-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pa865WA/tzhP1rHOW99ghCP2EJ9UZNDNHmN4HL7bk0tKwbFPkvaxS2j43fN87aXA l0phuC7YxXLJVSP0f0wUXw== 0000080249-98-000003.txt : 19980701 0000080249-98-000003.hdr.sgml : 19980701 ACCESSION NUMBER: 0000080249-98-000003 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980531 FILED AS OF DATE: 19980630 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRICE T ROWE NEW INCOME FUND INC CENTRAL INDEX KEY: 0000080249 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 520980581 FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-02396 FILM NUMBER: 98657590 BUSINESS ADDRESS: STREET 1: 100 EAST PRATT ST CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 4105472000 FORMER COMPANY: FORMER CONFORMED NAME: PRICE T ROWE NEW INCOME FUND INC ET AL DATE OF NAME CHANGE: 19920703 N-30D 1 NEW INCOME FUND - -------------------------------------------------------------------------------- T. Rowe Price - -------------------------------------------------------------------------------- Annual Report New Income Fund - -------------------------------------------------------------------------------- May 31, 1998 - -------------------------------------------------------------------------------- REPORT HIGHLIGHTS ================================================================================ New Income Fund * The bond market environment was favorable for most of your fund's fiscal year ended May 31, although interest rates declined more in the first half than in the second. * Among high-quality bonds, 30-year Treasury bonds posted the best six-month returns, but corporates also performed well. * The fund's 6- and 12-month returns of 3.92% and 10.84%, respectively, were in line with its peer group but slightly lower than the Lehman Aggregate Bond Index. * We focused on income, reducing U.S. Treasury bonds and increasing holdings of corporate bonds as the U.S. economy remained healthy. * Our outlook for the bond market is positive, as we see little likelihood of a tighter monetary policy unless inflationary pressures build significantly. Fellow Shareholders Fixed income investors continued to enjoy solid returns during the six months ended May 31 against a backdrop of declining interest rates and low inflation. Long-term Treasury bonds provided the highest returns, reflecting their extreme sensitivity to interest rate changes, but corporate bonds also performed well as the economy maintained its momentum. Mortgage-backed securities lagged as homeowners took advantage of attractive mortgage rates to refinance their loans. [Interest Rate Levels - a 3-line chart showing the 30-year Treasury Bond, 5- year Treasury Note and 1-year Treasury Bill yields from to 11/30/97 to 5/31/98.] Market Environment Interest rates fell approximately one percentage point over the past year, with about one-quarter of the move occurring in the past six months. In recent months, long-term rates declined more than short-term, causing the yield curve to flatten. For instance, a year ago, the 30-year Treasury bond yield of 6.99% was 113 basis points higher than the one-year Treasury bill yield, but on May 31 the difference was only 40 basis points (100 basis points equal one percent). This means that any move to long maturities in the U.S. government market now brings a relatively small pickup in income. The performance of mortgage-backed securities was hindered by a sharp increase in prepayments, reflected in the new high reached by the Mortgage Bankers Association Refinancing Index in January. Rising property values, a strong housing market, and attractive interest rates inspired many homeowners to change the terms of their mortgages and perhaps their addresses, also. The economy's consistent strength and momentum in recent years resulted in some credit trends that interested us as portfolio managers. In particular, credit rating agencies issued far more upgrades than downgrades for corporate bonds in the BBB and BB+ sectors, which straddle the line between investment grade (BBB) and noninvestment grade (BB). Prices of upgraded bonds rise as their yields adjust lower. As you know, your fund's investment program was recently amended to allow purchases of such "split-rated" bonds (up to 15% of total assets), and we began to take advantage of that increased flexibility. ================================================================================ Performance Comparison - -------------------------------------------------------------------------------- Periods Ended 5/31/98 6 Months 12 Months - -------------------------------------------------------------------------------- New Income Fund 3.92% 10.84% Lehman Aggregate Bond Index 4.09 10.91 Lipper Average of Corporate Bond Funds A-Rated 3.93 10.85 ================================================================================ Performance Review Your fund provided solid returns for both the 6- and 12-month periods that were in line with its Lipper peer group average. Returns were slightly lower than those of the benchmark Lehman index, due in part to the greater exposure of the index to long Treasury securities, which performed well. The fund's income return was boosted in both periods by appreciation, as the share price rose from $8.77 to $9.09 over the 12 months, but most of the gain belonged to the first half of the fiscal year-June through November. Strategy The overall aim of our portfolio adjustments during the period was to lay the groundwork for higher income in future months. Not only is this consistent with the fund's goal as prescribed in the prospectus, but income has the advantage of always contributing positively to total return. Toward this end, we analyzed credit trends across a number of U.S. and foreign markets in search of securities that fit our investment program but offered a yield advantage. This led us to so-called Yankee bonds, which are issued by foreign companies but are denominated in U.S. dollars and traded in the U.S. These bonds, representing 10 countries and a variety of industries, composed almost 15% of the portfolio at the close of the period and are included in the "corporate bond" section of the Security Diversification chart. We also took advantage of our new ability to buy some corporate bonds that may carry both investment-grade and noninvestment-grade ratings. As a result of this strategy, our holdings of corporate bonds and asset-backed securities rose to 64% from 41% six months ago. [A pie chart "Security Diversification" showing U.S. government and agencies, 8%; mortgage-backed securities 27%; corporate bonds 64%, Other and reserves 1%.] We trimmed but otherwise maintained a significant commitment to mortgage-backed securities because they offer high income and also high credit quality. Our holdings here are issued by Ginnie Mae (GNMA), which is an agency of the Department of Housing and Urban Development, and by the U.S. government-sponsored agencies, Fannie Mae and Freddie Mac. Within this universe, we look for securities backed by mortgages that should be less likely to be prepaid, such as those over two years old or with low balances. We also purchased CMOs (collateralized mortgage obligations) and asset-backed securities that are structured so that they are protected from prepayments and still offer attractive yields. And last, we largely eliminated our holdings of longer-term Treasuries to redeploy the assets in higher-yielding corporates. Our holdings of Tennessee Valley Authority securities and Fannie Mae debentures provide much the same liquidity and high quality as Treasuries, but also higher income. Outlook The economy remains in good shape. GDP was strong for the first quarter, and unemployment is at an 18-year low of 4.3%. However, inventories are building up, and we expect a slowing of growth in the second quarter. Asia's problems are starting to affect the domestic market and should remain an issue for at least the next two quarters, preventing our own economy from overheating and forestalling a tightening of monetary policy by the Federal Reserve. We expect stable interest rates but with a slightly downward drift as inflation remains in check. In this environment, we believe mortgage prepayments will remain fairly high but feel comfortable with our current strategy of holding mortgage securities with some protection against prepayments. We will continue to make use of our extensive in-house research resources to find debt securities that will help us provide a high level of income while maintaining the fund's overall investment-grade credit quality. For the past year, bond investors and your fund have benefited from the appreciation that accompanies falling rates. While we may see some more of this, we believe returns in the coming months may be driven primarily by income and, therefore, may be more modest than those of the past year. Respectfully submitted, /s/ Peter Van Dyke President and Chairman of the Investment Advisory Committee June 19, 1998 T. Rowe Price New Income Fund ================================================================================ ================================================================================ Portfolio Highlights - -------------------------------------------------------------------------------- Key statistics 11/30/97 5/31/98 - -------------------------------------------------------------------------------- Price Per Share $9.06 $9.09 Dividends Per Share For 6 months 0.29 0.28 For 12 months 0.58 0.57 Dividend Yield * For 6 months 6.53% 6.25% For 12 months 6.72 6.49 Weighted Average Maturity (years) 12.2 14.4 Weighted Average Effective Duration (years) 5.4 5.9 Weighted Average Quality ** AA A+ * Dividends earned and reinvested for the periods indicated are annualized and divided by the average daily net asset values per share for the same period. ** Based on T. Rowe Price research. ================================================================================ T. Rowe Price New Income Fund ================================================================================ ================================================================================ Portfolio Highlights - -------------------------------------------------------------------------------- SECTOR Diversification Percent of Percent of Net Assets Net Assets 11/30/97 5/31/98 - -------------------------------------------------------------------------------- Mortgage-Backed Securities 35% 27% Banking 12 16 Finance and Credit 7 7 Fannie Mae-Debenture - 6 Asset-Backed - 6 Industrial 1 4 Petroleum - 3 Insurance 2 3 Investment Dealers 2 3 Cable Operators 2 3 Entertainment and Leisure - 2 Building and Real Estate 1 2 Media and Communications - 2 Savings and Loan - 2 All Other 35 14 Other Assets Less Liabilities 3 - - -------------------------------------------------------------------------------- Total 100% 100% ================================================================================ T. Rowe Price New Income Fund ================================================================================ ================================================================================ Performance Comparison - -------------------------------------------------------------------------------- This chart shows the value of a hypothetical $10,000 investment in the fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records). The result is compared with a broad-based average or index. The index return does not reflect expenses, which have been deducted from the fund's return. [New Income Fund SEC graph shown here] ================================================================================ Average Annual Compound Total Return - -------------------------------------------------------------------------------- This table shows how the fund would have performed each year if its actual (or cumulative) returns for the periods shown had been earned at a constant rate. ================================================================================ Periods Ended 5/31/98 1 Year 3 Years 5 Years 10 Years New Income Fund 10.84% 7.37% 6.88% 8.47% Investment return and principal value represent past performance and will vary. Shares may be worth more or less at redemption than at original purchase. ================================================================================ T. Rowe Price New Income Fund ==================================================================================================================================== For a share outstanding throughout each period ==================================================================================================================================== Financial Highlights - ------------------------------------------------------------------------------------------------------------------------------------ Year 3 Months++ Year Ended Ended Ended 5/31/98 5/31/97 5/31/96 5/31/95 5/31/94 2/28/94 NET ASSET VALUE Beginning of period ...................... $ 8.77 $ 8.70 $ 8.97 $ 8.65 $ 9.12 $ 9.24 Investment activities Net investment income .............. 0.57 0.58 0.60 0.58 0.14 0.54 Net realized and unrealized gain (loss) ............. 0.36 0.07 (0.27) 0.34 (0.40) (0.05) Total from investment activities .............. 0.93 0.65 0.33 0.92 (0.26) 0.49 Distributions Net investment income .............. (0.57) (0.58) (0.60) (0.58) (0.14) (0.54) Net realized gain .................. (0.04) -- -- (0.02) (0.07) (0.07) Total distributions ................ (0.61) (0.58) (0.60) (0.60) (0.21) (0.61) NET ASSET VALUE End of period ............................ $ 9.09 $ 8.77 $ 8.70 $ 8.97 $ 8.65 $ 9.12 Ratios/Supplemental Data Total return^ ............................ 10.84% 7.70% 3.70% 11.13% (2.84)% 5.36% Ratio of expenses to average net assets ....................... 0.71% 0.74% 0.75% 0.78% 0.80%+ 0.82% Ratio of net investment income to average net assets ............................... 6.31% 6.65% 6.66% 6.95% 6.43%+ 5.77% Portfolio turnover rate .................. 147.3% 87.1% 35.5% 54.1% 91.5%+ 58.3% Net assets, end of period (in millions) ............................ $ 2,076 $ 1,711 $ 1,634 $ 1,566 $ 1,375 $ 1,458 ^ Total return reflects the rate that an investor would have earned on an investment in the fund during each period, assuming reinvestment of all distributions. + Annualized. ++ The fund's fiscal year-end was changed to May 31.
The accompanying notes are an integral part of these financial statements. T. Rowe Price New Income Fund ================================================================================ May 31, 1998 ================================================================================ Statement of Net Assets - -------------------------------------------------------------------------------- Par/Shares Value In thousands CORPORATE BONDS AND NOTES 58.6% Automobiles and Related 0.7% Hertz, 7.00%, 1/15/28 ....................................... $15,000 $14,860 14,860 Banking 15.9% Ahmanson Capital Trust I, Cap. Securities, (144a) 8.36%, 12/1/26 .............................. 10,000 11,010 Banco Generale, Sr. Sub. Notes, (144a), 7.70%, 8/1/02 ....... 10,000 9,757 Banco Latinoamericano, (144a), 6.69%, 12/23/99 .............. 10,000 10,029 Banco Santiago, Sub. Notes, 7.00%, 7/18/07 .................. 10,000 9,764 Bank of Boston Capital Trust, Gtd. Notes, 8.25%, 12/15/26 ... 30,000 32,608 Bank of Oklahoma, 7.125%, 8/15/07 ........................... 12,000 12,606 Bank United, 8.875%, 5/1/07 ................................. 15,000 16,415 Bankboston, Sub. Notes, 6.50%, 12/19/07 ..................... 6,500 6,502 Banque Parabas, Sub. Notes, 6.875%, 3/1/09 .................. 15,000 15,153 Capital One Bank, Sr. Notes, 6.70%, 5/15/08 ................. 20,000 20,003 Den Danske Bank, (144a), VR, 7.40%, 6/15/10 ................. 10,000 10,593 FCNCB Capital Trust I, Gtd. Cap. Securities, (144a) 8.05%, 3/1/28 ............................... 12,000 12,343 First Empire Capital Trust I, Gtd. Bonds, 8.234%, 2/1/27 .... 10,000 10,935 Hubco Capital Trust I, 8.98%, 2/1/27 ........................ 7,000 7,787 IBJ Preferred Capital, (144a), 8.79%, 6/30/08 ............... 22,000 19,494 Mason Dixon Bancshares, Sr. Notes, 7.48%, 4/23/08+ .......... 20,000 19,962 MBNA Capital I, 8.278%, 12/1/26 ............................. 15,000 15,931 Mercantile Bankshares, Sr. Notes, (144a), 6.13%, 7/15/98+ ... 5,000 4,999 Merita Bank, Non-Cum. Step-Up Perpetual Cap. Securities 7.15%, 9/11/02 .............................. 11,000 11,156 Riggs National, 9.65%, 6/15/09 .............................. 10,000 12,051 SB Treasury, (144a), 9.40%, 6/30/08 ......................... 18,000 17,580 Skandinaviska Enskilda Banken Step-Up Perpetual Sub. Notes, (144a) 6.50%, 12/4/03 .............................. 19,500 19,451 8.125%, 9/6/06 .............................. 10,000 10,787 Societe Generale, Step-Up Perpetual Sub. Notes, (144a) 7.85%, 4/30/07 .............................. 13,000 13,551 330,467 Beverages 1.1% Embotelladora Andina, 7.00%, 10/1/07 ........................ $10,000 $ 9,826 Panamerican Beverages, Sr. Notes, (144a), 7.25%, 7/1/09 ..... 13,000 12,993 22,819 Building Products 1.1% Owens Corning, 7.70%, 5/1/08 ................................ 23,000 23,382 23,382 Building and Real Estate 2.2% BRE Properties, 7.125%, 2/15/13 ............................. 10,000 9,950 Hospitality Properties Trust, Sr. Notes, 7.00%, 3/1/08 ...... 10,000 9,932 Simon Debartolo Group, 7.00%, 7/15/09 ....................... 10,000 10,031 Spieker Properties, 7.125%, 7/1/09 .......................... 14,700 14,999 44,912 Cable Operators 2.9% Clear Channel, Deb., 7.25%, 10/15/27 ........................ 20,000 20,528 Comcast Cable Communications, 8.375%, 5/1/07 ................ 20,000 22,204 Cox Enterprises, 7.375%, 7/15/27 ............................ 17,000 18,205 60,937 Conglomerates 1.0% Harcourt General, Sr. Deb., 7.20%, 8/1/27 ................... 20,000 20,106 20,106 Container 1.0% Owens Illinois, Sr. Notes, 7.35%, 5/15/08 ................... 20,000 20,175 20,175 Electric Utilities 0.9% Montana Power, 1st Mtg. Bonds, 8.25%, 2/1/07 ................ 5,000 5,587 Western Resources, 1st Mtg. Bonds, 6.875%, 8/1/04 ........... 12,000 12,246 17,833 Entertainment and Leisure 2.5% Royal Caribbean Cruises, Sr. Notes, 6.75%, 3/15/08 .......... 20,000 19,933 Viacom, Sr. Notes, 7.75%, 6/1/05 ............................ 30,000 31,872 51,805 Finance and Credit 6.5% CIT Capital Trust I, Gtd. Cap. Securities, 7.70%, 2/15/27 ... 10,000 10,786 Contifinancial Sr. Notes 7.50%, 3/15/02 .............................. 20,000 20,002 8.125%, 4/1/08 .............................. 9,300 9,466 Fairfax Financial Holdings, 8.25%, 10/1/15 .................. 12,760 14,178 Hutchison Whampoa Finance, (144a), 6.95%, 8/1/07 ............ $18,000 $ 16,720 Jefferson Pilot Capital Trust, (144a), 8.14%, 1/15/46 ....... 10,000 10,790 MCN Financing, Gtd. Notes, (144a), 6.305%, 6/1/37 ........... 15,000 15,026 Safeco Capital Trust I, 8.072%, 7/15/37 ..................... 15,000 15,867 Trenwick Capital Trust I, Cap. Securities, 8.82%, 2/1/37 .... 10,500 11,582 Zurich Capital Trust, (144a), 8.376%, 6/1/37 ................ 10,000 11,052 135,469 Food Processing 1.0% Flowers Industries, 7.15%, 4/15/28 .......................... 20,000 20,232 20,232 Food and Tobacco 0.8% Philip Morris, 7.65%, 7/1/08 ................................ 15,000 15,987 15,987 Health Care 1.0% Beckman Instruments, Sr. Notes, (144a), 7.45%, 3/4/08 ....... 20,000 20,217 20,217 Industrials 3.5% Celulosa Arauco Y Constitucion, (144a), 7.20%, 9/15/09 ...... 12,500 12,208 Oracle, Sr. Notes, 6.91%, 2/15/07 ........................... 10,000 10,229 WMX Tecnologies, Step-Up Notes, 8.00%, 4/30/04 .............. 10,000 10,691 YPF Sociedad Anonima 7.25%, 3/15/03 .............................. 20,000 19,756 7.75%, 8/27/07 .............................. 20,000 20,514 73,398 Insurance 3.3% Hartford Life, 6.90%, 6/15/04 ............................... 14,850 15,333 Liberty Mutual Insurance, (144a), 8.20%, 5/4/07 ............. 12,000 13,449 Metropolitan Life Insurance, (144a), 7.80%, 11/1/25 ......... 16,850 18,715 Provident, Sr. Notes, 7.25%, 3/15/28 ........................ 20,000 20,454 67,951 Investment Dealers 3.2% Goldman Sachs Group, (144a), 6.625%, 12/1/04 ................ 10,000 10,043 Jefferies Group, Sr. Notes, 7.50%, 8/15/07 .................. 10,000 10,400 Paine Webber Group MTN 6.64%, 4/14/10 .............................. 25,000 24,875 6.72%, 4/1/08 ............................... 20,000 20,307 65,625 Media and Communications 1.8% News America, (144a), 6.75%, 1/9/38 ......................... $25,500 $25,315 Time Warner, Sr. Notes, 9.125%, 1/15/13 ..................... 10,000 12,157 37,472 Oil Field Services 1.0% R & B Falcon, Sr. Notes, (144a), 6.95%, 4/15/08 ............. 20,000 19,918 19,918 Petroleum 3.4% PDV America, 7.875%, 8/1/03 ................................. 10,000 10,410 PDVSA Finance, (144a), 7.50%, 11/15/28 ...................... 20,000 20,094 Union Texas Petroleum, 7.00%, 4/15/08 ....................... 20,000 20,779 Woodside Finance, (144a), 6.60%, 4/15/08 .................... 20,000 19,798 71,081 Savings and Loan 1.6% CENFED Financial, Sr. Deb., (144a), 11.17%, 12/15/01 ........ 5,000 5,688 Greenpoint Capital Trust I, Gtd. Notes, 9.10%, 6/1/27 ....... 25,000 28,064 33,752 Specialty Chemicals 1.0% Sociedad Quimira Y Minera, LCP, (144a), 7.70%, 9/15/06 ...... 20,000 20,738 20,738 Telephone 1.2% MCI Communications, Sr. Notes, 6.50%, 4/15/10 ............... 10,000 9,929 Worldcom, 7.75%, 4/1/07 ..................................... 15,000 16,202 26,131 Total Corporate Bonds and Notes (Cost $1,198,429) ........... 1,215,267 ASSET-BACKED SECURITIES 5.7% Auto-Backed 0.0% Premier Auto Trust, 4.22%, 3/2/99 ........................... 274 273 273 Credit Card-Backed 1.0% Capital One Master Trust, 6.356%, 6/15/11 ................... 20,000 20,118 20,118 Financial 1.0% Saxon Asset Security Trust, 6.52%, 11/25/27 ................. 20,000 19,984 19,984 Home Equity Loans-Backed 3.1% FURST Home Equity Loan Trust, 7.77%, 9/25/27 ................ 5,300 5,595 GE Capital Mortgage Services, 6.465%, 6/25/28 ............... $14,207 $14,384 Money Store Home Equity Trust 6.985%, 10/15/16 ............................ 6,000 6,114 7.91%, 5/15/24 .............................. 13,159 13,690 UCFC Home Equity Loan Trust 7.18%, 2/15/25 .............................. 7,000 7,167 7.22%, 6/15/28 .............................. 11,400 11,770 7.325%, 1/10/27 ............................. 5,000 5,066 63,786 Receivables-Backed 0.4% Green Tree Financial, Sr. Sub. Certificates, 6.87%, 1/15/29.. 8,655 8,885 8,885 Whole Loans-Backed 0.2% Amresco Residential Securities, 6.745%, 3/25/28 ............. 4,850 4,850 4,850 Total Asset-Backed Securities (Cost $117,584) ............... 117,896 PREFERRED STOCKS 0.6% Banking 0.2% Silicon Valley Bancshares ................................... 120 2,970 2,970 Financial 0.4% Pinto Totta International Finance, (144a), (Series A) ....... 9 8,828 8,828 Total Preferred Stocks (Cost $11,725) ....................... 11,798 U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES 26.5% U.S. Government Agency Asset-Backed 0.7% Federal Home Loan Mortgage, REMIC Government National Mortgage Assn. Collateral 5.15%, 8/25/12 .............................. 5,267 5,237 Federal National Mortgage Assn., REMIC, 7.50%, 8/17/17 ...... 8,946 9,385 14,622 U.S. Government Agency Obligations 7.7% Federal Home Loan Mortgage 6.50%, 11/1/04 - 6/1/24 ..................... 10,094 10,093 7.00%, 2/1/24 - 6/1/25 ...................... 5,028 5,116 Federal Home Loan Mortgage 7.50%, 3/1 - 6/1/24 ......................... $ 7,678 $ 7,894 8.00%, 6/1/08 ............................... 76 78 9.00%, 3/1/21 - 5/1/22 ...................... 5,163 5,508 9.75%, 12/1/17 .............................. 1,728 1,886 10.50%, 2/1/01 - 8/1/20 ..................... 760 842 11.00%, 5/1/11 - 7/1/20 ..................... 392 444 11.50%, 6/1/01 .............................. 2 3 REMIC 5.50%, 10/15/20 ............................. 5,000 4,883 6.00%, 5/15/16 .............................. 3,362 3,356 6.50%, 7/15/11 - 6/15/23 .................... 31,663 32,007 7.00%, 8/15/09 - 9/15/24 .................... 40,600 41,117 7.50%, 2/15/06 .............................. 1,159 1,164 Federal National Mortgage Assn .............................. 6.00%, 3/1 - 5/1/28 ......................... 35,855 34,794 8.75%, 3/1/10 ............................... 11 12 10.50%, 7/1/09 - 4/1/22 ..................... 1,717 1,895 REMIC, 8.00%, 11/25/24 .............................. 8,233 8,761 159,853 U.S. Government Guaranteed Obligations 18.1% Government National Mortgage Assn ........................... I 6.50%, 4/15/23 - 1/15/28 .................... 56,051 55,944 7.00%, 4/15/22 - 1/15/28 .................... 118,580 120,647 7.50%, 8/15/16 - 9/15/27 .................... 21,276 22,015 8.00%, 7/15/16 - 10/15/27 ................... 51,919 54,335 8.50%, 9/15/16 - 7/15/23 .................... 12,682 13,488 9.00%, 1/15/09 - 1/15/23 .................... 7,733 8,339 9.50%, 6/15/09 - 3/15/25 .................... 46,026 50,129 11.00%, 12/15/09 - 1/15/21 .................. 13,726 15,541 11.50%, 3/15/10 - 10/15/15 .................. 1,938 2,222 II 7.00%, 12/20/23 - 5/20/28 ................... 25,023 25,279 8.50%, 9/20/26 .............................. 105 111 9.00%, 6/20/16 - 5/20/22 .................... 5,494 5,886 GPM, I, 10.25%, 2/15/16 - 11/15/20 .................. 2,076 2,285 376,221 Total U.S. Government Mortgage-Backed Securities (Cost $538,183) 550,696 U.S. GOVERNMENT OBLIGATIONS 8.4% U.S. Government Agency Obligations 7.4% Federal National Mortgage Assn .............................. 5.625%, 3/15/01 ............................. $35,000 $ 34,918 5.75%, 2/15/08 .............................. 95,000 93,946 Tennessee Valley Auth ....................................... 5.88%, 4/1/36 ............................... 20,000 20,822 6.235%, 7/15/45 ............................. 4,434 4,628 154,314 U.S. Treasury Obligations 1.0% U.S. Treasury Inflation-Indexed Notes, 3.375%, 1/15/07 ...... 20,358 19,748 19,748 Total U.S. Government Obligations (Cost $174,096) .......... 174,062 MONEY MARKET FUNDS 0.4% Reserve Investment Fund, 5.67% # ............................ 9,308 9,308 Total Money Market Funds (Cost $9,308) ..................... 9,308 Total Investments in Securities 100.2% of Net Assets (Cost $2,049,325) ..................... $2,079,027 Other Assets Less Liabilities ............................... (3,437) NET ASSETS .................................................. $2,075,590 Net Assets Consist of: Accumulated net investment income - net of distributions ........................................ $2,809 Accumulated net realized gain/loss - net of distributions ........................................ 36,660 Net unrealized gain (loss) .................................. 29,702 Paid-in-capital applicable to 228,218,118 shares of $1.00 par value capital stock outstanding; 300,000,000 shares authorized .................. 2,006,419 NET ASSETS .................................................. $2,075,590 NET ASSET VALUE PER SHARE ................................... $ 9.09 + Private Placement # Seven-day yield GPM Graduated Payment Mortgage MTN Medium Term Note REMIC Real Estate Mortgage Investment Conduit VR Variable Rate 144a Security was purchased pursuant to Rule 144a under the Securities Act of 1933 and may not be resold subject to that rule except to qualified institutional buyers total of such securities at period-end amounts to 19.3% of net assets. The accompanying notes are an integral part of these financial statements. T. Rowe Price New Income Fund ================================================================================ ================================================================================ Statement of Operations - -------------------------------------------------------------------------------- In thousands Year Ended 5/31/98 Investment Income Interest and dividend income .................................... 134,123 Expenses Investment management ..................................... 9,047 Shareholder servicing ..................................... 3,862 Custody and accounting .................................... 304 Prospectus and shareholder reports ........................ 158 Registration .............................................. 125 Legal and audit ........................................... 26 Directors ................................................. 20 Miscellaneous ............................................. 18 Total expenses ............................................ 13,560 Net investment income ........................................... 120,563 Realized and Unrealized Gain (Loss) Net realized gain (loss) Securities ................................................ 51,704 Futures ................................................... 249 Net realized gain (loss) .................................. 51,953 Change in net unrealized gain or loss on securities ............. 22,374 Net realized and unrealized gain (loss) ......................... 74,327 INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS .......................................... $194,890 The accompanying notes are an integral part of these financial statements. T. Rowe Price New Income Fund ================================================================================ ================================================================================ Statement of Changes in Net Assets - -------------------------------------------------------------------------------- In thousands Year Ended 5/31/98 5/31/97 Increase (Decrease) in Net Assets Operations Net investment income ........................... $ 120,563 $ 111,049 Net realized gain (loss) ........................ 51,953 4,730 Change in net unrealized gain or loss ........... 22,374 6,965 Increase (decrease) in net assets from operations 194,890 122,744 Distributions to shareholders Net investment income ........................... (120,455) (111,027) Net realized gain ............................... (8,527) -- Decrease in net assets from distributions ....... (128,982) (111,027) Capital share transactions * Shares sold ..................................... 525,602 323,914 Distributions reinvested ........................ 79,742 71,848 Shares redeemed ................................. (306,392) (331,111) Increase (decrease) in net assets from capital share transactions .............................. 298,952 64,651 Net Assets Increase (decrease) during period ..................... 364,860 76,368 Beginning of period ................................... 1,710,730 1,634,362 End of period ......................................... $2,075,590 $1,710,730 *Share information Shares sold ................................. 58,292 36,821 Distributions reinvested .................... 8,829 8,164 Shares redeemed ............................. (33,981) (37,672) Increase (decrease) in shares outstanding ... 33,140 7,313 The accompanying notes are an integral part of these financial statements. T. Rowe Price New Income Fund ================================================================================ May 31, 1998 ================================================================================ Notes to Financial Statements - -------------------------------------------------------------------------------- NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES T. Rowe Price New Income Fund, Inc. (the fund) is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company and commenced operations on October 12, 1973. The accompanying financial statements are prepared in accordance with generally accepted accounting principles for the investment company industry; these principles may require the use of estimates by fund management. VALUATION Debt securities are generally traded in the over-the-counter market. Investments in securities originally issued with maturities of one year or more are stated at fair value as furnished by dealers who make markets in such securities or by an independent pricing service, which considers yield or price of bonds of comparable quality, coupon, maturity, and type, as well as prices quoted by dealers who make markets in such securities. Securities with original maturities of 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 money market yields. 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 more than one exchange is valued at the quotation on the exchange determined to be the primary market for such security. Listed securities not traded on a particular day and securities regularly traded in the over-the-counter market are 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, or by persons delegated by the Board, best to reflect fair value. Investments in mutual funds are valued at the closing net asset value per share of the mutual fund on the day of valuation. Assets and liabilities for which the above valuation procedures are inappropriate or are deemed not to reflect fair value are stated at fair value as determined in good faith by or under the supervision of the officers of the fund, as authorized by the Board of Directors. PREMIUMS AND DISCOUNTS Premiums and discounts on debt securities, other than mortgage-backed securities, are amortized for both financial reporting and tax purposes. Premiums and discounts on mortgage-backed securities are recognized upon principal repayment as gain or loss for financial reporting purposes and as ordinary income for tax purposes. OTHER Income and expenses are recorded on the accrual basis. Investment transactions are accounted for on the trade date. Realized gains and losses are reported on the identified cost basis. Dividend income and distributions to shareholders are recorded by the fund on the ex-dividend date. Income and capital gain distributions are determined in accordance with federal income tax regulations and may differ from those determined in accordance with generally accepted accounting principles. NOTE 2 - INVESTMENT TRANSACTIONS Consistent with its investment objective, the fund engages in the following practices to manage exposure to certain risks or enhance performance. The investment objective, policies, program, and risk factors of the fund are described more fully in the fund's prospectus and Statement of Additional Information. SECURITIES LENDING The fund lends its securities to approved brokers to earn additional income and receives cash and U.S. Treasury securities as collateral against the loans. Cash collateral received is invested in a money market pooled account by the fund's lending agent. Collateral is maintained over the life of the loan in an amount not less than 100% of the value of loaned securities. Although the risk is mitigated by the collateral, the fund could experience a delay in recovering its securities and a possible loss of income or value if the borrower fails to return them. At May 31, 1998, the value of loaned securities was $9,617,000; aggregate collateral consisted of $10,033,000 in the securities lending collateral pool. OTHER Purchases and sales of portfolio securities, other than short-term and U.S. government securities, aggregated $1,660,804,000 and $751,781,000, respectively, for the year ended May 31, 1998. Purchases and sales of U.S. government securities aggregated $1,491,287,000 and $1,933,645,000, respectively, for the year ended May 31, 1998. NOTE 3 - FEDERAL INCOME TAXES No provision for federal income taxes is required since the fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. At May 31, 1998, the aggregate cost of investments for federal income tax and financial reporting purposes was $2,049,325,000, and net unrealized gain aggregated $29,702,000, of which $35,068,000 related to appreciated investments and $5,366,000 to depreciated investments. NOTE 4 - RELATED PARTY TRANSACTIONS The investment management agreement between the fund and T. Rowe Price Associates, Inc. (the manager) provides for an annual investment management fee, of which $823,000 was payable at May 31, 1998. The fee is computed daily and paid monthly, and consists of an individual fund fee equal to 0.15% of average daily net assets and a group fee. The group fee is based on the combined assets of certain mutual funds sponsored by the manager or Rowe Price-Fleming International, Inc. (the group). The group fee rate ranges from 0.48% for the first $1 billion of assets to 0.30% for assets in excess of $80 billion. At May 31, 1998, and for the year then ended, the effective annual group fee rate was 0.32%. The fund pays a pro-rata share of the group fee based on the ratio of its net assets to those of the group. In addition, the fund has entered into agreements with the manager and two wholly owned subsidiaries of the manager, pursuant to which the fund receives certain other services. The manager computes the daily share price and maintains the financial records of the fund. T. Rowe Price Services, Inc., is the fund's transfer and dividend disbursing agent and provides shareholder and administrative services to the fund. T. Rowe Price Retirement Plan Services, Inc., provides subaccounting and recordkeeping services for certain retirement accounts invested in the fund. The fund incurred expenses pursuant to these related party agreements totaling approximately $2,216,000 for the year ended May 31, 1998, of which $181,000 was payable at period-end. Additionally, the fund is one of several T. Rowe Price-sponsored mutual funds (underlying funds) in which the T. Rowe Price Spectrum Funds (Spectrum) may invest. Spectrum does not invest in the underlying funds for the purpose of exercising management or control. Expenses associated with the operation of Spectrum are borne by each underlying fund to the extent of estimated savings to it and in proportion to the average daily value of its shares owned by Spectrum, pursuant to special servicing agreements between and among Spectrum, the underlying funds, T. Rowe Price, and, in the case of T. Rowe Price Spectrum International, Rowe Price-Fleming International. Spectrum Income Fund held approximately 34.3% of the outstanding shares of the New Income Fund at May 31, 1998. For the year then ended, the fund was allocated $1,371,000 of Spectrum expenses, $132,000 of which was payable at period-end. The fund may invest in the Reserve Investment Fund and Government Reserve Investment Fund (collectively, the Reserve Funds), open-end management investment companies managed by T. Rowe Price Associates, Inc. The Reserve Funds are offered as cash management options only to mutual funds and other accounts managed by T. Rowe Price and its affiliates and are not available to the public. The Reserve Funds pay no investment management fees. Distributions from the Reserve Funds to the fund for the year ended May 31, 1998, totaled $2,572,000 and are reflected as interest income in the accompanying Statement of Operations. T. Rowe Price New Income Fund ================================================================================ ================================================================================ Report of Independent Accountants - -------------------------------------------------------------------------------- TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF T. ROWE PRICE NEW INCOME FUND, INC. In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of T. Rowe Price New Income Fund, Inc. (the "Fund") at May 31, 1998, and the results of its operations, the changes in its net assets and the financial highlights for each of the fiscal periods presented, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at May 31, 1998 by correspondence with the custodian and, where appropriate, the application of alternative auditing procedures for unsettled security transactions, provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Baltimore, Maryland June 17, 1998 T. Rowe Price New Income Fund ================================================================================ ================================================================================ Tax Information (Unaudited) for the Tax Year Ended 5/31/98 - -------------------------------------------------------------------------------- We are providing this information as required by the Internal Revenue Code. The amounts shown may differ from those elsewhere in this report because of differences between tax and financial reporting requirements. The fund's distributions to shareholders included $8,527,000 from long-term capital gains; of which $2,220,000 was subject to the 20% rate gains category. For corporate shareholders, $1,144,000 of the fund's distributed income qualified for the dividends-received deduction. ================================================================================ T. Rowe Price Shareholder Services ================================================================================ INVESTMENT SERVICES AND INFORMATION KNOWLEDGEABLE SERVICE REPRESENTATIVES BY PHONE 1-800-225-5132 Available Monday through Friday from 8 a.m. to 10 p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET. IN PERSON Available in T. Rowe Price Investor Centers. ACCOUNT SERVICES CHECKING Available on most fixed income funds ($500 minimum). AUTOMATIC INVESTING From your bank account or paycheck. AUTOMATIC WITHDRAWAL Scheduled, automatic redemptions. DISTRIBUTION OPTIONS Reinvest all, some, or none of your distributions. AUTOMATED 24-HOUR SERVICES Including Tele*Access [Registration Mark] and the T. Rowe Price Web site on the Internet. Address: www.troweprice.com DISCOUNT BROKERAGE* INDIVIDUAL INVESTMENTS Stocks, bonds, options, precious metals, and other securities at a savings over regular commission rates. INVESTMENT INFORMATION COMBINED STATEMENT Overview of all your accounts with T. Rowe Price. SHAREHOLDER REPORTS Fund managers' reviews of their strategies and results. T. ROWE PRICE REPORT Quarterly investment newsletter discussing markets and financial strategies. PERFORMANCE UPDATE Quarterly review of all T. Rowe Price fund results. INSIGHTS Educational reports on investment strategies and financial markets. INVESTMENT GUIDES Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A Guide to International Investing, Personal Strategy Planner, Retirees Financial Guide, and Retirement Planning Kit. * A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC. FOR YIELD, PRICE, LAST TRANSACTION, CURRENT BALANCE, OR TO CONDUCT TRANSACTIONS, 24 HOURS, 7 DAYS A WEEK, CALL TELE*ACCESS [REGISTRATION MARK]: 1-800-638-2587 toll free FOR ASSISTANCE WITH YOUR EXISTING FUND ACCOUNT, CALL: Shareholder Service Center 1-800-225-5132 toll free 410-625-6500 Baltimore area TO OPEN A DISCOUNT BROKERAGE ACCOUNT OR OBTAIN INFORMATION, CALL: 1-800-638-5660 toll free INTERNET ADDRESS: www.troweprice.com T. Rowe Price Associates 100 East Pratt Street Baltimore, Maryland 21202 This report is authorized for distribution only to shareholders and to others who have received a copy of the prospectus of the T. Rowe Price New Income Fund [Registration Mark]. INVESTOR CENTERS: 101 East Lombard St. Baltimore, MD 21202 T. Rowe Price Financial Center 10090 Red Run Blvd. Owings Mills, MD 21117 Farragut Square 900 17th Street, N.W. Washington, D.C. 20006 ARCO Tower 31st Floor 515 South Flower St. Los Angeles, CA 90071 4200 West Cypress St. 10th Floor Tampa, FL 33607 T. Rowe Price Investment Services, Inc., Distributor. F43-051 5/31/98 -----END PRIVACY-ENHANCED MESSAGE-----