to the Funds' shareholders.
Other. With respect to certain foreign countries,
especially developing and emerging ones, there is the
possibility
of adverse changes in investment or exchange control
regulations,
expropriation or confiscatory taxation, limitations on
the
removal of funds or other assets of the Funds,
political or
social instability, or diplomatic developments which
could affect
investments by U.S. persons in those countries.
Eastern Europe and Russia. Changes occurring in
Eastern
Europe and Russia today could have long-term potential
consequences. As restrictions fall, this could result
in rising
standards of living, lower manufacturing costs, growing
consumer
spending, and substantial economic growth. However,
investment
in the countries of Eastern Europe and Russia is highly
speculative at this time. Political and economic
reforms are too
recent to establish a definite trend away from
centrally-planned
economies and state owned industries. In many of the
countries
of Eastern Europe and Russia, there is no stock
exchange or
formal market for securities. Such countries may also
have
government exchange controls, currencies with no
recognizable
market value relative to the established currencies of
western
market economies, little or no experience in trading in
securities, no financial reporting standards, a lack of
a banking
and securities infrastructure to handle such trading,
and a legal
tradition which does not recognize rights in private
property.
In addition, these countries may have national policies
which
restrict investments in companies deemed sensitive to
the
country's national interest. Further, the governments
in such
countries may require governmental or
quasi-governmental
authorities to act as custodian of a Fund's assets
invested in
such countries and these authorities may not qualify as
a foreign
custodian under the Investment Company Act of 1940 and
exemptive
PAGE 10
relief from such Act may be required. All of these
considerations are among the factors which could cause
significant risks and uncertainties to investment in
Eastern
Europe and Russia. Each Fund will only invest in a
company
located in, or a government of, Eastern Europe and
Russia, if it
believes the potential return justifies the risk. To
the extent
any securities issued by companies in Eastern Europe
and Russia
are considered illiquid, each Fund will be required to
include
such securities within its 15% restriction on investing
in
illiquid securities.
High Yield and Personal Strategy Funds
Special Risks of Investing in Junk Bonds
The following special considerations are
additional risk
factors associated with the Fund's investments in lower
rated
debt securities.
Youth and Growth of the Lower Rated Debt
Securities Market.
The market for lower rated debt securities is
relatively new and
its growth has paralleled a long economic expansion.
Past
experience may not, therefore, provide an accurate
indication of
future performance of this market, particularly during
periods of
economic recession. An economic downturn or increase
in interest
rates is likely to have a greater negative effect on
this market,
the value of lower rated debt securities in the Fund's
portfolio,
the Fund's net asset value and the ability of the
bonds' issuers
to repay principal and interest, meet projected
business goals
and obtain additional financing than on higher rated
securities.
These circumstances also may result in a higher
incidence of
defaults than with respect to higher rated securities.
An
investment in this Fund is more speculative than
investment in
shares of a fund which invests only in higher rated
debt
securities.
Sensitivity to Interest Rate and Economic Changes.
Prices
of lower rated debt securities may be more sensitive to
adverse
economic changes or corporate developments than higher
rated
investments. Debt securities with longer maturities,
which may
have higher yields, may increase or decrease in value
more than
debt securities with shorter maturities. Market prices
of lower
rated debt securities structured as zero coupon or
pay-in-kind
securities are affected to a greater extent by interest
rate
changes and may be more volatile than securities which
pay
interest periodically and in cash. Where it deems it
appropriate
and in the best interests of Fund shareholders, the
Fund may
PAGE 11
incur additional expenses to seek recovery on a debt
security on
which the issuer has defaulted and to pursue litigation
to
protect the interests of security holders of its
portfolio
companies.
Liquidity and Valuation. Because the market for
lower rated
securities may be thinner and less active than for
higher rated
securities, there may be market price volatility for
these
securities and limited liquidity in the resale market.
Nonrated
securities are usually not as attractive to as many
buyers as
rated securities are, a factor which may make nonrated
securities
less marketable. These factors may have the effect of
limiting
the availability of the securities for purchase by the
Fund and
may also limit the ability of the Fund to sell such
securities at
their fair value either to meet redemption requests or
in
response to changes in the economy or the financial
markets.
Adverse publicity and investor perceptions, whether or
not based
on fundamental analysis, may decrease the values and
liquidity of
lower rated debt securities, especially in a thinly
traded
market. To the extent the Fund owns or may acquire
illiquid or
restricted lower rated securities, these securities may
involve
special registration responsibilities, liabilities and
costs, and
liquidity and valuation difficulties. Changes in
values of debt
securities which the Fund owns will affect its net
asset value
per share. If market quotations are not readily
available for
the Fund's lower rated or nonrated securities, these
securities
will be valued by a method that the Fund's Board of
Directors
believes accurately reflects fair value. Judgment
plays a
greater role in valuing lower rated debt securities
than with
respect to securities for which more external sources
of
quotations and last sale information are available.
Congressional Action. New and proposed laws may
have an
impact on the market for lower rated debt securities.
For
example, as a result of the Financial Institution's
Reform,
Recovery, and Enforcement Act of 1989, savings and loan
associations were required to dispose of their high
yield bonds
no later than July 1, 1994. Qualified affiliates of
savings and
loan associations, however, may purchase and retain
these
securities, and savings and loan associations may
divest these
securities by sale to their qualified affiliates. T.
Rowe Price
is unable at this time to predict what effect, if any,
the
legislation may have on the market for lower rated debt
securities.
Taxation. Special tax considerations are
associated with
investing in lower rated debt securities structured as
zero
PAGE 12
coupon or pay-in-kind securities. The Fund accrues
income on
these securities prior to the receipt of cash payments.
The Fund
must distribute substantially all of its income to its
shareholders to qualify for pass-through treatment
under the tax
laws and may, therefore, have to dispose of its
portfolio
securities to satisfy distribution requirements.
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 the Fund.
INVESTMENT PROGRAM
Types of Securities
Set forth below is additional information about
certain of
the investments described in the Fund's prospectus.
Debt Securities
Fixed income securities in which the Fund may
invest
include, but are not limited to, those described below.
All Funds
U.S. Government Obligations. Bills, notes, bonds
and other
debt securities issued by the U.S. Treasury. These are
direct
obligations of the U.S. Government and differ mainly in
the
length of their maturities.
U.S. Government Agency Securities. Issued or
guaranteed by
U.S. Government sponsored enterprises and federal
agencies.
These include securities issued by the Federal National
Mortgage
Association, Government National Mortgage Association,
Federal
Home Loan Bank, Federal Land Banks, Farmers Home
Administration,
Banks for Cooperatives, Federal Intermediate Credit
Banks,
Federal Financing Bank, Farm Credit Banks, the Small
Business
Association, and the Tennessee Valley Authority. Some
of these
securities are supported by the full faith and credit
of the U.S.
Treasury; and the remainder are supported only by the
credit of
the instrumentality, which may or may not include the
right of
the issuer to borrow from the Treasury.
PAGE 13
The GNMA, U.S. Treasury Money, Intermediate, and
Long-Term
Funds may only invest in these securities if they are
supported
by the full faith and credit of the U.S. government.
All Funds, except GNMA, U.S. Treasury Money,
Intermediate and
Long-Term Funds
Bank Obligations. Certificates of deposit,
bankers'
acceptances, and other short-term debt obligations.
Certificates
of deposit are short-term obligations of commercial
banks. A
bankers' acceptance is a time draft drawn on a
commercial bank by
a borrower, usually in connection with international
commercial
transactions. Certificates of deposit may have fixed
or variable
rates. The Fund may invest in U.S. banks, foreign
branches of
U.S. banks, U.S. branches of foreign banks, and foreign
branches
of foreign banks.
Corporate Debt Securities. Outstanding
nonconvertible
corporate debt securities (e.g., bonds and debentures).
Corporate notes may have fixed, variable, or floating
rates.
Commercial Paper. Short-term promissory notes
issued by
corporations primarily to finance short-term credit
needs.
Certain notes may have floating or variable rates.
Foreign Government Securities. Issued or
guaranteed by a
foreign government, province, instrumentality,
political
subdivision or similar unit thereof.
Savings and Loan Obligations. Negotiable
certificates of
deposit and other short-term debt obligations of
savings and loan
associations.
Supranational Agencies. Securities of certain
supranational
entities, such as the International Development Bank.
All Funds (except Prime Reserve and U.S. Treasury Money
Funds)
Mortgage-Related Securities
Mortgage-related securities in which the Fund may
invest
include, but are not limited to, those described below.
The
GNMA, U.S. Treasury Intermediate and U.S. Treasury
Long-Term
Funds may only invest in these securities to the extent
they are
backed by the full faith and credit of the U.S.
Government.
PAGE 14
Mortgage-Backed Securities. Mortgage-backed
securities are
securities representing an interest in a pool of
mortgages. The
mortgages may be of a variety of types, including
adjustable
rate, conventional 30-year fixed rate, graduated
payment, and 15-
year. Principal and interest payments made on the
mortgages in
the underlying mortgage pool are passed through to the
Fund. This
is in contrast to traditional bonds where principal is
normally
paid back at maturity in a lump sum. Unscheduled
prepayments of
principal shorten the securities' weighted average life
and may
lower their total return. (When a mortgage in the
underlying
mortgage pool is prepaid, an unscheduled principal
prepayment is
passed through to the Fund. This principal is returned
to the
Fund at par. As a result, if a mortgage security were
trading at
a premium, its total return would be lowered by
prepayments, and
if a mortgage security were trading at a discount, its
total
return would be increased by prepayments.) The value
of these
securities also may change because of changes in the
market's
perception of the creditworthiness of the federal
agency that
issued them. In addition, the mortgage securities
market in
general may be adversely affected by changes in
governmental
regulation or tax policies.
U.S. Government Agency Mortgage-Backed Securities.
These
are obligations issued or guaranteed by the United
States
Government or one of its agencies or instrumentalities,
such as
the Government National Mortgage Association ("Ginnie
Mae" or
"GNMA"), the Federal National Mortgage Association
("Fannie Mae"
or "FNMA") the Federal Home Loan Mortgage Corporation
("Freddie
Mac" or "FHLMC"), and the Federal Agricultural Mortgage
Corporation ("Farmer Mac" or "FAMC"). FNMA, FHLMC, and
FAMC
obligations are not backed by the full faith and credit
of the
U.S. Government as GNMA certificates are, but they are
supported
by the instrumentality's right to borrow from the
United States
Treasury. U.S. Government Agency Mortgage-Backed
Certificates provide for the pass-through to investors
of their
pro-rata share of monthly payments (including any
prepayments)
made by the individual borrowers on the pooled mortgage
loans,
net of any fees paid to the guarantor of such
securities and the
servicer of the underlying mortgage loans. Each of
GNMA, FNMA,
FHLMC, and FAMC guarantees timely distributions of
interest to
certificate holders. GNMA and FNMA guarantee timely
distributions of scheduled principal. FHLMC has in the
past
guaranteed only the ultimate collection of principal of
the
underlying mortgage loan; however, FHLMC now issues
Mortgage-Backed Securities (FHLMC Gold PCs) which also
guarantee
timely payment of monthly principal reductions.
PAGE 15
Ginnie Mae Certificates. Ginnie Mae is a
wholly-owned
corporate instrumentality of the United States within
the
Department of Housing and Urban Development. The
National
Housing Act of 1934, as amended (the "Housing Act"),
authorizes
Ginnie Mae to guarantee the timely payment of the
principal of
and interest on certificates that are based on and
backed by a
pool of mortgage loans insured by the Federal Housing
Administration under the Housing Act, or Title V of the
Housing
Act of 1949 ("FHA Loans"), or guaranteed by the
Department of
Veterans Affairs under the Servicemen's Readjustment
Act of 1944,
as amended ("VA Loans"), or by pools of other eligible
mortgage
loans. The Housing Act provides that the full faith
and credit
of the United States government is pledged to the
payment of all
amounts that may be required to be paid under any
guaranty. In
order to meet its obligations under such guaranty,
Ginnie Mae is
authorized to borrow from the United States Treasury
with no
limitations as to amount.
Fannie Mae Certificates. Fannie Mae is a
federally
chartered and privately owned corporation organized and
existing
under the Federal National Mortgage Association Charter
Act of
1938. FNMA Certificates represent a pro-rata interest
in a group
of mortgage loans purchased by Fannie Mae. FNMA
guarantees the
timely payment of principal and interest on the
securities it
issues. The obligations of FNMA are not backed by the
full faith
and credit of the U.S. Government.
Freddie Mac Certificates. Freddie Mac is a
corporate
instrumentality of the United States created pursuant
to the
Emergency Home Finance Act of 1970, as amended (the
"FHLMC Act").
Freddie Mac Certificates represent a pro-rata interest
in a group
of mortgage loans (a "Freddie Mac Certificate group")
purchased
by Freddie Mac. Freddie Mac guarantees timely payment
of
interest and principal on certain securities it issues
and timely
payment of interest and eventual payment of principal
on other
securities is issues. The obligations of Freddie Mac
are
obligations solely of Freddie Mac and are not backed by
the full
faith and credit of the U.S. Government.
Farmer Mac Certificates. The Federal Agricultural
Mortgage
Corporation ("Farmer Mac") is a federally chartered
instrumentality of the United States established by
Title VIII of
the Farm Credit Act of 1971, as amended ("Charter
Act"). Farmer
Mac was chartered primarily to attract new capital for
financing
of agricultural real estate by making a secondary
market in
certain qualified agricultural real estate loans.
Farmer Mac
provides guarantees of timely payment of principal and
interest
PAGE 16
on securities representing interests in, or obligations
backed
by, pools of mortgages secured by first liens on
agricultural
real estate ("Farmer Mac Certificates"). Similar to
Fannie Mae
and Freddie Mac, Farmer Mac's Certificates are not
supported by
the full faith and credit of the U.S. Government;
rather, Farmer
Mac may borrow up from the U.S. Treasury to meet its
guaranty
obligations.
As discussed above, prepayments on the underlying
mortgages
and their effect upon the rate of return of a
Mortgage-Backed
Security, is the principal investment risk for a
purchaser of
such securities, like the Fund. Over time, any pool of
mortgages
will experience prepayments due to a variety of
factors,
including (1) sales of the underlying homes (including
foreclosures), (2) refinancings of the underlying
mortgages, and
(3) increased amortization by the mortgagee. These
factors, in
turn, depend upon general economic factors, such as
level of
interest rates and economic growth. Thus, investors
normally
expect prepayment rates to increase during periods of
strong
economic growth or declining interest rates, and to
decrease in
recessions and rising interest rate environments.
Accordingly,
the life of the Mortgage-Backed Security is likely to
be
substantially shorter than the stated maturity of the
mortgages
in the underlying pool. Because of such variation in
prepayment
rates, it is not possible to predict the life of a
particular
Mortgage-Backed Security, but FHA statistics indicate
that 25- to
30-year single family dwelling mortgages have an
average life of
approximately 12 years. The majority of Ginnie Mae
Certificates
are backed by mortgages of this type, and, accordingly,
the
generally accepted practice treats Ginnie Mae
Certificates as 30-
year securities which prepay full in the 12th year.
FNMA and
Freddie Mac Certificates may have differing prepayment
characteristics.
Fixed Rate Mortgage-Backed Securities bear a
stated "coupon
rate" which represents the effective mortgage rate at
the time of
issuance, less certain fees to GNMA, FNMA and FHLMC for
providing
the guarantee, and the issuer for assembling the pool
and for
passing through monthly payments of interest and
principal.
Payments to holders of Mortgage-Backed Securities
consist of
the monthly distributions of interest and principal
less the
applicable fees. The actual yield to be earned by a
holder of
Mortgage-Backed Securities is calculated by dividing
interest
payments by the purchase price paid for the
Mortgage-Backed
Securities (which may be at a premium or a discount
from the face
value of the certificate).
PAGE 17
Monthly distributions of interest, as contrasted
to semi-
annual distributions which are common for other fixed
interest
investments, have the effect of compounding and thereby
raising
the effective annual yield earned on Mortgage-Backed
Securities.
Because of the variation in the life of the pools of
mortgages
which back various Mortgage-Backed Securities, and
because it is
impossible to anticipate the rate of interest at which
future
principal payments may be reinvested, the actual yield
earned
from a portfolio of Mortgage-Backed Securities will
differ
significantly from the yield estimated by using an
assumption of
a certain life for each Mortgage-Backed Security
included in such
a portfolio as described above.
U.S. Government Agency Multiclass Pass-Through
Securities.
Unlike CMOs, U.S. Government Agency Multiclass
Pass-Through
Securities, which include FNMA Guaranteed REMIC
Pass-Through
Certificates and FHLMC Multi-Class Mortgage
Participation
Certificates, are ownership interests in a pool of
Mortgage
Assets. Unless the context indicates otherwise, all
references
herein to CMOs include multiclass pass-through
securities.
Multi-Class Residential Mortgage Securities. Such
securities represent interests in pools of mortgage
loans to
residential home buyers made by commercial banks,
savings and
loan associations or other financial institutions.
Unlike GNMA,
FNMA and FHLMC securities, the payment of principal and
interest
on Multi-Class Residential Mortgage Securities is not
guaranteed
by the U.S. Government or any of its agencies.
Accordingly,
yields on Multi-Class Residential Mortgage Securities
have been
historically higher than the yields on U.S. government
mortgage
securities. However, the risk of loss due to default
on such
instruments is higher since they are not guaranteed by
the U.S.
Government or its agencies. Additionally, pools of
such
securities may be divided into senior or subordinated
segments.
Although subordinated mortgage securities may have a
higher yield
than senior mortgage securities, the risk of loss of
principal is
greater because losses on the underlying mortgage loans
must be
borne by persons holding subordinated securities before
those
holding senior mortgage securities.
Privately-Issued Mortgage-Backed Certificates.
These are
pass-through certificates issued by non-governmental
issuers.
Pools of conventional residential mortgage loans
created by such
issuers generally offer a higher rate of interest than
government
and government-related pools because there are no
direct or
indirect government guarantees of payment. Timely
payment of
PAGE 18
interest and principal of these pools is, however,
generally
supported by various forms of insurance or guarantees,
including
individual loan, title, pool and hazard insurance. The
insurance
and guarantees are issued by government entities,
private
insurance or the mortgage poolers. Such insurance and
guarantees
and the creditworthiness of the issuers thereof will be
considered in determining whether a mortgage-related
security
meets the Fund's quality standards. The Fund may buy
mortgage-
related securities without insurance or guarantees if
through an
examination of the loan experience and practices of the
poolers,
the investment manager determines that the securities
meet the
Fund's quality standards.
Collateralized Mortgage Obligations (CMOs). CMOs
are bonds
that are collateralized by whole loan mortgages or
mortgage pass-
through securities. The bonds issued in a CMO deal are
divided
into groups, and each group of bonds is referred to as
a
"tranche." Under the traditional CMO structure, the
cash flows
generated by the mortgages or mortgage pass-through
securities in
the collateral pool are used to first pay interest and
then pay
principal to the CMO bondholders. The bonds issued
under a CMO
structure are retired sequentially as opposed to the
pro rata
return of principal found in traditional pass-through
obligations. Subject to the various provisions of
individual CMO
issues, the cash flow generated by the underlying
collateral (to
the extent it exceeds the amount required to pay the
stated
interest) is used to retire the bonds. Under the CMO
structure,
the repayment of principal among the different tranches
is
prioritized in accordance with the terms of the
particular CMO
issuance. The "fastest-pay" tranche of bonds, as
specified in
the prospectus for the issuance, would initially
receive all
principal payments. When that tranche of bonds is
retired, the
next tranche, or tranches, in the sequence, as
specified in the
prospectus, receive all of the principal payments until
they are
retired. The sequential retirement of bond groups
continues
until the last tranche, or group of bonds, is retired.
Accordingly, the CMO structure allows the issuer to use
cash
flows of long maturity, monthly-pay collateral to
formulate
securities with short, intermediate and long final
maturities and
expected average lives.
CMO structures may also include floating rate
CMOs, planned
amortization classes, accrual bonds and CMO residuals.
These
structures affect the amount and timing of principal
and interest
received by each tranche from the underlying
collateral. Under
certain of these structures, given classes of CMOs have
priority
over others with respect to the receipt of prepayments
on the
PAGE 19
mortgages. Therefore, depending on the type of CMOs in
which the
Fund invests, the investment may be subject to a
greater or
lesser risk of prepayment than other types of
mortgage-related
securities.
The primary risk of any mortgage security is the
uncertainty
of the timing of cash flows. For CMOs, the primary
risk results
from the rate of prepayments on the underlying
mortgages serving
as collateral. An increase or decrease in prepayment
rates
(resulting from a decrease or increase in mortgage
interest
rates) will affect the yield, average life and price of
CMOs.
The prices of certain CMOs, depending on their
structure and the
rate of prepayments, can be volatile. Some CMOs may
also not be
as liquid as other securities.
Stripped Mortgage-Backed Securities. Stripped
Mortgage-
Backed securities represent interests in a pool of
mortgages, the
cash flow of which has been separated into its interest
and
principal components. "IOs" (interest only securities)
receive
the interest portion of the cash flow while "POs"
(principal only
securities) receive the principal portion. IOs and POs
are
usually structured as tranches of a CMO. Stripped
Mortgage-Backed Securities may be issued by U.S.
Government
Agencies or by private issuers similar to those
described above
with respect to CMOs and privately-issued
mortgage-backed
certificates. As interest rates rise and fall, the
value of IOs
tends to move in the same direction as interest rates.
The value
of the other mortgage-backed securities described
herein, like
other debt instruments, will tend to move in the
opposite
direction compared to interest rates. Under the
Internal Revenue
Code of 1986, as amended (the "Code"), POs may generate
taxable
income from the current accrual of original issue
discount,
without a corresponding distribution of cash to the
Fund.
The cash flows and yields on IO and PO classes are
extremely
sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets.
In the
case of IOs, prepayments affect the amount, but not the
timing,
of cash flows provided to the investor. In contrast,
prepayments
on the mortgage pool affect the timing, but not the
amount, of
cash flows received by investors in POs. A rapid or
slow rate of
principal payments may have a material adverse effect
on the
prices of IOs or POs, respectively. If the underlying
mortgage
assets experience greater than anticipated prepayments
of
principal, an investor may fail to recoup fully its
initial
investment in an IO class of a stripped mortgage-backed
security,
even if the IO class is rated AAA or Aaa or is derived
from a
PAGE 20
full faith and credit obligation. Conversely, if the
underlying
mortgage assets experience slower than anticipated
prepayments of
principal, the price on a PO class will be affected
more severely
than would be the case with a traditional
mortgage-backed
security.
The staff of the Securities and Exchange
Commission has
advised the Fund that it believes the Fund should treat
IOs and
POs, other than government-issued IOs or POs backed by
fixed rate
mortgages, as illiquid securities and, accordingly,
limit its
investments in such securities, together with all other
illiquid
securities, to 15% of the Fund's net assets. Under the
Staff's
position, the determination of whether a particular
government-issued IO and PO backed by fixed rate
mortgages may be
made on a case by case basis under guidelines and
standards
established by the Fund's Board of Directors/Trustees.
The
Fund's Board of Directors/Trustees has delegated to T.
Rowe Price
the authority to determine the liquidity of these
investments
based on the following guidelines: the type of issuer;
type of
collateral, including age and prepayment
characteristics; rate of
interest on coupon relative to current market rates and
the
effect of the rate on the potential for prepayments;
complexity
of the issue's structure, including the number of
tranches; size
of the issue and the number of dealers who make a
market in the
IO or PO. The Fund will treat non-government-issued IOs
and POs
not backed by fixed or adjustable rate mortgages as
illiquid
unless and until the Securities and Exchange Commission
modifies
its position.
Adjustable Rate Mortgages. Adjustable rate
mortgage (ARM)
securities are collateralized by adjustable rate,
rather than
fixed rate, mortgages.
ARMs, like fixed rate mortgages, have a specified
maturity
date, and the principal amount of the mortgage is
repaid over the
life of the mortgage. Unlike fixed rate mortgages, the
interest
rate on ARMs is adjusted at regular intervals based on
a
specified, published interest rate "index" such as a
Treasury
rate index. The new rate is determined by adding a
specific
interest amount, the "margin," to the interest rate of
the index.
Investment in ARM securities allows the Fund to
participate in
changing interest rate levels through regular
adjustments in the
coupons of the underlying mortgages, resulting in more
variable
current income and lower price volatility than longer
term fixed
rate mortgage securities. The ARM securities in which
the Fund
expects to invest will generally adjust their interest
rates at
PAGE 21
regular intervals of one year or less. ARM securities
are a less
effective means of locking in long-term rates than
fixed rate
mortgages since the income from adjustable rate
mortgages will
increase during periods of rising interest rates and
decline
during periods of falling rates.
Characteristics of Adjustable Rate Mortgage
Securities -
Interest Rate Indices. The interest rates paid on
adjustable
rate securities are readjusted periodically to an
increment over
some predetermined interest rate index. Such
readjustments occur
at intervals ranging from one to 60 months. There are
three main
categories of indexes: (1) those based on U.S. Treasury
securities (2) those derived from a calculated measure
such as a
cost of funds index ("COFI") or a moving average of
mortgage
rates and (3) those based on actively traded or
prominently
posted short-term, interest rates. Commonly utilized
indexes
include the one-year, three-year and five-year constant
maturity
Treasury rates, the three-month Treasury bill rate, the
180-day
Treasury bill rate, rates on longer-term Treasury
securities, the
11th District Federal Home Loan Bank Cost of Funds, the
National
Median Cost of Funds, the one-month, three-month,
six-month or
one-year London Interbank Offered Rate (LIBOR), the
prime rate of
a specific bank, or commercial paper rates. Some
indexes, such
as the one-year constant maturity Treasury rate,
closely mirror
changes in market interest rate levels. Others, such
as the 11th
District Home Loan Bank Cost of Funds index, tend to
lag behind
changes in market rate levels. The market value of the
Fund's
assets and of the net asset value of the Fund's shares
will be
affected by the length of the adjustment period, the
degree of
volatility in the applicable indexes and the maximum
increase or
decrease of the interest rate adjustment on any one
adjustment
date, in any one year and over the life of the
securities. These
maximum increases and decreases are typically referred
to as
"caps" and "floors", respectively.
A number of factors affect the performance of the
Cost of
Funds Index and may cause the Cost of Funds Index to
move in a
manner different from indices based upon specific
interest rates,
such as the One Year Treasury Index. Additionally,
there can be
no assurance that the Cost of Funds Index will
necessarily move
in the same direction or at the same rate as prevailing
interest
rates. Furthermore, any movement in the Cost of Funds
Index as
compared to other indices based upon specific interest
rates may
be affected by changes instituted by the FHLB of San
Francisco in
the method used to calculate the Cost of Funds Index.
To the
extent that the Cost of Funds Index may reflect
interest changes
PAGE 22
on a more delayed basis than other indices, in a period
of rising
interest rates, any increase may produce a higher yield
later
than would be produced by such other indices, and in a
period of
declining interest rates, the Cost of Funds Index may
remain
higher than other market interest rates which may
result in a
higher level of principal prepayments on mortgage loans
which
adjust in accordance with the Cost of Funds Index than
mortgage
loans which adjust in accordance with other indices.
LIBOR, the London interbank offered rate, is the
interest
rate that the most creditworthy international banks
dealing in
U.S. dollar-denominated deposits and loans charge each
other for
large dollar-denominated loans. LIBOR is also usually
the base
rate for large dollar-denominated loans in the
international
market. LIBOR is generally quoted for loans having
rate
adjustments at one, three, six or 12 month intervals.
Caps and Floors. ARMs will frequently have caps
and floors
which limit the maximum amount by which the interest
rate to the
residential borrower may move up or down, respectively,
each
adjustment period and over the life of the loan.
Interest rate
caps on ARM securities may cause them to decrease in
value in an
increasing interest rate environment. Such caps may
also prevent
their income from increasing to levels commensurate
with
prevailing interest rates. Conversely, interest rate
floors on
ARM securities may cause their income to remain higher
than
prevailing interest rate levels and result in an
increase in the
value of such securities. However, this increase may
be tempered
by the acceleration of prepayments.
Mortgage securities generally have a maximum
maturity of up
to 30 years. However, due to the adjustable rate
feature of ARM
securities, their prices are considered to have
volatility
characteristics which approximate the average period of
time
until the next adjustment of the interest rate. As a
result, the
principal volatility of ARM securities may be more
comparable to
short- and intermediate-term securities than to longer
term fixed
rate mortgage securities. Prepayments, however, will
increase
their principal volatility. See also the discussion of
Mortgage-
Backed Securities on page 9. Several characteristics
of ARMs may
make them more susceptible to prepayments than other
Mortgage-
Backed Securities. An adjustable rate mortgage has
greater
incentives to refinance with a fixed rate mortgage
during
favorable interest rate environments, in order to avoid
interest
rate risk. Also, homes financed with adjustable rate
mortgages
may be sold more frequently because of the prevalence
of first-
time home buyers in the adjustable rate mortgage
market. Also,
PAGE 23
delinquency and foreclosure rates are higher in this
market since
many buyers use adjustable rate mortgages to purchase
homes that
they could not otherwise finance on a fixed rate basis.
Significant increases in the index rates for the
adjustable rate
mortgages may also result in increased delinquency and
default
rates, which in turn, may affect prepayment rates on
the ARMs.
Other Mortgage Related Securities. The Fund
expects that
governmental, government-related or private entities
may create
mortgage loan pools offering pass-through investments
in addition
to those described above. The mortgages underlying
these
securities may be alternative mortgage instruments,
that is,
mortgage instruments whose principal or interest
payments may
vary or whose terms to maturity may differ from
customary long-
term fixed rate mortgages. As new types of
mortgage-related
securities are developed and offered to investors, the
investment
manager will, consistent with the Fund's objective,
policies and
quality standards, consider making investments in such
new types
of securities.
All Funds (except GNMA, U.S. Treasury Money,
Intermediate and
Long-Term Funds)
Asset-Backed Securities
The credit quality of most asset-backed securities
depends
primarily on the credit quality of the assets
underlying such
securities, how well the entity issuing the security is
insulated
from the credit risk of the originator or any other
affiliated
entities and the amount and quality of any credit
support
provided to the securities. The rate of principal
payment on
asset-backed securities generally depends on the rate
of
principal payments received on the underlying assets
which in
turn may be affected by a variety of economic and other
factors.
As a result, the yield on any asset-backed security is
difficult
to predict with precision and actual yield to maturity
may be
more or less than the anticipated yield to maturity.
Asset-
backed securities may be classified as pass-through
certificates
or collateralized obligations.
Pass-through certificates are asset-backed
securities which
represent an undivided fractional ownership interest in
an
underlying pool of assets. Pass-through certificates
usually
provide for payments of principal and interest received
to be
passed through to their holders, usually after
deduction for
certain costs and expenses incurred in administering
the pool.
PAGE 24
Because pass-through certificates represent an
ownership interest
in the underlying assets, the holders thereof bear
directly the
risk of any defaults by the obligors on the underlying
assets not
covered by any credit support. See "Types of Credit
Support".
Asset-backed securities issued in the form of debt
instruments, also known as collateralized or
pay-through
obligations, are generally issued as the debt of a
special
purpose entity organized solely for the purpose of
owning such
assets and issuing such debt. Such assets are most
often trade,
credit card or automobile receivables. The assets
collateralizing such asset-backed securities are
pledged to a
trustee or custodian for the benefit of the holders
thereof.
Such issuers generally hold no assets other than those
underlying
the asset-backed securities and any credit support
provided. As
a result, although payments on such asset-backed
securities are
obligations of the issuers, in the event of defaults on
the
underlying assets not covered by any credit support
(see "Types
of Credit Support"), the issuing entities are unlikely
to have
sufficient assets to satisfy their obligations on the
related
asset-backed securities.
Methods of Allocating Cash Flows. While many
asset-backed
securities are issued with only one class of security,
many
asset-backed securities are issued in more than one
class, each
with different payment terms. Multiple class
asset-backed
securities are issued for two main reasons. First,
multiple
classes may be used as a method of providing credit
support.
This is accomplished typically through creation of one
or more
classes whose right to payments on the asset-backed
security is
made subordinate to the right to such payments of the
remaining
class or classes. See "Types of Credit Support".
Second,
multiple classes may permit the issuance of securities
with
payment terms, interest rates or other characteristics
differing
both from those of each other and from those of the
underlying
assets. Examples include so-called "strips"
(asset-backed
securities entitling the holder to disproportionate
interests
with respect to the allocation of interest and
principal of the
assets backing the security), and securities with class
or
classes having characteristics which mimic the
characteristics of
non-asset-backed securities, such as floating interest
rates
(i.e., interest rates which adjust as a specified
benchmark
changes) or scheduled amortization of principal.
Asset-backed securities in which the payment
streams on the
underlying assets are allocated in a manner different
than those
PAGE 25
described above may be issued in the future. The Fund
may invest
in such asset-backed securities if such investment is
otherwise
consistent with its investment objectives and policies
and with
the investment restrictions of the Fund.
Types of Credit Support. Asset-backed securities
are often
backed by a pool of assets representing the obligations
of a
number of different parties. To lessen the effect of
failures by
obligors on underlying assets to make payments, such
securities
may contain elements of credit support. Such credit
support
falls into two classes: liquidity protection and
protection
against ultimate default by an obligor on the
underlying assets.
Liquidity protection refers to the provision of
advances,
generally by the entity administering the pool of
assets, to
ensure that scheduled payments on the underlying pool
are made in
a timely fashion. Protection against ultimate default
ensures
ultimate payment of the obligations on at least a
portion of the
assets in the pool. Such protection may be provided
through
guarantees, insurance policies or letters of credit
obtained from
third parties ("external credit enhancement"), through
various
means of structuring the transaction ("internal credit
enhancement") or through a combination of such
approaches.
Examples of asset-backed securities with internal
credit
enhancement include "senior-subordinated securities"
(multiple
class asset-backed securities with certain classes
subordinate to
other classes as to the payment of principal thereon,
with the
result that defaults on the underlying assets are borne
first by
the holders of the subordinated class) and asset-backed
securities that have "reserve funds" (where cash or
investments,
sometimes funded from a portion of the initial payments
on the
underlying assets, are held in reserve against future
losses) or
that have been "over collateralized" (where the
scheduled
payments on, or the principal amount of, the underlying
assets
substantially exceeds that required to make payment of
the asset-
backed securities and pay any servicing or other fees).
The
degree of credit support provided on each issue is
based
generally on historical information respecting the
level of
credit risk associated with such payments. Depending
upon the
type of assets securitized, historical information on
credit risk
and prepayment rates may be limited or even
unavailable.
Delinquency or loss in excess of that anticipated could
adversely
affect the return on an investment in an asset-backed
security.
Automobile Receivable Securities. The Fund may
invest in
Asset Backed Securities which are backed by receivables
from
motor vehicle installment sales contracts or
installment loans
secured by motor vehicles ("Automobile Receivable
Securities").
PAGE 26
Since installment sales contracts for motor vehicles or
installment loans related thereto ("Automobile
Contracts")
typically have shorter durations and lower incidences
of
prepayment, Automobile Receivable Securities generally
will
exhibit a shorter average life and are less susceptible
to
prepayment risk.
Most entities that issue Automobile Receivable
Securities
create an enforceable interest in their respective
Automobile
Contracts only by filing a financing statement and by
having the
servicer of the Automobile Contracts, which is usually
the
originator of the Automobile Contracts, take custody
thereof. In
such circumstances, if the servicer of the Automobile
Contracts
were to sell the same Automobile Contracts to another
party, in
violation of its obligation not to do so, there is a
risk that
such party could acquire an interest in the Automobile
Contracts
superior to that of the holders of Automobile
Receivable
Securities. Also although most Automobile Contracts
grant a
security interest in the motor vehicle being financed,
in most
states the security interest in a motor vehicle must be
noted on
the certificate of title to create an enforceable
security
interest against competing claims of other parties.
Due to the
large number of vehicles involved, however, the
certificate of
title to each vehicle financed, pursuant to the
Automobile
Contracts underlying the Automobile Receivable
Security, usually
is not amended to reflect the assignment of the
seller's security
interest for the benefit of the holders of the
Automobile
Receivable Securities. Therefore, there is the
possibility that
recoveries on repossessed collateral may not, in some
cases, be
available to support payments on the securities. In
addition,
various state and federal securities laws give the
motor vehicle
owner the right to assert against the holder of the
owner's
Automobile Contract certain defenses such owner would
have
against the seller of the motor vehicle. The assertion
of such
defenses could reduce payments on the Automobile
Receivable
Securities.
Credit Card Receivable Securities. The Fund may
invest in
Asset Backed Securities backed by receivables from
revolving
credit card agreements ("Credit Card Receivable
Securities").
Credit balances on revolving credit card agreements
("Accounts")
are generally paid down more rapidly than are
Automobile
Contracts. Most of the Credit Card Receivable
Securities issued
publicly to date have been Pass-Through Certificates.
In order
to lengthen the maturity of Credit Card Receivable
Securities,
most such securities provide for a fixed period during
which only
interest payments on the underlying Accounts are passed
through
PAGE 27
to the security holder and principal payments received
on such
Accounts are used to fund the transfer to the pool of
assets
supporting the related Credit Card Receivable
Securities of
additional credit card charges made on an Account. The
initial
fixed period usually may be shortened upon the
occurrence of
specified events which signal a potential deterioration
in the
quality of the assets backing the security, such as the
imposition of a cap on interest rates. The ability of
the issuer
to extend the life of an issue of Credit Card
Receivable
Securities thus depends upon the continued generation
of
additional principal amounts in the underlying accounts
during
the initial period and the non-occurrence of specified
events.
An acceleration in cardholders' payment rates or any
other event
which shortens the period during which additional
credit card
charges on an Account may be transferred to the pool of
assets
supporting the related Credit Card Receivable Security
could
shorten the weighted average life and yield of the
Credit Card
Receivable Security.
Credit cardholders are entitled to the protection
of a
number of state and federal consumer credit laws, many
of which
give such holder the right to set off certain amounts
against
balances owed on the credit card, thereby reducing
amounts paid
on Accounts. In addition, unlike most other Asset
Backed
Securities, Accounts are unsecured obligations of the
cardholder.
Other Assets. Asset Backed Securities backed by
assets
other than those described above, including, but not
limited to,
small business loans and accounts receivable, equipment
leases,
commercial real estate loans, boat loans and
manufacturing
housing loans. The Fund may invest in such securities
in the
future if such investment is otherwise consistent with
its
investment objective and policies.
There are, of course, other types of securities
that are, or
may become available, which are similar to the
foregoing and the
Fund reserves the right to invest in these securities.
High Yield Fund
Collateralized Bond or Loan Obligations
CBOs are bonds collateralized by corporate bonds
and CLOs
are bonds collateralized by bank loans. CBOs and CLOs
are
structured into tranches, and payments are allocated
such that
PAGE 28
each tranche has a predictable cash flow stream and
average life.
CBOs are fairly recent entrants to the fixed income
market. Most
issues to date have been collateralized by high yield
bonds or
loans, with heavy credit enhancement.
Loan Participations and Assignments
Loan participations and assignments (collectively
"participations") will typically be participating
interests in
loans made by a syndicate of banks, represented by an
agent bank
which has negotiated and structured the loan, to
corporate
borrowers to finance internal growth, mergers,
acquisitions,
stock repurchases, leveraged buy-outs and other
corporate
activities. Such loans may also have been made to
governmental
borrowers, especially governments of developing
countries (LDC
debt). LDC debt will involve the risk that the
governmental
entity responsible for the repayment of the debt may be
unable or
unwilling to do so when due. The loans underlying such
participations may be secured or unsecured, and the
Fund may
invest in loans collateralized by mortgages on real
property or
which have no collateral. The loan participations
themselves may
extend for the entire term of the loan or may extend
only for
short "strips" that correspond to a quarterly or
monthly floating
rate interest period on the underlying loan. Thus, a
term or
revolving credit that extends for several years may be
subdivided
into shorter periods.
The loan participations in which the Fund will
invest will
also vary in legal structure. Occasionally, lenders
assign to
another institution both the lender's rights and
obligations
under a credit agreement. Since this type of
assignment relieves
the original lender of its obligations, it is call a
novation.
More typically, a lender assigns only its right to
receive
payments of principal and interest under a promissory
note,
credit agreement or similar document. A true
assignment shifts
to the assignee the direct debtor-creditor relationship
with the
underlying borrower. Alternatively, a lender may
assign only
part of its rights to receive payments pursuant to the
underlying
instrument or loan agreement. Such partial
assignments, which
are more accurately characterized as "participating
interests,"
do not shift the debtor-creditor relationship to the
assignee,
who must rely on the original lending institution to
collect sums
due and to otherwise enforce its rights against the
agent bank
which administers the loan or against the underlying
borrower.
Pursuant to an SEC no-action letter, and because
the Fund is
allowed to purchase debt and debt securities, including
debt
PAGE 29
securities at private placement, the Fund will treat
loan
participations as securities and not subject to its
fundamental
investment restriction prohibiting the Fund from making
loans.
There may not be a recognizable, liquid public
market for
loan participations. To the extent this is the case,
the Fund
would consider the loan participation as illiquid and
subject to
the Fund's restriction on investing no more than 15% of
its net
assets in illiquid securities.
Where required by applicable SEC positions, the
Fund will
treat both the corporate borrower and the bank selling
the
participation interest as an issuer for purposes of its
fundamental investment restriction on diversification.
Various service fees received by the Fund from
loan
participations, may be treated as non-interest income
depending
on the nature of the fee (commitment, takedown,
commission,
service or loan origination). To the extent the
service fees are
not interest income, they will not qualify as income
under
Section 851(b) of the Internal Revenue Code. Thus the
sum of
such fees plus any other non-qualifying income earned
by the Fund
cannot exceed 10% of total income.
Trade Claims
Trade claims are non-securitized rights of payment
arising
from obligations other than borrowed funds. Trade
claims
typically arise when, in the ordinary course of
business, vendors
and suppliers extend credit to a company by offering
payment
terms. Generally, when a company files for bankruptcy
protection
payments on these trade claims cease and the claims are
subject
to compromise along with the other debts of the
company. Trade
claims typically are bought and sold at a discount
reflecting the
degree of uncertainty with respect to the timing and
extent of
recovery. In addition to the risks otherwise
associated with
low-quality obligations, trade claims have other risks,
including
the possibility that the amount of the claim may be
disputed by
the obligor.
Over the last few years a market for the trade
claims of
bankrupt companies has developed. Many vendors are
either
unwilling or lack the resources to hold their claim
through the
extended bankruptcy process with an uncertain outcome
and timing.
Some vendors are also aggressive in establishing
reserves against
these receivables, so that the sale of the claim at a
discount
may not result in the recognition of a loss.
PAGE 30
Trade claims can represent an attractive
investment
opportunity because these claims typically are priced
at a
discount to comparable public securities. This
discount is a
reflection of both a less liquid market, a smaller
universe of
potential buyers and the risks peculiar to trade claim
investing.
It is not unusual for trade claims to be priced at a
discount to
public securities that have an equal or lower priority
claim.
As noted above, investing in trade claims does
carry some
unique risks which include:
o Establishing the Amount of the Claim.
Frequently, the
supplier's estimate of its receivable will
differ from
the customer's estimate of its payable.
Resolution of
these differences can result in a reduction in
the amount
of the claim. This risk can be reduced by only
purchasing scheduled claims (claims already
listed as
liabilities by the debtor) and seeking
representations
from the seller.
o Defenses to Claims. The debtor has a variety
of defenses
that can be asserted under the bankruptcy code
against
any claim. Trade claims are subject to these
defenses,
the most common of which for trade claims
relates to
preference payments. (Preference payments are
all
payments made by the debtor during the 90 days
prior to
the filing. These payments are presumed to
have
benefited the receiving creditor at the expense
of the
other creditors. The receiving creditor may be
required
to return the payment unless it can show the
payments
were received in the ordinary course of
business.) While
none of these defenses can result in any
additional
liability of the purchaser of the trade claim,
they can
reduce or wipe out the entire purchased claim.
This risk
can be reduced by seeking representations and
indemnification from the seller.
o Documentation/Indemnification. Each trade
claim
purchased requires documentation that must be
negotiated
between the buyer and seller. This
documentation is
extremely important since it can protect the
purchaser
from losses such as those described above.
Legal
expenses in negotiating a purchase agreement
can be
fairly high. Additionally, it is important to
note that
the value of an indemnification depends on the
sellers
credit.
PAGE 31
o Volatile Pricing Due to Illiquid Market. There
are only
a handful of brokers for trade claims and the
quoted
price of these claims can be volatile.
Generally, it is
expected that Trade Claims would be considered
illiquid
investments.
o No Current Yield/Ultimate Recovery. Trade
claims are
almost never entitled to earn interest. As a
result, the
return on such an investment is very sensitive
to the
length of the bankruptcy, which is uncertain.
Although
not unique to trade claims, it is worth noting
that the
ultimate recovery on the claim is uncertain and
there is
no way to calculate a conventional yield to
maturity on
this investment. Additionally, the exit for
this
investment is a plan of reorganization which
may include
the distribution of new securities. These
securities may
be as illiquid as the original trade claim
investment.
o Tax Issue. Although the issue is not free from
doubt, it
is likely that Trade Claims would be treated as
non-
securities investments. As a result, any gains
would be
considered "non-qualifying" under the Internal
Revenue
Code. The Fund may have up to 10% of its gross
income
(including capital gains) derived from
non-qualifying
sources.
High Yield and Personal Strategy Funds
Zero Coupon and Pay-in-Kind Bonds
A zero coupon security has no cash coupon
payments.
Instead, the issuer sells the security at a substantial
discount
from its maturity value. The interest received by the
investor
from holding this security to maturity is the
difference between
the maturity value and the purchase price. The
advantage to the
investor is that reinvestment risk of the income
received during
the life of the bond is eliminated. However,
zero-coupon bonds
like other bonds retain interest rate and credit risk
and usually
display more price volatility than those securities
that pay a
cash coupon.
Pay-in-Kind (PIK) Instruments are securities that
pay
interest in either cash or additional securities, at
the issuer's
option, for a specified period. PIK's, like zero
coupon bonds,
are designed to give an issuer flexibility in managing
cash flow.
PIK bonds can be either senior or subordinated debt and
trade
PAGE 32
flat (i.e., without accrued interest). The price of
PIK bonds is
expected to reflect the market value of the underlying
debt plus
an amount representing accrued interest since the last
payment.
PIK's are usually less volatile than zero coupon bonds,
but more
volatile than cash pay securities.
For federal income tax purposes, these types of
bonds will
require the recognition of gross income each year even
though no
cash may be paid to the Fund until the maturity or call
date of
the bond. The Fund will nonetheless be required to
distribute
substantially all of this gross income each year to
comply with
the Internal Revenue Code, and such distributions could
reduce
the amount of cash available for investment by the
Fund.
High Yield, New Income, and Personal Strategy Funds
Warrants
The Fund may acquire warrants. Warrants are pure
speculation in that they have no voting rights, pay no
dividends
and have no rights with respect to the assets of the
corporation
issuing them. Warrants basically are options to
purchase equity
securities at a specific price valid for a specific
period of
time. They do not represent ownership of the
securities, but
only the right to buy them. Warrants differ from call
options in
that warrants are issued by the issuer of the security
which may
be purchased on their exercise, whereas call options
may be
written or issued by anyone. The prices of warrants do
not
necessarily move parallel to the prices of the
underlying
securities.
High Yield, New Income, Personal Strategy,
Short-Term Bond,
and Short-Term U.S. Government Funds
Hybrid Instruments
Hybrid Instruments have been developed and combine
the
elements of futures contracts or options with those of
debt,
preferred equity or a depository instrument
(hereinafter "Hybrid
Instruments"). Generally, a Hybrid Instrument will be
a debt
security, preferred stock, depository share, trust
certificate,
certificate of deposit or other evidence of
indebtedness on which
a portion of or all interest payments, and/or the
principal or
stated amount payable at maturity, redemption or
retirement, is
determined by reference to prices, changes in prices,
or
differences between prices, of securities, currencies,
intangibles, goods, articles or commodities
(collectively
PAGE 33
"Underlying Assets") or by another objective index,
economic
factor or other measure, such as interest rates,
currency
exchange rates, commodity indices, and securities
indices
(collectively "Benchmarks"). Thus, Hybrid Instruments
may take a
variety of forms, including, but not limited to, debt
instruments
with interest or principal payments or redemption terms
determined by reference to the value of a currency or
commodity
or securities index at a future point in time,
preferred stock
with dividend rates determined by reference to the
value of a
currency, or convertible securities with the conversion
terms
related to a particular commodity.
Hybrid Instruments can be an efficient means of
creating
exposure to a particular market, or segment of a
market, with the
objective of enhancing total return. For example, a
Fund may
wish to take advantage of expected declines in interest
rates in
several European countries, but avoid the transactions
costs
associated with buying and currency-hedging the foreign
bond
positions. One solution would be to purchase a U.S.
dollar-
denominated Hybrid Instrument whose redemption price is
linked to
the average three year interest rate in a designated
group of
countries. The redemption price formula would provide
for
payoffs of greater than par if the average interest
rate was
lower than a specified level, and payoffs of less than
par if
rates were above the specified level. Furthermore, the
Fund
could limit the downside risk of the security by
establishing a
minimum redemption price so that the principal paid at
maturity
could not be below a predetermined minimum level if
interest
rates were to rise significantly. The purpose of this
arrangement, known as a structured security with an
embedded put
option, would be to give the Fund the desired European
bond
exposure while avoiding currency risk, limiting
downside market
risk, and lowering transactions costs. Of course,
there is no
guarantee that the strategy will be successful and the
Fund could
lose money if, for example, interest rates do not move
as
anticipated or credit problems develop with the issuer
of the
Hybrid.
The risks of investing in Hybrid Instruments
reflect a
combination of the risks of investing in securities,
options,
futures and currencies. Thus, an investment in a
Hybrid
Instrument may entail significant risks that are not
associated
with a similar investment in a traditional debt
instrument that
has a fixed principal amount, is denominated in U.S.
dollars or
bears interest either at a fixed rate or a floating
rate
determined by reference to a common, nationally
published
Benchmark. The risks of a particular Hybrid Instrument
will, of
PAGE 34
course, depend upon the terms of the instrument, but
may include,
without limitation, the possibility of significant
changes in the
Benchmarks or the prices of Underlying Assets to which
the
instrument is linked. Such risks generally depend upon
factors
which are unrelated to the operations or credit quality
of the
issuer of the Hybrid Instrument and which may not be
readily
foreseen by the purchaser, such as economic and
political events,
the supply and demand for the Underlying Assets and
interest rate
movements. In recent years, various Benchmarks and
prices for
Underlying Assets have been highly volatile, and such
volatility
may be expected in the future. Reference is also made
to the
discussion of futures, options, and forward contracts
herein for
a discussion of the risks associated with such
investments.
Hybrid Instruments are potentially more volatile
and carry
greater market risks than traditional debt instruments.
Depending on the structure of the particular Hybrid
Instrument,
changes in a Benchmark may be magnified by the terms of
the
Hybrid Instrument and have an even more dramatic and
substantial
effect upon the value of the Hybrid Instrument. Also,
the prices
of the Hybrid Instrument and the Benchmark or
Underlying Asset
may not move in the same direction or at the same time.
Hybrid Instruments may bear interest or pay
preferred
dividends at below market (or even relatively nominal)
rates.
Alternatively, Hybrid Instruments may bear interest at
above
market rates but bear an increased risk of principal
loss (or
gain). The latter scenario may result if "leverage" is
used to
structure the Hybrid Instrument. Leverage risk occurs
when the
Hybrid Instrument is structured so that a given change
in a
Benchmark or Underlying Asset is multiplied to produce
a greater
value change in the Hybrid Instrument, thereby
magnifying the
risk of loss as well as the potential for gain.
Hybrid Instruments may also carry liquidity risk
since the
instruments are often "customized" to meet the
portfolio needs of
a particular investor, and therefore, the number of
investors
that are willing and able to buy such instruments in
the
secondary market may be smaller than that for more
traditional
debt securities. In addition, because the purchase and
sale of
Hybrid Instruments could take place in an
over-the-counter market
without the guarantee of a central clearing
organization or in a
transaction between the Fund and the issuer of the
Hybrid
Instrument, the creditworthiness of the counter party
or issuer
of the Hybrid Instrument would be an additional risk
factor which
the Fund would have to consider and monitor. Hybrid
Instruments
also may not be subject to regulation of the
Commodities Futures
PAGE 35
Trading Commission ("CFTC"), which generally regulates
the
trading of commodity futures by U.S. persons, the SEC,
which
regulates the offer and sale of securities by and to
U.S.
persons, or any other governmental regulatory
authority.
The various risks discussed above, particularly
the market
risk of such instruments, may in turn cause significant
fluctuations in the net asset value of the Fund.
Accordingly,
the Fund will limit its investments in Hybrid
Instruments to 10%
of net assets. However, because of their volatility,
it is
possible that the Fund's investment in Hybrid
Instruments will
account for more than 10% of the Fund's return
(positive or
negative).
All Funds
When-Issued Securities and Forward Commitment
Contracts
The Fund may purchase securities on a
"when-issued" or
delayed delivery basis ("When-Issueds") and may
purchase
securities on a forward commitment basis ("Forwards").
Any or
all of the Fund's investments in debt securities may be
in the
form of When-Issueds and Forwards. The price of such
securities,
which may be expressed in yield terms, is fixed at the
time the
commitment to purchase is made, but delivery and
payment take
place at a later date. Normally, the settlement date
occurs
within 90 days of the purchase for When-Issueds, but
may be
substantially longer for Forwards. During the period
between
purchase and settlement, no payment is made by the Fund
to the
issuer and no interest accrues to the Fund. The
purchase of
these securities will result in a loss if their value
declines
prior to the settlement date. This could occur, for
example, if
interest rates increase prior to settlement. The
longer the
period between purchase and settlement, the greater the
risks
are. At the time the Fund makes the commitment to
purchase these
securities, it will record the transaction and reflect
the value
of the security in determining its net asset value.
The Fund
will cover these securities by maintaining cash and/or
liquid,
high-grade debt securities with its custodian bank
equal in value
to commitments for them during the time between the
purchase and
the settlement. Therefore, the longer this period, the
longer
the period during which alternative investment options
are not
available to the Fund (to the extent of the securities
used for
cover). Such securities either will mature or, if
necessary, be
sold on or before the settlement date.
PAGE 36
To the extent the Fund remains fully or almost
fully
invested (in securities with a remaining maturity of
more than
one year) at the same time it purchases these
securities, there
will be greater fluctuations in the Fund's net asset
value than
if the Fund did not purchase them.
Additional Adjustable Rate Securities
Certain 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. 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 rate. A variable rate
instrument
which is subject to a demand feature entitles the
purchaser to
receive the principal amount of the underlying security
or
securities, either (i) upon notice of no more than 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 through demand.
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. 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. 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.
PAGE 37
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.
High Yield, New Income, Personal Strategy, Prime
Reserve, and
Short-Term Bond, and Short-Term U.S. Government
Funds
Illiquid or Restricted Securities
Restricted securities may be sold only in
privately
negotiated transactions or in a public offering with
respect to
which a registration statement is in effect under the
Securities
Act of 1933 (the "1933 Act"). Where registration is
required,
the Fund may be obligated to pay all or part of the
registration
expenses and a considerable period may elapse between
the time of
the decision to sell and the time the Fund may be
permitted to
sell a security under an effective registration
statement. If,
during such a period, adverse market conditions were to
develop,
the Fund might obtain a less favorable price than
prevailed when
it decided to sell. Restricted securities will be
priced at fair
value as determined in accordance with procedures
prescribed by
the Fund's Board of Directors/Trustees. If through the
appreciation of illiquid securities or the depreciation
of liquid
securities, the Fund should be in a position where more
than 15%
(10% for Prime Reserve and U.S. Treasury Money Funds)
of the
value of its net assets is invested in illiquid assets,
including
restricted securities, the Fund will take appropriate
steps to
protect liquidity.
Notwithstanding the above, the Fund may purchase
securities
which, while privately placed, are eligible for
purchase and sale
under Rule 144A under the 1933 Act. This rule permits
certain
qualified institutional buyers, such as the Fund, to
trade in
privately placed securities even though such securities
are not
registered under the 1933 Act. T. Rowe Price under the
supervision of the Fund's Board of Directors/Trustees,
will
consider whether securities purchased under Rule 144A
are
illiquid and thus subject to the Fund's restriction of
investing
no more than 15% (10% for Prime Reserve and U.S.
Treasury Money
Funds) of its net assets in illiquid securities. A
determination
of whether a Rule 144A security is liquid or not is a
question of
fact. In making this determination, T. Rowe Price will
consider
PAGE 38
the trading markets for the specific security taking
into account
the unregistered nature of a Rule 144A security. In
addition, T.
Rowe Price could consider the (1) frequency of trades
and quotes,
(2) number of dealers and potential purchases, (3)
dealer
undertakings to make a market, and (4) the nature of
the security
and of marketplace trades (e.g., the time needed to
dispose of
the security, the method of soliciting offers and the
mechanics
of transfer). The liquidity of Rule 144A securities
would be
monitored, and if as a result of changed conditions it
is
determined that a Rule 144A security is no longer
liquid, the
Fund's holdings of illiquid securities would be
reviewed to
determine what, if any, steps are required to assure
that the
Fund does not invest more than 15% (10% for Prime
Reserve and
U.S. Treasury Money Funds) of its net assets in
illiquid
securities. Investing in Rule 144A securities could
have the
effect of increasing the amount of the Fund's assets
invested in
illiquid securities if qualified institutional buyers
are
unwilling to purchase such securities.
New Income and Short-Term Bond Funds
Industry Concentration
When the market for corporate debt securities is
dominated
by issues in the gas utility, gas transmission utility,
electric
utility, telephone utility, or petroleum industry, the
Fund will
as a matter of fundamental policy concentrate more than
25%, but
not more than 50%, of its assets, in any one such
industry, if
the Fund has cash for such investment (i.e., will not
sell
portfolio securities to raise cash) and, if in T. Rowe
Price's
judgment, the return available and the marketability,
quality,
and availability of the debt securities of such
industry
justifies such concentration in light of the Fund's
investment
objective. Domination would exist with respect to any
one such
industry, when, in the preceding 30-day period, more
than 25% of
all new-issue corporate debt offerings (within the four
highest
grades of Moody's or S&P and with maturities of 10
years or less)
of $25,000,000 or more consisted of issues in such
industry.
Although the Fund will normally purchase corporate debt
securities in the secondary market as opposed to new
offerings,
T. Rowe Price believes that the new issue-based
dominance
standard, as defined above, is appropriate because it
is easily
determined and represents an accurate correlation to
the
secondary market. Investors should understand that
concentration
in any industry may result in increased risk.
Investments in any
of these industries may be affected by environmental
conditions,
energy conservation programs, fuel shortages,
difficulty in
PAGE 39
obtaining adequate return on capital in financing
operations and
large construction programs, and the ability of the
capital
markets to absorb debt issues. In addition, it is
possible that
the public service commissions which have jurisdiction
over these
industries may not grant future increases in rates
sufficient to
offset increases in operating expenses. These
industries also
face numerous legislative and regulatory uncertainties
at both
federal and state government levels. Management
believes that
any risk to the Fund which might result from
concentration in any
industry will be minimized by the Fund's practice of
diversifying
its investments in other respects. The Fund's policy
with
respect to industry concentration is a fundamental
policy. (For
investment restriction on industry concentration, see
Investment
Restriction (3) on page 45.)
PORTFOLIO MANAGEMENT PRACTICES
Lending of Portfolio Securities
Securities loans are made to broker-dealers or
institutional
investors or other persons, pursuant to agreements
requiring that
the loans be continuously secured by collateral at
least equal at
all times to the value of the securities lent marked to
market on
a daily basis. The collateral received will consist of
cash,
U.S. government securities, letters of credit or such
other
collateral as may be permitted under its investment
program.
While the securities are being lent, the Fund will
continue to
receive the equivalent of the interest or dividends
paid by the
issuer on the securities, as well as interest on the
investment
of the collateral or a fee from the borrower. The Fund
has a
right to call each loan and obtain the securities on
five
business days' notice or, in connection with securities
trading
on foreign markets, within such longer period of time
which
coincides with the normal settlement period for
purchases and
sales of such securities in such foreign markets. The
Fund will
not have the right to vote securities while they are
being lent,
but it will call a loan in anticipation of any
important vote.
The risks in lending portfolio securities, as with
other
extensions of secured credit, consist of possible delay
in
receiving additional collateral or in the recovery of
the
securities or possible loss of rights in the collateral
should
the borrower fail financially. Loans will only be made
to firms
deemed by T. Rowe Price to be of good standing and will
not be
made unless, in the judgment of T. Rowe Price, the
consideration
to be earned from such loans would justify the risk.
PAGE 40
Other Lending/Borrowing
Subject to approval by the Securities and Exchange
Commission and certain state regulatory agencies, the
Fund may
make loans to, or borrow funds from, other mutual funds
sponsored
or advised by T. Rowe Price or Rowe Price-Fleming
International,
Inc. (collectively, "Price Funds"). The Fund has no
current
intention of engaging in these practices at this time.
Repurchase Agreements
The Fund may enter into a repurchase agreement
through which
an investor (such as the Fund) purchases a security
(known as the
"underlying security") from a well-established
securities dealer
or a bank that is a member of the Federal Reserve
System. Any
such dealer or bank will be on T. Rowe Price's approved
list. At
that time, the bank or securities dealer agrees to
repurchase the
underlying security at the same price, plus specified
interest.
Repurchase agreements are generally for a short period
of time,
often less than a week. Repurchase agreements which do
not
provide for payment within seven days will be treated
as illiquid
securities. The Fund will only enter into repurchase
agreements
where (i) (A) Prime Reserve and U.S. Treasury Money
Funds--the
underlying securities are either U.S. government
securities or
securities that, at the time the repurchase agreement
is entered
into, are rated in the highest rating category by the
requisite
number of NRSROs (as required by Rule 2a-7 under the
1940 Act)
and otherwise are of the type (excluding maturity
limitations)
which the Fund's investment guidelines would allow it
to purchase
directly, (B) GNMA, High Yield, New Income, Personal
Strategy,
Short-Term Bond, Short-Term U.S. Government, and U.S.
Treasury
Intermediate and Long-Term Funds--the underlying
securities are
of the type (excluding maturity limitations) which the
Fund's
investment guidelines would allow it to purchase
directly, (ii)
the market value of the underlying security, including
interest
accrued, will be at all times equal to or exceed the
value of the
repurchase agreement, and (iii) payment for the
underlying
security is made only upon physical delivery or
evidence of book-
entry transfer to the account of the custodian or a
bank acting
as agent. In the event of a bankruptcy or other
default of a
seller of a repurchase agreement, the Fund could
experience both
delays in liquidating the underlying security and
losses,
including: (a) possible decline in the value of the
underlying
security during the period while the Fund seeks to
enforce its
rights thereto; (b) possible subnormal levels of income
and lack
of access to income during this period; and (c)
expenses of
enforcing its rights.
PAGE 41
Reverse Repurchase Agreements
Although the Fund has no current intention, in the
foreseeable future, of engaging in reverse repurchase
agreements,
the Fund reserves the right to do so. Reverse
repurchase
agreements are ordinary repurchase agreements in which
a Fund is
the seller of, rather than the investor in, securities,
and
agrees to repurchase them at an agreed upon time and
price. Use
of a reverse repurchase agreement may be preferable to
a regular
sale and later repurchase of the securities because it
avoids
certain market risks and transaction costs. A reverse
repurchase
agreement may be viewed as a type of borrowing by the
Fund,
subject to Investment Restriction (1). (See
"Investment
Restrictions," page 45.)
High Yield Fund
Short Sales
The Fund may make short sales for hedging purposes
to
protect the Fund against companies whose credit is
deteriorating.
Short sales are transactions in which the Fund sells a
security
it does not own in anticipation of a decline in the
market value
of that security. The Fund's short sales would be
limited to
situations where the Fund owns a debt security of a
company and
would sell short the common or preferred stock or
another debt
security at a different level of the capital structure
of the
same company. No securities will be sold short if,
after the
effect is given to any such short sale, the total
market value of
all securities sold short would exceed 2% of the value
of the
Fund's net assets.
To complete a short sale transaction, the Fund
must borrow
the security to make delivery to the buyer. The Fund
then is
obligated to replace the security borrowed by
purchasing it at
the market price at the time of replacement. The price
at such
time may be more or less than the price at which the
security was
sold by the Fund. Until the security is replaced, the
Fund is
required to pay to the lender amounts equal to any
dividends or
interest which accrue during the period of the loan.
To borrow
the security, the Fund also may be required to pay a
premium,
which would increase the cost of the security sold.
The proceeds
of the short sale will be retained by the broker, to
the extent
necessary to meet margin requirements, until the short
position
is closed out.
PAGE 42
Until the Fund replaces a borrowed security in
connection
with a short sale, the Fund will: (a) maintain daily a
segregated
account, containing cash or U.S. government securities,
at such a
level that (i) the amount deposited in the account plus
the
amount deposited with the broker as collateral will
equal the
current value of the security sold short and (ii) the
amount
deposited in the segregated account plus the amount
deposited
with the broker as collateral will not be less than the
market
value of the security at the time its was sold short;
or (b)
otherwise cover its short position.
The Fund will incur a loss as a result of the
short sale if
the price of the security sold short increases between
the date
of the short sale and the date on which the Fund
replaces the
borrowed security. The Fund will realize a gain if the
security
sold short declines in price between those dates. This
result is
the opposite of what one would expect from a cash
purchase of a
long position in a security. The amount of any gain
will be
decreased, and the amount of any loss increased, by the
amount of
any premium, dividends or interest the Fund may be
required to
pay in connection with a short sale. Any gain or loss
on the
security sold short would be separate from a gain or
loss on the
Fund security being hedged by the short sale.
All Funds (except Prime Reserve and U.S. Treasury Money
Funds)
Options
Writing Covered Call Options
The Fund may write (sell) American or European
style
"covered" call options and purchase options to close
out options
previously written by a Fund. In writing covered call
options,
the Fund expects to generate additional premium income
which
should serve to enhance the Fund's total return and
reduce the
effect of any price decline of the security or currency
involved
in the option. Covered call options will generally be
written on
securities or currencies which, in T. Rowe Price's
opinion, are
not expected to have any major price increases or moves
in the
near future but which, over the long term, are deemed
to be
attractive investments for the Fund.
A call option gives the holder (buyer) the "right
to
purchase" a security or currency at a specified price
(the
exercise price) at expiration of the option (European
style) or
at any time until a certain date (the expiration date)
(American
PAGE 43
style). So long as the obligation of the writer of a
call option
continues, he may be assigned an exercise notice by the
broker-
dealer through whom such option was sold, requiring him
to
deliver the underlying security or currency against
payment of
the exercise price. This obligation terminates upon
the
expiration of the call option, or such earlier time at
which the
writer effects a closing purchase transaction by
repurchasing an
option identical to that previously sold. To secure
his
obligation to deliver the underlying security or
currency in the
case of a call option, a writer is required to deposit
in escrow
the underlying security or currency or other assets in
accordance
with the rules of a clearing corporation.
The Fund will write only covered call options.
This means
that the Fund will own the security or currency subject
to the
option or an option to purchase the same underlying
security or
currency, having an exercise price equal to or less
than the
exercise price of the "covered" option, or will
establish and
maintain with its custodian for the term of the option,
an
account consisting of cash, U.S. government securities
or other
liquid high-grade debt obligations having a value equal
to the
fluctuating market value of the optioned securities or
currencies.
Portfolio securities or currencies on which call
options may
be written will be purchased solely on the basis of
investment
considerations consistent with the Fund's investment
objective.
The writing of covered call options is a conservative
investment
technique believed to involve relatively little risk
(in contrast
to the writing of naked or uncovered options, which the
Fund will
not do), but capable of enhancing the Fund's total
return. When
writing a covered call option, a Fund, in return for
the premium,
gives up the opportunity for profit from a price
increase in the
underlying security or currency above the exercise
price, but
conversely retains the risk of loss should the price of
the
security or currency decline. Unlike one who owns
securities or
currencies not subject to an option, the Fund has no
control over
when it may be required to sell the underlying
securities or
currencies, since it may be assigned an exercise notice
at any
time prior to the expiration of its obligation as a
writer. If a
call option which the Fund has written expires, the
Fund will
realize a gain in the amount of the premium; however,
such gain
may be offset by a decline in the market value of the
underlying
security or currency during the option period. If the
call
option is exercised, the Fund will realize a gain or
loss from
the sale of the underlying security or currency. The
Fund does
not consider a security or currency covered by a call
to be
PAGE 44
"pledged" as that term is used in the Fund's policy
which limits
the pledging or mortgaging of its assets.
The premium received is the market value of an
option. The
premium the Fund will receive from writing a call
option will
reflect, among other things, the current market price
of the
underlying security or currency, the relationship of
the exercise
price to such market price, the historical price
volatility of
the underlying security or currency, and the length of
the option
period. Once the decision to write a call option has
been made,
T. Rowe Price, in determining whether a particular call
option
should be written on a particular security or currency,
will
consider the reasonableness of the anticipated premium
and the
likelihood that a liquid secondary market will exist
for those
options. The premium received by the Fund for writing
covered
call options will be recorded as a liability of the
Fund. This
liability will be adjusted daily to the option's
current market
value, which will be the latest sale price at the time
at which
the net asset value per share of the Fund is computed
(close of
the New York Stock Exchange), or, in the absence of
such sale,
the latest asked price. The option will be terminated
upon
expiration of the option, the purchase of an identical
option in
a closing transaction, or delivery of the underlying
security or
currency upon the exercise of the option.
Closing transactions will be effected in order to
realize a
profit on an outstanding call option, to prevent an
underlying
security or currency from being called, or, to permit
the sale of
the underlying security or currency. Furthermore,
effecting a
closing transaction will permit the Fund to write
another call
option on the underlying security or currency with
either a
different exercise price or expiration date or both.
If the Fund
desires to sell a particular security or currency from
its
portfolio on which it has written a call option, or
purchased a
put option, it will seek to effect a closing
transaction prior
to, or concurrently with, the sale of the security or
currency.
There is, of course, no assurance that the Fund will be
able to
effect such closing transactions at favorable prices.
If the
Fund cannot enter into such a transaction, it may be
required to
hold a security or currency that it might otherwise
have sold.
When the Fund writes a covered call option, it runs the
risk of
not being able to participate in the appreciation of
the
underlying securities or currencies above the exercise
price, as
well as the risk of being required to hold on to
securities or
currencies that are depreciating in value. This could
result in
higher transaction costs. The Fund will pay
transaction costs in
connection with the writing of options to close out
previously
PAGE 45
written options. Such transaction costs are normally
higher than
those applicable to purchases and sales of portfolio
securities.
Call options written by the Fund will normally
have
expiration dates of less than nine months from the date
written.
The exercise price of the options may be below, equal
to, or
above the current market values of the underlying
securities or
currencies at the time the options are written. From
time to
time, the Fund may purchase an underlying security or
currency
for delivery in accordance with an exercise notice of a
call
option assigned to it, rather than delivering such
security or
currency from its portfolio. In such cases, additional
costs may
be incurred.
The Fund will realize a profit or loss from a
closing
purchase transaction if the cost of the transaction is
less or
more than the premium received from the writing of the
option.
Because increases in the market price of a call option
will
generally reflect increases in the market price of the
underlying
security or currency, any loss resulting from the
repurchase of a
call option is likely to be offset in whole or in part
by
appreciation of the underlying security or currency
owned by the
Fund.
In order to comply with the requirements of
several states,
the Fund will not write a covered call option if, as a
result,
the aggregate market value of all portfolio securities
or
currencies covering call or put options exceeds 25% of
the market
value of the Fund's net assets. Should these state
laws change
or should the Fund obtain a waiver of its application,
the Fund
reserves the right to increase this percentage. In
calculating
the 25% limit, the Fund will offset, against the value
of assets
covering written calls and puts, the value of purchased
calls and
puts on identical securities or currencies with
identical
maturity dates.
Writing Covered Put Options
The Fund may write American or European style
covered put
options and purchase options to close out options
previously
written by the Fund. A put option gives the purchaser
of the
option the right to sell, and the writer (seller) has
the
obligation to buy, the underlying security or currency
at the
exercise price during the option period (American
style) or at
the expiration of the option (European style). So long
as the
obligation of the writer continues, he may be assigned
an
PAGE 46
exercise notice by the broker-dealer through whom such
option was
sold, requiring him to make payment of the exercise
price against
delivery of the underlying security or currency. The
operation
of put options in other respects, including their
related risks
and rewards, is substantially identical to that of call
options.
The Fund would write put options only on a covered
basis,
which means that the Fund would maintain in a
segregated account
cash, U.S. government securities or other liquid
high-grade debt
obligations in an amount not less than the exercise
price or the
Fund will own an option to sell the underlying security
or
currency subject to the option having an exercise price
equal to
or greater than the exercise price of the "covered"
option at all
times while the put option is outstanding. (The rules
of a
clearing corporation currently require that such assets
be
deposited in escrow to secure payment of the exercise
price.)
The Fund would generally write covered put options
in
circumstances where T. Rowe Price wishes to purchase
the
underlying security or currency for the Fund's
portfolio at a
price lower than the current market price of the
security or
currency. In such event the Fund would write a put
option at an
exercise price which, reduced by the premium received
on the
option, reflects the lower price it is willing to pay.
Since the
Fund would also receive interest on debt securities or
currencies
maintained to cover the exercise price of the option,
this
technique could be used to enhance current return
during periods
of market uncertainty. The risk in such a transaction
would be
that the market price of the underlying security or
currency
would decline below the exercise price less the
premiums
received. Such a decline could be substantial and
result in a
significant loss to the Fund. In addition, the Fund,
because it
does not own the specific securities or currencies
which it may
be required to purchase in exercise of the put, cannot
benefit
from appreciation, if any, with respect to such
specific
securities or currencies.
In order to comply with the requirements of
several states,
the Fund will not write a covered put option if, as a
result, the
aggregate market value of all portfolio securities or
currencies
covering put or call options exceeds 25% of the market
value of
the Fund's net assets. Should these state laws change
or should
the Fund obtain a waiver of its application, the Fund
reserves
the right to increase this percentage. In calculating
the 25%
limit, the Fund will offset, against the value of
assets covering
written puts and calls, the value of purchased puts and
calls on
identical securities or currencies with identical
maturity dates.
PAGE 47
Purchasing Put Options
The Fund may purchase American or European style
put
options. As the holder of a put option, the Fund has
the right
to sell the underlying security or currency at the
exercise price
at any time during the option period (American style)
or at the
expiration of the option (European style). The Fund
may enter
into closing sale transactions with respect to such
options,
exercise them or permit them to expire. The Fund may
purchase
put options for defensive purposes in order to protect
against an
anticipated decline in the value of its securities or
currencies.
An example of such use of put options is provided
below.
The Fund may purchase a put option on an
underlying security
or currency (a "protective put") owned by the Fund as a
defensive
technique in order to protect against an anticipated
decline in
the value of the security or currency. Such hedge
protection is
provided only during the life of the put option when
the Fund, as
the holder of the put option, is able to sell the
underlying
security or currency at the put exercise price
regardless of any
decline in the underlying security's market price or
currency's
exchange value. For example, a put option may be
purchased in
order to protect unrealized appreciation of a security
or
currency where T. Rowe Price deems it desirable to
continue to
hold the security or currency because of tax
considerations. The
premium paid for the put option and any transaction
costs would
reduce any capital gain otherwise available for
distribution when
the security or currency is eventually sold.
The Fund may also purchase put options at a time
when the
Fund does not own the underlying security or currency.
By
purchasing put options on a security or currency it
does not own,
the Fund seeks to benefit from a decline in the market
price of
the underlying security or currency. If the put option
is not
sold when it has remaining value, and if the market
price of the
underlying security or currency remains equal to or
greater than
the exercise price during the life of the put option,
the Fund
will lose its entire investment in the put option. In
order for
the purchase of a put option to be profitable, the
market price
of the underlying security or currency must decline
sufficiently
below the exercise price to cover the premium and
transaction
costs, unless the put option is sold in a closing sale
transaction.
PAGE 48
To the extent required by the laws of certain
states, the
Fund may not be permitted to commit more than 5% of its
assets to
premiums when purchasing put and call options. Should
these
state laws change or should the Fund obtain a waiver of
its
application, the Fund may commit more than 5% of its
assets to
premiums when purchasing call and put options. The
premium paid
by the Fund when purchasing a put option will be
recorded as an
asset of the Fund. This asset will be adjusted daily
to the
option's current market value, which will be the latest
sale
price at the time at which the net asset value per
share of the
Fund is computed (close of New York Stock Exchange),
or, in the
absence of such sale, the latest bid price. This asset
will be
terminated upon expiration of the option, the selling
(writing)
of an identical option in a closing transaction, or the
delivery
of the underlying security or currency upon the
exercise of the
option.
Purchasing Call Options
The Fund may purchase American or European style
call
options. As the holder of a call option, the Fund has
the right
to purchase the underlying security or currency at the
exercise
price at any time during the option period (American
style) or at
the expiration of the option (European style). The
Fund may
enter into closing sale transactions with respect to
such
options, exercise them or permit them to expire. The
Fund may
purchase call options for the purpose of increasing its
current
return or avoiding tax consequences which could reduce
its
current return. The Fund may also purchase call
options in order
to acquire the underlying securities or currencies.
Examples of
such uses of call options are provided below.
Call options may be purchased by the Fund for the
purpose of
acquiring the underlying securities or currencies for
its
portfolio. Utilized in this fashion, the purchase of
call
options enables the Fund to acquire the securities or
currencies
at the exercise price of the call option plus the
premium paid.
At times the net cost of acquiring securities or
currencies in
this manner may be less than the cost of acquiring the
securities
or currencies directly. This technique may also be
useful to the
Fund in purchasing a large block of securities or
currencies that
would be more difficult to acquire by direct market
purchases.
So long as it holds such a call option rather than the
underlying
security or currency itself, the Fund is partially
protected from
any unexpected decline in the market price of the
underlying
security or currency and in such event could allow the
call
PAGE 49
option to expire, incurring a loss only to the extent
of the
premium paid for the option.
To the extent required by the laws of certain
states, the
Fund may not be permitted to commit more than 5% of its
assets to
premiums when purchasing call and put options. Should
these
state laws change or should the Fund obtain a waiver of
its
application, the Fund may commit more than 5% of its
assets to
premiums when purchasing call and put options. The
Fund may also
purchase call options on underlying securities or
currencies it
owns in order to protect unrealized gains on call
options
previously written by it. A call option would be
purchased for
this purpose where tax considerations make it
inadvisable to
realize such gains through a closing purchase
transaction. Call
options may also be purchased at times to avoid
realizing losses.
Dealer (Over-the-Counter) Options
The Fund may engage in transactions involving
dealer
options. Certain risks are specific to dealer options.
While
the Fund would look to a clearing corporation to
exercise
exchange-traded options, if the Fund were to purchase a
dealer
option, it would rely on the dealer from whom it
purchased the
option to perform if the option were exercised.
Failure by the
dealer to do so would result in the loss of the premium
paid by
the Fund as well as loss of the expected benefit of the
transaction.
Exchange-traded options generally have a
continuous liquid
market while dealer options have none. Consequently,
the Fund
will generally be able to realize the value of a dealer
option it
has purchased only by exercising it or reselling it to
the dealer
who issued it. Similarly, when the Fund writes a
dealer option,
it generally will be able to close out the option prior
to its
expiration only by entering into a closing purchase
transaction
with the dealer to which the Fund originally wrote the
option.
While the Fund will seek to enter into dealer options
only with
dealers who will agree to and which are expected to be
capable of
entering into closing transactions with the Fund, there
can be no
assurance that the Fund will be able to liquidate a
dealer option
at a favorable price at any time prior to expiration.
Until the
Fund, as a covered dealer call option writer, is able
to effect a
closing purchase transaction, it will not be able to
liquidate
securities (or other assets) or currencies used as
cover until
the option expires or is exercised. In the event of
insolvency
of the contra party, the Fund may be unable to
liquidate a dealer
option. With respect to options written by the Fund,
the
PAGE 50
inability to enter into a closing transaction may
result in
material losses to the Fund. For example, since the
Fund must
maintain a secured position with respect to any call
option on a
security it writes, the Fund may not sell the assets
which it has
segregated to secure the position while it is obligated
under the
option. This requirement may impair a Fund's ability
to sell
portfolio securities or currencies at a time when such
sale might
be advantageous.
The Staff of the SEC has taken the position that
purchased
dealer options and the assets used to secure the
written dealer
options are illiquid securities. The Fund may treat
the cover
used for written OTC options as liquid if the dealer
agrees that
the Fund may repurchase the OTC option it has written
for a
maximum price to be calculated by a predetermined
formula. In
such cases, the OTC option would be considered illiquid
only to
the extent the maximum repurchase price under the
formula exceeds
the intrinsic value of the option. Accordingly, the
Fund will
treat dealer options as subject to the Fund's
limitation on
illiquid securities. If the SEC changes its position
on the
liquidity of dealer options, the Fund will change its
treatment
of such instrument accordingly.
High Yield Fund
Spread Option Transactions
The Fund may purchase from and sell to securities
dealers
covered spread options. Such covered spread options
are not
presently exchange listed or traded. The purchase of a
spread
option gives the Fund the right to put, or sell, a
security that
it owns at a fixed dollar spread or fixed yield spread
in
relationship to another security that the Fund does not
own, but
which is used as a benchmark. The risk to the Fund in
purchasing
covered spread options is the cost of the premium paid
for the
spread option and any transaction costs. In addition,
there is
no assurance that closing transactions will be
available. The
purchase of spread options will be used to protect the
Fund
against adverse changes in prevailing credit quality
spreads,
i.e., the yield spread between high quality and lower
quality
securities. Such protection is only provided during
the life of
the spread option. The security covering the spread
option will
be maintained in a segregated account by the Fund's
custodian.
The Fund does not consider a security covered by a
spread option
to be "pledged" as that term is used in the Fund's
policy
limiting the pledging or mortgaging of its assets. The
Fund may
also buy and sell uncovered spread options. Such
options would
PAGE 51
be used for the same purposes and be subject to similar
risks as
covered spread options. However, in an uncovered
spread option,
the Fund would not own either of the securities
involved in the
spread.
All Funds (except Prime Reserve and U.S. Treasury Money
Funds)
Futures Contracts
Transactions in Futures
The Fund may enter into futures contracts,
including stock
index, interest rate and currency futures ("futures or
futures
contracts").
Stock index futures contracts may be used to
provide a hedge
for a portion of the Fund's portfolio, as a cash
management tool,
or as an efficient way for T. Rowe Price to implement
either an
increase or decrease in portfolio market exposure in
response to
changing market conditions. The Fund may purchase or
sell
futures contracts with respect to any stock index.
Nevertheless,
to hedge the Fund's portfolio successfully, the Fund
must sell
futures contacts with respect to indices or subindices
whose
movements will have a significant correlation with
movements in
the prices of the Fund's portfolio securities.
Interest rate or currency futures contracts may be
used as a
hedge against changes in prevailing levels of interest
rates or
currency exchange rates in order to establish more
definitely the
effective return on securities or currencies held or
intended to
be acquired by the Fund. In this regard, the Fund
could sell
interest rate or currency futures as an offset against
the effect
of expected increases in interest rates or currency
exchange
rates and purchase such futures as an offset against
the effect
of expected declines in interest rates or currency
exchange
rates.
The Fund will enter into futures contracts which
are traded
on national or foreign futures exchanges, and are
standardized as
to maturity date and underlying financial instrument.
Futures
exchanges and trading in the United States are
regulated under
the Commodity Exchange Act by the CFTC. Futures are
traded in
London, at the London International Financial Futures
Exchange,
in Paris, at the MATIF, and in Tokyo, at the Tokyo
Stock
Exchange. Although techniques other than the sale and
purchase
of futures contracts could be used for the
above-referenced
PAGE 52
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
qualify 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 and foreign currency
options traded
on a commodities exchange will be considered "related
options".
This policy may be modified by the Board of
Directors/Trustees
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 may have to apply the above 5% test without
excluding the
value of initial margin and premiums paid for bona fide
hedging
positions.
The Fund's use of futures contracts will not
result in
leverage. Therefore, to the extent necessary, in
instances
involving the purchase of futures contracts or the
writing of
call 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 53
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.
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
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
PAGE 54
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 purchase or sale is effected by entering into
an
offsetting futures contract sale or purchase,
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
Treasury Bills 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 Treasury Bills 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.
A futures contract on the Standard & Poor's 500
Stock Index,
composed of 500 selected common stocks, most of which
are listed
on the New York Stock Exchange, provides an example of
how
futures contracts operate. The S&P 500 Index assigns
relative
weightings to the common stocks included in the Index,
and the
Index fluctuates with changes in the market values of
those
common stocks. In the case of futures contracts on the
S&P 500
Index, the contracts are to buy or sell 500 units.
Thus, if the
value of the S&P 500 Index were $150, one contract
would be worth
$75,000 (500 units x $150). The contract specifies that
no
delivery of the actual stocks making up the index will
take
PAGE 55
place. Instead, settlement in cash occurs. Over the
life of the
contract, the gain or loss realized by the Fund will
equal the
difference between the purchase (or sale) price of the
contract
and the price at which the contract is terminated. For
example,
if the Fund enters into the example contract above and
the S&P
500 Index is at $154 on the termination date, the Fund
will gain
$2,000 (500 units x gain of $4). If, however, the S&P
500 Index
is at $148 on that future date, the Fund will lose
$1,000 (500
units x loss of $2).
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
PAGE 56
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
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
PAGE 57
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
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 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 portfolio. 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
PAGE 58
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
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 may purchase and sell options on the same
types of
futures in which it may invest.
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 the
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.
As an alternative to writing or purchasing call
and put
options on interest rate futures, the Fund may write or
purchase
call and put options on financial indices. Such
options would be
used in a manner similar to the use of options on
futures
contracts. 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 Funds and the other T.
Rowe Price
Funds in a fair and non-discriminatory manner.
PAGE 59
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
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.
Additional Futures and Options Contracts
Although the Fund has no current intention of
engaging in
futures or options transactions other than those
described above,
it reserves 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.
Foreign Futures and Options
Participation in foreign futures and foreign
options
transactions involves the execution and clearing of
trades on or
PAGE 60
subject to the rules of a foreign board of trade.
Neither the
National Futures Association nor any domestic exchange
regulates
activities of any foreign boards of trade, including
the
execution, delivery and clearing of transactions, or
has the
power to compel enforcement of the rules of a foreign
board of
trade or any applicable foreign law. This is true even
if the
exchange is formally linked to a domestic market so
that a
position taken on the market may be liquidated by a
transaction
on another market. Moreover, such laws or regulations
will vary
depending on the foreign country in which the foreign
futures or
foreign options transaction occurs. For these reasons,
when the
Fund trades foreign futures or foreign options
contracts, it may
not be afforded certain of the protective measures
provided by
the Commodity Exchange Act, the CFTC's regulations and
the rules
of the National Futures Association and any domestic
exchange,
including the right to use reparations proceedings
before the
Commission and arbitration proceedings provided by the
National
Futures Association or any domestic futures exchange.
In
particular, funds received from the Fund for foreign
futures or
foreign options transactions may not be provided the
same
protections as funds received in respect of
transactions on
United States futures exchanges. In addition, the
price of any
foreign futures or foreign options contract and,
therefore, the
potential profit and loss thereon may be affected by
any variance
in the foreign exchange rate between the time the
Fund's order is
placed and the time it is liquidated, offset or
exercised.
U.S. Treasury Intermediate and Long-Term Funds
Limitations on Futures and Options for
Intermediate and Long-Term Funds
The Funds will not purchase a futures contract or
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. In addition, neither of
the Funds
will enter into a futures transaction if it would be
obligated to
purchase or deliver under outstanding open futures
contracts
amounts which would exceed 15% of the Fund's total
assets.
A Fund will not write a covered call option if, as
a result,
the aggregate market value of all portfolio securities
covering
call options or subject to delivery under put options
exceeds 15%
of the market value of the Fund's total assets.
PAGE 61
A Fund will not write a covered put option if, as
a result,
the aggregate market value of all portfolio securities
subject to
such put options or covering call options exceeds 15%
of the
market value of the Fund's total assets.
In order to comply with the laws of certain
states, a Fund
will not invest more than 5% of its total assets in
premiums on
put options. Should these state laws change or should
a Fund
obtain a waiver of their applications, the Fund may
invest up to
15% of its total assets in premiums on put options.
In order to comply with the laws of certain
states, a Fund
will not invest more than 5% of its total assets in
premiums on
call options. Should these state laws change or should
a Fund
obtain a waiver of their applications, the Fund may
invest up to
15% of its total assets in premiums on call options.
In order to comply with the laws of certain
states, a Fund
will not purchase puts, calls, straddles, spreads and
any
combination thereof if by reason thereof the value of
its
aggregate investment in such classes of securities will
exceed 5%
of its total assets. Should these state laws change or
should a
Fund obtain a waiver of their application, the Fund may
invest a
higher percentage of its total assets in puts, calls,
straddles,
or spreads.
The total amount of a Fund's total assets invested
in
futures and options under any combination of the
limitations
described above will not exceed 15% of the Fund's total
assets.
High Yield, New Income, Personal Strategy, and
Short-Term Bond
Funds
Foreign Currency Transactions
A forward foreign currency exchange contract
involves an
obligation to purchase or sell a specific currency at a
future
date, which may be any fixed number of days from the
date of the
contract agreed upon by the parties, at a price set at
the time
of the contract. These contracts are principally
traded in the
interbank market conducted directly between currency
traders
(usually large, commercial banks) and their customers.
A forward
contract generally has no deposit requirement, and no
commissions
are charged at any stage for trades.
The Fund may enter into forward contracts for a
variety of
purposes in connection with the management of the
foreign
PAGE 62
securities portion of its portfolio. The Fund's use of
such
contracts would include, but not be limited to, the
following:
First, when the Fund enters into a contract for
the purchase
or sale of a security denominated in a foreign
currency, it may
desire to "lock in" the U.S. dollar price of the
security. By
entering into a forward contract for the purchase or
sale, for a
fixed amount of dollars, of the amount of foreign
currency
involved in the underlying security transactions, the
Fund will
be able to protect itself against a possible loss
resulting from
an adverse change in the relationship between the U.S.
dollar and
the subject foreign currency during the period between
the date
the security is purchased or sold and the date on which
payment
is made or received.
Second, when T. Rowe Price believes that one
currency may
experience a substantial movement against another
currency,
including the U.S. dollar, it may enter into a forward
contract
to sell or buy the amount of the former foreign
currency,
approximating the value of some or all of the Fund's
portfolio
securities denominated in such foreign currency.
Alternatively,
where appropriate, the Fund may hedge all or part of
its foreign
currency exposure through the use of a basket of
currencies or a
proxy currency where such currency or currencies act as
an
effective proxy for other currencies. In such a case,
the Fund
may enter into a forward contract where the amount of
the foreign
currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket
hedging
technique may be more efficient and economical than
entering into
separate forward contracts for each currency held in
the Fund.
The precise matching of the forward contract amounts
and the
value of the securities involved will not generally be
possible
since the future value of such securities in foreign
currencies
will change as a consequence of market movements in the
value of
those securities between the date the forward contract
is entered
into and the date it matures. The projection of
short-term
currency market movement is extremely difficult, and
the
successful execution of a short-term hedging strategy
is highly
uncertain. Under normal circumstances, consideration
of the
prospect for currency parities will be incorporated
into the
longer term investment decisions made with regard to
overall
diversification strategies. However, T. Rowe Price
believes that
it is important to have the flexibility to enter into
such
forward contracts when it determines that the best
interests of
the Fund will be served.
PAGE 63
Third, the Fund may use forward contracts when the
Fund
wishes to hedge out of the dollar into a foreign
currency in
order to create a synthetic bond or money market
instrument--the
security would be issued in U.S. dollars but the dollar
component
would be transformed into a foreign currency through a
forward
contract.
The Fund may enter into forward contacts for any
other
purpose consistent with the Fund's investment objective
and
program. However, the Fund will not enter into a
forward
contract, or maintain exposure to any such contract(s),
if the
amount of foreign currency required to be delivered
thereunder
would exceed the Fund's holdings of liquid, high-grade
debt
securities and currency available for cover of the
forward
contract(s). In determining the amount to be delivered
under a
contract, the Fund may net offsetting positions.
At the maturity of a forward contract, the Fund
may sell the
portfolio security and make delivery of the foreign
currency, or
it may retain the security and either extend the
maturity of the
forward contract (by "rolling" that contract forward)
or may
initiate a new forward contract.
If the Fund retains the portfolio security and
engages in an
offsetting transaction, the Fund will incur a gain or a
loss (as
described below) to the extent that there has been
movement in
forward contract prices. If the Fund engages in an
offsetting
transaction, it may subsequently enter into a new
forward
contract to sell the foreign currency. Should forward
prices
decline during the period between the Fund's entering
into a
forward contract for the sale of a foreign currency and
the date
it enters into an offsetting contract for the purchase
of the
foreign currency, the Fund will realize a gain to the
extent the
price of the currency it has agreed to sell exceeds the
price of
the currency it has agreed to purchase. Should forward
prices
increase, the Fund will suffer a loss to the extent of
the price
of the currency it has agreed to purchase exceeds the
price of
the currency it has agreed to sell.
The Fund's dealing in forward foreign currency
exchange
contracts will generally be limited to the transactions
described
above. However, the Fund reserves the right to enter
into
forward foreign currency contracts for different
purposes and
under different circumstances. Of course, the Fund is
not
required to enter into forward contracts with regard to
its
foreign currency-denominated securities and will not do
so unless
deemed appropriate by T. Rowe Price. It also should be
realized
PAGE 64
that this method of hedging against a decline in the
value of a
currency does not eliminate fluctuations in the
underlying prices
of the securities. It simply establishes a rate of
exchange at a
future date. Additionally, although such contracts
tend to
minimize the risk of loss due to a decline in the value
of the
hedged currency, at the same time, they tend to limit
any
potential gain which might result from an increase in
the value
of that currency.
Although the Fund values its assets daily in terms
of U.S.
dollars, it does not intend to convert its holdings of
foreign
currencies into U.S. dollars on a daily basis. It will
do so
from time to time, and investors should be aware of the
costs of
currency conversion. Although foreign exchange dealers
do not
charge a fee for conversion, they do realize a profit
based on
the difference (the "spread") between the prices at
which they
are buying and selling various currencies. Thus, a
dealer may
offer to sell a foreign currency to the Fund at one
rate, while
offering a lesser rate of exchange should the Fund
desire to
resell that currency to the dealer.
Federal Tax Treatment of Options, Futures Contracts and
Forward
Foreign Exchange Contracts
The Fund may enter into certain option, futures,
and forward
foreign exchange contracts, including options and
futures on
currencies, which will be treated as Section 1256
contracts or
straddles.
Transactions which are considered Section 1256
contracts
will be considered to have been closed at the end of
the Fund's
fiscal year and any gains or losses will be recognized
for tax
purposes at that time. Such gains or losses from the
normal
closing or settlement of such transactions will be
characterized
as 60% long-term capital gain or loss and 40%
short-term capital
gain or loss regardless of the holding period of the
instrument.
The Fund will be required to distribute net gains on
such
transactions to shareholders even though it may not
have closed
the transaction and received cash to pay such
distributions.
Options, futures and forward foreign exchange
contracts,
including options and futures on currencies, which
offset a
foreign dollar denominated bond or currency position
may be
considered straddles for tax purposes, in which case a
loss on
any position in a straddle will be subject to deferral
to the
extent of unrealized gain in an offsetting position.
The holding
period of the securities or currencies comprising the
straddle
PAGE 65
will be deemed not to begin until the straddle is
terminated.
For securities offsetting a purchased put, this
adjustment of the
holding period may increase the gain from sales of
securities
held less than three months. The holding period of the
security
offsetting an "in-the-money qualified covered call"
option on an
equity security will not include the period of time the
option is
outstanding.
Losses on written covered calls and purchased puts
on
securities, excluding certain "qualified covered call"
options on
equity securities, may be long-term capital loss, if
the security
covering the option was held for more than twelve
months prior to
the writing of the option.
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 or
currencies. Pending tax regulations could limit the
extent that
net gain realized from option, futures or foreign
forward
exchange contracts on currencies is qualifying income
for
purposes of the 90% requirement. In addition, gains
realized on
the sale or other disposition of securities, including
option,
futures or foreign forward exchange contracts on
securities or
securities indexes and, in some cases, currencies, 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 or currencies held less than three
months, the Fund
may be required to defer the closing out of option,
futures or
foreign forward exchange contracts) beyond the time
when it would
otherwise be advantageous to do so. It is anticipated
that
unrealized gains on Section 1256 option, futures and
foreign
forward exchange 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 or currencies held less than three months
for purposes
of the 30% test.
INVESTMENT RESTRICTIONS
Fundamental policies may not be changed without
the approval
of the lesser of (1) 67% of the Fund's shares present
at a
meeting of shareholders if the holders of more than 50%
of the
outstanding shares are present in person or by proxy or
(2) more
PAGE 66
than 50% of the Fund's outstanding shares. Other
restrictions in
the form of operating policies are subject to change by
the
Fund's Board of Directors/Trustees 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, the Fund.
Fundamental Policies
As a matter of fundamental policy, the Fund
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 Fund (other
than the
Prime Reserve and Treasury Money Funds)
may enter
into futures contracts and options
thereon;
(3) (a) Industry Concentration (All Funds,
except High
Yield, New Income, Prime Reserve and
Short-Term
Bond Funds). 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;
(b) Industry Concentration (High Yield
Fund).
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
PAGE 67
of issuers having their principal
business
activities in the same industry;
provided,
however, that the Fund will normally
invest more
than 25% of its total assets in the
securities of
the banking industry including, but not
limited
to, bank certificates of deposit and
bankers'
acceptances, when the Fund's position in
issues
maturing in one year or less equals 35%
or more of
the Fund's total assets;
(c) Industry Concentration (New Income
Fund).
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;
provided,
however, that the Fund will invest more
than 25%
of its total assets, but not more than
50%, in any
one of the gas utility, gas transmission
utility,
electric utility, telephone utility, and
petroleum
industries under certain circumstances,
and
further provided that this limitation
does not
apply to securities of the banking
industry
including, but not limited to,
certificates of
deposit and bankers' acceptances;
(d) Industry Concentration (Prime
Reserve Fund).
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;
provided,
however, that this limitation does not
apply to
securities of the banking industry
including, but
not limited to, certificates of deposit
and
bankers' acceptances; and
(e) Industry Concentration (Short-Term
Bond Fund).
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;
provided,
however, that the Fund will normally
invest more
than 25% of its total assets in the
securities of
the banking industry including, but not
limited
to, bank certificates of deposit and
bankers'
PAGE 68
acceptances when the Fund's position in
issues
maturing in one year or less equals 35%
or more of
the Fund's total assets; provided,
further, that
the Fund will invest more than 25% of
its total
assets, but not more than 50%, in any
one of the
gas utility, gas transmission utility,
electric
utility, telephone utility, and
petroleum
industries under certain circumstances;
(4) 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;
(5) 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;
(6) 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);
(7) Real Estate. Purchase or sell real
estate 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);
PAGE 69
(8) Senior Securities. Issue senior
securities except
in compliance with the Investment
Company Act of
1940; or
(9) 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
(4) the Fund will not borrow from or
lend to any
other T. Rowe Price Fund unless each
Fund applies
for and receives an exemptive order from
the SEC
or the SEC issues rules permitting such
transactions. The Fund has no current
intention
of engaging in any such activity and
there is no
assurance the SEC would grant any order
requested
by the Fund or promulgate any rules
allowing the
transactions.
With respect to investment restriction
(1), the
Prime Reserve and U.S. Treasury Money
Funds have
no current intention of engaging in any
borrowing
transactions.
With respect to investment restriction
(2), the
Fund does not consider currency
contracts or
hybrid instruments to be commodities.
For purposes of investment restriction
(3), U.S.,
state or local governments, or related
agencies or
instrumentalities, are not considered an
industry.
Industries are determined by reference
to the
classifications of industries set forth
in the
Fund's Semi-annual and Annual Reports.
For purposes of investment restriction
(4), the
Fund will consider the acquisition of a
debt
PAGE 70
security to include the execution of a
note or
other evidence of an extension of credit
with a
term of more than nine months.
For purposes of investment restriction
(5), the
Fund will consider a repurchase
agreement fully
collateralized with U.S. government
securities to
be U.S. government securities.
Operating Policies
As a matter of operating policy, the Fund may
not:
(1) Borrowing. The Fund 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) (a) Equity Securities (All Funds, except
High
Yield, New Income, and Personal Strategy
Funds).
Purchase any common stocks or other
equity
securities, or securities convertible
into equity
securities except as set forth in its
operating
policy on investment companies;
(b) Equity Securities (High Yield Fund).
Invest
more than 20% of the Fund's total assets
in equity
securities (including up to 5% in
warrants);
(c) Equity Securities (New Income Fund).
Invest
more than 25% of its total assets in
equity
securities;
(d) Equity Securities (Personal Strategy
Funds).
Purchase any common stocks or other
equity
securities, except as set forth in its
prospectus
and operating policy on investment
companies;
(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.
PAGE 71
(5) (a) Illiquid Securities (All Funds,
except
Personal Strategy Funds). Purchase
illiquid
securities if, as a result, more than
15% (10% for
the Prime Reserve and U.S. Treasury
Money Funds)
of its net assets would be invested in
such
securities;
(b) Illiquid Securities (Personal
Strategy Funds).
Purchase illiquid securities and
securities of
unseasoned issuers if, as a result, more
than 15%
of a Fund's net assets would be invested
in such
securities, provided that the Fund will
not invest
more than 5% of its total assets in
restricted
securities and not more than 5% in
securities of
unseasoned issuers. Securities eligible
for
resale under Rule 144A of the Securities
Act of
1933 are not included in the 5%
limitation but are
subject to the 15% limitation;
(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, and in
the case of
the Prime Reserve and U.S. Treasury
Money Funds,
only securities of other money market
funds.
Duplicate fees may result from such
purchases;
(7) Margin. Purchase securities on margin,
except (i)
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 or enter into
leases with
PAGE 72
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 .5% of the
outstanding
securities of such issuer, together own
beneficially more than 5% of such
securities.
(12) (a) Short Sales (All Funds except High
Yield
Fund). Effect short sales of
securities;
(b) Short Sales (High Yield Fund).
Effect short
sales of securities, other than as set
forth in
its prospectus and Statement of
Additional
Information;
(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
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
PAGE 73
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 Fund
in units
or attached to securities may be deemed
to be
without value.
Personal Strategy Funds
Notwithstanding anything in the above
fundamental and
operating restrictions to the contrary, the 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.
MANAGEMENT OF FUND
The officers and directors/trustees of the
Fund 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 Fund's
directors/trustees 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/trustees are referred to as inside directors
by virtue
of their officership, directorship, and/or employment
with T.
Rowe Price.
All Funds, except Personal Strategy Funds
Independent Directors/Trustees
ROBERT P. BLACK, Retired; formerly President, Federal
Reserve
Bank of Richmond; Address: 10 Dahlgren Road, Richmond,
Virginia
23233
PAGE 74
CALVIN W. BURNETT, PH.D., President, Coppin State
College;
Director, Maryland Chamber of Commerce and Provident
Bank of
Maryland; President, Baltimore Area Council Boy Scouts
of
America; Vice President, Board of Directors, The
Walters Art
Gallery; Address: 2500 West North Avenue, Baltimore,
Maryland
21216
ANTHONY W. DEERING, Director, President and Chief
Operating
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, President, F. Pierce Linaweaver &
Associates, Inc.; 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
JOHN G. SCHREIBER, President, Schreiber Investments,
Inc., a real
estate investment company; Director, AMCI Residential
Properties
Trust; Partner, Blackstone Real Estate Partners, L.P.;
Director
and formerly (1/80-12/90) Executive Vice President, JMB
Realty
Corporation, a national real estate investment manager
and
developer; Address: 1115 East Illinois Road, Lake
Forest,
Illinois 60045
ANNE MARIE WHITTEMORE, Partner, law firm of McGuire,
Woods,
Battle & Boothe, Richmond, Virginia; formerly, Chairman
(1991-
1993) and Director (1989-1993), Federal Reserve Bank of
Richmond;
Director, Owens & Minor, Inc., USF&G Corporation, Old
Dominion
University, and James River Corporation; Member,
Richmond Bar
Association and American Bar Association; Address: One
James
Center, 901 East Cary Street, Richmond, Virginia
23219-4030
Personal Strategy Funds
LEO C. BAILEY, Retired; Address: 3396 South Placita
Fabula, Green
Valley, Arizona 85614
DONALD W. DICK, JR., Principal, Overseas Partners,
Inc., a
financial investment firm; Director, Waverly Press,
Inc.,
Baltimore, Maryland; Address: 375 Park Avenue, Suite
2201, New
York, New York 10152
DAVID K. FAGIN, Chairman, Chief Executive Officer and
Director,
Golden Star Resources, Ltd.; formerly (1986-7/91)
President,
Chief Operating Officer and Director, Homestake Mining
Company;
Address: One Norwest Center, 1700 Lincoln Street, Suite
1950,
Denver, Colorado 80203
ADDISON LANIER, Financial management; President and
Director,
Thomas Emery's Sons, Inc., and Emery Group, Inc.;
Director,
PAGE 75
Scinet Development and Holdings, Inc.; Address: 441
Vine Street,
#2310, Cincinnati, Ohio 45202-2913
JOHN K. MAJOR, Chairman of the Board and President,
KCMA
Incorporated, Tulsa, Oklahoma; Address: 126 E. 26
Place, Tulsa,
Oklahoma 74114-2422
HANNE M. MERRIMAN, Retail business consultant;
formerly,
President and Chief Operating Officer, Nan Duskin,
Inc., a
women's specialty store, Director and Chairman Federal
Reserve
Bank of Richmond, and President and Chief Executive
Officer,
Honeybee, Inc., a division of Spiegel, Inc; Director,
Ann Taylor
Stores Corporation, Central Illinois Public Service
Company,
CIPSCO Incorporated, The Rouse Company, State Farm
Mutual
Automobile Insurance Company and USAir Group, Inc.,
Member,
National Women's Forum; Trustee, American-Scandinavian
Foundation; Address: One James Center, 901 East Cary
Street,
Richmond, Virginia 23219-4030
HUBERT D. VOS, President, Stonington Capital
Corporation, a
private investment company; Address: 1231 State Street,
Suite
210, Santa Barbara, CA 93190-0409
PAUL M. WYTHES, Founding General Partner, Sutter Hill
Ventures, a
venture capital limited partnership providing equity
capital to
young high technology companies throughout the United
States;
Director, Teltone Corporation, Interventional
Technologies Inc.,
and Stuart Medical, Inc.; Address: 755 Page Mill Road,
Suite
A200, Palo Alto, California 94304
Officers
HENRY H. HOPKINS, Vice President--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; Vice President, Rowe Price-Fleming
International,
Inc. and T. Rowe Price Retirement Plan Services, Inc.
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, T.
Rowe Price Services, Inc., and T. Rowe Price Trust
Company
ROGER L. FIERY, III, Assistant Vice President--Vice
President,
Rowe Price-Fleming International, Inc.
EDWARD T. SCHNEIDER, Assistant Vice
President--Assistant Vice
President, T. Rowe Price and T. Rowe Price Services,
Inc.
INGRID I. VORDEMBERGE, Assistant Vice
President--Employee, T.
Rowe Price
PAGE 76
GNMA Fund
*GEORGE J. COLLINS, Chairman of the Board--President,
Managing
Director and Chief Executive Officer, T. Rowe Price;
Director,
Rowe Price-Fleming International, Inc., T. Rowe Price
Trust
Company and T. Rowe Price Retirement Plan Services,
Inc.;
Chartered Investment Counselor
*JAMES S. RIEPE, Vice President and Trustee--Managing
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, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc
Rorer, Inc.
PETER VAN DYKE, President--Managing Director, T. Rowe
Price; Vice
President, Rowe Price-Fleming International, Inc. and
T. Rowe
Price Trust Company
ROBERT P. CAMPBELL, Vice President--Vice President, T.
Rowe Price
and Rowe Price-Fleming International, Inc.; formerly
(4/80-5/90)
Vice President and Director, Private Finance, New York
Life
Insurance Company, New York, New York
VEENA A. KUTLER, Vice President--Vice President, T.
Rowe Price
and Rowe Price-Fleming International, Inc.
HEATHER R. LANDON, Vice President--Vice President, T.
Rowe Price
and T. Rowe Price Trust Company
JAMES M. McDONALD, Vice President--Vice President, T.
Rowe Price
EDMUND M. NOTZON, Vice President--Vice President, T.
Rowe Price
and T. Rowe Price Trust Company; formerly (1972-1989)
charter
member of the U.S. Senior Executive Service and
Director,
Analysis and Evaluation Division in the Office of Water
Regulations and Standards of the U.S. Environmental
Protection
Agency
CHARLES P. SMITH, Vice President--Managing Director, T.
Rowe
Price; Vice President, Rowe Price-Fleming
International, Inc.
PAGE 77
COMPENSATION TABLE
_________________________________________________________________
Pension or Total
Compensation
Aggregate Retirement from
Fund and
Name of Compensation Benefits Fund
Group
Person, from Fund Accrued as
Paid to
Position Expensesa Part of Fundb
Directors/Trusteesc
_________________________________________________________________
Robert P. Black, $2,524 N/A
$52,667
Trustee
Calvin W. Burnett, 2,524 N/A
55,583
PH.D, Trustee
Anthony W. Deering, 2,524 N/A
66,333
Trustee
F. Pierce Linaweaver, 2,524 N/A
55,583
Trustee
John G. Schreiber, 2,524 N/A
55,667
Trustee
Anne Marie Whittemore, 2,524 N/A
32,667
Trustee
George J. Collins, 0 N/A
0
Chairman of the Boardd
James S. Riepe, 0 N/A
0
Trusteed
a Amounts in this Column are for the period June 1,
1993
through May 31, 1994.
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 1994.
d Any director/trustee of the Fund who is an officer
or
employee of T. Rowe Price receives no renumeration
from the
Fund.
PAGE 78
High Yield Fund
*GEORGE J. COLLINS, Chairman of the Board--President,
Managing
Director, and Chief Executive Officer, T. Rowe Price;
Director,
Rowe Price-Fleming International, Inc., T. Rowe Price
Trust
Company and T. Rowe Price Retirement Plan Services,
Inc.,
Chartered Investment Counselor
*RICHARD S. SWINGLE, President and Director--Managing
Director,
T. Rowe Price
*JAMES S. RIEPE, Vice President and Director--Managing
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, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc
Rorer, Inc.
CATHERINE B. BRAY, Vice President--Vice President, T.
Rowe Price
ANDREW M. BROOKS, Vice President--Vice President, T.
Rowe Price
MICHAEL J. CONELIUS, Vice President--Assistant Vice
President, T.
Rowe Price
HUBERT M. STILES, JR., Vice President--Vice President,
T. Rowe
Price
JAY W. VAN ERT, Vice President--Vice President, T. Rowe
Price
MARK J. VASELKIV, Vice President--Vice President, T.
Rowe Price
THEA N. WILLIAMS, Vice President--Vice President, T.
Rowe Price
JAMES M. McDONALD, Assistant Vice President--Vice
President, T.
Rowe Price
COMPENSATION TABLE
_________________________________________________________________
Pension or Total
Compensation
Aggregate Retirement from
Fund and
Name of Compensation Benefits Fund
Group
Person, from Fund Accrued as
Paid to
Position Expensesa Part of Fundb
Directors/Trusteesc
_________________________________________________________________
Robert P. Black, $3,804 N/A
$52,667
Director
Calvin W. Burnett, 3,804 N/A
55,583
PH.D, Director
Anthony W. Deering, 3,804 N/A
66,333
Director
F. Pierce Linaweaver, 3,804 N/A
55,583
Director
PAGE 79
John G. Schreiber, 3,804 N/A
55,667
Director
Anne Marie Whittemore, 3,804 N/A
32,667
Director
George J. Collins, 0 N/A
0
Chairman of the Boardd
James S. Riepe, 0 N/A
0
Directord
Richard S. Swingle, 0 N/A
0
Directord
a Amounts in this Column are for the period June 1,
1993
through May 31, 1994.
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 1994.
d Any director/trustee of the Fund who is an officer
or
employee of T. Rowe Price receives no renumeration
from the
Fund.
New Income Fund
*GEORGE J. COLLINS, Chairman of the Board--President,
Managing
Director, and Chief Executive Officer, T. Rowe Price;
Director,
Rowe Price-Fleming International, Inc., T. Rowe Price
Trust
Company and T. Rowe Price Retirement Plan Services,
Inc.,
Chartered Investment Counselor
*CARTER O. HOFFMAN, Vice President and
Director--Managing
Director, T. Rowe Price; Chartered Investment Counselor
*JAMES S. RIEPE, Vice President and Director--Managing
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, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc
Rorer, Inc.
*CHARLES P. SMITH, President and Director--Managing
Director, T.
Rowe Price; Vice President, Rowe Price-Fleming
International,
Inc.
SHAWN P. BURKE, Vice President--Vice President, T. Rowe
Price;
formerly (1985-1990) Assistant Vice President/Corporate
Finance,
Standard & Poor's Corporation; (1990-1993) Vice
President/Senior
Credit Officer, Merrill Lynch & Co., New York, New York
PAGE 80
ROBERT P. CAMPBELL, Vice President--Vice President, T.
Rowe Price
and Rowe Price Fleming International, Inc.; formerly
(4/80-5/90)
Vice President and Director, Private Finance, New York
Life
Insurance Company, New York, New York
HEATHER R. LANDON, Vice President--Vice President, T.
Rowe Price
and T. Rowe Price Trust Company
JAMES M. McDONALD, Vice President--Vice President, T.
Rowe Price
EDMUND M. NOTZON, Vice President--Vice President, T.
Rowe Price
and T. Rowe Price Trust Company; formerly (1972-1989)
charter
member of the U.S. Senior Executive Service and
Director,
Analysis and Evaluation Division in the Office of Water
Regulations and Standards of the U.S. Environmental
Protection
Agency
JOAN R. POTEE, Vice President--Vice President, T. Rowe
Price
ROBERT M. RUBINO, Vice President--Vice President, T.
Rowe Price
THOMAS E. TEWKSBURY, Vice President--Vice President, T.
Rowe
Price; formerly (1/89-12/93) senior bond trader,
Scudder, Stevens
& Clark, Boston, Massachusetts
PETER VAN DYKE, Vice President--Managing Director, T.
Rowe Price;
Vice President, Rowe Price-Fleming International, Inc.
and T.
Rowe Price Trust Company
COMPENSATION TABLE
_________________________________________________________________
Pension or Total
Compensation
Aggregate Retirement from
Fund and
Name of Compensation Benefits Fund
Group
Person, from Fund Accrued as
Paid to
Position Expensesa Part of Fundb
Directors/Trusteesc
_________________________________________________________________
Robert P. Black, $3,643 N/A
$52,667
Director
Calvin W. Burnett, 3,643 N/A
55,583
PH.D, Director
Anthony W. Deering, 3,643 N/A
66,333
Director
F. Pierce Linaweaver, 3,643 N/A
55,583
Director
John G. Schreiber, 3,643 N/A
55,667
Director
PAGE 81
Anne Marie Whittemore, 3,643 N/A
32,667
Director
George J. Collins, 0 N/A
0
Chairman of the Boardd
Carter O. Hoffman, 0 N/A
0
Directord
James S. Riepe, 0 N/A
0
Directord
Charles P. Smith, 0 N/A
0
Directorb
a Amounts in this Column are for the period June 1,
1993
through May 31, 1994.
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 1994.
d Any director/trustee of the Fund who is an officer
or
employee of T. Rowe Price receives no renumeration
from the
Fund.
Personal Strategy Balanced, Growth and Income Funds
M. DAVID TESTA, Chairman of the Board--Managing
Director, T. Rowe
Price; Chairman of the Board, Rowe Price-Fleming
International,
Inc.; Director and Vice President, T. Rowe Price Trust
Company;
Chartered Financial Analyst
PETER VAN DYKE, President--Managing Director, T. Rowe
Price; Vice
President of Rowe Price-Fleming International, Inc., T.
Rowe
Price Trust Company and T. Rowe Price Retirement Plan
Services,
Inc., Chartered Investment Counselor
STEPHEN W. BOESEL, Executive Vice President--Vice
President, T.
Rowe Price
JOHN D. GILLESPIE, Executive Vice President--Vice
President, T.
Rowe Price
EDMUND M. NOTZON, Executive Vice President--Vice
President, T.
Rowe Price and T. Rowe Price Trust Company; formerly
(1972-1989)
charter member of the U.S. Senior Executive Service and
Director,
Analysis and Evaluation Division in the Office of Water
Regulations and Standards of the U.S. Environmental
Protection
Agency
JOHN H. LAPORTE, Vice President--Managing Director, T.
Rowe
Price; Chartered Financial Analyst
PAGE 82
JAMES S. RIEPE, Vice President and Director--Managing
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, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc
Rorer, Inc.
WILLIAM T. REYNOLDS, Vice President--Managing Director,
T. Rowe
Price
BRIAN C. ROGERS, Vice President--Managing Director, T.
Rowe Price
COMPENSATION TABLE
_________________________________________________________________
Pension or Total
Compensation
Aggregate Retirement from
Fund and
Name of Compensation Benefits Fund
Group
Person, from Fund Accrued as
Paid to
Position Expensesa Part of Fundb
Directors/Trusteesc
_________________________________________________________________
Personal Strategy Balanced
Leo C. Bailey, $477 N/A
$64,583
Director
Donald W. Dick, Jr., 477 N/A
64,833
Director
David K. Fagin, 477 N/A
53,833
Director
Addison Lanier, 477 N/A
64,583
Director
John K. Major, 477 N/A
54,583
Director
Hanne M. Merriman, 477 N/A
42,083
Director
Hubert D. Vos, 477 N/A
54,583
Director
Paul M. Wythes, 477 N/A
54,333
Director
James S. Riepe, 0 N/A
0
Directord
PAGE 83
M. David Testa, 0 N/A
0
Chairman of the Boardd
Personal Strategy Growth
Leo C. Bailey, $475 N/A
$64,583
Director
Donald W. Dick, Jr., 475 N/A
64,833
Director
David K. Fagin, 475 N/A
53,833
Director
Addison Lanier, 475 N/A
64,583
Director
John K. Major, 475 N/A
54,583
Director
Hanne M. Merriman, 475 N/A
42,083
Director
Hubert D. Vos, 475 N/A
54,583
Director
Paul M. Wythes, 475 N/A
54,333
Director
James S. Riepe, 0 N/A
0
Directord
M. David Testa, 0 N/A
0
Chairman of the Boardd
Personal Strategy Income
Leo C. Bailey, $475 N/A
$64,583
Director
Donald W. Dick, Jr., 475 N/A
64,833
Director
David K. Fagin, 475 N/A
53,833
Director
PAGE 84
Addison Lanier, 475 N/A
64,583
Director
John K. Major, 475 N/A
54,583
Director
Hanne M. Merriman, 475 N/A
42,083
Director
Hubert D. Vos, 475 N/A
54,583
Director
Paul M. Wythes, 475 N/A
54,333
Director
James S. Riepe, 0 N/A
0
Directord
M. David Testa, 0 N/A
0
Chairman of the Boardd
a Amounts in this Column are for the period June 1,
1993
through May 31, 1994.
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 1994.
d Any director/trustee of the Fund who is an officer
or
employee of T. Rowe Price receives no renumeration
from the
Fund.
Prime Reserve Fund
*GEORGE J. COLLINS, Vice President and
Director--President,
Managing Director, and Chief Executive Officer, T. Rowe
Price;
Director, Rowe Price-Fleming International, Inc., T.
Rowe Price
Trust Company and T. Rowe Price Retirement Plan
Services, Inc.,
Chartered Investment Counselor
*CARTER O. HOFFMAN, Chairman of the Board--Managing
Director, T.
Rowe Price; Chartered Investment Counselor
EDWARD A. WIESE, President--Vice President, T. Rowe
Price, Rowe
Price-Fleming International, Inc. and T. Rowe Price
Trust Company
ROBERT P. CAMPBELL, Executive Vice President--Vice
President, T.
Rowe Price and Rowe Price-Fleming International Inc.;
formerly
(4/80-5/90) Vice President and Director, Private
Finance, New
York Life Insurance Company, New York, New York
JAMES M. MCDONALD, Executive Vice President--Vice
President, T.
Rowe Price
PAGE 85
PATRICE L. BERCHTENBREITER, Vice President--Vice
President, T.
Rowe Price
PAUL W. BOLTZ, Vice President--Vice President and
Financial
Economist of T. Rowe Price
MICHAEL J. CONELIUS, Vice President--Assistant Vice
President, T.
Rowe Price
JOAN R. POTEE, Vice President--Vice President, T. Rowe
Price
JAMES S. RIEPE, Vice President and Director--Managing
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, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc
Rorer, Inc.
ROBERT M. RUBINO, Vice President--Vice President, T.
Rowe Price
COMPENSATION TABLE
_________________________________________________________________
Pension or Total
Compensation
Aggregate Retirement from
Fund and
Name of Compensation Benefits Fund
Group
Person, from Fund Accrued as
Paid to
Position Expensesa Part of Fundb
Directors/Trusteesc
_________________________________________________________________
Robert P. Black, $7,263 N/A
$52,667
Director
Calvin W. Burnett, 7,263 N/A
55,583
PH.D, Director
Anthony W. Deering, 7,263 N/A
66,333
Director
F. Pierce Linaweaver, 7,263 N/A
55,583
Director
John G. Schreiber, 7,263 N/A
55,667
Director
Anne Marie Whittemore, 7,263 N/A
32,667
Director
George J. Collins, 0 N/A
0
Directord
Carter O. Hoffman, 0 N/A
0
Chairman of the Boardd
PAGE 86
James S. Riepe, 0 N/A
0
Directord
a Amounts in this Column are for the period June 1,
1993
through May 31, 1994.
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 1994.
d Any director/trustee of the Fund who is an officer
or
employee of T. Rowe Price receives no renumeration
from the
Fund.
Short-Term Bond Fund
*GEORGE J. COLLINS, Chairman of the Board--President,
Managing
Director, and Chief Executive Officer, T. Rowe Price;
Director,
Rowe Price-Fleming International, Inc., T. Rowe Price
Trust
Company and T. Rowe Price Retirement Plan Services,
Inc.,
Chartered Investment Counselor
*JAMES S. RIEPE, Vice President and Director--Managing
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, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc
Rorer, Inc.
EDWARD A. WIESE, President--Vice President, T. Rowe
Price, Rowe
Price-Fleming International, Inc. and T. Rowe Price
Trust Company
VEENA A. KUTLER, Vice President--Vice President, T.
Rowe Price
and Rowe Price-Fleming International, Inc.
ROBERT P. CAMPBELL, Vice President--Vice President, T.
Rowe Price
and Rowe Price-Fleming International, Inc.; formerly
(4/80-5/90)
Vice President and Director, Private Finance, New York
Life
Insurance Company, New York, New York
CHRISTY M. DIPIETRO, Vice President--Vice President, T.
Rowe
Price and T. Rowe Price Trust Company
JAMES M. MCDONALD, Vice President--Vice President, T.
Rowe Price
ROBERT M. RUBINO, Vice President--Vice President, T.
Rowe Price
CHARLES P. SMITH, Vice President--Managing Director, T.
Rowe
Price; Vice President, Rowe Price-Fleming
International, Inc.
PAGE 87
COMPENSATION TABLE
_________________________________________________________________
Pension or Total
Compensation
Aggregate Retirement from
Fund and
Name of Compensation Benefits Fund
Group
Person, from Fund Accrued as
Paid to
Position Expensesa Part of Fundb
Directors/Trusteesc
_________________________________________________________________
Robert P. Black, $2,069 N/A
$52,667
Director
Calvin W. Burnett, 2,069 N/A
55,583
PH.D, Director
Anthony W. Deering, 2,069 N/A
66,333
Director
F. Pierce Linaweaver, 2,069 N/A
55,583
Director
John G. Schreiber, 2,069 N/A
55,667
Director
Anne Marie Whittemore, 2,069 N/A
32,667
Director
George J. Collins, 0 N/A
0
Chairman of the Boardd
James S. Riepe, 0 N/A
0
Directord
a Amounts in this Column are for the period June 1,
1993
through May 31, 1994.
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 1994.
d Any director/trustee of the Fund who is an officer
or
employee of T. Rowe Price receives no renumeration
from the
Fund.
Short-Term U.S. Government Fund
*GEORGE J. COLLINS, Chairman of the Board--President,
Managing
Director, and Chief Executive Officer, T. Rowe Price;
Director,
Rowe Price-Fleming International, Inc., T. Rowe Price
Trust
PAGE 88
Company and T. Rowe Price Retirement Plan Services,
Inc.,
Chartered Investment Counselor
*PETER VAN DYKE, President and Director--Managing
Director, T.
Rowe Price; Vice President of Rowe Price-Fleming
International,
Inc. and T. Rowe Price Trust Company
*JAMES S. RIEPE, Vice President and Director--Managing
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, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc
Rorer, Inc.
HEATHER R. LANDON, Executive Vice President--Vice
President, T.
Rowe Price and T. Rowe Price Trust Company
VEENA A. KUTLER, Vice President--Vice President, T.
Rowe Price
and Rowe Price-Fleming International, Inc.
JAMES M. MCDONALD, Vice President--Vice President, T.
Rowe Price
EDMUND M. NOTZON, Vice President--Vice President, T.
Rowe Price
and T. Rowe Price Trust Company; formerly, (1972-1989)
charter
member of the U.S. Senior Executive Services and
Director,
Analysis and Evaluation Division in the Office of Water
Regulations and Standards of the U.S. Environmental
Protection
Agency
CHARLES P. SMITH, Vice President--Managing Director, T.
Rowe
Price; Vice President, Rowe Price-Fleming
International, Inc.
GWENDOLYN G. WAGNER, Vice President--Assistant Vice
President, T.
Rowe Price
DONNA M. ENNIS-DAVIS, Assistant Vice
President--Employee, T. Rowe
Price
COMPENSATION TABLE
_________________________________________________________________
Pension or Total
Compensation
Aggregate Retirement from
Fund and
Name of Compensation Benefits Fund
Group
Person, from Fund Accrued as
Paid to
Position Expensesa Part of Fundb
Directors/Trusteesc
_________________________________________________________________
Robert P. Black, $1,376 N/A
$52,667
Director
Calvin W. Burnett, 1,376 N/A
55,583
PH.D, Director
Anthony W. Deering, 1,376 N/A
66,333
Director
PAGE 89
F. Pierce Linaweaver, 1,376 N/A
55,583
Director
John G. Schreiber, 1,376 N/A
55,667
Director
Anne Marie Whittemore, 1,376 N/A
32,667
Director
George J. Collins, 0 N/A
0
Chairman of the Boardd
James S. Riepe, 0 N/A
0
Directord
Peter Van Dyke, 0 N/A
0
Directord
a Amounts in this Column are for the period June 1,
1993
through May 31, 1994.
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 1994.
d Any director/trustee of the Fund who is an officer
or
employee of T. Rowe Price receives no renumeration
from the
Fund.
U.S. Treasury Intermediate, Long-Term and Money Funds
*GEORGE J. COLLINS, President and Director--President,
Managing
Director, and Chief Executive Officer, T. Rowe Price;
Director,
Rowe Price-Fleming International, Inc., T. Rowe Price
Trust
Company and T. Rowe Price Retirement Plan Services,
Inc.,
Chartered Investment Counselor
*JAMES S. RIEPE, Vice President and Director--Managing
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, Rowe
Price-Fleming International, Inc. and Rhone-Poulenc
Rorer, Inc.
*CHARLES P. SMITH, Executive Vice President and
Director--
Managing Director, T. Rowe Price; Vice President, Rowe
Price-
Fleming International, Inc.
*PETER VAN DYKE, Executive Vice President and
Director--Managing
Director, T. Rowe Price; Vice President, Rowe
Price-Fleming
International, Inc. and T. Rowe Price Trust Company
PAGE 90
EDWARD A. WIESE, Executive Vice President--Vice
President, T.
Rowe Price, Rowe Price-Fleming International, Inc. and
T. Rowe
Price Trust Company
PAUL W. BOLTZ, Vice President--Vice President and
Financial
Economist of T. Rowe Price
ROBERT P. CAMPBELL, Vice President--Vice President, T.
Rowe Price
and Rowe Price-Fleming International Inc.; formerly
(4/80-5/90)
Vice President and Director, Private Finance, New York
Life
Insurance Company, New York, New York
VEENA A. KUTLER, Vice President--Vice President, T.
Rowe Price
and Rowe Price-Fleming International, Inc.
HEATHER R. LANDON, Vice President--Vice President, T.
Rowe Price
and T. Rowe Price Trust Company
JAMES M. McDONALD, Vice President--Vice President, T.
Rowe Price
JOAN R. POTEE, Vice President--Vice President, T. Rowe
Price
THOMAS E. TEWKSBURY, Vice President--Vice President, T.
Rowe
Price; formerly (1/89-12/93) senior bond trader,
Scudder, Stevens
& Clark, Boston, Massachusetts
COMPENSATION TABLE
_________________________________________________________________
Pension or Total
Compensation
Aggregate Retirement from
Fund and
Name of Compensation Benefits Fund
Group
Person, from Fund Accrued as
Paid to
Position Expensesa Part of Fundb
Directors/Trusteesc
_________________________________________________________________
U.S. Treasury Intermediate
Leo C. Bailey, $1,181 N/A
$64,583
Director
Calvin W. Burnett, 1,181 N/A
55,583
PH.D, Director
Anthony W. Deering, 1,181 N/A
66,333
Director
F. Pierce Linaweaver, 1,181 N/A
55,583
Director
John G. Schreiber, 1,181 N/A
55,667
Director
Anne Marie Whittemore, 1,181 N/A
32,667
Director
PAGE 91
George J. Collins, 0 N/A
0
Directord
James S. Riepe, 0 N/A
0
Directord
Charles P. Smith, 0 N/A
0
Directord
Peter Van Dyke, 0 N/A
0
Directord
U.S. Treasury Long-Term
Leo C. Bailey, $976 N/A
$64,583
Director
Calvin W. Burnett, 976 N/A
55,583
PH.D, Director
Anthony W. Deering, 976 N/A
66,333
Director
F. Pierce Linaweaver, 976 N/A
55,583
Director
John G. Schreiber, 976 N/A
55,667
Director
Anne Marie Whittemore, 976 N/A
32,667
Director
George J. Collins, 0 N/A
0
Directord
James S. Riepe, 0 N/A
0
Directord
Charles P. Smith, 0 N/A
0
Directord
Peter Van Dyke, 0 N/A
0
Directord
PAGE 92
U.S. Treasury Money
Leo C. Bailey, $1,967 N/A
$64,583
Director
Calvin W. Burnett, 1,967 N/A
55,583
PH.D, Director
Anthony W. Deering, 1,967 N/A
66,333
Director
F. Pierce Linaweaver, 1,967 N/A
55,583
Director
John G. Schreiber, 1,967 N/A
55,667
Director
Anne Marie Whittemore, 1,967 N/A
32,667
Director
George J. Collins, 0 N/A
0
Directord
James S. Riepe, 0 N/A
0
Directord
Charles P. Smith, 0 N/A
0
Directord
Peter Van Dyke, 0 N/A
0
Directord
a Amounts in this Column are for the period June 1,
1993
through May 31, 1994.
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 1994.
d Any director/trustee of the Fund who is an officer
or
employee of T. Rowe Price receives no renumeration
from the
Fund.
Each Fund's Executive Committee, consisting of the
Fund's
interested directors/trustees, has been authorized by
its
respective Board of Directors/Trustees to exercise all
powers of
the Board to manage the Fund in the intervals between
meetings of
the Board, except the powers prohibited by statute from
being
delegated.
PAGE 93
PRINCIPAL HOLDERS OF SECURITIES
As of the date of the prospectus, the officers and
directors
of the Fund, as a group, owned less than 1% of the
outstanding
shares of the Fund.
As of May 31, 1994, Yachtcrew & Co., FBO Spectrum
Income
Account, State Street Bank and Trust Co., 1776 Heritage
Drive-4W,
North Quincy, MA 02171-2010 beneficially owned more
than 5% of
the outstanding shares of the GNMA, High Yield, New
Income and
Short-Term Bond Funds; FTC & Co., #002, P. O. Box 5508,
Attn:
Datalynx, Denver, CO 80217-5508 and T. Rowe Price Trust
Company,
Assoc. in Surgery PAPP (UMSA), Attn: Installation Team
for
Conversion Plan #800302, P. O. Box 17215, Baltimore, MD
21203-
7999 beneficially owned more than 5% of the outstanding
shares of
the U.S. Treasury Intermediate Fund; and T. Rowe Price
Trust Co.
Inc., Attn: Installation Team for Conversion Assets,
New England
Electric Plan, 25 Research Drive, Westborough, MA 01582
beneficially owned more than 5% of the outstanding
shares of the
U.S. Treasury Money Fund.
INVESTMENT MANAGEMENT SERVICES
Services
Under the Management Agreement, T. Rowe Price
provides the
Fund with discretionary investment services.
Specifically, T.
Rowe Price is responsible for supervising and directing
the
investments of the Fund in accordance with the Fund's
investment
objectives, program, and restrictions as provided in
its
prospectus and this Statement of Additional
Information. T. Rowe
Price is also responsible for effecting all security
transactions
on behalf of the Fund, including the negotiation of
commissions
and the allocation of principal business and portfolio
brokerage.
In addition to these services, T. Rowe Price provides
the Fund
with certain corporate administrative services,
including:
maintaining the Fund's corporate existence and
corporate records;
registering and qualifying Fund shares under federal
and state
laws; monitoring the financial, accounting, and
administrative
functions of the Fund; maintaining liaison with the
agents
employed by the Fund such as the Fund's custodian and
transfer
agent; assisting the Fund in the coordination of such
agents'
activities; and permitting T. Rowe Price's employees to
serve as
officers, directors, and committee members of the Fund
without
cost to the Fund.
PAGE 94
The 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
The Fund pays T. Rowe Price a fee ("Fee") which
consists of
two components: a Group Management Fee ("Group Fee")
and an
Individual Fund Fee ("Fund Fee"). The Fee is paid
monthly to T.
Rowe Price on the first business day of the next
succeeding
calendar month and is calculated as described below.
The monthly Group Fee ("Monthly Group Fee") is the
sum of
the daily Group Fee accruals ("Daily Group Fee
Accruals") for
each month. The Daily Group Fee Accrual for any
particular day
is computed by multiplying the Price Funds' group fee
accrual as
determined below ("Daily Price Funds' Group Fee
Accrual") by the
ratio of the Fund's net assets for that day to the sum
of the
aggregate net assets of the Price Funds for that day.
The Daily
Price Funds' Group 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 annualized Daily
Price Funds'
Group Fee Accrual for that day as determined in
accordance with
the following schedule:
Price Funds'
Annual Group Base Fee
Rate for Each Level of Assets
0.480% First $1 billion
0.450% Next $1 billion
0.420% Next $1 billion
0.390% Next $1 billion
0.370% Next $1 billion
0.360% Next $2 billion
0.350% Next $2 billion
0.340% Next $5 billion
0.330% Next $10 billion
0.320% Next $10 billion
0.310% Thereafter
For the purpose of calculating the Group Fee, the
Price
Funds include all the mutual funds distributed by T.
Rowe Price
Investment Services, Inc., (excluding T. Rowe Price
Spectrum
PAGE 95
Fund, Inc. and any institutional or private label
mutual funds).
For the purpose of calculating the Daily Price Funds'
Group Fee
Accrual for any particular day, the net assets of each
Price Fund
are determined in accordance with the Fund's prospectus
as of the
close of business on the previous business day on which
the Fund
was open for business.
The monthly Fund Fee ("Monthly Fund Fee") is the
sum of the
daily Fund Fee accruals ("Daily Fund Fee Accruals") for
each
month. The Daily Fund Fee Accrual for any particular
day is
computed by multiplying the fraction of one (1) over
the number
of calendar days in the year by the individual Fund Fee
Rate and
multiplying this product by the net assets of the Fund
for that
day, as determined in accordance with the Fund's
prospectus as of
the close of business on the previous business day on
which the
Fund was open for business. The individual fund fees
for each
Fund are listed in the chart below:
Individual Fund Fees
GNMA Fund 0.15%
High Yield Fund 0.30%
New Income Fund 0.30%
Personal Strategy Growth Fund 0.30%
Personal Strategy Balanced Fund 0.25%
Personal Strategy Income Fund 0.15%
Prime Reserve Fund 0.05%
Short-Term Bond Fund 0.10%
Short-Term U.S. Government Fund 0.10%
U.S. Treasury Intermediate Fund 0.05%
U.S. Treasury Long-Term Fund 0.05%
U.S. Treasury Money Fund 0.00%
The following chart sets forth the total management
fees, if
any, paid to T. Rowe Price by each Fund, for the
three-month
fiscal year ended May 31, 1994 and for the fiscal years
ended
February 28, 1994, February 28, 1993 and February 29,
1992:
PAGE 96
Fund 1994* 1994 1993
1992
GNMA $1,034,000 $ 4,626,000 $ 4,102,000$
3,069,000
High Yield 2,197,000 10,554,000 8,014,000
5,701,000
New Income 1,748,000 7,750,000 7,113,000
6,348,000
Prime Reserve 3,601,000 13,617,000 15,620,000
18,486,000
Short-Term Bond 708,000 2,873,000 2,136,000
1,398,000
Short-Term U.S.
Government 100,000 526,000 627,000
**
U.S. Treasury 173,000 755,000 571,000
309,000
Intermediate
U.S. Treasury 26,000 180,000 125,000
4,000
Long-Term
U.S. Treasury 569,000 2,084,000 165,000
2,140,000
Money
* For the three-month fiscal year ended May 31, 1994.
** Due to the Fund's expense limitation in effect at
that time,
no management fee was paid by the Fund to T. Rowe
Price.
Limitation on Fund Expenses
The Management Agreement between the Fund and T.
Rowe Price
provides that the Fund will bear all expenses of its
operations
not specifically assumed by T. Rowe Price. However, in
compliance with certain state regulations, T. Rowe
Price will
reimburse the Fund for certain expenses which in any
year exceed
the limits prescribed by any state in which the Fund's
shares are
qualified for sale. Presently, the most restrictive
expense
ratio limitation imposed by any state is 2.5% of the
first $30
million of the Fund's average daily net assets, 2% of
the next
$70 million of the Fund's assets, and 1.5% of net
assets in
excess of $100 million. Reimbursement by the Fund to
T. Rowe
Price of any expenses paid or assumed under a state
expense
limitation may not be made more than two years after
the end of
the fiscal year in which the expenses were paid or
assumed.
The following chart sets forth expense ratio
limitations and
the periods for which they are effective. For each, T.
Rowe
Price has agreed to bear any Fund expenses which would
cause the
Fund's ratio of expenses to average net assets to
exceed the
indicated percentage limitations. The expenses borne
by T. Rowe
Price are subject to reimbursement by the Fund through
the
indicated reimbursement date, provided no reimbursement
will be
made if it would result in the Fund's expense ratio
exceeding its
applicable limitation.
PAGE 97
Expense
Limitation Ratio
Reimbursement
Fund Period Limitation
Date
Personal Strategy July 1, 1994- 0.95% May 31,
1998
Income Fund May 31, 1996
Personal Strategy July 1, 1994- 1.05% May 31,
1998
Balanced Fund May 31, 1996
Personal Strategy July 1, 1994- 1.10% May 31,
1998
Growth Fund May 31, 1996
Short-Term U.S.
Government+ January 1, 1994- 0.70% May 31,
1998
May 31, 1996
U.S. Treasury March 1, 1993- 0.80% February
28, 1997
Intermediate++ February 28, 1995
U.S. Treasury March 1, 1993- 0.80% February
28, 1997
Long-Term++ February 28, 1995
+ The Short-Term U.S. Government Fund previously
operated under
a 0.40% limitation that expired December 31, 1993.
The
reimbursement period for this limitation extends
through June
30, 1995.
++ The Intermediate and Long-Term Funds' operated under
a 0.80%
limitation that expired February 29, 1993. The
reimbursement
period for this limitation extends through February
28, 1995.
Each of the above-referenced Fund's Management
Agreement also
provides that one or more additional expense limitation
periods
(of the same or different time periods) may be
implemented after
the expiration of the current expense limitation, and
that with
respect to any such additional limitation period, the
Fund may
reimburse T. Rowe Price, provided the reimbursement
does not
result in the Fund's aggregate expenses exceeding the
additional
expense limitation.
Pursuant to the Short-Term U.S.
Government
Fund's current expense limitation, $130,000 and
$938,000 of
management fees were not accrued by the Fund for the
three-month
fiscal year ended May 31, 1994 and for the fiscal year
ended
February 28, 1994, respectively.
Pursuant to the Intermediate Fund's current expense
limitation, $77,000 of unaccrued 1993 fees for the
Fund,
representing the entire unaccrued balance, were
reimbursed to T.
Rowe Price during the fiscal year ended February 28,
1994.
PAGE 98
Pursuant to the Long-Term Fund's current expense
limitation,
$28,000 and $61,000 of management fees were not accrued
by the
Fund for the three-month fiscal year ended May 31, 1994
and for
the fiscal year ended February 28, 1994, respectively.
Additionally, $303,000 of unaccrued fees from the prior
period
for the Fund was subject to reimbursement through
February 28,
1995.
GNMA, High Yield, New Income, Prime Reserve and
Short-Term Bond
Funds
T. Rowe Price Spectrum Fund, Inc.
The Fund is a party to a Special Servicing Agreement
("Agreement") between and among T. Rowe Price Spectrum
Fund, Inc.
("Spectrum Fund"), T. Rowe Price, T. Rowe Price
Services, Inc.
and various other T. Rowe Price funds which, along with
the Fund,
are funds in which Spectrum Fund invests (collectively
all such
funds "Underlying Price Funds").
The Agreement provides that, if the Board of
Directors/Trustees of any Underlying Price Fund
determines that
such Underlying Fund's share of the aggregate expenses
of
Spectrum Fund is less than the estimated savings to the
Underlying Price Fund from the operation of Spectrum
Fund, the
Underlying Price Fund will bear those expenses in
proportion to
the average daily value of its shares owned by Spectrum
Fund,
provided further that no Underlying Price Fund will
bear such
expenses in excess of the estimated savings to it.
Such savings
are expected to result primarily from the elimination
of numerous
separate shareholder accounts which are or would have
been
invested directly in the Underlying Price Funds and the
resulting
reduction in shareholder servicing costs. Although
such cost
savings are not certain, the estimated savings to the
Underlying
Price Funds generated by the operation of Spectrum Fund
are
expected to be sufficient to offset most, if not all,
of the
expenses incurred by Spectrum Fund.
All Funds
DISTRIBUTOR FOR FUND
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 Fund's
distributor. Investment Services is registered as a
broker-
dealer under the Securities Exchange Act of 1934 and is
a member
PAGE 99
of the National Association of Securities Dealers, Inc.
The
offering of the Fund's shares is continuous.
Investment Services is located at the same address
as the
Fund and T. Rowe Price -- 100 East Pratt Street,
Baltimore,
Maryland 21202.
Investment Services serves as distributor to the
Fund
pursuant to an Underwriting Agreement ("Underwriting
Agreement"),
which provides that the Fund will pay all fees and
expenses in
connection with: registering and qualifying its shares
under the
various state "blue sky" laws; preparing, setting in
type,
printing, and mailing its prospectuses and reports to
shareholders; and issuing its shares, including
expenses of
confirming purchase orders.
The Underwriting Agreement provides that Investment
Services
will pay all fees and expenses in connection with:
printing and
distributing prospectuses and reports for use in
offering and
selling Fund shares; 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 Fund shares, except for those fees
and
expenses specifically assumed by the Fund. Investment
Services'
expenses are paid by T. Rowe Price.
Investment Services acts as the agent of the Fund in
connection with the sale of its 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
Fund.
CUSTODIAN
State Street Bank and Trust Company is the custodian
for the
Fund's domestic securities and cash, but it does not
participate
in the Fund's investment decisions. Portfolio
securities
purchased in the U.S. are maintained in the custody of
the Bank
and may be entered into the Federal Reserve Book Entry
System, or
the security depository system of the Depository Trust
Corporation. The Fund (other than the GNMA, Prime
Reserve and
U.S. Treasury Intermediate, Long-Term and Money Funds)
has
entered into a Custodian Agreement with The Chase
Manhattan Bank,
N.A., London, pursuant to which portfolio securities
which are
PAGE 100
purchased outside the United States are maintained in
the custody
of various foreign branches of The Chase Manhattan Bank
and such
other custodians, including foreign banks and foreign
securities
depositories as are approved by the Fund's Board of
Directors/Trustees in accordance with regulations under
the
Investment Company Act of 1940. The Bank's main office
is at 225
Franklin Street, Boston, Massachusetts 02110. The
address for
The Chase Manhattan Bank, N.A., London is Woolgate
House, Coleman
Street, London, EC2P 2HD, England.
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
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 fixed-income 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 Fund
(except to the extent it purchases equity securities
(High Yield,
New Income, and Personal Strategy Funds only)).
However, it is
included because T. Rowe Price does manage a
significant number
PAGE 101
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
Fund.
How Brokers and Dealers are Selected
Equity Securities
In purchasing and selling the Fund's portfolio
securities, it
is T. Rowe Price's policy to obtain quality execution
at the most
favorable prices through responsible brokers and
dealers and, in
the case of agency transactions, at competitive
commission rates.
However, under certain conditions, the Fund may pay
higher
brokerage commissions in return for brokerage and
research
services. As a general practice, over-the-counter
orders are
executed with market-makers. In selecting among
market-makers,
T. Rowe Price generally seeks to select those it
believes to be
actively and effectively trading the security being
purchased or
sold. In selecting broker-dealers to execute the
Fund's
portfolio transactions, consideration is given to such
factors as
the price of the security, the rate of the commission,
the size
and difficulty of the order, the reliability,
integrity,
financial condition, general execution and operational
capabilities of competing brokers and dealers, and
brokerage and
research services provided by them. It is not the
policy of T.
Rowe Price to seek the lowest available commission rate
where it
is believed that a broker or dealer charging a higher
commission
rate would offer greater reliability or provide better
price or
execution.
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.
With respect to equity and fixed income securities,
T. Rowe
Price may effect principal transactions on behalf of
the Fund
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
PAGE 102
with any such broker or dealer in connection with the
acquisition
of securities in underwritings. T. Rowe Price may
receive
research services in connection with brokerage
transactions,
including designations in fixed price offerings.
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)
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
PAGE 103
incorporated by T. Rowe Price into its investment
process. As a
practical matter, it would not be possible for T. Rowe
Price's
Equity Research Division 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 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
PAGE 104
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
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 or
dealers which execute transactions for the Fund are not
PAGE 105
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
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.
High Yield, New Income, Personal Strategy,
Short-Term Bond,
and Short-Term U.S. Government Funds
PAGE 106
Transactions with Related Brokers and Dealers
As provided in the Investment Management Agreement
between
the Fund and T. Rowe Price, T. Rowe Price is
responsible not only
for making decisions with respect to the purchase and
sale of the
Fund's portfolio securities, but also for implementing
these
decisions, including the negotiation of commissions and
the
allocation of portfolio brokerage and principal
business. It is
expected that T. Rowe Price may place orders for the
Fund's
portfolio transactions with broker-dealers through the
same
trading desk T. Rowe Price uses for portfolio
transactions in
domestic securities. The trading desk accesses brokers
and
dealers in various markets in which the Fund's foreign
securities
are located. These brokers and dealers may include
certain
affiliates of Robert Fleming Holdings Limited ("Robert
Fleming
Holdings") and Jardine Fleming Group Limited ("JFG"),
persons
indirectly related to T. Rowe Price. Robert Fleming
Holdings,
through Copthall Overseas Limited, a wholly-owned
subsidiary,
owns 25% of the common stock of Rowe Price-Fleming
International,
Inc. ("RPFI"), an investment adviser registered under
the
Investment Advisers Act of 1940. Fifty percent of the
common
stock of RPFI is owned by TRP Finance, Inc., a
wholly-owned
subsidiary of T. Rowe Price, and the remaining 25% is
owned by
Jardine Fleming Holdings Limited, a subsidiary of JFG.
JFG is
50% owned by Robert Fleming Holdings and 50% owned by
Jardine
Matheson Holdings Limited. Orders for the Fund's
portfolio
transactions placed with affiliates of Robert Fleming
Holdings
and JFG will result in commissions being received by
such
affiliates.
The Board of Directors/Trustees of the Fund has
authorized T.
Rowe Price to utilize certain affiliates of Robert
Fleming and
JFG in the capacity of broker in connection with the
execution of
the Fund's portfolio transactions. These affiliates
include, but
are not limited to, Jardine Fleming Securities Limited
("JFS"), a
wholly-owned subsidiary of JFG, Robert Fleming & Co.
Limited
("RF&Co."), Jardine Fleming Australia Securities
Limited, and
Robert Fleming, Inc. (a New York brokerage firm).
Other
affiliates of Robert Fleming Holding and JFG also may
be used.
Although it does not believe that the Fund's use of
these brokers
would be subject to Section 17(e) of the Investment
Company Act
of 1940, the Board of Directors/Trustees of the Fund
has agreed
that the procedures set forth in Rule 17e-1 under that
Act will
be followed when using such brokers.
PAGE 107
Other
The Funds engaged in portfolio transactions
involving broker-
dealers in the following amounts for the three-month
fiscal year
ended May 31, 1994:
Fund 1994
_____ ____
GNMA $ 620,027,000
High Yield 4,476,795,000
New Income 1,649,029,000
Prime Reserve 5,945,733,000
Short-Term Bond 1,149,888,000
Short-Term U.S. Government 63,449,000
U.S. Treasury Intermediate 35,433,000
U.S. Treasury Long-Term 85,972,000
U.S. Treasury Money 10,087,000
For the fiscal years ended February 28, 1994,
February 28,
1993 and February 29, 1992, the Funds engaged in
portfolio
transactions involving broker-dealers in the following
amounts:
Fund 1994 1993
1992
______ ____ ____
____
GNMA $ 2,306,951,000 $ 1,528,454,000 $
1,438,762,000
High Yield 18,554,222,000 16,168,606,000
6,702,967,000
New Income 20,265,475,000 15,193,999,000
6,648,064,000
Prime Reserve 29,024,172,000 36,478,989,000
29,975,769,000
Short-Term Bond 4,266,837,000 5,805,958,000
5,534,535,000
Short-Term U.S.
Government 793,565,000 1,876,498,000
427,475,000
U.S. Treasury 81,970,000 91,923,000
218,317,000
Intermediate
U.S. Treasury 142,513,000 192,941,000
192,774,000
Long-Term
U.S. Treasury 3,449,951,000 2,804,196,000
23,290,378,000
Money
The entire amount for each of these years
represented
principal transactions as to which the GNMA, Prime
Reserve,
Short-Term U.S. Government, U.S. Treasury Intermediate,
Long-Term
and Money Funds have no knowledge of the profits or
losses
realized by the respective broker-dealers for the
three-month
fiscal year ended May 31, 1994 and for the fiscal years
ended
February 28, 1994, February 28, 1993 and February 29,
1992.
PAGE 108
With respect to the High Yield Fund, for the
three-month
fiscal year ended May 31, 1994, $4,398,879,000
consisted of
principal transactions as to which the Fund has no
knowledge of
the profits or losses realized by the respective
broker-dealers;
and $77,916,000 involved trades with brokers acting as
agents or
underwriters, in which such broker received total
commissions,
including discounts received in connection with
underwritings of
$1,385,000.
With respect to the High Yield, New Income and
Short-Term
Bond Funds, the following amounts consisted of
principal
transactions as to which the Funds have no knowledge of
the
profits or losses realized by the respective
broker-dealers for
the fiscal years ended February 28, 1994, February 28,
1993 and
February 29, 1992:
Fund 1994 1993
1992
______ ____ ____
____
High Yield $17,956,306,000 $15,737,460,000
$6,682,140,000
New Income 20,206,382,000 15,189,019,000
6,518,595,000
Short-Term Bond 0 0
5,034,535,000
The following amounts involved trades with brokers
acting as
agents or underwriters for the fiscal years ended
February 28,
1994, February 28, 1993, and February 29, 1992:
Fund 1994 1993
1992
______ ____ ____
____
High Yield $597,916,000 $431,147,000 $
20,827,000
New Income 59,093,000 4,980,000
129,469,000
Short-Term Bond 0 0
5,000,000
The amounts shown below 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 February 28,
1994,
February 28, 1993 and February 29, 1992:
Fund 1994 1993
1992
______ ____ ____
____
High Yield $16,730,000 $3,661,000
$1,201,000
New Income 169,000 20,000
402,000
Short-Term Bond 0 0
15,000
PAGE 109
The percentage of total portfolio transactions,
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 for the three-month fiscal
year ended
May 31, 1994 and for the fiscal years ended February
28, 1994,
February 28, 1993 and February 29, 1992, are shown
below:
Fund 1994* 1994 1993
1992
______ ____ ____ ____
____
GNMA 98% 91% 91%
99%
High Yield 48% 70% 70%
59%
New Income 68% 61% 61%
87%
Prime Reserve 78% 87% 81%
76%
Short-Term Bond 83% 61% 84%
79%
Short-Term U.S.
Government 100% 100% 94%
100%
U.S. Treasury 87% 85% 98%
100%
Intermediate
U.S. Treasury Long-Term 100% 98% 99%
100%
U.S. Treasury Money 32% 66% 75%
60%
* For the three-month fiscal year ended May 31, 1994.
The portfolio turnover rates for the following
Funds for the
three-month fiscal year ended May 31, 1994 and for the
fiscal
years ended February 28, 1994, February 28, 1993 and
February 29,
1992 are as follows:
Fund 1994* 1994 1993
1992
______ _____ ____ ____
____
GNMA 151.8% 92.5% 94.2%
66.0%
High Yield 62.5% 107.0% 104.4%
58.9%
New Income 91.5% 58.3% 85.8%
49.7%
Short-Term Bond 222.8% 90.8% 68.4%
380.7%
Short-Term U.S.
Government 27.6% 70.4% 110.8%
98.4%
U.S. Treasury 45.5% 20.2% 22.8%
91.4%
Intermediate
U.S. Treasury Long-Term 246.9% 59.4% 165.4%
162.4%
* For the three-month fiscal year ended May 31, 1994.
PAGE 110
Prime Reserve Fund
The Fund, in pursuing its objectives, may engage in
short-term
trading to take advantage of market variations. The
Fund will
seek to protect principal, improve liquidity of its
securities,
or enhance yield by purchasing and selling securities
based upon
existing or anticipated market discrepancies.
Money Fund
The Fund, in pursuing its objectives, may engage in
short-term
trading to take advantage of market variations. The
Fund will
seek to protect principal, improve liquidity of its
securities,
or enhance yield by purchasing and selling securities
based upon
existing or anticipated market discrepancies.
PRICING OF SECURITIES
GNMA, High Yield, New Income, Short-Term Bond,
Short-Term U.S.
Government, U.S. Treasury Intermediate and Long-Term
Funds
Fixed income securities are generally traded in the
over-the-
counter market. Investments in domestic securities
with
remaining maturities of one year or more and foreign
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.
Domestic securities with remaining maturities less than
one year
are stated at fair value which is determined by using a
matrix
system that establishes a value for each security based
on bid-
side money market yields.
There are a number of pricing services available,
and the
Board of Directors, 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.
High Yield, New Income, and Personal Strategy Funds
Equity securities listed or regularly traded on a
securities
exchange (including NASDAQ) are valued at the last
quoted sales
price on the day the valuations are made. A security
which is
listed or traded on more than one exchange is valued at
the
PAGE 111
quotation on the exchange determined to be the primary
market for
such security. Other equity securities and those
listed
securities that are not traded on a particular day are
valued at
a price within the limits of the latest bid and asked
prices
deemed by the Board of Directors/Trustees, or by
persons
delegated by the Board, best to reflect fair value.
Debt securities are generally traded in the
over-the-counter
market and are valued at a price deemed best to reflect
fair
value as quoted by dealers who make markets in these
securities
or by an independent pricing service. Short-term debt
securities
are valued at their cost in local currency which, when
combined
with accrued interest, approximates fair value.
Prime Reserve and U.S. Treasury Money Funds
Securities with more than 60 days remaining to
maturity are
stated at fair value which is determined by using a
matrix system
that establishes a value for each security based on
money market
yields. Securities originally purchased with remaining
maturities of 60 days or less are valued at amortized
cost. In
addition, securities purchased with maturities in
excess of 60
days, but which currently have maturities of 60 days or
less, are
valued at their amortized cost for the 60 days prior to
maturity-
-such amortization being based on the fair value of the
securities on the 61st day prior to maturity.
All Funds
For the purposes of determining the Fund's net
asset value
per share, all assets and liabilities initially
expressed in
foreign currencies are converted into U.S. dollars at
the mean of
the bid and offer prices of such currencies against
U.S. dollars
quoted by any major bank.
Assets and liabilities for which the above
valuation
procedures are inappropriate or are deemed not to
reflect fair
value are stated at fair value, as determined in good
faith by or
under the supervision of officers of the Funds, as
authorized by
the Board of Directors.
Prime Reserve and U.S. Treasury Money Funds
Maintenance of Net Asset Value Per Share
It is the policy of the Fund to attempt to maintain
a net
asset value of $1.00 per share by rounding to the
nearest one
PAGE 112
cent. This method of valuation is commonly referred to
as "penny
rounding" and is permitted by Rule 2a-7 under the
Investment
Company Act of 1940. Under Rule 2a-7:
(a) the Board of Directors of the Fund must
undertake to
assure, to the extent reasonably practical taking
into
account current market conditions affecting the
Fund's
investment objectives, that the Fund's net asset
value will
not deviate from $1.00 per share;
Prime Reserve Fund
(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
(or in the case of U.S. government securities
greater than
762 days), and (iii) maintain a dollar-weighted
average
portfolio maturity of 90 days or less;
Money Fund
(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
762 days,
and (iii) maintain a dollar-weighted average
portfolio
maturity of 90 days or less;
Prime Reserve and U.S. Treasury Money Funds
(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;
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 price per share under the penny
rounding
method; and (ii) the Fund will continue to use the
penny
rounding 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,
PAGE 113
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.
Prime Reserve Fund
Prime Money Market Securities Defined. Prime money
market
securities are those which are described as First Tier
Securities
under Rule 2a-7 of the Investment Company Act of 1940.
These
include any security with a remaining maturity of 397
days or
less that is rated (or that has been issued by an
issuer that is
rated with respect to a class of short-term debt
obligations, or
any security within that class that is comparable in
priority and
security with the security) by any two nationally
recognized
statistical rating organizations (NRSROs) (or if only
one NRSRO
has issued a rating, that NRSRO) in the highest rating
category
for short-term debt obligations (within which there may
be sub-
categories). First Tier Securities also include
unrated
securities comparable in quality to rated securities,
as
determined by T. Rowe Price under the supervision of
the Fund's
Board of Directors.
All Funds
NET ASSET VALUE PER SHARE
The purchase and redemption price of the Fund's
shares is
equal to the Fund's net asset value per share or share
price.
The Fund determines its net asset value per share by
subtracting
the Fund's 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
PAGE 114
the total number of shares outstanding. The net asset
value per
share of the Fund is normally calculated as of the
close of
trading on the New York Stock Exchange ("NYSE") 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 the 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 the 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 AND DISTRIBUTIONS
Unless you elect otherwise, the Fund's annual
capital gain
distribution, 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
The Fund intends to qualify as a "regulated
investment
company" under Subchapter M of the Internal Revenue
Code of 1986,
as amended ("Code").
A portion of the dividends paid by the Fund may be
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. The Fund must declare dividends by
December
31 of each year equal to at least 98% of ordinary
income (as of
December 31) and capital gains (as of October 31) in
order to
PAGE 115
avoid a federal excise tax and distribute within 12
months 100%
of ordinary income and capital gains as of its tax
year-end to
avoid federal income tax.
At the time of your purchase, the 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, the
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 May 31, 1994, the books of
each Fund
(other than the Personal Strategy Fund) indicated that
each
Fund's aggregate net assets included undistributed net
income,
net realized capital gains, and unrealized appreciation
which are
listed below.
Net Realized
Unrealized
Undistributed Capital
Appreciation/
Fund Net Income Gains/(Losses)
(Depreciation)
GNMA $ 8,763 $(15,464,402) $
(26,398,092)
High Yield 3,988,627 (5,944,499)
(119,580,285)
New Income 21,962 1,014,811
(65,070,648)
Prime Reserve 2,105,954 1,900
203,760
Short-Term Bond 121,010 (4,542,864)
(15,924,117)
Short-Term U.S.
Government (1,938,550) (953,447)
(3,465,529)
U.S. Treasury Intermediate(108,298) 55,985
(6,124,061)
U.S. Treasury Long-Term (38,345) (577,048)
(2,954,108)
U.S. Treasury Money 81,339 2,371
174,801
If, in any taxable year, the Fund should not
qualify as a
regulated investment company under the Code: (i) the
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) the 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 dividends).
PAGE 116
Taxation of Foreign Shareholders
The Code provides that dividends from net income
will be
subject to U.S. tax. For shareholders who are not
engaged in a
business in the U.S., this tax would be imposed at the
rate of
30% upon the gross amount of the dividends in the
absence of a
Tax Treaty providing for a reduced rate or exemption
from U.S.
taxation. Distributions of net long-term capital gains
realized
by the Fund are not subject to tax unless the foreign
shareholder
is a nonresident alien individual who was physically
present in
the U.S. during the tax year for more than 182 days.
To the extent a Fund invests in foreign securities,
the
following would apply:
Passive Foreign Investment Companies
Each Fund may purchase the securities of certain
foreign
investment funds or trusts called passive foreign
investment
companies. Capital gains on the sale of such holdings
will be
deemed to be ordinary income regardless of how long the
Fund
holds its investment. In addition to bearing their
proportionate
share of the funds expenses (management fees and
operating
expenses) shareholders will also indirectly bear
similar expenses
of such funds. In addition, the Funds may be subject
to
corporate income tax and an interest charge on certain
dividends
and capital gains earned from these investments,
regardless of
whether such income and gains were distributed to
shareholders.
In accordance with tax regulations, the Funds
intend to
treat these securities as sold on the last day of a
Fund's fiscal
year and recognize any gains for tax purposes at that
time;
losses will not be recognized. Such gains will be
considered
ordinary income which a Fund will be required to
distribute even
though it has not sold the security and received cash
to pay such
distributions.
Foreign Currency Gains and Losses
Foreign currency gains and losses, including the
portion of
gain or loss on the sale of debt securities
attributable to
foreign exchange rate fluctuations, are taxable as
ordinary
income. If the net effect of these transactions is a
gain, the
ordinary income dividend paid by the Fund will be
increased; if
the result is a loss, a portion of its ordinary income
dividend
may be classified as a return of capital. Adjustments
to reflect
PAGE 117
these gains and losses will be made at the end of the
Fund's
taxable year.
YIELD INFORMATION
From time to time, the Fund may advertise a yield
figure
calculated in the following manner:
GNMA and Short-Term U.S. Government Funds
In conformity with regulations of the Securities
and
Exchange Commission, an income factor is calculated for
each
security in the portfolio based upon the security's
coupon rate.
The income factors are then adjusted for any gains or
losses
which have resulted from prepayments of principal
during the
period. 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.
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 yields of the GNMA and Short-Term U.S.
Government Funds
calculated under the above-described method for the
month ended
May 31, 1994 were 4.10% and 5.40%, respectively.
High Yield, New Income, Short-Term Bond, U.S. Treasury
Intermediate and U.S. Treasury Long-Term Funds
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
PAGE 118
monthly yield which is then annualized. 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 yields of the High Yield, New Income,
Short-Term Bond,
Intermediate and Long-Term Funds calculated under the
above-
described method for the month ended May 31, 1994, were
8.87%,
6.12%, 5.55%, 5.75% and 6.47%, respectively.
Prime Reserve and U.S. Treasury Money Funds
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.
The seven-day yields ending May 31, 1994 for the
Prime
Reserve and U.S. Treasury Money Funds were 3.33% and
3.18%,
respectively, and the Funds' compound yield for the
same period
were 3.38% and 3.23%, respectively.
All Funds
INVESTMENT PERFORMANCE
Total Return Performance
The 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
PAGE 119
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. 5 Yrs. 10 Yrs.
Since
Ended Ended Ended
Inception-
5/31/94 5/31/94 5/31/94
5/32/94
GNMA Fund
T. Rowe Price GNMA Fund -0.74% 49.74%
90.76%
(11/26/85)
Salomon Brothers 30-Year
GNMA Index 0.04 56.54
118.60
Lehman Brothers GNMA
Bond Index -0.34 55.23
120.89
Lipper GNMA Funds Average -0.02 48.17
93.96
High Yield Fund
High Yield Fund 2.34% 46.71%
158.53%
(12/31/84)
Merrill Lynch High
Yield Index 6.39 75.35
214.84
Merrill Lynch Medium Quality
Long Corporate Index 1.72 64.77
207.17
Lipper's Average of High
Current Yield Funds 6.70 61.77
163.20
New Income Fund
New Income Fund 1.40% 50.29% 153.33%
497.09%
(8/31/73)
Salomon Bros. Broad
Investment Grade Index 0.91 55.84 205.02
N/A
Salomon Bros. High Grade
Corporate Bond Index 0.04 61.05 273.45
567.37
Lehman Bros. Govt./Corp.
Bond Index 1.01 55.52 198.97
547.98
Lipper Corporate Bond Fund's
-A Rated Average 0.34 51.10 188.96
495.23
PAGE 120
Short-Term Bond Fund
T. Rowe Price Short-Term
Bond Fund 1.36% 40.71% 118.73%
119.04%
(3/2/84)
T. Rowe Price Prime
Reserve Fund 2.73% 28.24% 84.99%
316.49%
Donoghue Average of all
Taxable Money Funds 2.85 28.42 83.43
87.74
Lehman Bros. 1-3 Year
Govt./Corp. Bond Index 2.10 43.95 137.59
137.46
Lipper Short Investment
Grade Debt Funds Average 1.87 43.06 150.53
133.60
(2/29/84)
Short-Term U.S. Government Fund
T. Rowe Price Short-Term
U.S. Government Fund, Inc. 1.32%
8.23%
(9/30/91)
Lipper Average of Adjustable
Rate Mortgage Funds 1.37
9.00
Merrill Lynch 1-3 Year
Govt. Index 2.06
15.35
Salomon Brothers 1-Year
Treasury Index 2.67
11.98
Salomon Brothers 2-Year
Treasury Index 2.02
15.54
U.S. Treasury Intermediate Fund
Intermediate Fund 0.70%
44.62%
(9/29/89)
Salomon 1-7 year
Treasury Index 1.49
44.94
U.S. Treasury Long-Term Fund
Long-Term Fund -0.09
45.43
(9/29/89)
Salomon Treasury Index 1.12
48.24
PAGE 121
Average Annual Compound Rates of Return
1 Yr. 5 Yrs. 10 Yrs.
Since
Ended Ended Ended
Inception-
5/31/94 5/31/94 5/31/94
5/31/94
GNMA Fund
T. Rowe Price GNMA Fund -0.74% 8.41%
7.88%
(11/26/85)
Salomon Brothers 30-Year
GNMA Index 0.04 9.38
9.63
Lehman Brothers GNMA Bond
Index -0.34 9.19
9.52
Lipper GNMA Funds Average -0.62 8.17
8.09
High Yield Fund
High Yield Fund 2.34 7.97
10.62
(12/31/84)
Merrill Lynch High
Yield Index 6.39 11.98
12.96
Merrill Lynch Medium Quality
Long Corporate Index 1.72 10.50
12.66
Lipper's Average of High
Current Yield Funds 6.70 10.02
10.73
New Income Fund
New Income Fund 1.40% 8.49% 9.74
8.99%
(8/31/73)
Salomon Bros. Broad
Investment Grade Index 0.91 9.28 11.80
N/A
Salomon Bros. High Grade
Corporate Bond Index 0.04 10.00 14.08
9.58
Lehman Bros. Govt./Corp.
Bond Index 1.01 9.24 11.57
9.45
Lipper Corporate Bond Fund's
-A Rated Average 0.34 8.60 11.17
8.95
PAGE 122
Short-Term Bond Fund
T. Rowe Price Short-Term
Bond Fund 1.36 7.07 8.12
7.95
(3/2/84)
T. Rowe Price Prime
Reserve Fund 2.73 5.10 6.34
8.09
Donoghue Average of all
Taxable Money Funds 2.85 5.13 6.25
6.34
Lehman Bros. 1-3 Year
Govt./Corp. Bond Index 2.10 7.55 9.03
8.80
Lipper Short Investment
Grade Debt Funds Average 1.87 7.42 8.70
8.63
(2/29/84)
Short-Term U.S. Government Fund
T. Rowe Price Short-Term
U.S. Government Fund, Inc. 1.32%
3.01%
(9/30/91)
Lipper Average of Adjustable
Rate Mortgage Funds 1.37
Merrill Lynch 1-3 Year
Govt. Index 2.06
5.50
Salomon Brothers 1-Year
Treasury Index 2.67
4.33
Salomon Brothers 2-Year
Treasury Index 2.02
5.57
U.S. Treasury Intermediate Fund
Intermediate Fund 0.70
8.22
(9/29/89)
Salomon 1-7 Year Treasury
Index 1.49
8.28
U.S. Treasury Long-Term Fund
Long-Term Fund -0.09
8.35
(9/29/89)
Salomon Treasury Index 1.12
8.80
Outside Sources of Information
From time to time, in reports and promotional
literature, one
or more of the T. Rowe Price funds, including this
Fund, may
compare its performance to Overnight Government
Repurchase
PAGE 123
Agreements, Treasury bills, notes, and bonds,
certificates of
deposit, and six-month money market certificates.
Performance
may also be compared to (1) indices of broad groups of
managed or
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:
Advertising News Service, Inc., "Bank Rate Monitor+ -
The
Weekly Financial Rate Reporter" is a weekly
publication which
lists the yields on various money market instruments
offered to
the public by 100 leading banks and thrift
institutions in the
U.S., including loan rates offered by these banks.
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.
Donoghue Organization, Inc., "Donoghue's Money Fund
Report" is
a weekly publication which tracks net assets, yield,
maturity
and portfolio holdings on approximately 380 money
market mutual
funds offered in the U.S. These funds are broken
down into
various categories such as U.S. Treasury, Domestic
Prime and
Euros, Domestic Prime and Euros and Yankees, and
Aggressive.
First Boston High Yield Index. It shows statistics
on the
Composite Index and analytical data on new issues in
the
marketplace and low-grade issuers.
Lipper Analytical Services, Inc., "Lipper-Fixed
Income Fund
Performance Analysis" is a monthly publication which
tracks net
assets, total return, principal return and yield on
approximately 950 fixed income mutual funds offered
in the
United States.
Merrill Lynch, Pierce, Fenner & Smith, Inc., "Taxable
Bond
Indices" is a monthly publication which lists
principal, coupon
and total return on over 100 different taxable bond
indices
tracked by Merrill Lynch, together with the par
weighted
characteristics of each Index. The index used as a
benchmark
for the High Yield Fund is the High Yield Index. The
two
indices used as benchmarks for the Short-Term Bond
Fund are the
91-Day Treasury Bill Index and the 1-2.99 Year
Treasury Note
Index.
PAGE 124
Morningstar, Inc., is a widely used independent
research firm
which rates mutual funds by overall performance,
investment
objectives and assets.
Salomon Brothers Inc., "Analytical Record of Yields
and Yield
Spreads" is a publication which tracks historical
yields and
yield spreads on short-term market rates, public
obligations of
the U.S. Treasury and agencies of the U.S.
government, public
corporate debt obligations, municipal debt
obligations and
preferred stocks.
Salomon Brothers Inc., "Bond Market Round-up" is a
weekly
publication which tracks the yields and yield spreads
on a
large, but select, group of money market instruments,
public
corporate debt obligations, and public obligations of
the U.S.
Treasury and agencies of the U.S. Government.
Salomon Brothers Inc., "High Yield Composite Index"
is an index
which provides performance and statistics for the
high yield
market place.
Salomon Brothers Inc., "Market Performance" is a
monthly
publication which tracks principal return, total
return and
yield on the Salomon Brothers Broad investment -
Grade Bond
Index and the components of the Index.
Shearson Lehman Brothers, Inc., "The Bond Market
Report" is a
monthly publication which tracks principal, coupon
and total
return on the Shearson Lehman Govt./Corp. Index and
Shearson
Lehman Aggregate Bond Index, as well as all the
components of
these Indices.
Telerate Systems, Inc., is a market data distribution
network
which tracks a broad range of financial markets
including, the
daily rates on money market instruments, public
corporate debt
obligations and public obligations of the U.S.
Treasury and
agencies of the U.S. Government.
Wall Street Journal, is a national daily financial
news
publication which lists the yields and current market
values on
money market instruments, public corporate debt
obligations,
public obligations of the U.S. Treasury and agencies
of the
U.S. government as well as common stocks, preferred
stocks,
convertible preferred stocks, options and
commodities; in
addition to indices prepared by the research
departments of
such financial organizations as Shearson
Lehman/American
Express Inc., and Merrill Lynch, Pierce, Fenner and
Smith,
PAGE 125
Inc., including information provided by the Federal
Reserve
Board.
Performance rankings and ratings reported
periodically in
national financial publications such as MONEY, FORBES,
BUSINESS
WEEK, BARRON'S, etc. will also be used.
All Funds, except Personal Strategy and Prime Reserve
Funds
Benefits of Investing in High-Quality Bond Funds
o Higher Income
Bonds have generally provided a higher income than
money
market securities because yield usually increased
with longer
maturities. For instance, the yield on the 30-year
Treasury
bond usually exceeds the yield on the 1-year
Treasury bill or
5-year Treasury note. However, securities with
longer
maturities fluctuate more in price than those with
shorter
maturities. Therefore, the investor must weigh the
advantages of higher yields against the possibility
of
greater fluctuation in the principal value of your
investment.
o Income Compounding
Investing in bond mutual funds allows investors to
benefit
from easy and convenient compounding, because you
can
automatically reinvest monthly dividends in
additional fund
shares. Each month investors earn interest on a
larger
number of shares. Also, reinvesting dividends
removes the
temptation to spend the income.
o Broad Diversification
Each share of a mutual fund represents an interest
in a large
pool of securities, so even a small investment is
broadly
diversified by maturity. Since most bonds trade
efficiently
only in very large blocks,mutual funds provide a
degree of
diversification that may be difficult for individual
investors to achieve on their own.
o Lower Portfolio Volatility
Investing a portion of one's assets in longer term,
high-
quality bonds can help smooth out the fluctuations
in your
overall investment results, because bond prices do
not
PAGE 126
necessarily move with stock prices. Also, bonds
usually have
higher income yields than stocks, thus increasing
the total
income component of your portfolio. This strategy
should
also add stability to overall results, as income is
always a
positive component of total return.
o Liquidity
A bond fund can supplement a money market fund or
bank
account as a source of capital for unexpected
contingencies.
T. Rowe Price fixed-income funds offer you easy
access to
money through free checkwriting and convenient
redemption or
exchange features. Of course, the value of a bond
fund's
shares redeemed through checkwriting may be worth
more or
less than their value at the time of their original
purchase.
o Suitability
High-quality bond funds are most suitable for the
following
objectives: obtaining a higher current income with
minimal
credit risk; compounding of income over time; or
diversifying
overall investments to reduce volatility.
All Funds
IRAs
An IRA is a long-term investment whose objective
is to
accumulate personal savings for retirement. Due to the
long-term
nature of the investment, even slight differences in
performance
will result in significantly different assets at
retirement.
Mutual funds, with their diversity of choice, can be
used for IRA
investments. Generally, individuals may need to adjust
their
underlying IRA investments as their time to retirement
and
tolerance for risk changes.
Other Features and Benefits
The Fund is a member of the T. Rowe Price Family
of Funds
and may help investors achieve various long-term
investment
goals, such as investing money for retirement, saving
for a down
payment on a home, or paying college costs. To explain
how the
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
Associates, Inc.
and/or T. Rowe Price Investment Services, Inc. may be
made
available. These currently include: the Asset Mix
Worksheet
PAGE 127
which is designed to show shareholders how to reduce
their
investment risk by developing a diversified investment
plan; 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; the Retirement Planning Kit (also available
in a PC
version) includes a detailed workbook to determine how
much money
you may need for retirement and suggests how you might
invest to
achieve your objectives; and the Retirees Financial
Guide which
includes a detailed workbook to determine how much
money you can
afford to spend and still preserve your purchasing
power and
suggests how you might invest to reach your goal. From
time to
time, other worksheets and guides may be made available
as well.
Of course, an investment in the Fund cannot guarantee
that such
goals will be met. 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
diversified
investment mix.
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 below.
Historical Returns for Different Investments
Annualized returns for periods ended 12/31/93
50 years 20 years 10 years
5 years
Small-Company Stocks 15.3% 18.8% 10.0%
13.3%
Large-Company Stocks 12.3 12.8 14.9
14.5
Foreign Stocks N/A 14.4 17.9
2.3
Long-Term Corporate Bonds 5.6 10.2 14.0
13.0
Intermediate-Term U.S.
Gov't. Bonds 5.7 9.8 11.4
11.3
Treasury Bills 4.6 7.5 6.4
5.6
U.S. Inflation 4.3 5.9 3.7
3.9
PAGE 128
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
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 Retirement Portfolios*
Asset Mix Average Annualized
Value
Returns 20 Years
of
Ended 12/31/93
$10,000
Investment
After Period
_____________________________________
___________
Nominal Real Best
Worst
Portfolio Growth Income Safety Return Return** Year
Year
I. Low
Risk 40% 40% 20% 11.3% 5.4%
24.9%-9.3%$ 79,775
II. Moderate
Risk 60% 30% 10% 12.1% 6.2%
29.1%-15.6%$ 90,248
III. High
Risk 80% 20% 0% 12.9% 7.0%
33.4%-21.9%$100,031
Source: T. Rowe Price Associates; data supplied by
Lehman
Brothers, Wilshire Associates, and Ibbotson Associates.
* Based on actual performance for the 20 years ended
1993 of
stocks (85% Wilshire 5000 and 15% Europe, Australia,
Far East
[EAFE] Index), bonds (Lehman Brothers Aggregate Bond
Index
from 1976-93 and Lehman Brothers
Government/Corporate Bond
Index from 1974-75), and 30-day Treasury bills from
January
1974 through December 1993. Past performance does
not
guarantee future results. Figures include changes
in
principal value and reinvested dividends and assume
the same
PAGE 129
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 5.9% for the 20-year
period ended
12/31/93.
Insights
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 Fund,
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 objective and policies of the Fund; (b) are
acquired
for investment and not for resale except in accordance
with
applicable law; (c) have a value that is readily
ascertainable
PAGE 130
via listing on or trading in a recognized United States
or
international exchange or market; and (d) are not
illiquid.
All Funds, except GNMA Fund
CAPITAL STOCK
The Fund's Charter authorizes the 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 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 Fund has
authorized to
issue without shareholder approval.
Except to the extent that the Fund'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
PAGE 131
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
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 Fund, a special meeting of
shareholders of
the Fund shall be called by the Secretary of the Fund
on the
written request of shareholders entitled to cast at
least 10% of
all the votes of the Fund entitled to be cast at such
meeting.
Shareholders requesting such a meeting must pay to the
Fund the
reasonably estimated costs of preparing and mailing the
notice of
the meeting. The Fund, however, will otherwise assist
the
shareholders seeking to hold the special meeting in
communicating
to the other shareholders of the Fund to the extent
required by
Section 16(c) of the Investment Company Act of 1940.
GNMA Fund
DESCRIPTION OF THE FUND
For tax and business reasons, the Fund was
organized in 1985
as a Massachusetts Business Trust and is registered
with the
Securities and Exchange Commission under the Investment
Company
Act of 1940 as a diversified, open-end investment
company,
commonly known as a "mutual fund."
The Declaration of Trust permits the Board of
Trustees to
issue an unlimited number of full and fractional shares
of a
single class. The Declaration of Trust also provides
that the
Board of Trustees may issue additional series or
classes of
shares. Each share represents an equal proportionate
beneficial
interest in the Fund. In the event of the liquidation
of the
Fund, each share is entitled to a pro rata share of the
net
assets of the Fund.
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 trustees (to the
extent
PAGE 132
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 trustees
unless and
until such time as less than a majority of the trustees
holding
office have been elected by shareholders, at which time
the
trustees then in office will call a shareholders'
meeting for the
election of trustees. Pursuant to Section 16(c) of the
Investment Company Act of 1940, holders of record of
not less
than two-thirds of the outstanding shares of the Fund
may remove
a trustee by a vote cast in person or by proxy at a
meeting
called for that purpose. Except as set forth above,
the trustees
shall continue to hold office and may appoint successor
trustees.
Voting rights are not cumulative, so that the holders
of more
than 50% of the shares voting in the election of
trustees can, if
they choose to do so, elect all the trustees of the
Trust, in
which event the holders of the remaining shares will be
unable to
elect any person as a trustee. No amendments may be
made to the
Declaration of Trust without the affirmative vote of a
majority
of the outstanding shares of the Trust.
Shares have no preemptive or conversion rights;
the right of
redemption and the privilege of exchange are described
in the
prospectus. Shares are fully paid and nonassessable,
except as
set forth below. The Trust may be terminated (i) upon
the sale
of its assets to another diversified, open-end
management
investment company, if approved by the vote of the
holders of
two-thirds of the outstanding shares of the Trust, or
(ii) upon
liquidation and distribution of the assets of the
Trust, if
approved by the vote of the holders of a majority of
the
outstanding shares of the Trust. If not so terminated,
the Trust
will continue indefinitely.
Under Massachusetts law, shareholders could, under
certain
circumstances, be held personally liable for the
obligations of
the Fund. However, the Declaration of Trust disclaims
shareholder liability for acts or obligations of the
Fund and
requires that notice of such disclaimer be given in
each
agreement, obligation or instrument entered into or
executed by
the Fund or a Trustee. The Declaration of Trust
provides for
indemnification from Fund property for all losses and
expenses of
any shareholder held personally liable for the
obligations of the
Fund. Thus, the risk of a shareholder incurring
financial loss
on account of shareholder liability is limited to
circumstances
in which the Fund itself would be unable to meet its
obligations,
a possibility which T. Rowe Price believes is remote.
Upon
payment of any liability incurred by the Fund, the
shareholders
of the Fund paying such liability will be entitled to
PAGE 133
reimbursement from the general assets of the Fund. The
Trustees
intend to conduct the operations of the Fund in such a
way so as
to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of such Fund.
FEDERAL AND STATE REGISTRATION OF SHARES
The 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, L.L.P.,
whose address
is 919 Third Avenue, New York, New York 10022, is legal
counsel
to the Fund.
INDEPENDENT ACCOUNTANTS
GNMA, High Yield, New Income, Prime Reserve, Short-Term
Bond and
Money Funds
Price Waterhouse, LLP, 7 St. Paul Street, Suite
1700,
Baltimore, Maryland 21202, are independent accountants
to the
Fund.
Intermediate, Long-Term, Personal Strategy, and
Short-Term
U.S. Government Funds
Coopers & Lybrand, L.L.P., 217 East Redwood
Street,
Baltimore, Maryland 21202, are independent accountants
to the
Fund.
Effective June 1, 1994, Price Waterhouse, LLP will
be the
independent accountants to the Intermediate and
Long-Term
Funds.
Financial Statements (All Funds, except Personal
Strategy
Funds)
The financial statements of the Fund for the year
ended May
31, 1994, and the report of independent accountants are
included
in the Fund's Annual Report for the year ended May 31,
1994.
PAGE 134
Also included are the unaudited financial statements of
the Funds
dated November 30, 1994. A copy of the Annual and
Semi-Annual
Reports accompany this Statement of Additional
Information. The
following financial statements and the report of
independent
accountants appearing in the Annual Report for the year
ended May
31, 1994, and the unaudited financial statements for
the Fund's
Semi-Annual Report dated November 30, 1994, are
incorporated into
this Statement of Additional Information by reference:
ANNUAL REPORT REFERENCES:
HIGH NEW
PRIME
GNMA YIELD INCOME
RESERVE
____ ______ _______
________
Report of Independent
Accountants 13 19 15
11
Statement of Net Assets,
May 31, 1994 7-8 6-13 6-10
5-8
Statement of Operations,
three months ended
May 31, 1994 and year
ended February 28, 1994 9 14 11
8
Statement of Changes in Net
Assets, three months
ended May 31, 1994 and
years ended February 28,
1994 and February 28, 1993 10 15 12
9
Notes to Financial Statements
May 31, 1994 10-12 16-17 12-14
9-10
Financial Highlights 12 18 14
11
PAGE 135
U.S.
SHORT- TREASURY
TERM BOND MONEY
_____________ ____________
Report of Independent
Accountants 17 22
Statement of Net Assets,
May 31, 1994 6-11 7
Statement of Operations,
three months ended May 31,
1994 and year ended
February 28, 1994 12 11
Statement of Changes in Net
Assets, three months ended
May 31, 1994 and years ended
February 28, 1994 and
February 28, 1993 13 14
Notes to Financial Statements
May 31, 1994 14-15 17-18
Financial Highlights 16 19
SHORT-TERM U.S.
U.S.
U.S. TREASURY
TREASURY
GOVERNMENT INTERMEDIATE
LONG-TERM
______________ __________
__________
Report of Independent
Accountants 13 23
23
Statement of Net Assets,
May 31, 1994 5-7 8-9
10
Statement of Operations,
three months ended May 31,
1994 and year ended
February 28, 1994 8 12
13
Statement of Changes in Net
Assets, three months ended
May 31, 1994 and years ended
February 28, 1994 and
February 28, 1993 9 15
16
Notes to Financial Statements
May 31, 1994 10-11 17-18
17-18
Financial Highlights 12 20
21
PAGE 136
SEMI-ANNUAL REPORT REFERENCES:
HIGH NEW
PRIME
GNMA YIELD INCOME
RESERVE
____ ______ _______
________
Statement of Net Assets,
November 30, 1994
(unaudited) 4-5 4-10 4-8
4-7
Statement of Operations,
six months ended
November 30, 1994
(unaudited) 6 11 8
8
Statement of Changes in Net
Assets, six months ended
November 30, 1994, three
months ended May 31, 1994
and year ended February 28,
1994 (unaudited) 7 12 9
9
Notes to Financial Statements
November 30, 1994
(unaudited) 8-9 13-14 10-11
9-10
Financial Highlights
(unaudited) 10 15 11
11
PAGE 137
U.S.
SHORT- TREASURY
TERM BOND MONEY
_____________ ____________
Statement of Net Assets,
November 30, 1994
(unaudited) 4-8 3-4
Statement of Operations,
six months ended
November 30, 1994
(unaudited) 9 7
Statement of Changes in Net
Assets, six months ended
November 30, 1994, three
months ended May 31, 1994
and year ended February 28,
1994 (unaudited) 10 8
Notes to Financial Statements
November 30, 1994
(unaudited) 11-12 11-12
Financial Highlights
(unaudited) 13 13
SHORT-TERM U.S.
U.S.
U.S. TREASURY
TREASURY
GOVERNMENT INTERMEDIATE
LONG-TERM
______________ __________
__________
Statement of Net Assets,
November 30, 1994
(unaudited) 4-6 4-5
6-7
Statement of Operations,
six months ended
November 30, 1994
(unaudited) 7 7
7
Statement of Changes in Net
Assets, six months ended
November 30, 1994, three
months ended May 31, 1994
and year ended February 28,
1994 (unaudited) 8 9
10
Notes to Financial Statements
November 30, 1994
(unaudited) 9-10 11-12
11-12
Financial Highlights
(unaudited) 11 14
15
PAGE 138
Financial Statements (Personal Strategy Funds)
The Statement of Assets and Liabilities of the
Personal
Strategy Funds as of July 25, 1994, included in the
Statement of
Additional Information has been so included in reliance
on the
report of Coopers & Lybrand, given on the authority of
said firm
as experts in auditing and accounting.
The financial statements of the Personal Strategy
Funds for
the period July 29, 1994 (commencement of operations)
to November
30, 1994, are included in the Fund's Semi-Annual report
on pages
6-23 and are unaudited for the period shown. A copy of
the Semi-
Annual report accompanies this Statement of Additional
Information. The following financial statements
appearing in the
Semi-Annual report for the period ended November 30,
1994, are
incorporated into this Statement of Additional
Information by
reference:
Personal
Strategy
Balanced
Fund
Semi-Annual
Report
Page
Portfolio of Investments, November 30, 1994
(Unaudited) 10-13
Statement of Assets & Liabilities,
November 30, 1994 (Unaudited) 18
Statement of Operations, July 29, 1994
(Commencement of Operations) to
November 30, 1994 (Unaudited) 19
Statement of Changes in Net Assets, July 29,
1994 (Commencement of Operations) to
November 30, 1994 (Unaudited) 20
Notes to Financial Statements,
November 30, 1994 (Unaudited) 21-22
Financial Highlights, July 29, 1994
(Commencement of Operations) to
November 30, 1994 (Unaudited) 23
PAGE 139
Personal
Strategy
Growth
Fund
Semi-Annual
Report
Page
Portfolio of Investments, November 30, 1994
(Unaudited) 14-17
Statement of Assets & Liabilities,
November 30, 1994 (Unaudited) 18
Statement of Operations, July 29, 1994
(Commencement of Operations) to
November 30, 1994 (Unaudited) 19
Statement of Changes in Net Assets, July 29,
1994 (Commencement of Operations) to
November 30, 1994 (Unaudited) 20
Notes to Financial Statements,
November 30, 1994 (Unaudited) 21-22
Financial Highlights, July 29, 1994
(Commencement of Operations) to
November 30, 1994 (Unaudited) 23
Personal
Strategy
Income
Fund
Semi-Annual
Report
Page
Portfolio of Investments, November 30, 1994
(Unaudited) 6-9
Statement of Assets & Liabilities,
November 30, 1994 (Unaudited) 18
Statement of Operations, July 29, 1994
(Commencement of Operations) to
November 30, 1994 (Unaudited) 19
Statement of Changes in Net Assets, July 29,
1994 (Commencement of Operations) to
November 30, 1994 (Unaudited) 20
Notes to Financial Statements,
November 30, 1994 (Unaudited) 21-22
Financial Highlights, July 29, 1994
(Commencement of Operations) to
November 30, 1994 (Unaudited) 23
PAGE 140
RATINGS OF COMMERCIAL PAPER
High Yield, Prime Reserve, Short-Term Bond, and
Short-Term
U.S. Government Funds
Moody's Investors Service, Inc.: The rating of Prime-1
is the
highest commercial paper rating assigned by Moody's.
Among the
factors considered by Moody's in assigning ratings are
the
following: valuation of the management of the issuer;
economic
evaluation of the issuer's industry or industries and
an
appraisal of speculative-type risks which may be
inherent in
certain areas; evaluation of the issuer's products in
relation to
competition and customer acceptance; liquidity; amount
and
quality of long-term debt; trend of earnings over a
period of 10
years; financial strength of the parent company and the
relationships which exist with the issuer; and
recognition by the
management of obligations which may be present or may
arise as a
result of public interest questions and preparations to
meet such
obligations. These factors are all considered in
determining
whether the commercial paper is rated P1, P2, or P3.
Standard & Poor's Corporation: Commercial paper rated
A (highest
quality) by S&P has the following characteristics:
liquidity
ratios are adequate to meet cash requirements;
long-term senior
debt is rated "A" or better, although in some cases
"BBB" credits
may be allowed. The issuer has access to at least two
additional
channels of borrowing. Basic earnings and cash flow
have an
upward trend with allowance made for unusual
circumstances.
Typically, the issuer's industry is well established
and the
issuer has a strong position within the industry. The
reliability and quality of management are unquestioned.
The
relative strength or weakness of the above factors
determines
whether the issuer's commercial paper is rated A1, A2,
or A3.
Prime Reserve Fund
Fitch Investors Service, Inc.: Fitch 1 - Highest
grade.
Commercial paper assigned this rating is regarded as
having the
strongest degree of assurance for timely payment.
Fitch 2 - Very
good grade. Issues assigned this rating reflect an
assurance of
timely payment only slightly less in degree than the
strongest
issues.
PAGE 141
RATINGS OF CORPORATE DEBT SECURITIES
High Yield, New Income, Personal Strategy,
Short-Term Bond,
and Short-Term U.S. Government Funds
Moody's Investors Services, Inc. (Moody's)
Aaa-Bonds rated Aaa are judged to be of the best
quality.
They carry the smallest degree of investment risk and
are
generally referred to as "gilt edge."
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 futures 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.
PAGE 142
Standard & Poor's Corporation (S&P)
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-Bonds rated AA also qualify as high-quality debt
obligations. Capacity to pay principal and interest is
very
strong.
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 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, C, 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.
Fitch Investors Service, Inc.
AAA-High grade, broadly marketable, suitable for
investment by
trustees and fiduciary institutions, and liable to but
slight
market fluctuation other than through changes in the
money rate.
The prime feature of a "AAA" bond is the showing of
earnings
several times or many times interest requirements for
such
stability of applicable interest that safety is beyond
reasonable
question whenever changes occur in conditions. Other
features
may enter, such as a wide margin of protection through
collateral, security or direct lien on specific
property.
Sinking funds or voluntary reduction of debt by call or
purchase
or often factors, while guarantee or assumption by
parties other
than the original debtor may influence their rating.
PAGE 143
AA-Of safety virtually beyond question and readily
salable.
Their merits are not greatly unlike those of "AAA"
class but a
bond so rated may be junior though of strong lien, or
the margin
of safety is less strikingly broad. The issue may be
the
obligation of a small company, strongly secured, but
influenced
as to rating by the lesser financial power of the
enterprise and
more local type of market.
PAGE 144
T. ROWE PRICE PERSONAL STRATEGY FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
JULY 25, 1994
Balanced Growth
Income
Fund Fund
Fund
Assets
Receivable for Fund shares sold $30,000 $30,000
$40,000
Deferred organizational expenses 42,507 42,507
42,507
_______ _______
_______
Total assets 72,507 72,507
82,507
Liabilities
Amount due Manager 39,407 39,407
39,407
Accrued expenses 3,100 3,100
3,100
_______ _______
_______
Total liabilities 42,507 42,507
42,507
_______ _______
_______
Net Assets - offering and redemption
price of $10.00 per share; 1,000,000,000
shares of $0.0001 par value capital
stock authorized, 3,000 shares
outstanding $30,000 $30,000
======= =======
Net Assets - offering and redemption
price of $10.00 per share; 1,000,000,000
shares of $0.0001 par value capital
stock authorized, 4,000 shares
outstanding
$40,000
=======
NOTE TO STATEMENT OF ASSETS AND LIABILITIES
T. Rowe Price Personal Strategy Fund, Inc. (the
"Corporation")
was organized on May 21, 1994, as a Maryland
corporation and is
registered under the Investment Company Act of 1940.
The
Corporation is a series fund, of which the T. Rowe
Price Personal
Strategy Balanced Fund, T. Rowe Price Personal Strategy
Growth
Fund and the T. Rowe Price Personal Strategy Income
Fund (the
"Funds"), diversified, open-end management investment
companies
are the only funds currently established. The
Corporation has
had no operations other than those matters related to
organization and registration as an investment company,
the
registration of shares for sale under the Securities
Act of 1933,
and the sale of 3,000 shares of the T. Rowe Price
Personal
PAGE 145
Strategy Balanced Fund at $10.00 per share, the sale of
3,000
shares of the T. Rowe Price Personal Strategy Growth
Fund at
$10.00 per share, the sale of 4,000 shares of the T.
Rowe Price
Personal Strategy Income Fund at $10.00 per share on
July 25,
1994 to T. Rowe Price Associates, Inc. Each Fund's
receivable
for fund shares sold was funded by T. Rowe Price
Associates, Inc.
on July 26, 1994. The Funds have entered into an
investment
management agreement with T. Rowe Price Associates,
Inc. (the
Manager) which is described in the Statement of
Additional
Information under the heading "Investment Management
Services."
Organizational expenses of $42,507 for each fund
have been
accrued at July 25, 1994, and will be amortized on a
straight-
line basis over a period not to exceed sixty months.
The Manager
has agreed to advance certain organizational expenses
incurred by
the Funds and will be reimbursed for such expenses
approximately
six months after the commencement of the Fund's
operations.
The Manager has agreed that in the event any of its
initial
shares are redeemed during the 60-month amortization
period of
the deferred organizational expenses, proceeds from a
redemption
of the shares representing the initial capital will be
reduced by
a pro rata portion of any unamortized organizational
expenses.
PAGE 146
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
T. Rowe Price Personal Strategy Funds, Inc.:
We have audited the accompanying statement of assets
and
liabilities of the T. Rowe Price Personal Strategy
Funds, Inc.
(the "Funds"), comprised of the T. Rowe Price Personal
Strategy
Balanced Fund, T. Rowe Price Personal Strategy Growth
Fund, and
T. Rowe Price Personal Strategy Income Fund, as of July
25, 1994.
This financial statement is the responsibility of the
Funds'
management. Our responsibility is to express an
opinion of this
financial statement based on our audit.
We conducted our audit in accordance with generally
accepted
auditing standards. Those standards require that we
plan and
perform the audit to obtain reasonable assurance about
whether
the financial statement is free of material
misstatement. An
audit includes examining, on a test basis, evidence
supporting
the amounts and disclosures in the financial statement.
An audit
also includes assessing the accounting principles used
and
significant estimates made by management, as well as
evaluating
the overall financial statement presentation. We
believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and
liabilities
referred to above presents fairly, in all material
respects, the
financial position of the T. Rowe Price Personal
Strategy Funds,
Inc. as of July 25, 1994, in conformity with generally
accepted
accounting principles.
/s/Coopers & Lybrand, L.L.P.
COOPERS & LYBRAND, L.L.P.
Baltimore, Maryland
July 26, 1994
