PAGE 1
Registration Nos.: 811-07353
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X /
Pre-Effective Amendment No. ___ / /
Post-Effective Amendment No. ___ / /
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF
1940 / X /
Amendment No. ___ / /
T. ROWE PRICE CORPORATE INCOME FUND, INC.
___________________________________________________
(Exact Name of Registrant as Specified in Charter)
100 East Pratt Street, Baltimore, Maryland 21202
__________________________________________ _________
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code 410-547-2000
____________
Henry H. Hopkins
100 East Pratt Street
Baltimore, Maryland 21202
_______________________________________
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering October 30, 1995
__________________
It is proposed that this filing will become effective (check
appropriate box):
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
PAGE 2
/ / on (date) pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on (date) pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933+
_________________________________________________________________
Proposed Proposed
Maximum Maximum
Amount Offering Aggregate
Title of Securities Being Price Offering Amount of
Being Registered Registered Per Unit Price Registration
Fee
_________________________________________________________________
Capital Stock - Indefinite Varying prices $500
$.0001 par value Number calculated as set
per share forth in prospectus
_________________________________________________________________
The purpose of this Registration Statement is to register the
Registrant under the Investment Company Act of 1940, to register
the shares of the Registrant under the Securities Act of 1933 and
to declare pursuant to Section 24(f) of the Investment Company
Act of 1940 and Rule 24f-2 thereunder that an indefinite number
of its securities is being registered by this Registration
Statement.
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date
until the Registrant shall file a further amendment which
specifically states the Registration Statement shall thereafter
become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant
to Section 8(a) may determine.
SUBJECT TO COMPLETION
Information contained herein is subject to completion or
amendment. A Registration Statement relating to these securities
has been filed with the Securities and Exchange Commission.
These securities may not be sold nor may offers to buy be
accepted prior to the time the Registration Statement becomes
effective. This prospectus shall not constitute an offer to sell
PAGE 3
or the solicitation of an offer to buy nor shall there be any
sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such state.
PAGE 4
CROSS REFERENCE SHEET
N-1A Item No. Location
_____________ _________
PART A
Item 1. Cover Page Cover Page
Item 2. Synopsis Transaction and Fund
Expenses
Item 3. Condensed Financial +
Information
Item 4. General Description of About the Fund; Fund,
Registrant Market, and Risk
Characteristics: What
to Expect;
Understanding Fund
Performance;
Investment Policies
and Practices
Item 5. Management of the Fund Transaction and Fund
Expenses; Organization
and Management
Item 6. Capital Stock and Other Useful Information on
Securities Distributions and
Taxes; Organization
and Management
Item 7. Purchase of Securities Pricing Shares and
Being Offered Receiving Sale
Proceeds; Transaction
Procedures and Special
Requirements; Account
Requirements and
Transaction
Information;
Shareholder Services
Item 8. Redemption or Repurchase Pricing Shares and
Receiving Sale
Proceeds; Transaction
Procedures and Special
Requirements;
Shareholder Services
Item 9. Pending Legal Proceedings +
PART B
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and +
History
Item 13. Investment Objectives and Investment Objectives
Policies and Policies; Risk
PAGE 5
Factors; Investment
Program; Investment
Restrictions;
Investment Performance
Item 14. Management of the Registrant Management of Fund
Item 15. Control Persons and Principal Principal Holders of
Holders of Securities Securities
Item 16. Investment Advisory and Investment Management
Other Services Services; Custodian;
Independent
Accountants; Legal
Counsel
Item 17. Brokerage Allocation Portfolio
Transactions; Code of
Ethics
Item 18. Capital Stock and Other Dividends and
Securities Distributions; Capital
Stock
Item 19. Purchase, Redemption and Pricing of Securities;
Pricing of Securities Being Net Asset Value Per
Offered Share; Redemptions in
Kind; Federal and
State Registration of
Shares
Item 20. Tax Status Tax Status
Item 21. Underwriters Distributor for the
Fund
Item 22. Calculation of Yield Quotations +
of Money Market Funds
Item 23. Financial Statements +
PART C
Information required to be included in Part C is set forth under
the appropriate item, so numbered, in Part C to this Registration
Statement
___________________________________
+ Not applicable or negative answer
PAGE 6
Facts at a Glance
Investment Goal
To provide a high level of income,
with capital appreciation as a
secondary goal. As with any mutual
fund, there is no guarantee the fund
will achieve its goal.
Strategy
To invest primarily in corporate and
investment-grade debt securities. Up
to one-third of assets can be
invested in below investment grade
debt ("junk") obligations, which
carry a greater risk of default and
fluctuate in price more than higher-
rated bonds. The fund can also
invest in foreign bonds, convertible
securities, and preferred stocks.
Risk/Reward
The potential to provide greater
total return, but with greater risk
of loss, than a fund composed only
of investment grade bonds. Before
investing, you should carefully
consider the risks explained in more
detail in "Investment Policies and
Practices."
Investor Profile
Individuals seeking high current
income and some capital
appreciation, who can accept the
possibility of share price declines.
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
PAGE 7
Founded in 1937 by the late Thomas
Rowe Price, Jr., T. Rowe Price
Associates, Inc. ("T. Rowe Price")
and its affiliates managed over $66
billion for over three million
individual and institutional
investor accounts as of June 30,
1995.
THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION,
OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION, OR ANY STATE SECURITIES
COMMISSION, PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. T. Rowe Price
Corporate Income Fund, Inc.
October 30, 1995
Prospectus
Contents
______________________
1 About the Fund
______________________
Transaction and Fund
Expenses
______________________
Fund, Market, and Risk
Characteristics
______________________
2 About Your Account
______________________
Pricing Shares and
Receiving Sale Proceeds
______________________
Distributions and Taxes
______________________
Transaction Procedures
and Special Requirements
______________________
3 More About the Fund
______________________
Organization and
PAGE 8
Management
______________________
Understanding Fund
Performance
______________________
Investment Policies and
Practices
______________________
4 Investing With T. Rowe
Price
______________________
Account Requirements and
Transaction Information
______________________
Opening a New Account
______________________
Purchasing Additional
Shares
______________________
Exchanging and Redeeming
______________________
Shareholder Services
______________________
This prospectus contains
information you should
know before investing.
Please keep it for
future reference. A
Statement of Additional
Information about the
fund, dated October 1,
1995, revised to October
30, 1995, 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.
PAGE 9
1 About the Fund
Transaction and Fund Expenses
These tables should help you understand the
kinds of expenses you will bear directly or
indirectly as a fund shareholder.
_________________________
Like all T. Rowe Price
funds, the fund is 100%
no load. In Table 1 below, "Shareholder Transaction
Expenses" shows that you pay no sales
charges. All the money you invest in the
fund goes to work for you, subject to the
fees explained below. "Annual Fund
Expenses" provides an estimate of how much
it will cost to operate the fund for a
year, based on projected 1996 fiscal year
expenses (and any applicable expense
limitations). 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.
________________________
For the fiscal period
ending May 31, 1996, the
fund is expected to pay:
$_______, to T. Rowe
Price Services, Inc. for
transfer and dividend
disbursing functions and
shareholder services;
$_______ , to T. Rowe
Price Retirement Plan
Services, Inc. for
recordkeeping services
for certain retirement
plans; and $______, to T.
Rowe Price for
accounting services. ___________________________________________
Shareholder Transaction Expenses
___________________________________________
Sales charge "load" on
purchases None
PAGE 10
___________________________________________
Sales charge "load" on
reinvested dividends None
___________________________________________
Redemption fees None
___________________________________________
Exchange fees None
___________________________________________
Annual Fund Percentage of Fiscal
Expenses 1996 Average Net
Assets
___________________________________________
Management fee 0.__%
___________________________________________
Total other (Shareholder
servicing, custodial,
auditing, etc.) 0.__%
___________________________________________
Marketing fees (12b-1) None
___________________________________________
Total fund expenses 0.__%
___________________________________________
Note: The fund charges a $5 fee for wire
redemptions under $5,000, subject to change
without notice.
___________________________________________
Table 1
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. The fund's fee is comprised of a
group fee, discussed later, and an
individual fund fee of ____%.
o "Other" administrative expenses:
primarily the servicing of shareholder
accounts, such as providing statements,
reports, disbursing dividends, as well as
custodial services.
o Marketing or distribution fees: an annual
charge ("12b-1") to existing shareholders
PAGE 11
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 "Organization and Management."
o Hypothetical example: Assume you invest
$1,000, the fund returns 5% annually,
expense ratios remain as listed above,
and you close your account at the end of
the time periods shown. Your expenses
would be:
_________________________
The table at right is
just an example; actual
expenses can be higher or
lower than those shown. ____________________
1 year 3 years
____________________
$__ $__
____________________
Table 2
Fund, Market, and Risk Characteristics:
What to Expect
To help you decide whether the fund is
appropriate for you, this section takes a
closer look at its investment objectives
and approach.
_________________________
The fund should not
represent your complete
investment program, nor
be used for short-term
trading purposes. What is the fund's objective?
The objective is to provide high income and
some capital appreciation primarily through
investments in corporate and investment-
grade debt securities.
What is the fund's investment program?
The fund will invest at least 65% of total
PAGE 12
assets in corporate bonds and also 65% in
investment-grade debt securities. The
investment-grade holdings can be a
combination of corporate bonds and other
types of securities. The fund also seeks
high income and some capital appreciation
by investing up to one-third of total
assets in below investment grade
obligations, commonly called high-yield or
junk bonds. Such purchases will be limited
to the two highest credit categories below
investment grade (BB and single B), and no
more than 10% of assets will be invested in
single B-rated securities. Up to 25% of
assets may be invested in foreign debt
securities, and up to 25% in convertible
bonds and preferred stocks. Most of the
bond holdings will have long-term
maturities and the fund's dollar-weighted
average maturity is expected to exceed 10
years.
_________________________
At its discretion, the
fund may retain a
security that is
downgraded after
purchase. What is the credit quality of the fund's
investments?
When purchased, at least 65% of the fund's
securities will be rated within the four
highest credit categories by at least one
established public rating agency (or, if
unrated, a T. Rowe Price equivalent
rating).
Investment-grade securities can range from
the highest rating (AAA) to medium quality
(BBB). Securities in the BBB category may
be more susceptible to adverse economic
conditions or changing circumstances, and
securities at the lower end of the BBB
PAGE 13
category have certain speculative
characteristics.
Securities in the fund rated BB and single-
PAGE 13
B carry greater risk of default and,
therefore, must offer high yields to
compensate investors for assuming higher
risk.
_________________________
For details about the
fund's investment program
and practices, please see
the "Investment Policies
and Practices" section. What are some of the fund's potential
rewards?
The fund's emphasis on corporate and
investment-grade bonds is designed to offer
higher income than is available from
Treasury securities only. In addition, the
component of high-yield bonds and
convertible securities provides
diversification, as well as the opportunity
for capital appreciation.
What are the main risks of investing in the
fund?
Besides the risks of high-yield bonds
(discussed below), there are the usual
risks associated with fixed income
investing, including:
o Interest rate or market risk -- the
decline in bond prices that accompanies a
rise in the overall level of interest
rates.
o Credit risk -- the chance that any of the
fund's holdings will have its credit
rating downgraded or will default,
potentially reducing the fund's share
price and income level.
A portfolio containing a combination of
high-yield and investment-grade bonds is
intended to cushion the fund's interest
rate risk, although there is no guarantee
this will be accomplished.
What are some characteristics of high yield
bonds?
High yield bonds carry a greater risk of
PAGE 14
default, which refers to the failure to
make timely payments of interest and
principal. Corporations that issue junk
bonds include small companies lacking the
history or capital to merit investment
grade status, former blue chip companies
downgraded because of financial problems,
and companies with heavy debt loads.
These bonds are usually viewed as
speculative investments since their issuers
are more vulnerable to financial setbacks
and recessions than more creditworthy
companies . The prices of higher quality
bonds are generally influenced most by
changes in interest rate levels, but high
yield bond prices are affected by other
factors as well. For example, changes in
economic forecasts, stock market activity,
large sales by major investors, and overall
market psychology can sometimes lead to the
type of volatility usually associated with
stocks.
In addition, high yield bonds are generally
less liquid than high quality bonds,
meaning that large purchases or sales may
cause substantial changes in their prices.
_________________________
Please see "High
Yield/High Risk
Investing" for additional
information about these
investments. What are derivatives and can the fund
invest in them?
The term derivative is used to describe
financial instruments whose value is
derived from an underlying security (e.g.,
a stock or bond) or a market benchmark
(e.g., an interest rate index). Many types
of investments representing a wide range of
potential risks and rewards fall under the
"derivatives" umbrella--from conventional
instruments such as callable bonds,
futures, and options, to more exotic
investments such as stripped mortgage
securities and structured notes. While it
PAGE 15
was only recently that the term derivative
has become widely known among the investing
public, derivatives have in fact been
employed by investment managers for many
years. The fund will invest in derivatives
only if the expected risks and rewards are
consistent with its objective, policies,
and overall risk profile as described in
this prospectus. Accordingly, the fund
will not invest in any high risk, highly
leveraged derivative instrument that is
expected to cause the price volatility of
the portfolio to be substantially different
than that of a long-term investment grade
bond. The fund limits its use of
derivatives to situations in which they may
enable the fund to: increase yield; hedge
against a decline in principal value;
invest in eligible asset classes with
greater efficiency and lower cost than is
possible through direct investment; or to
adjust duration.
How does the portfolio manager try to
reduce risk?
Consistent with the fund's objective, the
portfolio manager actively manages the fund
in an effort to manage risk and increase
total return. Risk management tools
include:
o Diversification of assets to reduce the
impact of a single holding on the fund's
net asset value;
o Thorough credit research by our analysts;
and
o Adjustment in the fund's duration to try
to reduce the negative impact of rising
interest rates or to take advantage of
the favorable effects of falling rates.
Depending on market outlook, the investment
manager may shorten or lengthen the fund's
average effective maturity within the
ranges and guidelines established in this
PAGE 16
prospectus.
Is a fund's yield fixed or will it vary?
_________________________
For a better
understanding of the
fund, you may find it
helpful to review these
fundamentals of fixed-
income investing. It will vary. The yield is calculated every
day by dividing the fund's net income per
share, expressed at annual rates, by the
share price. Since both income and share
price will fluctuate, the fund's yield will
also vary.
Is a fund's "yield" the same thing as the
"total return"?
Not for bond funds. Your total return is
the result of reinvested income paid and
the change in share price for a given time
period. Income is always a positive
contributor to total return and can enhance
a rise in share price or serve as an offset
to a drop in share price.
What is meant by a bond fund's maturity?
Every bond has a stated maturity date when
the issuer must repay the security's entire
principal value to the investor. Some types
of bonds may also have an "effective
maturity" that is shorter than the stated
date. Many corporate and municipal bonds
are "callable," meaning their principal can
be repaid before their stated, maturity
dates on (or after) specified call dates.
Bonds are most likely to be called when
interest rates are falling, because the
issuer wants to refinance at a lower rate.
In such an environment, a bond's "effective
maturity" is usually its nearest call date.
A bond mutual fund has no maturity in the
strict sense of the word, but does have a
dollar-weighted average maturity or average
effective maturity. This number is an
average of the stated or effective
PAGE 17
maturities of the underlying bonds, with
each maturity "weighted" by the percentage
of fund assets it represents. Funds that
target effective maturities would use the
effective (rather than stated) maturities
of the underlying instruments when
computing the average. Targeting effective
maturity provides additional flexibility in
portfolio management but; all else being
equal, could result in higher volatility
than a fund targeting a stated maturity or
maturity range.
What is meant by a bond fund's "duration"?
Duration is the time-weighted value of
discounted future interest rate changes
more accurately than maturity because it
takes into account the time value of cash
flows generated over the bond's life.
Future interest and principal payments are
discounted to reflect their present value
and then are multiplied by the number of
years they will be received to produce a
value that is expressed in years, i.e., the
duration. Effective duration takes into
account call features and sinking fund
payments that may shorten a bond's life.
Since duration can also be computed for
bond funds, you can estimate the effect of
interest rates on a fund's share price.
Simply multiply the fund's duration
(available for T. Rowe Price bond funds in
our shareholder reports) by an expected
change in interest rates. For example, the
price of a bond fund with a duration of
five years would be expected to fall
approximately 5% if rates rose by one
percentage point.
________________________
In general, the longer a
bond's maturity, the
greater the price
increase or decrease in
response to a given
change in interest rates,
as shown in the table at
PAGE 18
right. How is a bond's price affected by changes
in interest rates?
When interest rates rise, a bond's price
usually falls, and vice versa.
__________________________________________
How Interest Rates Affect Bond Prices
Price Per $1,000 of
Bond Bond Face Value if
Maturity Coupon Interest Rates:
Increase Decrease
_________ _________
1% 2% 1% 2%
___________________________________________
1 year 5.70% $990 $981 $1,010 $1,019
___________________________________________
5 years 6.15 959 919 1,044 1,089
___________________________________________
10 years 6.45 930 867 1,076 1,160
___________________________________________
20 years 6.85 885 791 1,141 1,314
___________________________________________
Table 4 Coupons reflect yields on Treasury
securities as of July 31, 1995,
1995. This is an illustration and
does not represent expected yields
or share-price changes of any T.
Rowe Price fund.
How can I decide if the fund is appropriate
for me?
Consider your investment goals, your time
horizon for achieving them, and your
tolerance for risk. If you can accept the
possibility of share price decline in an
effort to achieve high income and some
capital appreciation, the fund could be an
appropriate part of your overall investment
strategy.
Is there other information I need to review
before making a decision?
Be sure to review "Investment Policies and
Practices" in Types of Portfolio Securities
(bonds, preferred stocks, convertible
securities and warrants, foreign
PAGE 19
securities, asset-backed securities,
mortgage-backed securities, hybrid
instruments, private placements, and high
yield/high risk investing); Types of
Management Practices (cash position,
borrowing money and transferring assets,
futures and options, managing foreign
exchange risk, lending of portfolio
securities, when-issued securities and
forward commitment contracts, and portfolio
turnover).
2 About Your Account
Pricing Shares and Receiving Sale Proceeds
Here are some procedures you should know
when investing in a fund.
________________________
The various ways you can
buy, sell, and exchange
shares are explained at
the end of this
prospectus and on the New
Account Form. These
procedures may differ for
institutional and
employer-sponsored
retirement accounts. How and when shares are priced
Bond and money funds. The share price (also
called "net asset value" or NAV per share)
for each fund is calculated at 4 p.m. ET
each day the New York Stock Exchange is
open for business. To calculate the NAV, a
fund's assets are valued and totaled,
liabilities are subtracted, and the
balance, called net assets, is divided by
the number of shares outstanding.
Money fund NAVs, which are managed to
remain at $1.00, are calculated at noon ET
each day as well as 4 p.m. Amortized cost
or amortized market value is used to value
money fund securities that mature in 60
days or less.
________________________
When filling out the New
Account Form, you may
PAGE 20
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 and the time until which orders are
accepted may be changed in case of an
emergency or if the New York Stock Exchange
closes at a time other than 4 p.m. ET.
_________________________
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 the
next business day. Proceeds can be sent to
you by mail, or to your bank account by ACH
transfer or bank wire. Proceeds sent by ACH
transfer should be credited the second day
after the sale. ACH (Automated Clearing
House) is an automated method of initiating
payments from and receiving payments in
your financial institution account. ACH is
a payment system supported
by over 20,000 banks, savings banks and
credit unions, which electronically
exchanges the transactions through the
Federal Reserve Banks. Proceeds sent by
bank wire should be credited to your bank
account the next business day.
Exception:
PAGE 21
o Under certain circumstances and when
deemed to be in the fund's best
interests, your proceeds may not be sent
for up to five business days after
receiving your sale or exchange request.
If you were exchanging into another bond
or money fund, your new investment would
not begin to earn dividends until the
sixth business day.
Useful Information on Distributions and Taxes
________________________
The fund distributes all
net investment income and
realized capital gains to
shareholders. Dividends and Other Distributions
Dividend and capital gain distributions are
reinvested in additional fund shares in
your account unless you select another
option on your New Account Form. The
advantage of reinvesting distributions
arises from compounding; that is, you
receive 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, the fund reserves
the right to reinvest your distribution
check in your account at the then current
NAV and to reinvest all subsequent
distributions in shares of the fund.
Income dividends
o Bond funds declare income dividends daily
at 4 p.m. ET to shareholders of record at
that time provided payment has been
received on the previous business day.
o Money funds declare income dividends
daily at noon ET to shareholders of
record at that time provided payment has
been received by that time.
PAGE 22
o Bond and money funds pay dividends on the
last business day of each month.
o Bond and money fund shares will earn
dividends through the date of redemption;
shares redeemed on a Friday or prior to a
holiday will continue to earn dividends
until the next business day. Generally,
if you redeem all of your shares at any
time during the month, you will also
receive all dividends earned through the
date of redemption in the same check.
When you redeem only a portion of your
shares, all dividends accrued on those
shares will be reinvested, or paid in
cash, on the next dividend payment date.
Capital gains
o A capital gain or loss is the difference
between the purchase and sale price of a
security.
o If 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. If
a second distribution is necessary, it is
usually declared and paid during the
first quarter of the following year.
Tax Information
You need to be aware of the possible tax
consequences when:
o you sell fund shares, including an
exchange from one fund to another; or
o the fund makes a short- and/or long-term
capital gain distribution to your
account.
Taxes on your 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.
PAGE 23
In January, the fund will send you Form
1099-B, indicating the date and amount of
each sale you made in the fund during the
prior year. This information will also be
reported to the IRS. For accounts opened
new or by exchange in 1983 or later, we
will provide you the gain or loss of the
shares you sold during the year, based on
the "average cost" method. This
information is not reported to the IRS, and
you do not have to use it. You may
calculate the cost basis using other
methods acceptable to the IRS, such as
"specific identification."
________________________
The fund sends timely
information for your tax
filing needs. To help you maintain accurate records, we
send you a confirmation immediately
following each transaction (except for
systematic purchases and redemptions) and a
year-end statement detailing all your
transactions in each fund account during
the year.
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 fund will send you Form
1099-DIV indicating the tax status of any
dividend and capital gain distribution made
to you. This information will also be
reported to the IRS. All distributions
made by the fund 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. The fund
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.
PAGE 24
_________________________
Capital gain
distributions are taxable
whether reinvested in
additional shares or
received in cash. 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.
If distributions arising from transactions
in foreign currencies or securities reduce
a fund's net income, a portion of its
dividends may be classified as a return of
capital. Tax treatment of distributions is
explained in the year-end tax information
we send.
Tax effect of buying shares before a
capital gain distribution. If you buy
shares shortly before or on the "record
date"--the date that establishes you as the
person to receive the upcoming
distribution--you will receive in the form
of a taxable distribution a portion of the
money you just invested. Therefore, you may
wish to find out a fund's record date(s)
before investing. Of course, a fund's share
price may at any time reflect undistributed
capital gains or unrealized appreciation.
Transaction Procedures and Special
Requirements
Purchase Conditions
________________________
Following these
procedures helps assure
timely and accurate
PAGE 25
transactions. 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. If, during the clearing
period, we receive a check drawn against
your bond or money market account, it will
be returned marked "uncollected." (The 10-
day hold does not apply to the following:
purchases paid for by bank wire; cashier's,
certified, or treasurer's checks; or
automatic purchases through your paycheck.)
Telephone, Tele*AccessR, and PC*AccessR
transactions. These exchange and redemption
services are established automatically when
you sign the New Account Form unless you
check the box which states that you do not
want these services. The fund uses
reasonable procedures (including
shareholder identity verification) to
confirm that instructions given by
telephone are genuine and is not liable for
PAGE 26
acting on these instructions. If these
procedures are not followed, it is the
opinion of certain regulatory agencies that
the 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 promptly 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.
________________________
T. Rowe Price may bar
excessive traders from
purchasing shares. Excessive Trading
Frequent trades involving either
substantial fund assets, or a substantial
portion of your account or accounts
controlled by you, can disrupt management
of 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 fund A to fund
B, and, within the next 120 days, sell your
shares in fund B to return to fund A or
move to fund C.
If you exceed the number of trades
described above, you may be barred
indefinitely from further purchases of T.
PAGE 27
Rowe Price funds.
Three types of transactions are exempt from
excessive trading guidelines: (1) trades
solely between money market funds; (2)
redemptions that are not part of exchanges;
and (3) systematic purchases or redemptions
(see "Shareholder Services").
Keeping Your Account Open
Due to the relatively high cost to the fund
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; and
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
PAGE 28
accept guarantees from notaries public or
organizations that do not provide
reimbursement in the case of fraud.
3 More About the Fund
Organization and Management
________________________
Shareholders benefit from
T. Rowe Price's 58 years
of investment management
experience. How is the fund organized?
The fund was incorporated in Maryland in
1995 and is a "diversified, open-end
investment company," or mutual fund. Mutual
funds pool money received from shareholders
and invest it to try to achieve specified
objectives.
What is meant by "shares"?
As with all mutual funds, investors receive
"shares" when they put money in the fund.
These shares are part of the fund's
authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles
the shareholder to:
o receive a proportional interest in the
fund's income and capital gain
distributions;
o cast one vote per share on certain fund
matters, including the election of fund
directors/trustees, changes in
fundamental policies, or approval of
changes in the fund's management
contract.
Do T. Rowe Price funds have annual
shareholder meetings?
The funds are not required to hold annual
meetings and do not intend to do so except
when certain matters, such as a change in
the fund's fundamental policies, are to be
decided. In addition, shareholders
PAGE 29
representing at least 10% of all eligible
votes may call a special meeting if they
wish for the purpose of voting on the
removal of any fund director(s)/trustee(s).
If a meeting is held and you cannot attend,
you can vote by proxy. Before the meeting,
the fund will send you proxy materials that
explain the issues to be decided and
include a voting card for you to mail back.
_________________________
All decisions regarding
the purchase and sale of
fund investments are made
by T. Rowe Price--
specifically by the
fund's portfolio
managers. Who runs the fund?
General oversight. The fund is 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 fund's
officers. The policy of the fund is that a
majority of Board members will be
independent of T. Rowe Price.
Portfolio Management. The fund has an
Investment Advisory Committee composed of
the following members: Peter Van Dyke,
Chairman, Catherine H. Bray, Heather R.
Landon, Robert M. Rubino, Charles P. Smith,
and Mark J. Vaselkiv. The Committee
Chairman has day-to-day responsibility for
managing the fund and works with the
Committee in developing and executing the
fund's investment program. Mr. Van Dyke has
been Chairman of the fund's Committee since
it's inception. He has been managing
investments since joining T. Rowe Price in
1985.
Marketing. T. Rowe Price Investment
Services, Inc., a wholly-owned subsidiary
of T. Rowe Price, distributes (sells)
shares of this and all other T. Rowe Price
funds.
PAGE 30
Shareholder Services. T. Rowe Price
Services, Inc., another wholly-owned
subsidiary, acts as the fund's 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 the fund. In
addition to the management fee, the 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 under
"Transaction and Fund Expenses") 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 daily based on the combined
net assets of all T. Rowe Price funds
(except Equity Index and the 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
0.450% Next $1 billion
0.420% Next $1 billion
0.390% Next $1 billion
PAGE 31
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
The 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 as described above. Based on
combined Price funds' assets of
approximately $47.8 billion at June 30,
1995, the Group Fee was 0.34%.
Understanding Performance Information
This section should help you understand the
terms used to describe the fund's
performance. You will come across them in
shareholder reports you receive from us
four times a year, in our newsletter,
Insights, in reports, in T. Rowe Price
advertisements, and in the media.
________________________
Total return is the most
widely used performance
measure. Detailed
performance information
is included in the fund's
annual report and
quarterly shareholder
reports. Total Return
This tells you how much an investment in
the 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
PAGE 32
cumulative or compound average annual total
return figures, which may be compared with
various indices, other performance
measures, or other mutual funds.
Cumulative Total Return
This is the actual rate of return on an
investment for a specified period. A
cumulative return does not indicate how
much the value of the investment may have
fluctuated between the beginning and the
end of the period specified.
Average Annual Total Return
This is always hypothetical. Working
backward from the actual cumulative return,
it tells you what constant year-by-year
return would have produced the actual,
cumulative return. By smoothing out all the
variations in annual performance, it gives
you an idea of the investment's annual
contribution to your portfolio provided you
held it for the entire period in question.
________________________
You will see frequent
references to a fund's
yield in our reports,
advertisements, in media
stories, and so on. Yield
The current or "dividend yield" on the fund
or any investment tells you the
relationship between the investment's
current level of annual income and its
price on a particular day. The dividend
yield reflects the actual income paid to
shareholders for a given period,
annualized, and divided by the average
price during the given period. For example,
a fund providing $5 of annual income per
share and a price of $50 has a current
yield of 10%. Yields can be calculated for
any time period.
The advertised or "SEC yield" is found by
determining the net income per share (as
defined by the SEC) earned by the fund
during a 30-day base period and dividing
PAGE 33
this amount by the per-share price on the
last day of the base period. The "SEC
yield" may differ from the dividend yield.
Investment Policies and Practices
________________________
Fund managers have
considerable leeway in
choosing investment
strategies and selecting
investments they believe
will help the fund
achieve its objectives. This section takes a detailed look at some
of the types of securities the fund may
hold in its portfolio and the various kinds
of investment practices that may be used in
day-to-day portfolio management. The
fund's investment program is subject to
further restrictions and risks described in
the "Statement of Additional Information."
Shareholder approval is required to
substantively change the fund's objectives
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.
However, significant changes are discussed
with shareholders in fund reports. The
fund adheres to applicable investment
restrictions and policies at the time it
makes 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.
The fund's holdings of certain kinds of
investments cannot exceed maximum
percentages of total assets, which are set
forth in the prospectus. For instance,
this fund is not permitted to invest more
than 10% of total assets in hybrid
instruments. While these restrictions
provide a useful level of detail about the
fund's investment program, investors should
not view them as an accurate gauge of the
PAGE 34
potential risk of such investments. For
example, in a given period, a 5% investment
in hybrid securities could have
significantly more than a 5% impact on the
fund's share price. The net effect of a
particular investment depends on its
volatility and the size of its overall
return in relation to the performance of
all the fund's other investments.
Changes in the fund's holdings, the fund's
performance, and the contribution of
various investments are discussed in the
shareholder reports sent to you.
Types of Portfolio Securities
In seeking to meet its investment
objective, the fund may invest in any type
of security or instrument (including
certain potentially high-risk derivatives)
whose yield, credit quality and maturity
characteristics are consistent with the
fund's investment program. These and some
of the other investment techniques the fund
may use are described in the following
pages.
Fundamental policy: The fund will not
purchase a security if, as a result, with
respect to 75% of its total assets, more
than 5% of its total assets would be
invested in securities of a single issuer
or more than 10% of the outstanding voting
securities of the issuer would be held by
the fund, provided that these limitations
do not apply to the fund's purchases of
securities issued or guaranteed by the U.S.
Government, it agencies or
instrumentalities.
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
PAGE 35
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 in their principal
value. In calculating the fund's weighted
average maturity, the maturity of these
securities may be shortened under certain
specified conditions.
Bonds may be senior, 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 subordinated
debt.
_________________________
Without regard to
quality, the fund may
invest up to 25% of its
total assets in preferred
stocks and convertible
securities, convertible
into or which carry
warrants for common
stocks or other equity
securities. Preferred Stocks. Stocks represent shares
of ownership in a company. Generally,
preferred stock has a specified dividend
PAGE 36
and ranks after bonds and before common
stocks in its claim on income for dividend
payments and on assets should the company
be liquidated. While most preferred stocks
pay a dividend, the fund 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. The fund 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.
Foreign Securities. The fund may invest in
foreign securities, including nondollar
denominated securities traded outside of
the U.S. and dollar-denominated securities
of foreign issuers. 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).
PAGE 37
Operating policy: The fund may invest
without limitation, in U.S.
dollar-denominated debt securities issued
by foreign issuers, foreign branches of
U.S. banks, and U.S. branches of foreign
banks. The fund may also invest up to 25%
of its total assets in non-U.S. dollar-
denominated fixed income securities
principally traded in financial markets
outside the United States.
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 fund's investment
in these securities.
Mortgage-backed Securities. The fund 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 fund. 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
PAGE 38
and credit of the U.S. Government, 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.
_________________________
There is no limit on the
fund's investment in
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 the fund's net asset
value. When rates rise, however,
mortgage-backed securities have
historically experienced smaller price
declines than comparable quality bonds.
Additional mortgage-backed securities in
which the fund 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
PAGE 39
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 potentially
high-risk 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 other mortgage-backed
securities and POs, the value of IOs
tends to move in the same direction as
interest rates. The fund 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 the
fund's investment in CMOs,IOs or POs
PAGE 40
will be successful, and the fund's
total return could be adversely
affected as a result.
Operating policy: The fund may invest up
to 10% of its total assets in stripped
mortgage securities.
_________________________
There is no assurance the
fund's investment in
hybrids will be
successful. Hybrid Instruments. These instruments (a
type of potentially high-risk 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
also exposes the fund to the credit risk of
the issuer of the hybrid. These risks may
PAGE 41
cause significant fluctuations in the net
asset value of the fund. There is no
assurance that the fund's investment in
hybrids will be successful.
Operating policy: The fund may invest up
to 10% of its total assets in hybrid
instruments.
Private Placements. 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: The fund will not invest
more than 15% of its net assets in illiquid
securities.
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
PAGE 42
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 fund may invest up to
33 1/3% of its total assets in below
investment grade or junk bonds.
Types of Management Practices
_________________________
Cash reserves provide
flexibility and serve as
a short-term defense
during periods of unusual
market volatility. Cash Position. The fund will hold a certain
portion of its assets in U.S. and foreign
dollar denominated money market securities,
including repurchase agreements, in the two
highest rating categories, maturing in one
year or less. For temporary, defensive
purposes, the 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 fund 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 33 1/3% of total fund assets.
PAGE 43
Operating policies: The 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 33 1/3% of the fund's total
assets. The fund may not purchase
additional securities when borrowings
exceed 5% of total assets.
_________________________
Futures are used to
manage risk; options give
the investor the option
to buy or sell an asset
at a predetermined price
in the future. Futures and Options. Futures (a type of
potentially high-risk derivative) are often
used to manage or hedge 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
fund may buy and sell futures and options
contracts for a number of reasons
including: to manage its exposure to
changes in interest rates, bond prices, and
foreign currencies; as an efficient means
of adjusting its overall exposure to
certain markets; to enhance income; and to
protect the value of portfolio securities.
The fund 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
PAGE 44
equal more than 5% of the fund's net asset
value. Options on securities: The total
market value of securities against which
the fund has written call or put options
may not exceed 25% of its total assets.
The fund will not commit more than 5% of
its total assets to premiums when
purchasing call or put options.
Managing Foreign Exchange 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." The fund may also use these
contracts to create a synthetic bond--
issued by a U.S. company, for example, but
with the dollar component transformed into
a foreign currency. Although foreign
currency transactions will be used
primarily to protect the fund's foreign
securities from adverse currency movements
relative to the dollar, they involve the
risk that anticipated currency movements
will not occur and the fund's total return
could be reduced.
Operating policy: The fund will not commit
more than 25% of its total assets to
forward currency contracts.
Lending of Portfolio Securities. Like other
mutual funds, the fund 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 fund could
experience delays in recovering its
securities and possibly capital losses.
Fundamental policy: The value of loaned
PAGE 45
securities may not exceed 33 1/3% of the
fund's total assets.
When-Issued Securities and Forward
Commitment Contracts. The fund 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
fund's 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 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.
Portfolio Turnover. Although the fund will
not generally trade for short-term profits,
circumstances may warrant a sale without
regard to the length of time a security was
held. A high turnover rate may increase
transaction costs and result in additional
taxable gains. The fund's portfolio
turnover rate is not expected to exceed
100% for its initial year of operation.
PAGE 46
4 Investing with T. Rowe Price
Account Requirements and Transaction
Information
________________________
Always verify your
transactions by carefully
reviewing the
confirmation we send
you. Please report any
discrepancies to
Shareholder Services. Tax Identification Number
We must have your correct social security
or corporate tax identification number on a
signed New Account Form or W-9 Form.
Otherwise, federal law requires the funds
to withhold a percentage (currently 31%) of
your dividends, capital gain distributions,
and redemptions, and may subject you to an
IRS fine. If this information is not
received within 60 days after your account
is established, your account may be
redeemed, priced at the NAV on the date of
redemption.
Unless you request otherwise, one
shareholder report will be mailed to
multiple account owners with the same tax
identification number and same zip code and
to shareholders who have requested that
their account be combined with someone
else's for financial reporting.
_________________________
T. Rowe Price Trust
Company
1-800-492-7670
1-410-625-6585 Employer-Sponsored Retirement Plans and
Institutional Accounts
Transaction procedures in the following
sections may not apply to employer-
sponsored retirement plans and
institutional accounts. For procedures
regarding employer-sponsored retirement
plans, please call T. Rowe Price Trust
Company or consult your plan administrator.
For institutional account procedures,
PAGE 47
please call your designated account manager
or service representative.
Opening a New Account: $2,500 minimum
initial investment; $1,000 for retirement
or gifts or transfers to minors (UGMA/UTMA)
accounts
Account Registration
If you own other T. Rowe Price funds, be
sure to register any new account just like
your existing accounts so you can exchange
among them easily. (The name and account
type would have to be identical.)
________________________
Regular Mail
T. Rowe Price
Account Services
P.O. Box 17300
Baltimore, MD
21298-9353
Mailgram, Express,
Registered, or Certified
Mail
T. Rowe Price
Account Services
10090 Red Run Blvd.
Owings Mills, MD 21117 By Mail
Please make your check payable to T. Rowe
Price Funds (otherwise it will be returned)
and send your check together with the New
Account Form to the address at left. We do
not accept third party checks, except for
IRA Rollover checks, to open new accounts.
By Wire
o Call Investor Services for an account
number and give the following wire
address to your bank:
Morgan Guaranty Trust Co. of New York
ABA# 021000238
T. Rowe Price [fund name]
AC-00153938
account name(s), and account number
PAGE 48
o Complete a New Account Form and mail it
to one of the appropriate addresses
listed at left.
Note: No services will be established and
IRS penalty withholding may occur until a
signed New Account Form is received.
Also, retirement plans cannot be opened
by wire.
By Exchange
Call Shareholder Services or use
Tele*Access or PC*Access (see "Automated
Services" under "Shareholder Services").
The new account will have the same
registration as the account from which you
are exchanging. Services for the new
account may be carried over by telephone
request if preauthorized on the existing
account. (See explanation of "Excessive
Trading" under "Transaction Procedures.")
In Person
Drop off your New Account Form at any of
the locations listed on the cover and
obtain a receipt.
Note: The fund and its agents reserve the
right to waive or lower investment
minimums; to accept initial purchases by
telephone or mailgram; to cancel or rescind
any purchase or exchange (for example, if
an account has been restricted due to
excessive trading or fraud) upon notice to
the shareholder within five business days
of the trade or if the written confirmation
has not been received by the shareholder,
whichever is sooner; to freeze any account
and suspend services when notice has been
received of a dispute between the
registered or beneficial account owners or
there is reason to believe a fraudulent
transaction may occur; to otherwise modify
the conditions of purchase and any
services at any time; or to act on
instructions believed to be genuine.
PAGE 49
Purchasing Additional Shares: $100 minimum
purchase; $50 minimum for retirement plans
and Automatic Asset Builder.
By ACH Transfer
Use Tele*Access, PC*Access or call Investor
Services if you have established electronic
transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire
address in "Opening a New Account."
________________________
Regular Mail
T. Rowe Price Funds
Account Services
P.O. Box 89000
Baltimore, MD
21289-1500 By Mail
o Provide your account number and the fund
name on your check.
o Make your check payable to T. Rowe Price
Funds (otherwise it may be returned).
o Mail the check to us at the address shown
at left with either a fund reinvestment
slip or a note indicating the fund you
want to buy and you fund account number.
By Automatic Asset Builder
Fill out the Automatic Asset Builder
section on the New Account or Shareholder
Services Form.
Exchanging and Redeeming Shares
By Phone
Call Shareholder Services. If you find our
phones busy during unusually volatile
markets, please consider placing your order
by Tele*Access, PC*Access (if you have
previously authorized telephone services),
mailgram or by express mail. For exchange
PAGE 50
policies, please see "Transaction
Procedures and Special Requirements--
Excessive Trading."
Redemption proceeds can be mailed to your
account address, sent by ACH transfer, or
wired to your bank (provided your bank
information is already on file). For
charges, see "Electronic Transfers--By
Wire" under "Shareholder Services".
_________________________
Mailgram, Express,
Registered, or
Certified Mail
(See "Opening a New
Account".) 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 (please see "Transaction
Procedures and Special
Requirements--Signature Guarantees").
Regular Mail
For nonretirement For employer-sponsored
and IRA accounts: retirement accounts:
T. Rowe Price T. Rowe Price Trust
Account Services Company
P.O. Box 89000 P.O. Box 89000
Baltimore, MD Baltimore, MD
21289-0220 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 T. Rowe Price Trust Company or your
plan administrator for instructions.
_______________________
Shareholder Services
PAGE 51
1-800-225-5132
1-410-625-6500 Shareholder Services
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.
Note: Corporate and other entity accounts
require an original or certified resolution
to establish services and to redeem by
mail. For more information, call Investor
Services.
Retirement Plans
We offer a wide range of plans for
individuals and institutions, including
large and small businesses: IRAs, SEP-IRAs,
Keoghs (profit sharing, money purchase
pension), 401(k), and 403(b)(7). For
information on IRAs, call Investor
Services. For information on all other
retirement plans, please call our Trust
Company at 1-800-492-7670.
_________________________
Investor Services
1-800-638-5660
1-410-547-2308 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
PAGE 52
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.
Automated Services
Tele*Access. 24-hour service via toll-free
number provides information on fund yields
and prices, dividends, account balances,
and your latest transaction as well as the
ability to request prospectuses, account
and tax forms, duplicate statements,
checks, and to initiate purchase,
redemption and exchange orders in your
accounts (see "Electronic Transfers"
below).
PC*Access. 24-hour service via 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 whose addresses are listed on the
cover.
Electronic Transfers
By ACH. With no charges to pay, you can
initiate a purchase or redemption for as
little as $100 or as much as $100,000
between your bank account and fund account
using the ACH network. Enter instructions
via Tele*Access, PC*Access or call
Shareholder Services.
By Wire. Electronic transfers can also be
conducted via bank wire. There is currently
a $5 fee for wire redemptions under $5,000,
and your bank may charge for incoming or
outgoing wire transfers regardless of size.
PAGE 53
Checkwriting (Not available for equity
funds, High Yield Bond or Emerging Markets
Bond Funds.) You may write an unlimited
number of free checks on any money market
fund, and most bond funds, with a minimum
of $500 per check. Keep in mind, however
that a check results in a redemption; a
check written on a bond fund will create a
taxable event which you and we must report
to the IRS.
Automatic Investing ($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. You can set up
systematic investments from one fund
account into another, such as from a
money fund into a stock fund.
_________________________
Discount Brokerage is a
division of T. Rowe Price
Investment Services, Inc.
Discount Brokerage
You can trade stocks, bonds, options,
precious metals, and other securities at a
savings over regular commission rates. Call
Investor Services for information.
Note: If you buy or sell T. Rowe Price
Funds through anyone other than T. Rowe
Price, such as broker-dealers or banks, you
may be charged transaction or service fees
by those institutions. No such fees are
charged by T. Rowe Price Investment
Services or the fund for transactions
conducted directly with the fund.
PAGE 54
To Open an Account
Investor Services Prospectus
1-800-638-5660
1-410-547-2308 T. Rowe Price
Corporate Income
For Existing Accounts Fund
Shareholder Services
1-800-225-5132
1-410-625-6500 ______________
To help you A moderately
For Yields and Prices achieve your T. Rowe Price aggressive
Tele*Access(registered financial goals, Corporate Income bond fund
trademark) T. Rowe Price Fund, Inc. seeking a high
1-800-638-2587 offers a wide October 30, 1995 level of
1-410-625-7676 range of stock, income and
24 hours, 7 days bond, and money some capital
market appreciation.
Investor Centers investments, as
101 East Lombard St. well as
Baltimore, MD convenient
services and
T. Rowe Price timely,
Financial Center informative
10090 Red Run Blvd. reports.
Owings Mills, MD
Farragut Square
900 17th Street, N.W.
Washington, DC
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA
T. Rowe Price
Invest With
Confidence
(registered
trademark)
PAGE 55
STATEMENT OF ADDITIONAL INFORMATION
T. ROWE PRICE CORPORATE INCOME FUND, INC.
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, 1995, revised to October 30,
1995 (for the T. Rowe Price Corporate Income 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, 1995, revised to October 30, 1995.
PAGE 56
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 57
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 58
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 59
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.
Corporate 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 60
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
restrictions may take the form of prior governmental approval,
PAGE 61
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.
Information and Supervision. There is generally less
PAGE 62
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
relief from such Act may be required. All of these
PAGE 63
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.
Corporate Income, 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
incur additional expenses to seek recovery on a debt security on
PAGE 64
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
coupon or pay-in-kind securities. The Fund accrues income on
PAGE 65
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.
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.
PAGE 66
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.
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
PAGE 67
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.
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
PAGE 68
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
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
PAGE 69
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).
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.
PAGE 70
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
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
PAGE 71
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
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.
PAGE 72
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
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.
PAGE 73
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
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 -
PAGE 74
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
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.
PAGE 75
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,
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
PAGE 76
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.
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,
PAGE 77
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
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
PAGE 78
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").
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
PAGE 79
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
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
PAGE 80
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
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
PAGE 81
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
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
PAGE 82
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.
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
PAGE 83
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.
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
PAGE 84
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
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.
PAGE 85
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.
Corporate Income, 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
"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
PAGE 86
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
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.
PAGE 87
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
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).
PAGE 88
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.
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
PAGE 89
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.
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.
Corporate Income, High Yield, New Income, Personal Strategy,
Prime Reserve, and Short-Term Bond, and Short-Term U.S.
Government Funds
Illiquid or Restricted Securities
PAGE 90
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
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
PAGE 91
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
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.)
PAGE 92
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.
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
PAGE 93
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.
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.)
PAGE 94
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.
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
PAGE 95
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
Options are a type of potentially high-risk
derivative.
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
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.
PAGE 96
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
"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
PAGE 97
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
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.
PAGE 98
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
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
PAGE 99
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.
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
PAGE 100
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.
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.
PAGE 101
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
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.
PAGE 102
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
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
PAGE 103
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
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
Futures are a type of potentially high-risk
derivative.
Transactions in Futures
The Fund may enter into futures contracts, including stock
index, interest rate and currency futures ("futures or futures
PAGE 104
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
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
PAGE 105
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.
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
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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
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
PAGE 107
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
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
PAGE 108
in turn are affected by fiscal and monetary policies and national
and international political and economic events.
Most United States futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that
the price of a futures contract may vary either up or down from
the previous day's settlement price at the end of a trading
session. Once the daily limit has been reached in a particular
type of futures contract, no trades may be made on that day at a
price beyond that limit. The daily limit governs only price
movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting
some futures traders to substantial losses.
Because of the low margin deposits required, futures trading
involves an extremely high degree of leverage. As a result, a
relatively small price movement in a futures contract may result
in immediate and substantial loss, as well as gain, to the
investor. For example, if at the time of purchase, 10% of the
value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract
would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then
closed out. A 15% decrease would result in a loss equal to 150%
of the original margin deposit, if the contract were closed out.
Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract.
However, the Fund would presumably have sustained comparable
losses if, instead of the futures contract, it had invested in
the underlying financial instrument and sold it after the
decline. Furthermore, in the case of a futures contract
purchase, in order to be certain that the Fund has sufficient
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
PAGE 109
terminate the Fund's position in the futures contracts. Final
determinations of variation margin would then be made, additional
cash would be required to be paid by or released to the Fund, and
the Fund would realize a loss or a gain.
Futures contracts may be closed out only on the exchange or
board of trade where the contracts were initially traded.
Although the Fund intends to purchase or sell futures contracts
only on exchanges or boards of trade where there appears to be an
active market, there is no assurance that a liquid market on an
exchange or board of trade will exist for any particular contract
at any particular time. In such event, it might not be possible
to close a futures contract, and in the event of adverse price
movements, the Fund would continue to be required to make daily
cash payments of variation margin. However, in the event futures
contracts have been used to hedge the underlying instruments, the
Fund would continue to hold the underlying instruments subject to
the hedge until the futures contracts could be terminated. In
such circumstances, an increase in the price of underlying
instruments, if any, might partially or completely offset losses
on the futures contract. However, as described below, there is
no guarantee that the price of the underlying instruments will,
in fact, correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures
contract.
Hedging Risk. A decision of whether, when, and how to hedge
involves skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of unexpected market
behavior, market or interest rate trends. There are several
risks in connection with the use by the Fund of futures contracts
as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures
contracts and movements in the prices of the underlying
instruments which are the subject of the hedge. T. Rowe Price
will, however, attempt to reduce this risk by entering into
futures contracts whose movements, in its judgment, will have a
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
PAGE 110
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
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
PAGE 111
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.
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
PAGE 112
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
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
PAGE 113
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.
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
PAGE 114
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.
Corporate Income, 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
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,
PAGE 115
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.
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
PAGE 116
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
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.
PAGE 117
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
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
PAGE 118
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
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
PAGE 119
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
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
PAGE 120
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'
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
PAGE 121
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);
(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
PAGE 122
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
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 and New Income Funds). Purchase any equity
securities, or securities convertible into equity
PAGE 123
securities except as set forth in its prospectus
and 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;
(4) Futures Contracts. Purchase a futures contract or
an option thereon if, with respect to positions in
futures or options on futures which do not
represent bona fide hedging, the aggregate initial
margin and premiums on such positions would exceed
5% of the Fund's net asset value.
(5) (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;
PAGE 124
(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
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
PAGE 125
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
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
PAGE 126
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 Corporate Income and Personal Strategy
Funds
Independent Directors/Trustees
ROBERT P. BLACK, Retired; formerly President, Federal Reserve
Bank of Richmond; Address: 10 Dahlgren Road, Richmond, Virginia
23233
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
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
PAGE 127
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,
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
*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.
HENRY H. HOPKINS, Vice President--Managing Director, T. Rowe
Price; Vice President and Director, T. Rowe Price Investment
PAGE 128
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
PATRICIA S. BUTCHER, Assistant Secretary--Assistant Vice
President, T. Rowe Price and T. Rowe Price Investment Services,
Inc.
CARMEN F. DEYESU, Treasurer--Vice President, T. Rowe Price, T.
Rowe Price Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, Controller--Vice President, T. Rowe Price,
and T. Rowe Price Trust Company
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Rowe Price-Fleming International, Inc. and T. Rowe Price
EDWARD T. SCHNEIDER, Assistant Vice President--Vice President,
T. Rowe Price
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T.
Rowe Price
Corporate Income Fund
JAMES S. RIEPE, 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.
PAGE 129
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
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 130
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
CATHERINE B. BRAY, Vice President--Vice President, T. Rowe Price
ANDREW M. BROOKS, Vice President--Vice President, T. Rowe Price
WILLIAM T. REYNOLDS, Vice President--Managing Director, 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
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
*CHARLES P. SMITH, President and Director--Managing Director, T.
Rowe Price; Vice President, 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
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
PAGE 131
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
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
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.
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
WILLIAM T. REYNOLDS, Vice President--Managing Director, T. Rowe
Price
BRIAN C. ROGERS, Vice President--Managing Director, T. Rowe Price
Prime Reserve Fund
*WILLIAM T. REYNOLDS, Chairman of the Board--Managing
Director, T. Rowe Price
*GEORGE J. COLLINS, Vice President and Director--President,
PAGE 132
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
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
PATRICE L. BERCHTENBREITER, Vice President--Vice President, T.
Rowe Price
PAUL W. BOLTZ, Vice President--Vice President and Financial
Economist of T. Rowe Price
JOAN R. POTEE, Vice President--Vice President, T. Rowe Price
ROBERT M. RUBINO, Vice President--Vice President, T. Rowe Price
BRIAN E. BURNS, Assistant Vice President--Assistant Vice
President, T.Rowe Price Associates, Inc.
GWENDOLYN G. WAGNER, Assistant Vice President--Assistant Vice
President, T. Rowe Price
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
EDWARD A. WIESE, President--Vice President, T. Rowe Price, 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
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.
THOMAS E. TEWKSBURY, Vice President--Vice President, T. Rowe
Price; formerly (1/89-12/93) senior bond trader, Scudder, Stevens
PAGE 133
& Clark, New York, New York
CHERYL A. REDWOOD, Assistant Vice President--Employee, T. Rowe
Price
PAGE 134
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
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
HEATHER R. LANDON, Executive 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 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
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
*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
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)
PAGE 135
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
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
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 136
COMPENSATION TABLE
_________________________________________________________________
Pension or Total Compensation
Aggregate Retirement from Fund and
Name of Compensation Benefits Fund Complex
Person, from Accrued as Paid to
Position Fund(a) Part of Fund(b) Directors(c)
_________________________________________________________________
GNMA Fund
Robert P. Black, $2,545 N/A $52,667
Trustee
Calvin W. Burnett, 2,545 N/A 55,583
PH.D, Trustee
Anthony W. Deering, 2,545 N/A 66,333
Trustee
F. Pierce Linaweaver, 2,545 N/A 55,583
Trustee
John G. Schreiber, 2,545 N/A 55,667
Trustee
George J. Collins, 0 N/A 0
Chairman of the Board(d)
James S. Riepe, 0 N/A 0
Trustee(d)
_________________________________________________________________
High Yield Fund
Robert P. Black, $3,463 N/A $52,667
Director
Calvin W. Burnett, 3,463 N/A 55,583
PH.D, Director
Anthony W. Deering, 3,463 N/A 66,333
Director
PAGE 137
F. Pierce Linaweaver, 3,463 N/A 55,583
Director
John G. Schreiber, 3,463 N/A 55,667
Director
George J. Collins, 0 N/A 0
Chairman of the Boardd
James S. Riepe, 0 N/A 0
Director(d)
Richard S. Swingle, 0 N/A 0
Director(d)
_________________________________________________________________
New Income Fund
Robert P. Black, $3,981 N/A $52,667
Director
Calvin W. Burnett, 3,981 N/A 55,583
PH.D, Director
Anthony W. Deering, 3,981 N/A 66,333
Director
F. Pierce Linaweaver, 3,981 N/A 55,583
Director
John G. Schreiber, 3,981 N/A 55,667
Director
PAGE 138
George J. Collins, 0 N/A 0
Chairman of the Board(d)
Carter O. Hoffman, 0 N/A 0
Director(d)
James S. Riepe, 0 N/A 0
Director(d)
Charles P. Smith, 0 N/A 0
Director(b)
_________________________________________________________________
Personal Strategy Balanced Fund
Leo C. Bailey, $536 N/A $64,583
Director
Donald W. Dick, Jr., 536 N/A 64,833
Director
David K. Fagin, 536 N/A 53,833
Director
Addison Lanier, 536 N/A 64,583
Director
John K. Major, 536 N/A 54,583
Director
Hanne M. Merriman, 536 N/A 42,083
Director
Hubert D. Vos, 536 N/A 54,583
Director
Paul M. Wythes, 536 N/A 54,333
Director
James S. Riepe, 0 N/A 0
Director(d)
M. David Testa, 0 N/A 0
Chairman of the Board(d)
_________________________________________________________________
Personal Strategy Growth
PAGE 139
Leo C. Bailey, $533 N/A $64,583
Director
Donald W. Dick, Jr., 533 N/A 64,833
Director
David K. Fagin, 533 N/A 53,833
Director
Addison Lanier, 533 N/A 64,583
Director
John K. Major, 533 N/A 54,583
Director
Hanne M. Merriman, 533 N/A 42,083
Director
Hubert D. Vos, 533 N/A 54,583
Director
Paul M. Wythes, 533 N/A 54,333
Director
James S. Riepe, 0 N/A 0
Director(d)
M. David Testa, 0 N/A 0
Chairman of the Board(d)
________________________________________________________________
Personal Strategy Income
Leo C. Bailey, $539 N/A $64,583
Director
Donald W. Dick, Jr., 539 N/A 64,833
Director
David K. Fagin, 539 N/A 53,833
Director
Addison Lanier, 539 N/A 64,583
Director
John K. Major, 539 N/A 54,583
Director
PAGE 140
Hanne M. Merriman, 539 N/A 42,083
Director
Hubert D. Vos, 539 N/A 54,583
Director
Paul M. Wythes, 539 N/A 54,333
Director
James S. Riepe, 0 N/A 0
Directord
M. David Testa, 0 N/A 0
Chairman of the Board(d)
_________________________________________________________________
Prime Reserve Fund
Robert P. Black, $7,560 N/A $52,667
Director
Calvin W. Burnett, 7,560 N/A 55,583
PH.D, Director
Anthony W. Deering, 7,560 N/A 66,333
Director
F. Pierce Linaweaver, 7,560 N/A 55,583
Director
John G. Schreiber, 7,560 N/A 55,667
Director
George J. Collins, 0 N/A 0
Director(d)
Carter O. Hoffman, 0 N/A 0
Chairman of the Board(d)
James S. Riepe, 0 N/A 0
Director(d)
_________________________________________________________________
Short-Term Bond Fund
Robert P. Black, $1,964 N/A $52,667
Director
PAGE 141
Calvin W. Burnett, 1,964 N/A 55,583
PH.D, Director
Anthony W. Deering, 1,964 N/A 66,333
Director
F. Pierce Linaweaver, 1,964 N/A 55,583
Director
John G. Schreiber, 1,964 N/A 55,667
Director
George J. Collins, 0 N/A 0
Chairman of the Board(d)
James S. Riepe, 0 N/A 0
Director(d)
_________________________________________________________________
Short-Term U.S. Government Fund
Robert P. Black, $1,080 N/A $52,667
Director
Calvin W. Burnett, 1,080 N/A 55,583
PH.D, Director
Anthony W. Deering, 1,080 N/A 66,333
Director
F. Pierce Linaweaver, 1,080 N/A 55,583
Director
John G. Schreiber, 1,080 N/A 55,667
Director
George J. Collins, 0 N/A 0
Chairman of the Board(d)
James S. Riepe, 0 N/A 0
Director(d)
Peter Van Dyke, 0 N/A 0
Director(d)
_________________________________________________________________
U.S. Treasury Intermediate
Robert P. Black, $1,082 N/A $52,667
PAGE 142
Director
Calvin W. Burnett, 1,082 N/A 55,583
PH.D, Director
Anthony W. Deering, 1,082 N/A 66,333
Director
F. Pierce Linaweaver, 1,082 N/A 55,583
Director
John G. Schreiber, 1,082 N/A 55,667
Director
George J. Collins, 0 N/A 0
Director(d)
James S. Riepe, 0 N/A 0
Director(d)
Charles P. Smith, 0 N/A 0
Director(d)
Peter Van Dyke, 0 N/A 0
Director(d)
_________________________________________________________________
U.S. Treasury Long-Term
Robert P. Black, $992 N/A $52,667
Director
Calvin W. Burnett, 992 N/A 55,583
PH.D, Director
Anthony W. Deering, 992 N/A 66,333
Director
F. Pierce Linaweaver, 992 N/A 55,583
Director
John G. Schreiber, 992 N/A 55,667
Director
George J. Collins, 0 N/A 0
Director(d)
James S. Riepe, 0 N/A 0
PAGE 143
Director(d)
Charles P. Smith, 0 N/A 0
Director(d)
Peter Van Dyke, 0 N/A 0
Director(d)
_________________________________________________________________
U.S. Treasury Money
Robert P. Black, $2,306 N/A $64,583
Director
Calvin W. Burnett, 2,306 N/A 55,583
PH.D, Director
Anthony W. Deering, 2,306 N/A 66,333
Director
F. Pierce Linaweaver, 2,306 N/A 55,583
Director
John G. Schreiber, 2,306 N/A 55,667
Director
George J. Collins, 0 N/A 0
Director(d)
James S. Riepe, 0 N/A 0
Director(d)
Charles P. Smith, 0 N/A 0
Director(d)
Peter Van Dyke, 0 N/A 0
Director(d)
(a) Amounts in this Column are for the period June 1, 1994
through May 31, 1995.
(b) Not applicable. The Fund does not pay pension or retirement
benefits to officers or directors/trustees of the Fund.
(c) Amounts in this column are for calendar year 1994.
(d) Any director/trustee of the Fund who is an officer or
employee of T. Rowe Price receives no remuneration from the
Fund.
PAGE 144
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 July 31, 1995, 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 145
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
Fund, Inc. and any institutional or private label mutual funds).
PAGE 146
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
Corporate Income Fund 0.__%
GNMA Fund 0.15%
High Yield Fund 0.30%
New Income Fund 0.15%
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 fiscal year
ended May 31, 1995, three-month fiscal year ended May 31, 1994
and for the fiscal years ended February 28, 1994, and February
28, 1993:
PAGE 147
Fund 1995 1994* 1994 1993
GNMA $3,835,000 $ 1,034,000 $ 4,626,000$ 4,102,000
High Yield 7,367,000 2,197,000 10,554,000 8,014,000
New Income 6,972,000 1,748,000 7,750,000 7,113,000
Prime Reserve 14,784,000 3,601,000 13,617,000 15,620,000
Short-Term Bond 2,280,000 708,000 2,873,000 2,136,000
Short-Term U.S.
Government 284,000 100,000 526,000 627,000
U.S. Treasury 671,000 173,000 755,000 571,000
Intermediate
U.S. Treasury 157,000 26,000 180,000 125,000
Long-Term
U.S. Treasury 2,341,000 569,000 2,084,000 165,000
Money
Personal Strategy **
Income
Personal Strategy **
Balance
Personal Strategy **
Growth
* 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
PAGE 148
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.
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, 1995- 0.80% May 31, 1999
Long-Term++ May 31, 1997
+ 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 Long-Term Fund operated under a 0.80% limitation that
expired February 28, 1995. The reimbursement period for this
limitation extends through February 28, 1997.
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, $329,000 of management fees were not accrued
by the Fund for the fiscal year ended May 31, 1995. Pursuant to a
previous agreement, $267,000 of unaccrued fees from the prior
periods are subject to reimbursement through May 31, 1996.
Pursuant to the Long-Term Fund's current expense limitation,
PAGE 149
$66,000 of management fees were not accrued by the Fund for the
fiscal year ended May 31, 1995, of which $58,000 are subject to
reimbursement through February 28, 1997 and $8,000 are subject to
reimbursement through May 31, 1999. Additionally, $89,000 of
unaccrued management fees related to a previous expense
limitation are subject to reimbursement through February 28,
1997. 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
PAGE 150
distributor. Investment Services is registered as a broker-
dealer under the Securities Exchange Act of 1934 and is a member
of the National Association of Securities Dealers, Inc. The
offering of 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,
PAGE 151
N.A., London, pursuant to which portfolio securities which are
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. In addition, employees
are prohibited from engaging in short-term trading (e.g.,
purchases and sales involving the same security within 60 days).
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
PAGE 152
(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
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
PAGE 153
with a broker or dealer who furnishes brokerage and/or research
services, designate any such broker or dealer to receive selling
concessions, discounts or other allowances, or otherwise deal
with any such broker or dealer in connection with the acquisition
of securities in underwritings. 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.
PAGE 154
Research services received from brokers and dealers are
supplemental to T. Rowe Price's own research effort and, when
utilized, are subject to internal analysis before being
incorporated by T. Rowe Price into its investment process. As a
practical matter, it would not be possible for T. Rowe Price'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
PAGE 155
to assess the reasonableness of commissions in light of the total
brokerage and research services provided by each particular
broker. T. Rowe Price may receive research, as defined in
Section 28(e), in connection with selling concessions and
designations in fixed price offerings in which the Funds
participate.
Internal Allocation Procedures
T. Rowe Price has a policy of not precommitting a specific
amount of business to any broker or dealer over any specific time
period. Historically, the majority of brokerage placement has
been determined by the needs of a specific transaction such as
market-making, availability of a buyer or seller of a particular
security, or specialized execution skills. However, T. Rowe
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
PAGE 156
Price. Conversely, research services received from brokers or
dealers which execute transactions for the Fund are not
necessarily used by T. Rowe Price exclusively in connection with
the management of the Fund.
From time to time, orders for clients may be placed through a
computerized transaction network.
The Fund does not allocate business to any broker-dealer on
the basis of its sales of the Fund's shares. However, this does
not mean that broker-dealers who purchase Fund shares for their
clients will not receive business from the Fund.
Some of T. Rowe Price's other clients have investment
objectives and programs similar to those of the Fund. T. Rowe
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.
PAGE 157
High Yield, New Income, Personal Strategy, Short-Term Bond, and
Short-Term U.S. Government Funds
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 158
Other
For the fiscal years ended May 31, 1995, February 28, 1994,
and February 28, 1993, the Funds engaged in portfolio
transactions involving broker-dealers in the following amounts:
Fund 1995 1994 1993
______ ____ ____ ____
GNMA $2,605,743,000 $ 2,306,951,000 $ 1,528,454,000
High Yield 14,045,057,000 18,554,222,000 16,168,606,000
New Income 5,469,278,000 20,265,475,000 15,193,999,000
Prime Reserve 53,302,615,000 29,024,172,000 36,478,989,000
Short-Term Bond 4,874,827,000 4,266,837,000 5,805,958,000
Short-Term U.S.
Government 1,033,107,000 793,565,000 1,876,498,000
U.S. Treasury 235,797,000 81,970,000 91,923,000
Intermediate
U.S. Treasury 185,478,000 142,513,000 192,941,000
Long-Term
U.S. Treasury 5,593,158,000 3,449,951,000 2,804,196,000
Money
Personal Strategy 178,662,000
Income
Personal Strategy 70,729,000
Balanced
Personal Strategy 111,347,000
Growth
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
PAGE 159
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 fiscal year
ended May 31, 1995, three-month fiscal year ended May 31, 1994,
and for the fiscal years ended February 28, 1994, and February
28, 1993.
With respect to the New Income and Short-Term Bond Funds,
the entire amount for the three-month fiscal year ended May 31,
1994 represented principal transactions as to which the Bond
Funds have no knowledge of the profits or losses realized by the
respective broker-dealers.
With respect to the High Yield Fund, for the fiscal year
ended May 31, 1995, $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, Short-Term
Bond, Personal Strategy Income, Personal Strategy Growth, and
Personal Strategy Balanced 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 May 31, 1995, February 28,
1994, and February 28, 1993:
Fund 1995 1994 1993
______ ____ ____ ____
High Yield $13,782,740,000 $17,956,306,000 $15,737,460,000
New Income 5,469,278,000 20,206,382,000 15,189,019,000
Short-Term Bond 4,874,827,000 4,266,837,000 5,805,958,000
Personal Strategy
Income 170,562,000 -- --
Personal Strategy
Growth 62,481,000 -- --
Personal Strategy
Balanced 103,137,000 -- --
The following amounts involved trades with brokers acting as
PAGE 160
agents or underwriters for the fiscal years ended May 31, 1995,
February 28, 1994, and February 28, 1993:
Fund 1995 1994 1993
______ ____ ____ ____
High Yield $262,317,000 $597,916,000 $ 431,147,000
New Income 0 59,093,000 4,980,000
Short-Term Bond 0 0 0
Personal Strategy 8,100,000 -- --
Income
Personal Strategy 8,248,000 -- --
Growth
Personal Strategy 8,210,000 -- --
Balanced
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 May 31, 1995, February
28, 1994, and February 28, 1993:
Fund 1995 1994 1993
______ ____ ____ ____
High Yield $4,704,000 $16,730,000 $3,661,000
New Income 0 169,000 20,000
Short-Term Bond 0 0 0
GNMA 3,000 -- --
Personal Strategy 47,000 -- --
Income
Personal Strategy 11,000 -- --
Growth
Personal Strategy 13,000 -- --
Balanced
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 fiscal year
ended May 31, 1995, three-month fiscal year ended May 31, 1994,
and for the fiscal years ended February 28, 1994, and February
28, 1993, are shown below:
Fund 1995 1994* 1994 1993
______ ____ ____ ____ ____
PAGE 161
GNMA 97% 98% 91% 91%
High Yield 97% 48% 70% 70%
New Income 73% 68% 61% 61%
Prime Reserve 90% 78% 87% 81%
Short-Term Bond 66% 83% 61% 84%
Short-Term U.S. 81%
Government 100% 100% 94%
U.S. Treasury 95% 87% 85% 98%
Intermediate
U.S. Treasury Long-Term 100% 100% 98% 99%
U.S. Treasury Money 67% 32% 66% 75%
Personal Strategy 30% -- -- --
Income
Personal Strategy 30% -- -- --
Growth
Personal Strategy 40% -- -- --
Balanced
* For the three-month fiscal year ended May 31, 1994.
The portfolio turnover rates for the following Funds for the
fiscal year ended May 31, 1995, the three-month fiscal year ended
May 31, 1994, and for the fiscal years ended February 28, 1994,
and February 28, 1993, are as follows:
Fund 1995 1994* 1994 1993
______ _____ ____ ____ ____
GNMA 121.3% 151.8% 92.5% 94.2%
High Yield 74.2% 62.5% 107.0% 104.4%
New Income 54.1% 91.5% 58.3% 85.8%
Short-Term Bond 136.9% 222.8% 90.8% 68.4%
Short-Term U.S.
Government 100.0% 27.6% 70.4% 110.8%
U.S. Treasury 45.5% 20.2% 22.8%
Intermediate 81.1%
U.S. Treasury Long-Term 99.3% 246.9% 59.4% 165.4%
Personal Strategy
Income 50.5% -- -- --
Personal Strategy
Growth 25.7% -- -- --
Personal Strategy
Balanced 25.8% -- -- --
* For the three-month fiscal year ended May 31, 1994.
PAGE 162
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
Corporate Income, 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.
Corporate Income, High Yield, New Income, and Personal
Strategy Funds
Equity securities listed or regularly traded on a securities
exchange are valued at the last quoted sales price on the day the
valuations are made. A security which is listed or traded on
PAGE 163
more than one exchange is valued at the quotation on the exchange
determined to be the primary market for such security. Listed
securities that are not traded on a particular day and securities
that are regularly traded in the over-the-counter market valued
at the mean of the latest bid and asked prices. Other equity
securities 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
PAGE 164
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
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.
PAGE 165
Although the Fund believes that it will be able to maintain
its net asset value at $1.00 per share under most conditions,
there can be no absolute assurance that it will be able to do so
on a continuous basis. If the Fund's net asset value per share
declined, or was expected to decline, below $1.00 (rounded to the
nearest one cent), the Board of Directors of the Fund might
temporarily reduce or suspend dividend payments in an effort to
maintain the net asset value at $1.00 per share. As a result of
such reduction or suspension of dividends, an investor would
receive less income during a given period than if such a
reduction or suspension had not taken place. Such action could
result in an investor receiving no dividend for the period during
which he holds his shares and in his receiving, upon redemption,
a price per share lower than that which he paid. On the other
hand, if the Fund's net asset value per share were to increase,
or were anticipated to increase above $1.00 (rounded to the
nearest one cent), the Board of Directors of the Fund might
supplement dividends in an effort to maintain the net asset value
at $1.00 per share.
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
PAGE 166
securities the Fund holds plus cash and other assets, including
income accrued but not yet received) and dividing the result by
the total number of shares outstanding. The net asset value per
share of 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
PAGE 167
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
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, 1995, 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 $(4,773,629) $(6,992,148) $37,254,075
High Yield 2,561,608 (79,799,320) 50,036,921
New Income 2,666,066 (11,115,122) 68,296,084
Prime Reserve 1,764,968 613,219 2,004,740
Short-Term Bond 311,727 (28,959,393) 15,247,053
Short-Term U.S.
Government (587,703) (5,752,700) 4,951,808
U.S. Treasury Intermediate 250,112 (2,130,422) 6,380,170
U.S. Treasury Long-Term 12,190 (1,278,210) 5,909,908
U.S. Treasury Money 81,340 57,856 147,449
Personal Strategy Income (35,231) 50,942 1,677,355
Personal Strategy Balanced (35,575) 1,402 1,161,787
Personal Strategy Growth (50,755) 10,512 991,622
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
PAGE 168
considered capital gain dividends).
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.
To avoid such tax and interest, the Funds in accordance
with tax regulations, 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
PAGE 169
may be classified as a return of capital. Adjustments to reflect
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, 1995 were 7.16% and 5.89%, 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 170
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, 1995, were
9.03%, 6.53%, 5.94%, 6.02% and 6.48%, 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, 1995 for the Prime
Reserve and U.S. Treasury Money Funds were 5.47% and 5.32%,
respectively, and the Funds' compound yield for the same period
were 5.62% and 5.46%, 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
specified. The annual compound rate of return for the Fund over
PAGE 171
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-
5/31/95 5/31/95 5/31/95 5/31/95
GNMA Fund
T. Rowe Price GNMA Fund 12.11% 53.09% 113.86%
(11/26/85)
Salomon Brothers 30-Year
GNMA Index 11.32 57.28 143.34
Lehman Brothers GNMA
Bond Index 11.57 55.87 139.23
Lipper GNMA Funds Average 10.18 49.86 115.84
High Yield Fund
T. Rowe Price High
Yield Fund 7.09% 68.43% 150.74% 176.85%
(12/31/84)
Merrill Lynch High
Yield Index 14.43 96.75 217.54 253.79
Merrill Lynch Medium Quality
Long Corporate Index 16.25 76.97 215.65 257.08
Lipper's Average of High
Current Yield Funds 7.67 84.71 156.57 182.67
New Income Fund
T. Rowe Price New
Income Fund 11.13% 54.75% 139.69% 563.52%
(8/31/73)
Salomon Bros. Broad
Investment Grade Index 11.52 59.07 162.24 N/A
Salomon Bros. High Grade
Corporate Bond Index 15.79 72.73 205.69 672.74
Lehman Bros. Govt./Corp.
Bond Index 11.61 59.48 158.85 626.52
Lipper Corporate Bond Fund's
-A Rated Average 10.67 56.68 148.15 562.22
Personal Strategy Funds
PAGE 172
Personal Strategy Income 12.90%
(7/29/94)
S&P 500 19.30
Lehman Bros. Gov't/Corp. 9.68
Bond Index
Personal Strategy Balanced 14.35
(7/29/94)
S&P 500 19.30
Lehman Bros. Gov't/Corp. 9.68
Bond Index
Personal Strategy Growth 15.65%
(7/29/94)
S&P 500 19.30
Lehman Bros. Gov't/Corp. 9.68
Bond Index
Short-Term Bond Fund
T. Rowe Price Short-Term
Bond Fund 3.41% 34.89% 93.11% 126.51%
(3/2/84)
T. Rowe Price Prime
Reserve Fund 4.85 24.08 76.35 336.68
(1/26/76)
IBC/Donoghue Average of all
Taxable Money Funds 4.83 24.38 76.01* 319.15*
(1/21.76)
Lehman Bros. 1-3 Year
Govt./Corp. Bond Index 7.46 42.96 114.27 155.17
(2/29/84)
Lipper Short Investment
Grade Debt Funds Average 6.69 41.75 113.19 151.07
(2/29/84)
Short-Term U.S. Government Fund
T. Rowe Price Short-Term
U.S. Government Fund, Inc.6.14% 14.88%
(9/30/91)
Lipper Average of Adjustable
Rate Mortgage Funds 1.62 13.88
Merrill Lynch 1-3 Year
Govt. Index 7.44 24.04
Salomon Brothers 1-Year
Treasury Index 6.41 19.16
PAGE 173
Salomon Brothers 2-Year
Treasury Index 7.55 24.26
U.S. Treasury Intermediate Fund
T. Rowe Price U.S. Treasury
Intermediate Fund 9.29% 50.81 58.05%
(9/29/89)
Salomon 1-7 year
Treasury Index 8.40 49.37 57.12
U.S. Treasury Long-Term Fund
T. Rowe Price U.S. Treasury
Long-Term Fund 15.24 62.70 67.60
(9/29/89)
Salomon Treasury Index 10.90 57.66 64.38
PAGE 174
Average Annual Compound Rates of Return
1 Yr. 5 Yrs. 10 Yrs. Since
Ended Ended Ended Inception-
5/31/95 5/31/95 5/31/95 5/31/95
GNMA Fund
T. Rowe Price GNMA Fund 12.11% 8.89% 8.32%
(11/26/85)
Salomon Brothers 30-Year
GNMA Index 11.32 9.48 9.82
Lehman Brothers GNMA Bond
Index 11.57 9.28 9.62
Lipper GNMA Funds Average 10.18 8.42 8.42
High Yield Fund
T. Rowe Price
High Yield Fund 7.09% 10.99% 9.63% 10.10%
(12/31/84)
Merrill Lynch High
Yield Index 14.43 14.49 12.25 12.68
Merrill Lynch Medium Quality
Long Corporate Index 16.25 12.09 12.18 12.78
Lipper's Average of High
Current Yield Funds 7.67 12.99 9.78 10.39
New Income Fund
T. Rowe Price
New Income Fund 11.13% 9.13% 9.14% 9.09%
(8/31/73)
Salomon Bros. Broad
Investment Grade Index 11.52 9.73 10.12 N/A
Salomon Bros. High Grade
Corporate Bond Index 15.79 11.55 11.82 9.86
Lehman Bros. Govt./Corp.
Bond Index 11.61 9.79 9.98 9.55
Lipper Corporate Bond Fund's
-A Rated Average 10.67 9.38 9.49 9.05
PAGE 175
Personal Strategy Funds
Personal Strategy Income N/A
(7/29/94)
Personal Strategy Balanced N/A
(7/29/94)
Personal Strategy Growth N/A
(7/29/94)
Short-Term Bond Fund
T. Rowe Price Short-Term
Bond Fund 3.41 6.17 6.91 7.54
(3/2/84)
T. Rowe Price Prime
Reserve Fund 4.85 4.41 5.84 7.92
(1/26/76)
IBC/Donoghue Average of all
Taxable Money Funds 4.83 4.46 5.82 7.69
(1/31/76)
Lehman Bros. 1-3 Year
Govt./Corp. Bond Index 7.46 7.41 7.92 8.69
(2/29/84)
Lipper Short Investment
Grade Debt Funds Average 6.69 7.23 7.86 8.53
(2/29/84)
Short-Term U.S. Government Fund
T. Rowe Price Short-Term U.S.
Government Fund, Inc. 6.14% 3.86%
(9/30/91)
Lipper Average of Adjustable
Rate Mortgage Funds 1.62 3.59
Merrill Lynch 1-3 Year
Govt. Index 7.44 6.05
Salomon Brothers 1-Year
Treasury Index 6.41 4.89
Salomon Brothers 2-Year
Treasury Index 7.55 6.10
U.S. Treasury Intermediate Fund
T. Rowe Price U.S. Treasury
Intermediate Fund 9.29 8.56 8.41
PAGE 176
(9/29/89)
Salomon 1-7 Year Treasury
Index 8.40 8.36 8.30
U.S. Treasury Long-Term Fund
T. Rowe Price U.S. Treasury
Long-Term Fund 15.24 10.22 9.54
(9/29/89)
Salomon Treasury Index 10.90 9.53 9.16
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
Agreements, Treasury bills, notes, and bonds, certificates of
deposit, and six-month money market certificates. Bank
certificates of deposit differ from mutual funds in several ways:
the interest rate established by the sponsoring bank is fixed for
the term of a CD; there are penalties for early withdrawal from
CDs; and the principal on a CD is insured. Performance 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; such as: 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; Morningstar, Inc., is
a widely used independent research firm which rates mutual funds
by overall performance, investment objectives and assets.; (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.
IBC/Donoghue Organization, Inc., "IBC/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
PAGE 177
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.
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.
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
PAGE 178
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.
Indices prepared by the research departments of such financial
organizations as Shearson Lehman/American Express Inc., and
Merrill Lynch, Pierce, Fenner and Smith, 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
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
which is designed to show shareholders how to reduce their
PAGE 179
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. Tax
Considerations for Investors discusses the tax advantages of
annuities and municipal bonds and how to assess whether they are
suitable for your portfolio, reviews pros and cons of placing
assets in a gift to minors account and summarizes the benefits
and types of tax-deferred retirement plans currently available.
Personal Strategy Planner simplifies investment decision making
by helping investors define personal financial goals, establish
length of time the investor intends to invest, determine risk
"comfort zone" and select diversified investment mix; and the How
to Choose a Bond Fund guide which discusses how to choose an
appropriate bond fund for your portfolio. From time to time,
other worksheets and guides may be made available as well. Of
course, an investment in the Fund cannot guarantee that such
goals will be met.
To assist investors in understanding the different returns
and risk characteristics of various investments, the
aforementioned guides will include presentation of historical
returns of various investments using published indices. An
example of this is shown below.
Historical Returns for Different Investments
Annualized returns for periods ended 12/31/94
50 years 20 years 10 years 5 years
________ ________ ________ _______
Small-Company Stocks 14.4% 20.3% 11.1% 11.8%
Large-Company Stocks 11.9 14.6 14.4 8.7
Foreign Stocks N/A 16.3 17.9 1.8
Long-Term Corporate Bonds 5.3 10.0 11.6 8.4
Intermediate-Term U.S.
PAGE 180
Gov't. Bonds 5.6 9.3 9.4 7.5
Treasury Bills 4.7 7.3 5.8 4.7
U.S. Inflation 4.5 5.5 3.6 3.5
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.
PAGE 181
Performance of Retirement Portfolios*
_____________________________________
Asset Mix Average Annualized Value
Returns 20 Years of
Ended 12/31/94 $10,000
Investment
After Period
________________ __________________ ____________
Nominal Real Best Worst
Portfolio Growth Income Safety Return Return** Year Year
_________ ______ ______ ______ ______ ________ ____ ____
I. Low
Risk 40% 40% 20% 12.4% 6.9% 24.9% 0.1%$ 92,515
II. Moderate
Risk 60% 30% 10% 13.5% 8.1% 29.1% -1.8%$118,217
III. High
Risk 80% 20% 0% 14.5% 9.1% 33.4% -5.2%$149,200
Source: T. Rowe Price Associates; data supplied by Lehman
Brothers, Wilshire Associates, and Ibbotson Associates.
* Based on actual performance for the 20 years ended 1994 of
stocks (85% Wilshire 5000 and 15% Europe, Australia, Far East
[EAFE] Index), bonds (Lehman Brothers Aggregate Bond Index
from 1976-94 and Lehman Brothers Government/Corporate Bond
Index from 1975), and 30-day Treasury bills from January 1975
through December 1994. Past performance does not guarantee
future results. Figures include changes in principal value
and reinvested dividends and assume the same asset mix is
maintained each year. This exhibit is for illustrative
purposes only and is not representative of the performance of
any T. Rowe Price fund.
** Based on inflation rate of 5.5% for the 20-year period ended
12/31/94.
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,
PAGE 182
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
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
PAGE 183
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
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
PAGE 184
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
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
PAGE 185
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
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.
PAGE 186
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, Intermediate, Long-Term, 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.
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 became the
independent accountants to the Intermediate and Long-Term
Funds.
Corporate Income Fund
_____________________, Baltimore, Maryland 21202, are
independent accountants to the Fund.
Financial Statements
The financial statements of the Fund for the year ended May
31, 1995, and the report of independent accountants are included
in the Fund's Annual Report for the year ended May 31, 1995.
A copy of the Annual Report accompanies 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, 1995, are incorporated into
this Statement of Additional Information by reference:
ANNUAL REPORT REFERENCES:
HIGH NEW PRIME
GNMA YIELD INCOME RESERVE
____ ______ _______ ________
PAGE 187
Report of Independent
Accountants 13 18 15 13
Statement of Net Assets,
May 31, 1995 6-7 7-12 6-10 5-8
Statement of Operations,
fiscal year ended
May 31, 1995 8 13 10 9
Statement of Changes in Net
Assets, fiscal year
ended May 31, 1995, three
months ended May 31, 1994,
and fiscal year ended
February 28, 1994 9 14 11 10
Notes to Financial
Statements
May 31, 1995 10-11 15-16 12-13 10-11
Financial Highlights 12 17 14 12
PAGE 188
U.S.
SHORT- TREASURY
TERM BOND MONEY
_____________ ____________
Report of Independent
Accountants 15 19
Statement of Net Assets,
May 31, 1995 6-9 7-10
Statement of Operations,
fiscal year ended
May 31, 1995 10 10
Statement of Changes in Net
Assets, fiscal year
ended May 31, 1995, three
months ended May 31, 1994,
and fiscal year ended
February 28, 1994 11 11
Notes to Financial Statements
May 31, 1995 12-13 16
Financial Highlights 14 16
SHORT-TERM U.S. U.S.
U.S. TREASURY TREASURY
GOVERNMENT INTERMEDIATE LONG-TERM
______________ __________ __________
Report of Independent
Accountants 13 19 19
Statement of Net Assets,
May 31, 1995 7 7-10 7-10
Statement of Operations,
fiscal year ended
May 31, 1995 8 10 10
Statement of Changes in Net
Assets, fiscal year
ended May 31, 1995, three
months ended May 31, 1994,
and fiscal year ended
February 28, 1994. 9 12 13
Notes to Financial Statements
May 31, 1995 10-11 16 16
Financial Highlights 12 17 18
PAGE 189
Personal Strategy
Balanced Fund
Annual
Report Page
___________
Statement of Net Assets,
May 31, 1995 12-16
Statement of Operations, July 29, 1994
(Commencement of Operations) to
May 31, 1995 22
Statement of Changes in Net Assets, July 29,
1994 (Commencement of Operations) to
May 31, 1995 23
Notes to Financial Statements,
May 31, 1995 24-26
Financial Highlights, July 29, 1994
(Commencement of Operations) to
May 31, 1995 26
PAGE 190
Personal Strategy
Growth Fund
Annual
Report Page
___________
Statement of Net Assets,
May 31, 1995 17-21
Statement of Operations, July 29, 1994
(Commencement of Operations) to
May 31, 1995 22
Statement of Changes in Net Assets, July 29,
1994 (Commencement of Operations) to
May 31, 1995 23
Notes to Financial Statements,
May 31, 1995 24-26
Financial Highlights, July 29, 1994
(Commencement of Operations) to
May 31, 1995 26
Personal Strategy
Income Fund
Annual
Report Page
___________
Statement of Net Assets,
May 31, 1995 7-11
Statement of Operations, July 29, 1994
(Commencement of Operations) to
May 31, 1995 22
Statement of Changes in Net Assets, July 29,
1994 (Commencement of Operations) to
May 31, 1995 23
Notes to Financial Statements,
May 31, 1995 24-26
Financial Highlights, July 29, 1994
(Commencement of Operations) to
May 31, 1995 26
PAGE 191
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 192
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 193
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.
D-In default.
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 194
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 195
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements. A Statement of Assets and Liabilities
of Registrant as of _____________, 1995, appears in the
Statement of Additional Information. Such Statement has
been examined by ____________________, independent
accountants, and has been included in the Statement of
Additional Information in reliance on the report of such
accountants appearing in the Statement of Additional
Information given upon their authority as experts in
auditing and account.+ All other financial statements,
schedules and historical information have been omitted as
the subject matter is not required, not present, or not
present in amounts sufficient to require submission.
(b) Exhibits.
(1) Articles of Incorporation of Registrant, dated
August 17, 1995
(2) By-Laws of Registrant
(3) Inapplicable
(4) See Article SIXTH, Capital Stock, subparagraphs
(b)-(g) of the Articles of Incorporation and Article
II, Shareholders, in its entirety, and Article VIII,
Capital Stock, in its entirety, of the Bylaws
electronically filed as exhibits to this
Registration Statement.
(5) Investment Management Agreement between Registrant,
and T. Rowe Price Associates, Inc. (to be filed by
amendment)
(6) Underwriting Agreement between Registrant, and T.
Rowe Price Investment Services, Inc. (to be filed by
amendment)
(7) Inapplicable
+Omitted from Registration Statement as initially filed
since Registrant has no assets or liabilities and has never
had any assets or liabilities. Registrant proposes to raise
PAGE 196
its minimum capital through an initial private offering of
shares at $_____ per share.
(8)(a) Custodian Agreement between T. Rowe Price Funds and
State Street Bank and Trust Company, dated September
28, 1987, as amended to June 24, 1988, October 19,
1988, February 22, 1989, July 19, 1989, September
15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990,
July 18, 1990, October 15, 1990, February 13, 1991,
March 6, 1991, September 12, 1991, November 6, 1991,
April 23, 1992, September 2, 1992, November 3, 1992,
December 16, 1992, December 21, 1992, January 28,
1993, April 22, 1993 September 16, 1993, November 3,
1993, March 1, 1994, April 21, 1994, July 27, 1994,
September 21, 1994, November 1, 1994, November 2,
1994, and January 25, 1995 (to be filed by
amendment)
(8)(b) Global Custody Agreement between The Chase Manhattan
Bank, N.A., and T. Rowe Price Funds, dated January
3, 1994, as amended April 18, 1994, August 15, 1994,
November 28, 1994, and May 31, 1995 (to be filed by
amendment)
(9)(a) Transfer Agency and Service Agreement between T.
Rowe Price Services, Inc. and T. Rowe Price Funds
dated January 1, 1995, as amended January 25, 1995
(to be filed by amendment)
(9)(b) Agreement between T. Rowe Price Associates, Inc. and
T. Rowe Price Funds for Fund Accounting Services
dated January 1, 1995, as amended January 25, 1995
(to be filed by amendment)
(9)(c) Agreement between T. Rowe Price Retirement Plan
Services, Inc. and the Taxable funds, dated January
1, 1995, as amended January 25, 1995 (to be filed by
amendment)
(10) Opinion of Counsel, dated August 31, 1995
(11) Inapplicable
(12) Inapplicable
PAGE 197
(13) Inapplicable
(14) Inapplicable
(15) Inapplicable
(16) Inapplicable
(17) Financial Data Schedule as of August 31, 1995
Item 25. Persons Controlled by or Under Common Control With
Registrant.
None.
Item 26. Number of Holders of Securities
As of August 31, 1995, there were zero shareholders in
the T. Rowe Price Corporate Income Fund, Inc.
Item 27. Indemnification
The Registrant maintains comprehensive Errors and Omissions and
Officers and Directors insurance policies written by the Evanston
Insurance Company, The Chubb Group and ICI Mutual. These
policies provide coverage for the named insureds, which include
T. Rowe Price Associates, Inc. ("Manager"), Rowe Price-Fleming
International, Inc. ("Price-Fleming"), T. Rowe Price Investment
Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price Trust
Company, T. Rowe Price Stable Asset Management, Inc., RPF
International Bond Fund and forty other investment companies,
namely, T. Rowe Price Growth Stock Fund, Inc., T. Rowe Price New
Horizons Fund, Inc., T. Rowe Price New Era Fund, Inc., T. Rowe
Price New Income Fund, Inc., T. Rowe Price Prime Reserve Fund,
Inc., T. Rowe Price Tax-Free Income Fund, Inc., T. Rowe Price
Tax-Exempt Money Fund, Inc., T. Rowe Price International Funds,
Inc., T. Rowe Price Growth & Income Fund, Inc., T. Rowe Price
Tax-Free Short-Intermediate Fund, Inc., T. Rowe Price Short-Term
Bond Fund, Inc., T. Rowe Price High Yield Fund, Inc., T. Rowe
Price Tax-Free High Yield Fund, Inc., T. Rowe Price New America
Growth Fund, T. Rowe Price Equity Income Fund, T. Rowe Price GNMA
Fund, T. Rowe Price Capital Appreciation Fund, T. Rowe Price
State Tax-Free Income Trust, T. Rowe Price California Tax-Free
Income Trust, T. Rowe Price Science & Technology Fund, Inc., T.
Rowe Price Small-Cap Value Fund, Inc., Institutional
PAGE 198
International Funds, Inc., T. Rowe Price U.S. Treasury Funds,
Inc., T. Rowe Price Index Trust, Inc., T. Rowe Price Spectrum
Fund, Inc., T. Rowe Price Balanced Fund, Inc., T. Rowe Price
Short-Term U.S. Government Fund, Inc., T. Rowe Price Mid-Cap
Growth Fund, Inc., T. Rowe Price OTC Fund, Inc., T. Rowe Price
Tax-Free Insured Intermediate Bond Fund, Inc., T. Rowe Price
Dividend Growth Fund, Inc., T. Rowe Price Blue Chip Growth Fund,
Inc., T. Rowe Price Summit Funds, Inc., T. Rowe Price Summit
Municipal Funds, Inc., T. Rowe Price Equity Series, Inc., T. Rowe
Price International Series, Inc., T. Rowe Price Fixed Income
Series, Inc., T. Rowe Price Personal Strategy Funds, Inc., T.
Rowe Price Value Fund, Inc., and T. Rowe Price Capital
Opportunity Fund, Inc. The Registrant and the forty investment
companies listed above, with the exception of Institutional
International Funds, Inc., will be collectively referred to as
the Price Funds. The investment manager for the Price Funds,
excluding T. Rowe Price International Funds, Inc., T. Rowe Price
International Series , Inc., is the manager. Price-Fleming is the
manager to T. Rowe Price International Funds, Inc., T. Rowe Price
International Series, Inc. and Institutional International Funds,
Inc. and is 50% owned by TRP Finance, Inc., a wholly-owned
subsidiary of the Manager, 25% owned by Copthall Overseas
Limited, a wholly-owned subsidiary of Robert Fleming Holdings
Limited, and 25% owned by Jardine Fleming International Holdings
Limited. In addition to the corporate insureds, the policies
also cover the officers, directors, and employees of each of the
named insureds. The premium is allocated among the named
corporate insureds in accordance with the provisions of Rule
17d-1(d)(7) under the Investment Company Act of 1940.
General. The Charter of the Corporation provides that
to the fullest extent permitted by Maryland or federal law,
no director of officer of the Corporation shall be
personally liable to the Corporation or the holders of
Shares for money damages and each director and officer shall
be indemnified by the Corporation; provided, however, that
nothing herein shall be deemed to protect any director or
officer of the Corporation against any liability to the
Corporation of the holders of Shares to which such director
or officer would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or
her office.
Article X, Section 10.01 of the Registrant's By-Laws
provides as follows:
PAGE 199
Section 10.01. Indemnification and Payment of Expenses
in Advance: The Corporation shall indemnify any individual
("Indemnitee") who is a present or former director, officer,
employee, or agent of the Corporation, or who is or has been
serving at the request of the Corporation as a director,
officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, who,
by reason of his position was, is, or is threatened to be
made a party to any threatened, pending, or completed
action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (hereinafter collectively
referred to as a "Proceeding") against any judgments,
penalties, fines, settlements, and reasonable expenses
(including attorneys' fees) incurred by such Indemnitee in
connection with any Proceeding, to the fullest extent that
such indemnification may be lawful under Maryland law. The
Corporation shall pay any reasonable expenses so incurred by
such Indemnitee in defending a Proceeding in advance of the
final disposition thereof to the fullest extent that such
advance payment may be lawful under Maryland law. Subject
to any applicable limitations and requirements set forth in
the Corporation's Articles of Incorporation and in these
By-Laws, any payment of indemnification or advance of
expenses shall be made in accordance with the procedures set
forth in Maryland law.
Notwithstanding the foregoing, nothing herein shall
protect or purport to protect any Indemnitee against any
liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of
his office ("Disabling Conduct").
Anything in this Article X to the contrary
notwithstanding, no indemnification shall be made by the
Corporation to any Indemnitee unless:
(a) there is a final decision on the merits by a court
or other body before whom the Proceeding was
brought that the Indemnitee was not liable by
reason of Disabling Conduct; or
(b) in the absence of such a decision, there is a
reasonable determination, based upon a review of
the facts, that the Indemnitee was not liable by
reason of Disabling Conduct, which determination
shall be made by:
PAGE 200
(i) the vote of a majority of a quorum of
directors who are neither "interested
persons" of the Corporation as defined in
Section 2(a)(19) of the Investment Company
Act, nor parties to the Proceeding; or
(ii) an independent legal counsel in a written
opinion.
Anything in this Article X to the contrary notwithstanding,
any advance of expenses by the Corporation to any Indemnitee
shall be made only upon the undertaking by such Indemnitee
to repay the advance unless it is ultimately determined that
such Indemnitee is entitled to indemnification as above
provided, and only if one of the following conditions is
met:
(a) the Indemnitee provides a security for his
undertaking; or
(b) the Corporation shall be insured against losses
arising by reason of any lawful advances; or
(c) there is a determination, based on a review of
readily available facts, that there is reason to
believe that the Indemnitee will ultimately be
found entitled to indemnification, which
determination shall be made by:
(i) a majority of a quorum of directors who are
neither "interested persons" of the
Corporation as defined in Section 2(a)(19) of
the Investment Company Act, nor parties to
the Proceeding; or
(ii) an independent legal counsel in a written
opinion.
Section 10.02 of the Registrant's By-Laws provides as
follows:
Section 10.02. Insurance of Officers, Directors,
Employees and Agents: To the fullest extent permitted by
applicable Maryland law and by Section 17(h) of the
Investment Company Act, as from time to time amended, the
Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee, or
PAGE 201
agent of the Corporation, or who is or was serving at the
request of the Corporation as a director, officer, employee,
or agent of another corporation, partnership, joint venture,
trust, or other enterprise, against any liability asserted
against him and incurred by him in or arising out of his
position, whether or not the Corporation would have the
power to indemnify him against such liability.
Insofar as indemnification for liability under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the Registrant pursuant
to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28. Business and Other Connections of Investment Manager.
Rowe Price-Fleming International, Inc. ("Price-Fleming"), a
Maryland corporation, is a corporate joint venture 50% owned by
TRP Finance, Inc., a wholly-owned subsidiary of the Manager.
Price-Fleming was organized in 1979 to provide investment counsel
service with respect to foreign securities for institutional
investors in the United States. In addition to managing private
counsel client accounts, Price-Fleming also sponsors registered
investment companies which invest in foreign securities, serves
as general partner of RPFI International Partners, Limited
Partnership, and provides investment advice to the T. Rowe Price
Trust Company, trustee of the International Common Trust Fund.
T. Rowe Price Investment Services, Inc. ("Investment Services"),
a wholly-owned subsidiary of the Manager, is a Maryland
corporation organized in 1980 for the purpose of acting as the
principal underwriter and distributor for the Price Funds.
PAGE 202
Investment Services is registered as a broker-dealer under the
Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. In 1984, Investment
Services expanded its activities to include a discount brokerage
service.
TRP Distribution, Inc., a wholly-owned subsidiary of Investment
Services, is a Maryland corporation organized in 1991. It was
organized for and engages in the sale of certain investment
related products prepared by Investment Services.
T. Rowe Price Associates Foundation, Inc., was organized in 1981
for the purpose of making charitable contributions to religious,
charitable, scientific, literary and educational organizations.
The Foundation (which is not a subsidiary of the Manager) is
funded solely by contributions from the Manager and income from
investments.
T. Rowe Price Services, Inc. ("Price Services"), a wholly-owned
subsidiary of the Manager, is a Maryland corporation organized in
1982 and is registered as a transfer agent under the Securities
Exchange Act of 1934. Price Services provides transfer agent,
dividend disbursing, and certain other services, including
shareholder services, to the Price Funds.
T. Rowe Price Retirement Plan Services, Inc. ("RPS"), a
wholly-owned subsidiary of the Manager, was incorporated in
Maryland in 1991 and is registered as a transfer agent under the
Securities Exchange Act of 1934. RPS provides administrative,
recordkeeping, and subaccounting services to administrators of
employee benefit plans.
T. Rowe Price Trust Company ("Trust Company"), a wholly-owned
subsidiary of the Manager, is a Maryland-chartered limited
purpose trust company, organized in 1983 for the purpose of
providing fiduciary services. The Trust Company serves as
trustee/custodian for employee benefit plans, individual
retirement accounts and common trust funds and as
trustee/investment agent for a few trusts.
T. Rowe Price Threshold Fund Associates, Inc., a wholly-owned
subsidiary of the Manager, is a Maryland corporation organized in
1994 and serves as the general partner of T. Rowe Price Threshold
Fund III, L.P., a Delaware limited partnership established in
1994.
T. Rowe Price Threshold Fund II, L.P., a Delaware limited
PAGE 203
partnership, was organized in 1986 by the Manager, and invests in
private financings of small companies with high growth potential;
the Manager is the General Partner of the partnership.
T. Rowe Price Threshold Fund III, L.P., a Delaware limited
partnership was organized in 1994 by the Manager, and invests in
private financings of small companies with high growth potential;
T. Rowe Price Threshold Fund Associates, Inc. is the General
Partner of this partnership.
RPFI International Partners, Limited Partnership, is a Delaware
limited partnership organized in 1985 for the purpose of
investing in a diversified group of small and medium-sized
non-U.S. companies. Price-Fleming is the general partner of this
partnership, and certain institutional investors, including
advisory clients of Price-Fleming are its limited partners.
T. Rowe Price Real Estate Group, Inc. ("Real Estate Group"), is a
Maryland corporation and a wholly-owned subsidiary of the Manager
established in 1986 to provide real estate services.
Subsidiaries of Real Estate Group are: T. Rowe Price Realty
Income Fund I Management, Inc., a Maryland corporation (General
Partner of T. Rowe Price Realty Income Fund I, A No-Load Limited
Partnership), T. Rowe Price Realty Income Fund II Management,
Inc., a Maryland corporation (General Partner of T. Rowe Price
Realty Income Fund II, America's Sales-Commission-Free Real
Estate Limited Partnership), T. Rowe Price Realty Income Fund III
Management, Inc., a Maryland corporation (General Partner of T.
Rowe Price Realty Income Fund III, America's
Sales-Commission-Free Real Estate Limited Partnership, a Delaware
limited partnership), and T. Rowe Price Realty Income Fund IV
Management, Inc., a Maryland corporation (General Partner of T.
Rowe Price Realty Income Fund IV, America's Sales-Commission-Free
Real Estate Limited Partnership). Real Estate Group serves as
investment manager to T. Rowe Price Renaissance Fund, Ltd., A
Sales-Commission-Free Real Estate Investment, established in 1989
as a Maryland corporation which qualifies as a REIT.
T. Rowe Price Stable Asset Management, Inc. ("Stable Asset
Management") is a Maryland corporation organized in 1988 as a
wholly-owned subsidiary of the Manager. Stable Asset Management,
which is registered as an investment adviser under the Investment
Advisers Act of 1940, specializes in the management of investment
portfolios which seek stable and consistent investment returns
through the use of guaranteed investment contracts, bank
investment contracts, structured investment contracts, and
short-term fixed-income securities.
PAGE 204
T. Rowe Price Recovery Fund Associates, Inc., a Maryland
corporation, is a wholly-owned subsidiary of the Manager
organized in 1988 for the purpose of serving as the General
Partner of T. Rowe Price Recovery Fund, L.P., a Delaware limited
partnership which invests in financially distressed companies.
T. Rowe Price (Canada), Inc. ("TRP Canada") is a Maryland
corporation organized in 1988 as a wholly-owned subsidiary of the
Manager. This entity is registered as an investment adviser
under the Investment Advisers Act of 1940, and as a non-Canadian
Adviser under the Securities Act (Ontario). TRP Canada provides
certain services to the RPF International Bond Fund, a trust
(whose shares are sold in Canada), and Price-Fleming serves as
investment adviser to TRP Canada.
Since 1983, the Manager has organized several distinct Maryland
limited partnerships, which are informally called the Pratt
Street Ventures partnerships, for the purpose of acquiring
interests in growth-oriented businesses.
Tower Venture, Inc., a wholly-owned subsidiary of the Manager, is
a Maryland corporation organized in 1989 for the purpose of
serving as a general partner of 100 East Pratt St., L.P., a
Maryland limited partnership whose limited partners also include
the Manager. The purpose of the partnership is to further
develop and improve the property at 100 East Pratt Street, the
site of the Manager's headquarters, through the construction of
additional office, retail and parking space.
TRP Suburban, Inc. is a Maryland corporation organized in 1990 as
a wholly-owned subsidiary of the Manager. TRP Suburban has
entered into agreements with McDonogh School and
CMANE-McDonogh-Rowe Limited Partnership to construct an office
building in Owings Mills, Maryland, which houses the Manager's
transfer agent, plan administrative services, retirement plan
services and operations support functions.
TRP Finance, Inc., a wholly-owned subsidiary of the Manager, and
TRP Finance MRT, Inc., a wholly-owned subsidiary of TRP Finance,
Inc., are Delaware corporations organized in 1990 to manage
certain passive corporate investments and other intangible
assets. TRP Finance MRT, Inc. was dissolved on October 4, 1993.
T. Rowe Price Strategic Partners Fund, L.P. is a Delaware limited
partnership organized in 1990 for the purpose of investing in
small public and private companies seeking capital for expansion
or undergoing a restructuring of ownership. The general partner
PAGE 205
of the Fund is T. Rowe Price Strategic Partners, L.P., a Delaware
limited partnership whose general partner is T. Rowe Price
Strategic Partners Associates, Inc., ("Strategic Associates"), a
Maryland corporation which is a wholly-owned subsidiary of the
Manager. Strategic Associates also serves as the general partner
of T. Rowe Price Strategic Partners II, L.P., a Delaware limited
partnership established in 1992, which in turn serves as general
partner of T. Rowe Price Strategic Partners Fund II, L.P., a
Delaware limited partnership organized in 1992.
Listed below are the directors of the Manager who have other
substantial businesses, professions, vocations, or employment
aside from that of Director of the Manager:
JAMES E. HALBKAT, JR., Director of the Manager. Mr. Halbkat is
President of U.S. Monitor Corporation, a provider of public
response systems. Mr. Halbkat's address is: P.O. Box 23109,
Hilton Head Island, South Carolina 29925.
JOHN W. ROSENBLUM, Director of the Manager. Mr. Rosenblum is the
Tayloe Murphy Professor at the University of Virginia, and a
director of: Chesapeake Corporation, a manufacturer of paper
products, Cadmus Communications Corp., a provider of printing and
communication services; Comdial Corporation, a manufacturer of
telephone systems for businesses; and Cone Mills Corporation, a
textiles producer. Mr. Rosenblum's address is: P.O. Box 6550,
Charlottesville, Virginia 22906.
ROBERT L. STRICKLAND, Director of the Manager. Mr. Strickland is
Chairman of Lowe's Companies, Inc., a retailer of specialty home
supplies and a Director of Hannaford Bros., Co., a food retailer.
Mr. Strickland's address is 604 Two Piedmont Plaza Building,
Winston-Salem, North Carolina 27104.
PHILIP C. WALSH, Director of the Manager. Mr. Walsh is a
Consultant to Cyprus Amax Minerals Company, Englewood, Colorado,
and a director of Piedmont Mining Company, Inc., Charlotte, North
Carolina. Mr. Walsh's address is: 200 East 66th Street, Apt. A-
1005, New York, New York 10021.
With the exception of Messrs. Halbkat, Rosenblum, Strickland, and
Walsh, all of the directors of the Manager are employees of the
Manager.
George J. Collins, who is Chief Executive Officer, President, and
a Managing Director of the Manager, is a Director of
Price-Fleming.
PAGE 206
George A. Roche, who is Chief Financial Officer and a Managing
Director of the Manager, is a Vice President and a Director of
Price-Fleming.
M. David Testa, who is a Managing Director of the Manager, is
Chairman of the Board of Price-Fleming.
Henry H. Hopkins, Charles P. Smith, and Peter Van Dyke, who are
Managing Directors of the Manager, are Vice Presidents of
Price-Fleming.
Robert P. Campbell, Roger L. Fiery, III, Robert C. Howe, Veena A.
Kutler, Heather R. Landon, Nancy M. Morris, George A. Murnaghan,
William F. Wendler, II, and Edward A. Wiese, who are Vice
Presidents of the Manager, are Vice Presidents of Price-Fleming.
Michael J. Conelius, who is an Assistant Vice President of the
Manager, is a Vice President of Price-Fleming.
Kimberly A. Haker, an employee of the Manager, is Assistant Vice
President and Controller of Price-Fleming.
Alvin M. Younger, Jr., who is a Managing Director and the
Secretary and Treasurer of the Manager, is Secretary and
Treasurer of Price-Fleming.
Nolan L. North, who is a Vice President and Assistant Treasurer
of the Manager, is Assistant Treasurer of Price-Fleming.
Leah P. Holmes, who is an Assistant Vice President of the
Manager, is a Vice President of Price-Fleming.
Barbara A. Van Horn, who is Assistant Secretary of the Manager,
is Assistant Secretary of Price-Fleming.
Certain directors and officers of the Manager are also officers
and/or directors of one or more of the Price Funds and/or one or
more of the affiliated entities listed herein.
See also "Management of Fund," in Registrant's Statement of
Additional Information.
Item 29. Principal Underwriters.
(a) The principal underwriter for the Registrant is
Investment Services. Investment Services acts as the
PAGE 207
principal underwriter for the other sixty-nine Price
Funds. Investment Services is a wholly-owned subsidiary
of the Manager is registered as a broker-dealer under
the Securities Exchange Act of 1934 and is a member of
the National Association of Securities Dealers, Inc.
Investment Services has been formed for the limited
purpose of distributing the shares of the Price Funds
and will not engage in the general securities business.
Since the Price Funds are sold on a no-load basis,
Investment Services will not receive any commission or
other compensation for acting as principal underwriter.
(b) The address of each of the directors and officers of
Investment Services listed below is 100 East Pratt Street,
Baltimore, Maryland 21202.
Positions and
Name and Principal Positions and Offices Offices With
Business Address With Underwriter Registrant
__________________ ______________________ ______________
James Sellers Riepe President and Director President
and Director
Henry Holt Hopkins Vice President and Vice President
Director
Mark E. Rayford Director None
Charles E. Vieth Vice President and None
Director
Patricia M. Archer Vice President None
Edward C. Bernard Vice President None
Joseph C. Bonasorte Vice President None
Meredith C. Callanan Vice President None
Laura H. Chasney Vice President None
Victoria C. Collins Vice President None
Christopher W. Dyer Vice President None
Forrest R. Foss Vice President None
Patricia O. Goodyear Vice President None
James W. Graves Vice President None
Andrea G. Griffin Vice President None
David J. Healy Vice President None
Joseph P. Healy Vice President None
Walter J. Helmlinger Vice President None
Eric G. Knauss Vice President None
Douglas G. Kremer Vice President None
Sharon Renae Krieger Vice President None
Keith Wayne Lewis Vice President None
David A. Lyons Vice President None
Sarah McCafferty Vice President None
PAGE 208
Maurice A. Minerbi Vice President None
Nancy M. Morris Vice President None
George A. Murnaghan Vice President None
Steven E. Norwitz Vice President None
Kathleen M. O'Brien Vice President None
Pamela D. Preston Vice President None
Lucy B. Robins Vice President None
John R. Rockwell Vice President None
Monica R. Tucker Vice President None
William F. Wendler, II Vice President None
Terrie L. Westren Vice President None
Jane F. White Vice President None
Thomas R. Woolley Vice President None
Alvin M. Younger, Jr. Secretary and Treasurer None
Mark S. Finn Controller None
Richard J. Barna Assistant Vice President None
Catherine L. Berkenkemper Assistant Vice President None
Ronae M. Brock Assistant Vice President None
Brenda E. Buhler Assistant Vice President None
Patricia S. Butcher Assistant Vice President Assistant
Secretary
John A. Galateria Assistant Vice President None
Janelyn A. Healey Assistant Vice President None
Keith J. Langrehr Assistant Vice President None
C. Lillian Matthews Assistant Vice President None
Janice D. McCrory Assistant Vice President None
Sandra J. McHenry Assistant Vice President None
JeanneMarie B. Patella Assistant Vice President None
Kristin E. Seeberger Assistant Vice President None
Arthur J. Silber Assistant Vice President None
Anne B. Winter Assistant Vice President None
Linda C. Wright Assistant Vice President None
Nolan L. North Assistant Treasurer None
Barbara A. VanHorn Assistant Secretary None
(c) Not applicable. Investment Services will not receive
any compensation with respect to its activities as underwriter
for the Price Funds since the Price Funds are sold on a no-load
basis.
Item 30. Location of Accounts and Records.
All accounts, books, and other documents required to be
maintained by T. Rowe Price Corporate Income Fund, Inc.
under Section 31(a) of the Investment Company Act of 1940
and the rules thereunder will be maintained by T. Rowe Price
Corporate Income Fund, Inc., at its offices at 100 East
PAGE 209
Pratt Street, Baltimore, Maryland 21202. Transfer agent,
dividend disbursing, and shareholder service activities are
performed by T. Rowe Price Services, Inc., at 100 East Pratt
Street, Baltimore, Maryland 21202. Custodian activities for
T. Rowe Price Corporate Income Fund, Inc. are performed at
State Street Bank and Trust Company's Service Center (State
Street South), 1776 Heritage Drive, Quincy, Massachusetts
02171.
Item 31. Management Services.
The Registrant is not a party to any management-related
service contract, other than as set forth in the Prospectus.
Item 32. Undertakings.
(a) The undersigned Registrant hereby undertakes to file an
amendment to the Registration Statement with certified
financial statements showing the initial capital
received before accepting subscriptions from any
persons in excess of 25 if it raises its initial
capital pursuant to Section 14(a)(3) of the 1940 Act.
(b) The Fund will file, within four to six months from the
effective date of its registration statement, a
post-effective amendment using financial statements
which need not be certified.
(c) If requested to do so by the holders of at least 10% of
all votes entitled to be cast, the Registrant will call
a meeting of shareholders for the purpose of voting on
the question of removal of a director or directors and
will assist in communications with other shareholders
to the extent required by Section 16(c).
(d) Each series of the Registrant agrees to furnish, upon
request and without charge, a copy of its latest Annual
Report to each person to whom as prospectus is
delivered.
PAGE 210
Pursuant to the requirements of the Securities Act of 1933,
as amended, and the Investment Company Act of 1940, as amended,
the Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Baltimore, State of Maryland, this
31st day of August, 1995.
T. ROWE PRICE CORPORATE
INCOME FUND, INC.
By: /s/James S. Riepe
James S. Riepe
President and Director
Pursuant to the requirements of the Securities Act of 1933,
as amended, this Registration Statement has been signed below by
the following persons in the capacities and on the dates
indicated:
SIGNATURE TITLE DATE
_________ ______ _____
/s/James S. Riepe
James S. Riepe President and
Director (Principal
Executive Officer) August 31, 1995
/s/Carmen F. Deyesu
Carmen F. Deyesu Treasurer
(Principal Financial
Officer) August 31, 1995
PAGE 1
T. ROWE PRICE CORPORATE INCOME FUND, INC.
ARTICLES OF INCORPORATION
_________________________
FIRST: THE UNDERSIGNED, Henry H. Hopkins, whose address
is 100 East Pratt Street, Baltimore, Maryland 21202, being at
least eighteen years of age, acting as incorporator, does hereby
form a corporation under the General Laws of the State of
Maryland.
SECOND: (a) The name of the corporation (which is
hereinafter called the "Corporation") is:
T. Rowe Price Corporate Income Fund, Inc.
(b) The Corporation acknowledges that it is adopting its
corporate name through permission of T. Rowe Price Associates,
Inc., a Maryland corporation (hereinafter referred to as "Price
Associates"), and acknowledges that Price Associates has the sole
and exclusive right to use or license the use of the name "T.
Rowe Price" in commerce. The Corporation agrees that if at any
time and for any cause, the investment adviser or distributor of
the Corporation ceases to be Price Associates or an affiliate of
Price Associates, the Corporation shall at the written request of
Price Associates take all requisite action to amend its charter
to eliminate the name "T. Rowe Price" from the Corporation's
corporate name and from the designations of its shares of capital
stock. The Corporation further acknowledges that Price
Associates reserves the right to grant the non-exclusive right to
use the name "T. Rowe Price" to any other corporation, including
other investment companies, whether now in existence or hereafter
created.
THIRD: (a) The purposes for which the Corporation is
formed and the business and objects to be carried on and promoted
by it are:
(1) To engage generally in the business of investing,
reinvesting, owning, holding or trading in securities, as
defined in the Investment Company Act of 1940, as from time
to time amended (hereinafter referred to as the "Investment
Company Act"), as an investment company classified under the
PAGE 2
Investment Company Act as a management company.
(2) To engage in any one or more businesses or
transactions, or to acquire all or any portion of any entity
engaged in any one or more businesses or transactions, which
the Board of Directors may from time to time authorize or
approve, whether or not related to the business described
elsewhere in this Article or to any other business at the
time or theretofore engaged in by the Corporation.
(b) The foregoing enumerated purposes and objects shall be
in no way limited or restricted by reference to, or inference
from, the terms of any other clause of this or any other Article
of the charter of the Corporation, and each shall be regarded as
independent; and they are intended to be and shall be construed
as powers as well as purposes and objects of the Corporation and
shall be in addition to and not in limitation of the general
powers of corporations under the General Laws of the State of
Maryland.
FOURTH: The present address of the principal office of the
Corporation in this State is:
100 East Pratt Street
Baltimore, Maryland 21202
FIFTH: The name and address of the resident agent of the
Corporation in this State are:
Henry H. Hopkins
100 East Pratt Street
Baltimore, Maryland 21202
Said resident agent is a citizen of the State of Maryland,
and actually resides therein.
SIXTH: (a) The total number of shares of stock of all
classes and series which the Corporation initially has authority
to issue is One Billion (1,000,000,000) shares of capital stock
(par value $.0001 per share), amounting in aggregate par value to
One Hundred Thousand Dollars ($100,000). All of such shares are
initially classified as "Common Stock" of the "Value" series.
The Board of Directors may classify and reclassify any unissued
shares of capital stock (whether or not such shares have been
previously classified or reclassified) by setting or changing in
any one or more respects the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
PAGE 3
qualifications, or terms or conditions of redemption of such
shares of stock.
(b) The following is a description of the preferences,
conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and
conditions of redemption of the shares of Common Stock classified
as the "Corporate Income" series and any additional series of
Common Stock of the Corporation (unless provided otherwise by the
Board of Directors with respect to any such additional series at
the time it is established and designated):
(1) Assets Belonging to Series. All consideration
received by the Corporation from the issue or sale of shares
of a particular series, together with all assets in which
such consideration is invested or reinvested, all income,
earnings, profits and proceeds thereof, including any
proceeds derived from the sale, exchange or liquidation of
such assets, and any funds or payments derived from any
investment or reinvestment of such proceeds in whatever form
the same may be, shall irrevocably belong to that series for
all purposes, subject only to the rights of creditors, and
shall be so recorded upon the books of account of the
Corporation. Such consideration, assets, income, earnings,
profits and proceeds, together with any General Items
allocated to that series as provided in the following
sentence, are herein referred to collectively as "assets
belonging to" that series. In the event that there are any
assets, income, earnings, profits or proceeds which are not
readily identifiable as belonging to any particular series
(collectively, "General Items"), such General Items shall be
allocated by or under the supervision of the Board of
Directors to and among any one or more of the series
established and designated from time to time in such manner
and on such basis as the Board of Directors, in its sole
discretion, deems fair and equitable; and any General Items
so allocated to a particular series shall belong to that
series. Each such allocation by the Board of Directors
shall be conclusive and binding for all purposes.
(2) Liabilities of Series. The assets belonging to
each particular series shall be charged with the liabilities
of the Corporation in respect of that series and all
expenses, costs, charges and reserves attributable to that
series, and any general liabilities, expenses, costs,
charges or reserves of the Corporation which are not readily
identifiable as pertaining to any particular series, shall
PAGE 4
be allocated and charged by or under the supervision of the
Board of Directors to and among any one or more of the
series established and designated from time to time in such
manner and on such basis as the Board of Directors, in its
sole discretion, deems fair and equitable. The liabilities,
expenses, costs, charges and reserves allocated and so
charged to a series are herein referred to collectively as
"liabilities of" that series. Each allocation of
liabilities, expenses, costs, charges and reserves by or
under the supervision of the Board of Directors shall be
conclusive and binding for all purposes.
(3) Dividends and Distributions. Dividends and
capital gains distributions on shares of a particular series
may be paid with such frequency, in such form and in such
amount as the Board of Directors may determine by resolution
adopted from time to time, or pursuant to a standing
resolution or resolutions adopted only once or with such
frequency as the Board of Directors may determine, after
providing for actual and accrued liabilities of that series.
All dividends on shares of a particular series shall be paid
only out of the income belonging to that series and all
capital gains distributions on shares of a particular series
shall be paid only out of the capital gains belonging to
that series. All dividends and distributions on shares of a
particular series shall be distributed pro rata to the
holders of that series in proportion to the number of shares
of that series held by such holders at the date and time of
record established for the payment of such dividends or
distributions, except that in connection with any dividend
or distribution program or procedure, the Board of Directors
may determine that no dividend or distribution shall be
payable on shares as to which the shareholder's purchase
order and/or payment have not been received by the time or
times established by the Board of Directors under such
program or procedure.
Dividends and distributions may be paid in cash,
property or additional shares of the same or another series,
or a combination thereof, as determined by the Board of
Directors or pursuant to any program that the Board of
Directors may have in effect at the time for the election by
shareholders of the form in which dividends or distributions
are to be paid. Any such dividend or distribution paid in
shares shall be paid at the current net asset value thereof.
(4) Voting. On each matter submitted to a vote of the
PAGE 5
shareholders, each holder of shares shall be entitled to one
vote for each share standing in his name on the books of the
Corporation, irrespective of the series thereof, and all
shares of all series shall vote as a single class ("Single
Class Voting"); provided, however, that (i) as to any matter
with respect to which a separate vote of any series is
required by the Investment Company Act or by the Maryland
General Corporation Law, such requirement as to a separate
vote by that series shall apply in lieu of Single Class
Voting; (ii) in the event that the separate vote requirement
referred to in (i) above applies with respect to one or more
series, then, subject to (iii) below, the shares of all
other series shall vote as a single class; and (iii) as to
any matter which does not affect the interest of a
particular series, including liquidation of another series
as described in subsection (7) below, only the holders of
shares of the one or more affected series shall be entitled
to vote.
(5) Redemption by Shareholders. Each holder of shares
of a particular series shall have the right at such times as
may be permitted by the Corporation to require the
Corporation to redeem all or any part of his shares of that
series, at a redemption price per share equal to the net
asset value per share of that series next determined after
the shares are properly tendered for redemption, less such
redemption fee or sales charge, if any, as may be
established by the Board of Directors in its sole
discretion. Payment of the redemption price shall be in
cash; provided, however, that if the Board of Directors
determines, which determination shall be conclusive, that
conditions exist which make payment wholly in cash unwise or
undesirable, the Corporation may, to the extent and in the
manner permitted by the Investment Company Act, make payment
wholly or partly in securities or other assets belonging to
the series of which the shares being redeemed are a part, at
the value of such securities or assets used in such
determination of net asset value.
Notwithstanding the foregoing, the Corporation may
postpone payment of the redemption price and may suspend the
right of the holders of shares of any series to require the
Corporation to redeem shares of that series during any
period or at any time when and to the extent permissible
under the Investment Company Act.
(6) Redemption by Corporation. The Board of Directors
PAGE 6
may cause the Corporation to redeem at net asset value the
shares of any series from a holder (i) if the Board of
Directors of the Corporation determines in its sole
discretion that failure to so redeem such shares may have
materially adverse consequences to the holders of shares of
the Corporation or any series, or (ii) upon such other
conditions with respect to the maintenance of shareholder
accounts of a minimum amount as may from time to time be
established by the Board of Directors in its sole
discretion.
(7) Liquidation. In the event of the liquidation of a
particular series, the shareholders of the series that is
being liquidated shall be entitled to receive, as a class,
when and as declared by the Board of Directors, the excess
of the assets belonging to that series over the liabilities
of that series. The holders of shares of any particular
series shall not be entitled thereby to any distribution
upon liquidation of any other series. The assets so
distributable to the shareholders of any particular series
shall be distributed among such shareholders in proportion
to the number of shares of that series held by them and
recorded on the books of the Corporation. The liquidation
of any particular series in which there are shares then
outstanding may be authorized by vote of a majority of the
Board of Directors then in office, subject to the approval
of a majority of the outstanding voting securities of that
series, as defined in the Investment Company Act, and
without the vote of the holders of shares of any other
series. The liquidation of a particular series may be
accomplished, in whole or in part, by the transfer of assets
of such series to another series or by the exchange of
shares of such series for the shares of another series.
(8) Net Asset Value Per Share. The net asset value
per share of any series shall be the quotient obtained by
dividing the value of the net assets of that series (being
the value of the assets belonging to that series less the
liabilities of that series) by the total number of shares of
that series outstanding, all as determined by or under the
direction of the Board of Directors in accordance with
generally accepted accounting principles and the Investment
Company Act. Subject to the applicable provisions of the
Investment Company Act, the Board of Directors, in its sole
discretion, may prescribe and shall set forth in the By-Laws
of the Corporation or in a duly adopted resolution of the
Board of Directors such bases and times for determining the
PAGE 7
value of the assets belonging to, and the net asset value
per share of outstanding shares of, each series, or the net
income attributable to such shares, as the Board of
Directors deems necessary or desirable. The Board of
Directors shall have full discretion, to the extent not
inconsistent with the Maryland General Corporation Law and
the Investment Company Act, to determine which items shall
be treated as income and which items as capital and whether
any item of expense shall be charged to income or capital.
Each such determination and allocation shall be conclusive
and binding for all purposes.
The Board of Directors may determine to maintain the
net asset value per share of any series at a designated
constant dollar amount and in connection therewith may adopt
procedures not inconsistent with the Investment Company Act
for the continuing declaration of income attributable to
that series as dividends and for the handling of any losses
attributable to that series. Such procedures may provide
that in the event of any loss, each shareholder shall be
deemed to have contributed to the capital of the Corporation
attributable to that series his pro rata portion of the
total number of shares required to be canceled in order to
permit the net asset value per share of that series to be
maintained, after reflecting such loss, at the designated
constant dollar amount. Each shareholder of the Corporation
shall be deemed to have agreed, by his investment in any
series with respect to which the Board of Directors shall
have adopted any such procedure, to make the contribution
referred to in the preceding sentence in the event of any
such loss.
(9) Equality. All shares of each particular series
shall represent an equal proportionate interest in the
assets belonging to that series (subject to the liabilities
of that series), and each share of any particular series
shall be equal to each other share of that series. The
Board of Directors may from time to time divide or combine
the shares of any particular series into a greater or lesser
number of shares of that series without thereby changing the
proportionate interest in the assets belonging to that
series or in any way affecting the rights of holders of
shares of any other series.
(10) Conversion or Exchange Rights. Subject to
compliance with the requirements of the Investment Company
Act, the Board of Directors shall have the authority to
PAGE 8
provide that holders of shares of any series shall have the
right to convert or exchange said shares into shares of one
or more other classes or series of shares in accordance with
such requirements and procedures as may be established by
the Board of Directors.
(c) The shares of Common Stock of the Corporation, or of
any series of Common Stock of the Corporation to the extent such
Common Stock is divided into series, may be further subdivided
into classes (which may, for convenience of reference be referred
to a term other than "class"). Unless otherwise provided in the
Articles Supplementary establishing such classes, all such
shares, or all shares of a series of Common Stock in a series,
shall have identical voting, dividend, and liquidation rights.
Shares of the classes shall also be subject to such front-end
sales loads, contingent deferred sales charges, expenses
(including, without limitation, distribution expenses under a
Rule 12b-1 plan and administrative expenses under an
administration or service agreement, plan or other arrangement,
however designated), conversion rights, and class voting rights
as shall be consistent with Maryland law, the Investment Company
Act of 1940, and the rules and regulations of the National
Association of Securities Dealers and shall be contained in
Articles Supplementary establishing such classes.
(d) For the purposes hereof and of any articles
supplementary to the charter providing for the classification or
reclassification of any shares of capital stock or of any other
charter document of the Corporation (unless otherwise provided in
any such articles or document), any class or series of stock of
the Corporation shall be deemed to rank:
(1) prior to another class or series either as to
dividends or upon liquidation, if the holders of such class
or series shall be entitled to the receipt of dividends or
of amounts distributable on liquidation, dissolution or
winding up, as the case may be, in preference or priority to
holders of such other class or series;
(2) on a parity with another class or series either as
to dividends or upon liquidation, whether or not the
dividend rates, dividend payment dates or redemption or
liquidation price per share thereof be different from those
of such others, if the holders of such class or series of
stock shall be entitled to receipt of dividends or amounts
distributable upon liquidation, dissolution or winding up,
as the case may be, in proportion to their respective
PAGE 9
dividend rates or redemption or liquidation prices, without
preference or priority over the holders of such other class
or series; and
(3) junior to another class or series either as to
dividends or upon liquidation, if the rights of the holders
of such class or series shall be subject or subordinate to
the rights of the holders of such other class or series in
respect of the receipt of dividends or the amounts
distributable upon liquidation, dissolution or winding up,
as the case may be.
(e) Unless otherwise prohibited by law, so long as the
Corporation is registered as an open-end management investment
company under the Investment Company Act, the Board of Directors
shall have the power and authority, without the approval of the
holders of any outstanding shares, to increase or decrease the
number of shares of capital stock or the number of shares of
capital stock of any class or series that the Corporation has
authority to issue.
(f) The Corporation may issue and sell fractions of shares
of capital stock having pro rata all the rights of full shares,
including, without limitation, the right to vote and to receive
dividends, and wherever the words "share" or "shares" are used in
the charter or By-Laws of the Corporation, they shall be deemed
to include fractions of shares, where the context does not
clearly indicate that only full shares are intended.
(g) The Corporation shall not be obligated to issue
certificates representing shares of any class or series of
capital stock. At the time of issue or transfer of shares
without certificates, the Corporation shall provide the
shareholder with such information as may be required under the
Maryland General Corporation Law.
SEVENTH: The number of directors of the Corporation shall
initially be one (1), which number may be increased or decreased
pursuant to the By-Laws of the Corporation, but shall never be
less than the minimum number permitted by the General Laws of the
State of Maryland now or hereafter in force. James S. Riepe
shall serve as director until the first annual meeting and until
his successor is elected and qualified.
EIGHTH: (a) The following provisions are hereby adopted
for the purpose of defining, limiting, and regulating the powers
of the Corporation and of the directors and shareholders:
PAGE 10
(1) The Board of Directors is hereby empowered to
authorize the issuance from time to time of shares of its
stock of any class or series, whether now or hereafter
authorized, or securities convertible into shares of its
stock of any class or series, whether now or hereafter
authorized, for such consideration as may be deemed
advisable by the Board of Directors and without any action
by the shareholders.
(2) No holder of any stock or any other securities of
the Corporation, whether now or hereafter authorized, shall
have any preemptive right to subscribe for or purchase any
stock or any other securities of the Corporation other than
such, if any, as the Board of Directors, in its sole
discretion, may determine and at such price or prices and
upon such other terms as the Board of Directors, in its sole
discretion, may fix; and any stock or other securities which
the Board of Directors may determine to offer for
subscription may, as the Board of Directors in its sole
discretion shall determine, be offered to the holders of any
class, series or type of stock or other securities at the
time outstanding to the exclusion of the holders of any or
all other classes, series or types of stock or other
securities at the time outstanding.
(3) The Board of Directors of the Corporation shall,
consistent with applicable law, have power in its sole
discretion to determine from time to time in accordance with
sound accounting practice or other reasonable valuation
methods what constitutes annual or other net profits,
earnings, surplus, or net assets in excess of capital; to
determine that retained earnings or surplus shall remain in
the hands of the Corporation; to set apart out of any funds
of the Corporation such reserve or reserves in such amount
or amounts and for such proper purpose or purposes as it
shall determine and to abolish any such reserve or any part
thereof; to distribute and pay distributions or dividends in
stock, cash or other securities or property, out of surplus
or any other funds or amounts legally available therefor, at
such times and to the shareholders of record on such dates
as it may, from time to time, determine; and to determine
whether and to what extent and at what times and places and
under what conditions and regulations the books, accounts
and documents of the Corporation, or any of them, shall be
open to the inspection of shareholders, except as otherwise
provided by statute or by the By-Laws, and, except as so
PAGE 11
provided, no shareholder shall have any right to inspect any
book, account or document of the Corporation unless
authorized so to do by resolution of the Board of Directors.
(4) Notwithstanding any provision of law requiring the
authorization of any action by a greater proportion than a
majority of the total number of shares of all classes and
series of capital stock or of the total number of shares of
any class or series of capital stock entitled to vote as a
separate class, such action shall be valid and effective if
authorized by the affirmative vote of the holders of a
majority of the total number of shares of all classes and
series outstanding and entitled to vote thereon, or of the
class or series entitled to vote thereon as a separate
class, as the case may be, except as otherwise provided in
the charter of the Corporation.
(5) The Corporation shall indemnify (i) its directors
and officers, whether serving the Corporation or at its
request any other entity, to the full extent required or
permitted by the General Laws of the State of Maryland now
or hereafter in force, including the advance of expenses
under the procedures and to the full extent permitted by
law, and (ii) other employees and agents to such extent as
shall be authorized by the Board of Directors or the By-Laws
and as permitted by law. Nothing contained herein shall be
construed to protect any director or officer of the
Corporation against any liability to the Corporation or its
security holders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct
of his office. The foregoing rights of indemnification
shall not be exclusive of any other rights to which those
seeking indemnification may be entitled. The Board of
Directors may take such action as is necessary to carry out
these indemnification provisions and is expressly empowered
to adopt, approve and amend from time to time such by-laws,
resolutions or contracts implementing such provisions or
such further indemnification arrangements as may be
permitted by law. No amendment of the charter of the
Corporation or repeal of any of its provisions shall limit
or eliminate the right of indemnification provided hereunder
with respect to acts or omissions occurring prior to such
amendment or repeal.
(6) To the fullest extent permitted by Maryland
statutory or decisional law, as amended or interpreted, and
PAGE 12
the Investment Company Act, no director or officer of the
Corporation shall be personally liable to the Corporation or
its shareholders for money damages; provided, however, that
nothing herein shall be construed to protect any director or
officer of the Corporation against any liability to the
Corporation or its security holders to which he would
otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office. No amendment of the
charter of the Corporation or repeal of any of its
provisions shall limit or eliminate the limitation of
liability provided to directors and officers hereunder with
respect to any act or omission occurring prior to such
amendment or repeal.
(7) The Corporation reserves the right from time to
time to make any amendments of its charter which may now or
hereafter be authorized by law, including any amendments
changing the terms or contract rights, as expressly set
forth in its charter, of any of its outstanding stock by
classification, reclassification or otherwise.
(b) The enumeration and definition of particular powers of
the Board of Directors included in the foregoing shall in no way
be limited or restricted by reference to or inference from the
terms of any other clause of this or any other Article of the
charter of the Corporation, or construed as or deemed by
inference or otherwise in any manner to exclude or limit any
powers conferred upon the Board of Directors under the General
Laws of the State of Maryland now or hereafter in force.
NINTH: The duration of the Corporation shall be perpetual.
PAGE 13
IN WITNESS WHEREOF, I have signed these Articles of
Incorporation, acknowledging the same to be my act, on this 17th
day of August, 1995.
Witness:
/s/Patricia S. Butcher /s/Henry H. Hopkins
Patricia S. Butcher Henry H. Hopkins
PAGE 1
BY-LAWS
OF
T. ROWE PRICE CORPORATE INCOME FUND, INC.
PAGE 2
TABLE OF CONTENTS
Page
____
ARTICLE I. NAME OF CORPORATION, LOCATION OF OFFICES AND
SEAL . . . . . . . . . . . . . . . . . . . 1
1.01. Name . . . . . . . . . . . . . . . . . . . 1
1.02. Principal Office . . . . . . . . . . . . . 1
1.03. Seal . . . . . . . . . . . . . . . . . . . 1
ARTICLE II. SHAREHOLDERS . . . . . . . . . . . . . . . 1
2.01. Annual Meetings . . . . . . . . . . . . . . 1
2.02. Special Meetings . . . . . . . . . . . . . 2
2.03. Place of Meetings . . . . . . . . . . . . . 2
2.04. Notice of Meetings . . . . . . . . . . . . 2
2.05. Voting - in General . . . . . . . . . . . . 2
2.06. Shareholders Entitled to Vote . . . . . . . 3
2.07. Voting - Proxies . . . . . . . . . . . . . 3
2.08. Quorum . . . . . . . . . . . . . . . . . . 3
2.09. Absence of Quorum . . . . . . . . . . . . . 3
2.10. Stock Ledger and List of Shareholders . . . 4
2.11. Informal Action by Shareholders . . . . . . 4
ARTICLE III. BOARD OF DIRECTORS . . . . . . . . . . . . 4
3.01. Number and Term of Office . . . . . . . . . 4
3.02. Qualification of Directors . . . . . . . . 4
3.03. Election of Directors . . . . . . . . . . . 5
3.04. Removal of Directors . . . . . . . . . . . 5
3.05. Vacancies and Newly Created Directorships . 5
3.06. General Powers . . . . . . . . . . . . . . 5
3.07. Power to Issue and Sell Stock . . . . . . . 6
3.08. Power to Declare Dividends . . . . . . . . 6
3.09. Annual and Regular Meetings . . . . . . . . 6
3.10. Special Meetings . . . . . . . . . . . . . 6
3.11. Notice . . . . . . . . . . . . . . . . . . 7
3.12. Waiver of Notice . . . . . . . . . . . . . 7
3.13. Quorum and Voting . . . . . . . . . . . . . 7
3.14. Conference Telephone . . . . . . . . . . . 7
3.15. Compensation . . . . . . . . . . . . . . . 7
3.16. Action without a Meeting . . . . . . . . . 7
3.17. Director Emeritus . . . . . . . . . . . . . 7
PAGE 3
ARTICLE IV. EXECUTIVE COMMITTEE AND OTHER COMMITTEES . 8
4.01. How Constituted . . . . . . . . . . . . . . 8
4.02. Powers of the Executive Committee . . . . . 8
4.03. Other Committees of the Board of Directors 8
4.04. Proceedings, Quorum and Manner of Acting . 8
4.05. Other Committees . . . . . . . . . . . . . 8
ARTICLE V. OFFICERS . . . . . . . . . . . . . . . . . 9
5.01. General . . . . . . . . . . . . . . . . . . 9
5.02. Election, Term of Office and Qualifications 9
5.03. Resignation . . . . . . . . . . . . . . . . 9
5.04. Removal . . . . . . . . . . . . . . . . . . 9
5.05. Vacancies and Newly Created Offices . . . . 9
5.06. Chairman of the Board . . . . . . . . . . . 9
5.07. President . . . . . . . . . . . . . . . . . 10
5.08. Vice President . . . . . . . . . . . . . . 10
5.09. Treasurer and Assistant Treasurers . . . . 10
5.10. Secretary and Assistant Secretaries . . . . 10
5.11. Subordinate Officers . . . . . . . . . . . 11
5.12. Remuneration . . . . . . . . . . . . . . . 11
5.13. Surety Bond . . . . . . . . . . . . . . . . 11
ARTICLE VI. CUSTODY OF SECURITIES AND CASH . . . . . . 11
6.01. Employment of a Custodian . . . . . . . . . 11
6.02. Central Certificate Service . . . . . . . . 12
6.03. Cash Assets . . . . . . . . . . . . . . . . 12
6.04. Free Cash Accounts . . . . . . . . . . . . 12
6.05. Action Upon Termination of Custodian
Agreement . . . . . . . . . . . . . . . . . 12
6.06. Other Arrangements . . . . . . . . . . . . 12
ARTICLE VII. EXECUTION OF INSTRUMENTS, VOTING OF
SECURITIES . . . . . . . . . . . . . . . . 13
7.01. Execution of Instruments . . . . . . . . . 13
7.02. Voting of Securities . . . . . . . . . . . 13
ARTICLE VIII. CAPITAL STOCK . . . . . . . . . . . . . . . 13
8.01. Ownership of Shares . . . . . . . . . . . . 13
8.02. Transfer of Capital Stock . . . . . . . . . 13
8.03. Transfer Agents and Registrars . . . . . . 14
8.04. Transfer Regulations . . . . . . . . . . . 14
8.05. Fixing of Record Date . . . . . . . . . . . 14
PAGE 4
ARTICLE IX. FISCAL YEAR, ACCOUNTANT . . . . . . . . . . 14
9.01. Fiscal Year . . . . . . . . . . . . . . . . 14
9.02. Accountant . . . . . . . . . . . . . . . . 14
ARTICLE X. INDEMNIFICATION AND INSURANCE . . . . . . . 15
10.01. Indemnification and Payment of Expenses in
Advance . . . . . . . . . . . . . . . . . . 15
10.02. Insurance of Officers, Directors, Employees
and Agents . . . . . . . . . . . . . . . . 16
10.03. Amendment . . . . . . . . . . . . . . . . . 16
ARTICLE XI. AMENDMENTS . . . . . . . . . . . . . . . . 17
11.01. General . . . . . . . . . . . . . . . . . . 17
11.02. By Shareholders Only . . . . . . . . . . . 17
ARTICLE XII. MISCELLANEOUS . . . . . . . . . . . . . . . 17
12.01 Use of the Term "Annual Meeting" . . . . . 17
PAGE 5
T. ROWE PRICE CORPORATE INCOME FUND, INC.
(A Maryland Corporation)
BY-LAWS
ARTICLE I
NAME OF CORPORATION,
LOCATION OF OFFICES AND SEAL
____________________________
Section 1.01. Name: The name of the Corporation is T. ROWE
PRICE CORPORATE INCOME FUND, INC.
Section 1.02. Principal Office: The principal office of
the Corporation in the State of Maryland shall be located in the
City of Baltimore. The Corporation may, in addition, establish
and maintain such other offices and places of business, within
or outside the State of Maryland, as the Board of Directors may
from time to time determine. [MGCL, Sections 2-103(4),
2-108(a)(1)]*
Section 1.03. Seal: The corporate seal of the Corporation
shall be circular in form, and shall bear the name of the
Corporation, the year of its incorporation, and the words
"Corporate Seal, Maryland." The form of the seal shall be
subject to alteration by the Board of Directors and the seal may
be used by causing it or a facsimile to be impressed or affixed
or printed or otherwise reproduced. In lieu of affixing the
corporate seal to any document it shall be sufficient to meet the
requirements of any law, rule, or regulation relating to a
corporate seal to affix the word "(Seal)" adjacent to the
signature of the authorized officer of the Corporation. Any
officer or Director of the Corporation shall have authority to
affix the corporate seal of the Corporation to any document
requiring the same. [MGCL, Sections 1-304(b), 2-103(3)]
ARTICLE II
__________
SHAREHOLDERS
____________
Section 2.01. Annual Meetings: The Corporation shall not
be required to hold an annual meeting of its shareholders in any
year unless the Investment Company Act of 1940 requires an
election of directors by shareholders. In the event that the
Corporation shall be so required to hold an annual meeting, such
meeting shall be held at a date and time set by the Board of
Directors, which date shall be no later than 120 days after the
occurrence of the event requiring the meeting.
PAGE 6
_________________________
* Bracketed citations are to the General Corporation Law of
the State of Maryland ("MGCL") or to the United States
Investment Company Act of 1940, as amended (the "Investment
Company Act"), or to Rules of the United States Securities
and Exchange Commission thereunder ("SEC Rules"). The
citations are inserted for reference only and do not
constitute a part of the By-Laws.
Any shareholders' meeting held in accordance with the preceding
sentence shall for all purposes constitute the annual meeting of
shareholders for the fiscal year of the corporation in which the
meeting is held. At any such meeting, the shareholders shall
elect directors to hold the offices of any directors who have
held office for more than one year or who have been elected by
the Board of Directors to fill vacancies which result from any
cause. Except as the Articles of Incorporation or statute
provides otherwise, Directors may transact any business within
the powers of the Corporation as may properly come before the
meeting. Any business of the Corporation may be transacted at
the annual meeting without being specially designated in the
notice, except such business as is specifically required by
statute to be stated in the notice. [MGCL, Section 2-501]
Section 2.02. Special Meetings: Special meetings of the
shareholders may be called at any time by the Chairman of the
Board, the President, any Vice President, or by the Board of
Directors. Special meetings of the shareholders shall be called
by the Secretary on the written request of shareholders entitled
to cast at least ten (10) percent of all the votes entitled to be
cast at such meeting, provided that (a) such request shall state
the purpose or purposes of the meeting and the matters proposed
to be acted on, and (b) the shareholders requesting the meeting
shall have paid to the Corporation the reasonably estimated cost
of preparing and mailing the notice thereof, which the Secretary
shall determine and specify to such shareholders. Unless
requested by shareholders entitled to cast a majority of all the
votes entitled to be cast at the meeting, a special meeting need
not be called to consider any matter which is substantially the
same as a matter voted upon at any special meeting of the
shareholders held during the preceding twelve (12) months. [MGCL,
Section 2-502]
Section 2.03. Place of Meetings: All shareholders'
meetings shall be held at such place within the United States as
may be fixed from time to time by the Board of Directors. [MGCL,
Section 2-503]
Section 2.04. Notice of Meetings: Not less than ten (10)
days, nor more than ninety (90) days before each shareholders'
meeting, the Secretary or an Assistant Secretary of the
Corporation shall give to each shareholder entitled to vote at
PAGE 7
the meeting, and each other shareholder entitled to notice of the
meeting, written notice stating (1) the time and place of the
meeting, and (2) the purpose or purposes of the meeting if the
meeting is a special meeting or if notice of the purpose is
required by statute to be given. Such notice shall be personally
delivered to the shareholder, or left at his residence or usual
place of business, or mailed to him at his address as it appears
on the records of the Corporation. Notice shall be deemed to be
given when deposited in the United States mail addressed to the
shareholders as aforesaid. No notice of a shareholders' meeting
need be given to any shareholder who shall sign a written waiver
of such notice, whether before or after the meeting, which is
filed with the records of shareholders' meetings, or to any
shareholder who is present at the meeting in person or by proxy.
Notice of adjournment of a shareholders' meeting to another time
or place need not be given if such time and place are announced
at the meeting, unless the adjournment is for more than one
hundred twenty (120) days after the original record date.
Irregularities in the notice of any meeting to, or the nonreceipt
of any such notice by, any of the stockholders shall not
invalidate any action otherwise properly taken by or at any such
meeting. [MGCL, Sections 2-504, 2-511(d)]
Section 2.05. Voting - In General: Except as otherwise
specifically provided in the Articles of Incorporation or these
By-Laws, or as required by provisions of the Investment Company
Act with respect to the vote of a series, if any, of the
Corporation, at every shareholders' meeting, each shareholder
shall be entitled to one vote for each share of stock of the
Corporation validly issued and outstanding and held by such
shareholder, except that no shares held by the Corporation shall
be entitled to a vote. Fractional shares shall be entitled to
fractional votes. Except as otherwise specifically provided in
the Articles of Incorporation, or these By-Laws, or as required
by provisions of the Investment Company Act, a majority of all
the votes cast at a meeting at which a quorum is present is
sufficient to approve any matter which properly comes before the
meeting. The vote upon any question shall be by ballot whenever
requested by any person entitled to vote, but, unless such a
request is made, voting may be conducted in any way approved by
the meeting. [MGCL, Sections 2-214(a)(i), 2-506(a)(2), 2-507(a),
2-509(b)]
At any meeting at which there is an election of Directors,
the Chairman of the meeting may, and upon the request of the
holders of ten (10) percent of the stock entitled to vote at such
election shall, appoint two inspectors of election who shall
first subscribe an oath or affirmation to execute faithfully the
duties of inspectors at such election with strict impartiality
and according to the best of their ability, and shall, after the
election, make a certificate of the result of the vote taken. No
candidate for the office of Director shall be appointed as an
inspector.
PAGE 8
Section 2.06. Shareholders Entitled to Vote: If, pursuant
to Section 8.05 hereof, a record date has been fixed for the
determination of shareholders entitled to notice of or to vote at
any shareholders' meeting, each shareholder of the Corporation
shall be entitled to vote in person or by proxy, each share or
fraction of a share of stock outstanding in his name on the books
of the Corporation on such record date. If no record date has
been fixed for the determination of shareholders, the record date
for the determination of shareholders entitled to notice of or to
vote at a meeting of shareholders shall be at the close of
business on the day on which notice of the meeting is mailed or
the 30th day before the meeting, whichever is the closer date to
the meeting, or, if notice is waived by all shareholders, at the
close of business on the tenth (10th) day next preceding the date
of the meeting. [MGCL, Sections 2-507, 2-511]
Section 2.07. Voting - Proxies: The right to vote by proxy
shall exist only if the instrument authorizing such proxy to act
shall have been executed in writing by the shareholder himself,
or by his attorney thereunto duly authorized in writing. No
proxy shall be valid more than eleven (11) months after its date
unless it provides for a longer period. All proxies shall be
delivered to the Secretary of the Corporation or to the person
acting as Secretary of the meeting before being voted, who shall
decide all questions concerning qualification of voters, the
validity of proxies, and the acceptance or rejection of votes.
If inspectors of election have been appointed by the chairman of
the meeting, such inspectors shall decide all such questions. A
proxy with respect to stock held in the name of two or more
persons shall be valid if executed by one of them unless at or
prior to exercise of such proxy the Corporation receives a
specific written notice to the contrary from any one of them. A
proxy purporting to be executed by or on behalf of a shareholder
shall be deemed valid unless challenged at or prior to its
exercise. [MGCL, Section 2-507(b)]
Section 2.08. Quorum: The presence at any shareholders'
meeting, in person or by proxy, of shareholders entitled to cast
a majority of the votes entitled to be cast at the meeting shall
constitute a quorum. [MGCL, Section 2-506(a)]
Section 2.09. Absence of Quorum: In the absence of a
quorum, the holders of a majority of shares entitled to vote at
the meeting and present thereat in person or by proxy, or, if no
shareholder entitled to vote is present in person or by proxy,
any officer present who is entitled to preside at or act as
Secretary of such meeting, may adjourn the meeting sine die or
from time to time. Any business that might have been transacted
at the meeting originally called may be transacted at any such
adjourned meeting at which a quorum is present.
Section 2.10. Stock Ledger and List of Shareholders: It
shall be the duty of the Secretary or Assistant Secretary of the
PAGE 9
Corporation to cause an original or duplicate stock ledger to be
maintained at the office of the Corporation's transfer agent,
containing the names and addresses of all shareholders and the
number of shares of each class held by each shareholder. Such
stock ledger may be in written form, or any other form capable of
being converted into written form within a reasonable time for
visual inspection. Any one or more persons, who together are and
for at least six (6) months have been shareholders of record of
at least five percent (5%) of the outstanding capital stock of
the Corporation, may submit (unless the Corporation at the time
of the request maintains a duplicate stock ledger at its
principal office) a written request to any officer of the
Corporation or its resident agent in Maryland for a list of the
shareholders of the Corporation. Within twenty (20) days after
such a request, there shall be prepared and filed at the
Corporation's principal office a list, verified under oath by an
officer of the Corporation or by its stock transfer agent or
registrar, which sets forth the name and address of each
shareholder and the number of shares of each class which the
shareholder holds. [MGCL, Sections 2-209, 2-513]
Section 2.11. Informal Action By Shareholders: Any action
required or permitted to be taken at a meeting of shareholders
may be taken without a meeting if the following are filed with
the records of shareholders' meetings:
(a) A unanimous written consent which sets forth the
action and is signed by each shareholder entitled
to vote on the matter; and
(b) A written waiver of any right to dissent signed by
each shareholder entitled to notice of the
meeting, but not entitled to vote at it.
[MGCL, Section 2-505]
ARTICLE III
___________
BOARD OF DIRECTORS
__________________
Section 3.01. Number and Term of Office: The Board of
Directors shall consist of one (1) Director, which number may be
increased by a resolution of a majority of the entire Board of
Directors, provided that the number of Directors shall not be
more than fifteen (15) nor less than the lesser of (i) three (3)
or (ii) the number of shareholders of the Corporation. Each
Director (whenever elected) shall hold office until the next
annual meeting of shareholders and until his successor is elected
and qualifies or until his earlier death, resignation, or
removal. [MGCL, Sections 2-402, 2-404, 2-405]
PAGE 10
Section 3.02. Qualification of Directors: No member of the
Board of Directors need be a shareholder of the Corporation, but
at least one member of the Board of Directors shall be a person
who is not an interested person (as such term is defined in the
Investment Company Act) of the investment adviser of the
Corporation, nor an officer or employee of the Corporation.
[MGCL, Section 2-403; Investment Company Act, Section 10(d)]
Section 3.03. Election of Directors: Until the first
annual meeting of shareholders, or until successors are duly
elected and qualified, the Board of Directors shall consist of
the persons named as such in the Articles of Incorporation.
Thereafter, except as otherwise provided in Sections 3.04 and
3.05 hereof, at each annual meeting, the shareholders shall elect
Directors to hold office until the next annual meeting and/or
until their successors are elected and qualify. In the event
that Directors are not elected at an annual shareholders'
meeting, then Directors may be elected at a special shareholders'
meeting. Directors shall be elected by vote of the holders of a
plurality of the shares present in person or by proxy and
entitled to vote. [MGCL, Section 2-404]
Section 3.04. Removal of Directors: At any meeting of
shareholders, duly called and at which a quorum is present, the
shareholders may, by the affirmative vote of the holders of a
majority of the votes entitled to be cast thereon, remove any
Director or Directors from office, either with or without cause,
and may elect a successor or successors to fill any resulting
vacancies for the unexpired terms of removed Directors. [MGCL,
Sections 2-406, 2-407]
Section 3.05. Vacancies and Newly Created Directorships:
If any vacancies occur in the Board of Directors by reason of
resignation, removal or otherwise, or if the authorized number of
Directors is increased, the Directors then in office shall
continue to act, and such vacancies (if not previously filled by
the shareholders) may be filled by a majority of the Directors
then in office, whether or not sufficient to constitute a quorum,
provided that, immediately after filling such vacancy, at least
two-thirds of the Directors then holding office shall have been
elected to such office by the shareholders of the Corporation.
In the event that at any time, other than the time preceding the
first meeting of shareholders, less than a majority of the
Directors of the Corporation holding office at that time were so
elected by the shareholders, a meeting of the shareholders shall
be held promptly and in any event within sixty (60) days for the
purpose of electing Directors to fill any existing vacancies in
the Board of Directors unless the Securities and Exchange
Commission shall by order extend such period. Except as provided
in Section 3.04 hereof, a Director elected by the Board of
PAGE 11
Directors to fill a vacancy shall be elected to hold office until
the next annual meeting of shareholders or until his successor is
elected and qualifies. [MGCL, Section 2-407; Investment Company
Act, Section 16(a)]
Section 3.06. General Powers:
______________
(a) The property, business, and affairs of the
Corporation shall be managed under the direction of the Board of
Directors which may exercise all the powers of the Corporation
except such as are by law, by the Articles of Incorporation, or
by these By-Laws conferred upon or reserved to the shareholders
of the Corporation. [MGCL, Section 2-401]
(b) All acts done by any meeting of the Directors or
by any person acting as a Director, so long as his successor
shall not have been duly elected or appointed, shall,
notwithstanding that it be afterwards discovered that there was
some defect in the election of the Directors or such person
acting as a Director or that they or any of them were
disqualified, be as valid as if the Directors or such person, as
the case may be, had been duly elected and were or was qualified
to be Directors or a Director of the Corporation.
Section 3.07. Power to Issue and Sell Stock: The Board of
Directors may from time to time authorize by resolution the
issuance and sale of any of the Corporation's authorized shares
to such persons as the Board of Directors shall deem advisable
and such resolution shall set the minimum price or value of
consideration for the stock or a formula for its determination,
and shall include a fair description of any consideration other
than money and a statement of the actual value of such
consideration as determined by the Board of Directors or a
statement that the Board of Directors has determined that the
actual value is or will be not less than a certain sum. [MGCL,
Section 2-203]
Section 3.08. Power to Declare Dividends:
(a) The Board of Directors, from time to time as it
may deem advisable, may declare and the Corporation pay
dividends, in cash, property, or shares of the Corporation
available for dividends out of any source available for
dividends, to the shareholders according to their respective
rights and interests. [MGCL, Section 2-309]
(b) The Board of Directors shall cause to be
accompanied by a written statement any dividend payment wholly or
partly from any source other than the Corporation's accumulated
undistributed net income (determined in accordance with good
accounting practice and the rules and regulations of the
Securities and Exchange Commission then in effect) not including
profits or losses realized upon the sale of securities or other
PAGE 12
properties. Such statement shall adequately disclose the source
or sources of such payment and the basis of calculation and shall
be otherwise in such form as the Securities and Exchange
Commission may prescribe. [Investment Company Act, Section 19;
SEC Rule 19a-1; MGCL, Section 2-309(c)]
(c) Notwithstanding the above provisions of this
Section 3.08, the Board of Directors may at any time declare and
distribute pro rata among the shareholders a stock dividend out
of the Corporation's authorized but unissued shares of stock,
including any shares previously purchased by the Corporation,
provided that such dividend shall not be distributed in shares of
any class with respect to any shares of a different class. The
shares so distributed shall be issued at the par value thereof,
and there shall be transferred to stated capital, at the time
such dividend is paid, an amount of surplus equal to the
aggregate par value of the shares issued as a dividend and there
may be transferred from earned surplus to capital surplus such
additional amount as the Board of Directors may determine.
[MGCL, Section 2-309]
Section 3.09. Annual and Regular Meetings: The annual
meeting of the Board of Directors for choosing officers and
transacting other proper business shall be held after the annual
shareholders' meeting at such time and place as may be specified
in the notice of such meeting of the Board of Directors or, in
the absence of such annual shareholders' meeting, at such time
and place as the Board of Directors may provide. The Board of
Directors from time to time may provide by resolution for the
holding of regular meetings and fix their time and place (within
or outside the State of Maryland). [MGCL, Section 2-409(a)]
Section 3.10. Special Meetings: Special meetings of the
Board of Directors shall be held whenever called by the Chairman
of the Board, the President (or, in the absence or disability of
the President, by any Vice President), the Treasurer, or two or
more Directors, at the time and place (within or outside the
State of Maryland) specified in the respective notices or waivers
of notice of such meetings.
Section 3.11. Notice: Notice of annual, regular, and
special meetings shall be in writing, stating the time and place,
and shall be mailed to each Director at his residence or regular
place of business or caused to be delivered to him personally or
to be transmitted to him by telegraph, cable, or wireless at
least two (2) days before the day on which the meeting is to be
held. Except as otherwise required by the By-Laws or the
Investment Company Act, such notice need not include a statement
of the business to be transacted at, or the purpose of, the
meeting. [MGCL, Section 2-409(b)]
PAGE 13
Section 3.12. Waiver of Notice: No notice of any meeting
need be given to any Director who is present at the meeting or to
any Director who signs a waiver of the notice of the meeting
(which waiver shall be filed with the records of the meeting),
whether before or after the meeting. [MGCL, Section 2-409(c)]
Section 3.13. Quorum and Voting: At all meetings of the
Board of Directors the presence of one-third of the total number
of Directors authorized, but not less than two (2) Directors if
there are at least two directors, shall constitute a quorum. In
the absence of a quorum, a majority of the Directors present may
adjourn the meeting, from time to time, until a quorum shall be
present. The action of a majority of the Directors present at a
meeting at which a quorum is present shall be the action of the
Board of Directors unless the concurrence of a greater proportion
is required for such action by law, by the Articles of
Incorporation or by these By-Laws. [MGCL, Section 2-408]
Section 3.14. Conference Telephone: Members of the Board
of Directors or of any committee designated by the Board, may
participate in a meeting of the Board or of such committee by
means of a conference telephone or similar communications
equipment if all persons participating in the meeting can hear
each other at the same time, and participation by such means
shall constitute presence in person at such meeting. [MGCL,
Section 2-409(d)]
Section 3.15. Compensation: Each Director may receive such
remuneration for his services as shall be fixed from time to time
by resolution of the Board of Directors.
Section 3.16. Action Without a Meeting: Except as
otherwise provided under the Investment Company Act, any action
required or permitted to be taken at any meeting of the Board of
Directors or any committee thereof may be taken without a meeting
if a unanimous written consent which sets forth the action is
signed by all members of the Board or of such committee and such
written consent is filed with the minutes of proceedings of the
Board or committee. [MGCL, Section 2-408(c)]
Section 3.17. Director Emeritus: Upon the retirement of a
Director of the Corporation, the Board of Directors may designate
such retired Director as a Director Emeritus. The position of
Director Emeritus shall be honorary only and shall not confer
upon such Director Emeritus any responsibility, or voting
authority, whatsoever with respect to the Corporation. A
Director Emeritus may, but shall not be required to, attend the
meetings of the Board of Directors and receive materials normally
provided Directors relating to the Corporation. The Board of
Directors may establish such compensation as it may deem
appropriate under the circumstances to be paid by the Corporation
to a Director Emeritus.
PAGE 14
ARTICLE IV
__________
EXECUTIVE COMMITTEE AND OTHER COMMITTEES
________________________________________
Section 4.01. How Constituted: By resolution adopted by
the Board of Directors, the Board may appoint from among its
members one or more committees, including an Executive Committee,
each consisting of at least two (2) Directors. Each member of a
committee shall hold office during the pleasure of the Board.
[MGCL, Section 2-411]
Section 4.02. Powers of the Executive Committee: Unless
otherwise provided by resolution of the Board of Directors, the
Executive Committee, in the intervals between meetings of the
Board of Directors, shall have and may exercise all of the powers
of the Board of Directors to manage the business and affairs of
the Corporation except the power to:
(a) Declare dividends or distributions on stock;
(b) Issue stock other than as provided in Section
2-411(b) of Corporations and Associations Article
of the Annotated Code of Maryland;
(c) Recommend to the shareholders any action which
requires shareholder approval;
(d) Amend the By-Laws; or
(e) Approve any merger or share exchange which does
not require shareholder approval.
[MGCL, Section 2-411(a)]
Section 4.03. Other Committees of the Board of Directors:
To the extent provided by resolution of the Board, other
committees shall have and may exercise any of the powers that may
lawfully be granted to the Executive Committee. [MGCL, Section
2-411(a)]
Section 4.04. Proceedings, Quorum, and Manner of Acting:
In the absence of appropriate resolution of the Board of
Directors, each committee may adopt such rules and regulations
governing its proceedings, quorum and manner of acting as it
shall deem proper and desirable, provided that the quorum shall
not be less than two (2) Directors. In the absence of any member
of any such committee, the members thereof present at any
meeting, whether or not they constitute a quorum, may appoint a
member of the Board of Directors to act in the place of such
absent member. [MGCL, Section 2-411(c)]
PAGE 15
Section 4.05. Other Committees: The Board of Directors may
appoint other committees, each consisting of one or more persons
who need not be Directors. Each such committee shall have such
powers and perform such duties as may be assigned to it from time
to time by the Board of Directors, but shall not exercise any
power which may lawfully be exercised only by the Board of
Directors or a committee thereof.
PAGE 16
ARTICLE V
_________
OFFICERS
________
Section 5.01. General: The officers of the Corporation
shall be a President, one or more Vice Presidents (one or more of
whom may be designated Executive Vice President), a Secretary,
and a Treasurer, and may include one or more Assistant Vice
Presidents, one or more Assistant Secretaries, one or more
Assistant Treasurers, and such other officers as may be appointed
in accordance with the provisions of Section 5.11 hereof. The
Board of Directors may elect, but shall not be required to elect,
a Chairman of the Board. [MGCL, Section 2-412]
Section 5.02. Election, Term of Office and Qualifications:
The officers of the Corporation (except those appointed pursuant
to Section 5.11 hereof) shall be elected by the Board of
Directors at its first meeting and thereafter at each annual
meeting of the Board. If any officer or officers are not elected
at any such meeting, such officer or officers may be elected at
any subsequent regular or special meeting of the Board. Except
as provided in Sections 5.03, 5.04, and 5.05 hereof, each officer
elected by the Board of Directors shall hold office until the
next annual meeting of the Board of Directors and until his
successor shall have been chosen and qualified. Any person may
hold two or more offices of the Corporation, except that neither
the Chairman of the Board, nor the President, may hold the office
of Vice President, but no person shall execute, acknowledge, or
verify any instrument in more than one capacity if such
instrument is required by law, the Articles of Incorporation, or
these By-Laws to be executed, acknowledged, or verified by two or
more officers. The Chairman of the Board shall be selected from
among the Directors of the Corporation and may hold such office
only so long as he continues to be a Director. No other officer
need be a Director. [MGCL, Sections 2-412, 2-413 and 2-415]
Section 5.03. Resignation: Any officer may resign his
office at any time by delivering a written resignation to the
Board of Directors, the President, the Secretary, or any
Assistant Secretary. Unless otherwise specified therein, such
resignation shall take effect upon delivery.
Section 5.04. Removal: Any officer may be removed from
office by the Board of Directors whenever in the judgment of the
Board of Directors the best interests of the Corporation will be
served thereby. [MGCL, Section 2-413(c)]
Section 5.05. Vacancies and Newly Created Offices: If any
vacancy shall occur in any office by reason of death,
resignation, removal, disqualification or other cause, or if any
new office shall be created, such vacancies or newly created
offices may be filled by the Board of Directors at any meeting
PAGE 17
or, in the case of any office created pursuant to Section 5.11
hereof, by any officer upon whom such power shall have been
conferred by the Board of Directors. [MGCL, Section 2-413(d)]
Section 5.06. Chairman of the Board: Unless otherwise
provided by resolution of the Board of Directors, the Chairman of
the Board, if there be such an officer, shall be the chief
executive and operating officer of the Corporation, shall preside
at all shareholders' meetings, and at all meetings of the Board
of Directors. He shall be ex officio a member of all standing
committees of the Board of Directors. Subject to the supervision
of the Board of Directors, he shall have general charge of the
business, affairs, property, and operation of the Corporation and
its officers, employees, and agents. He may sign (unless the
President or a Vice President shall have signed) certificates
representing stock of the Corporation authorized for issuance by
the Board of Directors and shall have such other powers and
perform such other duties as may be assigned to him from time to
time by the Board of Directors.
Section 5.07. President: Unless otherwise provided by
resolution of the Board of Directors, the President shall, at the
request of or in the absence or disability of the Chairman of the
Board, or if no Chairman of the Board has been chosen, he shall
preside at all shareholders' meetings and at all meetings of the
Board of Directors and shall in general exercise the powers and
perform the duties of the Chairman of the Board. He may sign
(unless the Chairman or a Vice President shall have signed)
certificates representing stock of the Corporation authorized for
issuance by the Board of Directors. Except as the Board of
Directors may otherwise order, he may sign in the name and on
behalf of the Corporation all deeds, bonds, contracts, or
agreements. He shall exercise such other powers and perform such
other duties as from time to time may be assigned to him by the
Board of Directors.
Section 5.08. Vice President: The Board of Directors
shall, from time to time, designate and elect one or more Vice
Presidents (one or more of whom may be designated Executive Vice
President) who shall have such powers and perform such duties as
from time to time may be assigned to them by the Board of
Directors or the President. At the request or in the absence or
disability of the President, the Vice President (or, if there are
two or more Vice Presidents, the Vice President in order of
seniority of tenure in such office or in such other order as the
Board of Directors may determine) may perform all the duties of
the President and, when so acting, shall have all the powers of
and be subject to all the restrictions upon the President. Any
Vice President may sign (unless the Chairman, the President, or
another Vice President shall have signed) certificates
representing stock of the Corporation authorized for issuance by
the Board of Directors.
PAGE 18
Section 5.09. Treasurer and Assistant Treasurers: The
Treasurer shall be the principal financial and accounting officer
of the Corporation and shall have general charge of the finances
and books of account of the Corporation. Except as otherwise
provided by the Board of Directors, he shall have general
supervision of the funds and property of the Corporation and of
the performance by the custodian of its duties with respect
thereto. He may countersign (unless an Assistant Treasurer or
Secretary or Assistant Secretary shall have countersigned)
certificates representing stock of the Corporation authorized for
issuance by the Board of Directors. He shall render to the Board
of Directors, whenever directed by the Board, an account of the
financial condition of the Corporation and of all his
transactions as Treasurer; and as soon as possible after the
close of each fiscal year he shall make and submit to the Board
of Directors a like report for such fiscal year. He shall cause
to be prepared annually a full and correct statement of the
affairs of the Corporation, including a balance sheet and a
financial statement of operations for the preceding fiscal year,
which shall be submitted at the annual meeting of shareholders
and filed within twenty (20) days thereafter at the principal
office of the Corporation. He shall perform all the acts
incidental to the office of the Treasurer, subject to the control
of the Board of Directors. Any Assistant Treasurer may perform
such duties of the Treasurer as the Treasurer or the Board of
Directors may assign, and, in the absence of the Treasurer, he
may perform all the duties of the Treasurer.
Section 5.10. Secretary and Assistant Secretaries: The
Secretary shall attend to the giving and serving of all notices
of the Corporation and shall record all proceedings of the
meetings of the shareholders and Directors in one or more books
to be kept for that purpose. He shall keep in safe custody the
seal of the Corporation and shall have charge of the records of
the Corporation, including the stock books and such other books
and papers as the Board of Directors may direct and such books,
reports, certificates and other documents required by law to be
kept, all of which shall at all reasonable times be open to
inspection by any Director. He shall countersign (unless the
Treasurer, an Assistant Treasurer or an Assistant Secretary shall
have countersigned) certificates representing stock of the
Corporation authorized for issuance by the Board of Directors.
He shall perform such other duties as appertain to his office or
as may be required by the Board of Directors. Any Assistant
Secretary may perform such duties of the Secretary as the
Secretary or the Board of Directors may assign, and, in the
absence of the Secretary, he may perform all the duties of the
Secretary.
Section 5.11. Subordinate Officers: The Board of Directors
from time to time may appoint such other officers or agents as it
may deem advisable, each of whom shall have such title, hold
office for such period, have such authority and perform such
PAGE 19
duties as the Board of Directors may determine. The Board of
Directors from time to time may delegate to one or more officers
or agents the power to appoint any such subordinate officers or
agents and to prescribe their respective rights, terms of office,
authorities, and duties. Any officer or agent appointed in
accordance with the provisions of this Section 5.11 may be
removed, either with or without cause, by any officer upon whom
such power of removal shall have been conferred by the Board of
Directors. [MGCL, Section 2-412(b)]
Section 5.12. Remuneration: The salaries or other
compensation of the officers of the Corporation shall be fixed
from time to time by resolution of the Board of Directors, except
that the Board of Directors may by resolution delegate to any
person or group of persons the power to fix the salaries or other
compensation of any subordinate officers or agents appointed in
accordance with the provisions of Section 5.11 hereof.
Section 5.13. Surety Bond: The Board of Directors may
require any officer or agent of the Corporation to execute a bond
(including, without limitation, any bond required by the
Investment Company Act and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder) to the
Corporation in such sum and with such surety or sureties as the
Board of Directors may determine, conditioned upon the faithful
performance of his or her duties to the Corporation, including
responsibility for negligence and for the accounting for any of
the Corporation's property, funds or securities that may come
into his or her hands.
ARTICLE VI
CUSTODY OF SECURITIES AND CASH
Section 6.01. Employment of a Custodian: The Corporation
shall place and at all times maintain in the custody of a
Custodian (including any sub-custodian for the Custodian) all
funds, securities, and similar investments owned by the
Corporation. The Custodian shall be a bank having an aggregate
capital, surplus, and undivided profits of not less than
$10,000,000. Subject to such rules, regulations, and orders as
the Securities and Exchange Commission may adopt as necessary or
appropriate for the protection of investors, the Corporation's
Custodian may deposit all or a part of the securities owned by
the Corporation in a sub-custodian or sub-custodians situated
within or without the United States. The Custodian shall be
appointed and its remuneration fixed by the Board of Directors.
[Investment Company Act, Section 17(f)]
Section 6.02. Central Certificate Service: Subject to such
rules, regulations, and orders as the Securities and Exchange
PAGE 20
Commission may adopt as necessary or appropriate for the
protection of investors, the Corporation's Custodian may deposit
all or any part of the securities owned by the Corporation in a
system for the central handling of securities established by a
national securities exchange or national securities association
registered with the Commission under the Securities Exchange Act
of 1934, or such other person as may be permitted by the
Commission, pursuant to which system all securities of any
particular class or series of any issuer deposited within the
system are treated as fungible and may be transferred or pledged
by bookkeeping entry without physical delivery of such
securities. [Investment Company Act, Section 17(f)]
Section 6.03. Cash Assets: The cash proceeds from the sale
of securities and similar investments and other cash assets of
the Corporation shall be kept in the custody of a bank or banks
appointed pursuant to Section 6.01 hereof, or in accordance with
such rules and regulations or orders as the Securities and
Exchange Commission may from time to time prescribe for the
protection of investors, except that the Corporation may maintain
a checking account or accounts in a bank or banks, each having an
aggregate capital, surplus, and undivided profits of not less
than $10,000,000, provided that the balance of such account or
the aggregate balances of such accounts shall at no time exceed
the amount of the fidelity bond, maintained pursuant to the
requirements of the Investment Company Act and rules and
regulations thereunder, covering the officers or employees
authorized to draw on such account or accounts. [Investment
Company Act, Section 17(f)]
Section 6.04. Free Cash Accounts: The Corporation may,
upon resolution of its Board of Directors, maintain a petty cash
account free of the foregoing requirements of this Article VI in
an amount not to exceed $500, provided that such account is
operated under the imprest system and is maintained subject to
adequate controls approved by the Board of Directors over
disbursements and reimbursements including, but not limited to,
fidelity bond coverage for persons having access to such funds.
[Investment Company Act, Rule 17f-3]
Section 6.05. Action Upon Termination of Custodian
Agreement: Upon resignation of a custodian of the Corporation or
inability of a custodian to continue to serve, the Board of
Directors shall promptly appoint a successor custodian, but in
the event that no successor custodian can be found who has the
required qualifications and is willing to serve, the Board of
Directors shall call as promptly as possible a special meeting of
the shareholders to determine whether the Corporation shall
function without a custodian or shall be liquidated. If so
directed by vote of the holders of a majority of the outstanding
shares of stock of the Corporation, the custodian shall deliver
and pay over all property of the Corporation held by it as
specified in such vote.
PAGE 21
Section 6.06. Other Arrangements: The Corporation may make
such other arrangements for the custody of its assets (including
deposit arrangements) as may be required by any applicable law,
rule or regulation.
PAGE 22
ARTICLE VII
EXECUTION OF INSTRUMENTS, VOTING OF SECURITIES
Section 7.01. Execution of Instruments: All deeds,
documents, transfers, contracts, agreements, requisitions or
orders, promissory notes, assignments, endorsements, checks and
drafts for the payment of money by the Corporation, and other
instruments requiring execution by the Corporation shall be
signed by the Chairman, the President, a Vice President, or the
Treasurer, or as the Board of Directors may otherwise, from time
to time, authorize. Any such authorization may be general or
confined to specific instances.
Section 7.02. Voting of Securities: Unless otherwise
ordered by the Board of Directors, the Chairman, the President,
or any Vice President shall have full power and authority on
behalf of the Corporation to attend and to act and to vote, or in
the name of the Corporation to execute proxies to vote, at any
meeting of shareholders of any company in which the Corporation
may hold stock. At any such meeting such officer shall possess
and may exercise (in person or by proxy) any and all rights,
powers, and privileges incident to the ownership of such stock.
The Board of Directors may by resolution from time to time confer
like powers upon any other person or persons. [MGCL, Section
2-509]
ARTICLE VIII
____________
CAPITAL STOCK
_____________
Section 8.01. Ownership of Shares:
(a) Certificates certifying the ownership of shares
will not be issued for shares purchased or otherwise acquired.
The ownership of shares, full or fractional, shall be recorded on
the books of the Corporation or its agent. The record books of
the Corporation as kept by the Corporation or its agent, as the
case may be, shall be conclusive as to the number of shares held
from time to time by each such shareholder.
Section 8.02. Transfer of Capital Stock:
(a) Shares of stock of the Corporation shall be
transferable only upon the books of the Corporation kept for such
purpose.
(b) The Corporation shall be entitled to treat the
holder of record of any share of stock as the absolute owner
thereof for all purposes, and accordingly shall not be bound to
PAGE 23
recognize any legal, equitable, or other claim or interest in
such share on the part of any other person, whether or not it
shall have express or other notice thereof, except as otherwise
expressly provided by the statutes of the State of Maryland.
Section 8.03. Transfer Agents and Registrars: The Board of
Directors may, from time to time, appoint or remove transfer
agents and registrars of transfers of shares of stock of the
Corporation, and it may appoint the same person as both transfer
agent and registrar.
Section 8.04. Transfer Regulations: The shares of stock of
the Corporation may be freely transferred, and the Board of
Directors may, from time to time, adopt lawful rules and
regulations with reference to the method of transfer of the
shares of stock of the Corporation.
Section 8.05. Fixing of Record Date: The Board of
Directors may fix in advance a date as a record date for the
determination of the shareholders entitled to notice of or to
vote at any meeting of shareholders or any adjournment thereof,
or to express consent to corporate action in writing without a
meeting, or to receive payment of any dividend or other
distribution or allotment of any rights, or to exercise any
rights in respect of any change, conversion, or exchange of
stock, or for any other proper purpose, provided that such record
date shall be a date not more than sixty (60) days nor, in the
case of a meeting of shareholders, less than ten (10) days prior
to the date on which the particular action, requiring such
determination of shareholders, is to be taken. In such case,
only such shareholders as shall be shareholders of record on the
record date so fixed shall be entitled to such notice of, and to
vote at, such meeting or adjournment, or to give such consent, or
to receive payment of such dividend or other distribution, or to
receive such allotment of rights, or to exercise such rights, or
to take other action, as the case may be, notwithstanding any
transfer of any shares on the books of the Corporation after any
such record date. A meeting of shareholders convened on the date
for which it was called may be adjourned from time to time
without notice to a date not more than one hundred twenty (120)
days after the original record date. [MGCL, Section 2-511]
ARTICLE IX
__________
FISCAL YEAR, ACCOUNTANT
_______________________
Section 9.01. Fiscal Year: The fiscal year of the
Corporation shall be the twelve (12) calendar months beginning on
the 1st day of June in each year and ending on the last day of
the following May, or such other period of twelve (12) calendar
months as the Board of Directors may by resolution prescribe.
PAGE 24
Section 9.02. Accountant:
(a) The Corporation shall employ an independent public
accountant or firm of independent public accountants for each
series of the Corporation to examine the accounts of the
Corporation with respect to such series and to sign and certify
financial statements filed by the Corporation with respect to
such series. The certificates and reports of the accountant(s)
shall be addressed both to the Board of Directors and to the
shareholders. The Corporation may employ a different accountant
with respect to each series.
(b) A majority of the members of the Board of
Directors who are not interested persons (as such term is defined
in the Investment Company Act) of the Corporation shall select
the accountant for each series, by vote cast in person, at any
meeting held within such period of time as may be allowed under
the Investment Company Act. Such selection shall be submitted
for ratification or rejection at the next succeeding annual
shareholders' meeting for such series. If such meeting shall
reject such selection, the accountant for such series shall be
selected by majority vote of the Corporation's outstanding voting
securities of such series, either at the meeting at which the
rejection occurred or at a subsequent meeting of shareholders for
such series called for the purpose.
(c) Any vacancy occurring between annual meetings, due
to the death or resignation of the accountant of a series, may be
filled by the vote of a majority of those members of the Board of
Directors who are not interested persons (as so defined) of the
Corporation, cast in person at a meeting called for the purpose
of voting on such action.
(d) The employment of the accountant of a series shall
be conditioned upon the right of such series of the Corporation
by vote of a majority of the outstanding voting securities of
such series at any meeting called for the purpose to terminate
such employment forthwith without any penalty. [Investment
Company Act, Section 32(a)]
ARTICLE X
_________
INDEMNIFICATION AND INSURANCE
_____________________________
Section 10.01. Indemnification and Payment of Expenses in
Advance: The Corporation shall indemnify any individual
("Indemnitee") who is a present or former director, officer,
employee, or agent of the Corporation, or who is or has been
serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint
PAGE 25
venture, trust or other enterprise, who, by reason of his
position was, is, or is threatened to be made a party to any
threatened, pending, or completed action, suit, or proceeding,
whether civil, criminal, administrative, or investigative
(hereinafter collectively referred to as a "Proceeding") against
any judgments, penalties, fines, settlements, and reasonable
expenses (including attorneys' fees) incurred by such Indemnitee
in connection with any Proceeding, to the fullest extent that
such indemnification may be lawful under Maryland law. The
Corporation shall pay any reasonable expenses so incurred by such
Indemnitee in defending a Proceeding in advance of the final
disposition thereof to the fullest extent that such advance
payment may be lawful under Maryland law. Subject to any
applicable limitations and requirements set forth in the
Corporation's Articles of Incorporation and in these By-Laws, any
payment of indemnification or advance of expenses shall be made
in accordance with the procedures set forth in Maryland law.
Notwithstanding the foregoing, nothing herein shall protect
or purport to protect any Indemnitee against any liability to
which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard
of the duties involved in the conduct of his office ("Disabling
Conduct").
Anything in this Article X to the contrary notwithstanding,
no indemnification shall be made by the Corporation to any
Indemnitee unless:
(a) there is a final decision on the merits by a court
or other body before whom the Proceeding was
brought that the Indemnitee was not liable by
reason of Disabling Conduct; or
(b) in the absence of such a decision, there is a
reasonable determination, based upon a review of
the facts, that the Indemnitee was not liable by
reason of Disabling Conduct, which determination
shall be made by:
(i) the vote of a majority of a quorum of directors
who are neither "interested persons" of the
Corporation as defined in Section 2(a)(19) of the
Investment Company Act, nor parties to the
Proceeding; or
(ii) an independent legal counsel in a written
opinion.
Anything in this Article X to the contrary notwithstanding,
any advance of expenses by the Corporation to any Indemnitee
shall be made only upon the undertaking by such Indemnitee to
repay the advance unless it is ultimately determined that such
PAGE 26
Indemnitee is entitled to indemnification as above provided, and
only if one of the following conditions is met:
(a) the Indemnitee provides a security for his
undertaking; or
(b) the Corporation shall be insured against losses
arising by reason of any lawful advances; or
(c) there is a determination, based on a review of readily
available facts, that there is reason to believe that
the Indemnitee will ultimately be found entitled to
indemnification, which determination shall be made by:
(i) a majority of a quorum of directors who are
neither "interested persons" of the Corporation as
defined in Section 2(a)(19) of the Investment
Company Act, nor parties to the Proceeding; or
(ii) an independent legal counsel in a written opinion.
Section 10.02. Insurance of Officers, Directors, Employees
and Agents: To the fullest extent permitted by applicable
Maryland law and by Section 17(h) of the Investment Company Act,
as from time to time amended, the Corporation may purchase and
maintain insurance on behalf of any person who is or was a
director, officer, employee, or agent of the Corporation, or who
is or was serving at the request of the Corporation as a
director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise, against
any liability asserted against him and incurred by him in or
arising out of his position, whether or not the Corporation would
have the power to indemnify him against such liability. [MGCL,
Section 2-418(k)]
Section 10.03. Amendment: No amendment, alteration or
repeal of this Article or the adoption, alteration or amendment
of any other provision of the Articles of Incorporation or By-
Laws inconsistent with this Article shall adversely affect any
right or protection of any person under this Article with respect
to any act or failure to act which occurred prior to such
amendment, alteration, repeal or adoption.
ARTICLE XI
AMENDMENTS
PAGE 27
Section 11.01. General: Except as provided in Section 11.02
hereof, all By-Laws of the Corporation, whether adopted by the
Board of Directors or the shareholders, shall be subject to
amendment, alteration, or repeal, and new By-Laws may be made, by
the affirmative vote of a majority of either:
(a) the holders of record of the outstanding shares of
stock of the Corporation entitled to vote, at any annual or
special meeting the notice or waiver of notice of which
shall have specified or summarized the proposed amendment,
alteration, repeal, or new By-Law; or
(b) the Directors present at any regular or special
meeting at which a quorum is present if the notice or waiver
of notice thereof or material sent to the Directors in
connection therewith on or prior to the last date for the
giving of such notice under these By-Laws shall have
specified or summarized the proposed amendment, alteration,
repeal, or new By-Law.
Section 11.02. By Shareholders Only:
(a) No amendment of any section of these By-Laws shall be
made except by the shareholders of the Corporation if the
shareholders shall have provided in the By-Laws that such section
may not be amended, altered, or repealed except by the
shareholders.
(b) From and after the issue of any shares of the Capital
Stock of the Corporation, no amendment of this Article XI shall
be made except by the shareholders of the Corporation.
ARTICLE XII
___________
MISCELLANEOUS
_____________
Section 12.01. Use of the Term "Annual Meeting:" The use of
the term "annual meeting" in these By-Laws shall not be construed
as implying a requirement that a shareholder meeting be held
annually.
PAGE 1
August 31, 1995
T. Rowe Price Corporate Income Fund, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Dear Sirs:
In connection with the proposed registration of an
indefinite number of shares of Capital Stock of your Company, I
have examined certified copies of your company's Articles of
Incorporation dated August 17, 1995, and the By-Laws of your
Company as presently in effect.
I am of the opinion that:
(i) your Company is a corporation duly organized and
existing under the laws of Maryland; and
(ii) each of such authorized shares of Capital Stock of
your Company, upon payment in full of the price fixed
by the Board of Directors of your Company, will be
legally and validly issued and will be fully paid and
non-assessable.
I hereby consent to the use of this opinion as an exhibit to
the Company's Registration Statement on Form N-1A to be filed
with the Securities and Exchange Commission for the registration
under the Securities Act of 1933 of an indefinite number of
shares of Capital Stock of your Company.
Sincerely,
/s/Henry H. Hopkins
Henry H. Hopkins
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