-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, BACffA3ZHcsEaNraejkYaw1Kmdqo0gLVXftbZdi1+Ez8MaJEnpgESJ6sBPnxUdCk prl25UQq3kxQ0+h1d9BrUg== 0000080249-95-000003.txt : 199507100000080249-95-000003.hdr.sgml : 19950710 ACCESSION NUMBER: 0000080249-95-000003 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19950531 FILED AS OF DATE: 19950707 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: 1940 Act SEC FILE NUMBER: 811-02396 FILM NUMBER: 95552538 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 Fellow Shareholders The bond market rally that got under way in late 1994 strengthened during your fund's final fiscal quarter, overcoming 1994's weak performance. The net result was double-digit returns for many bond funds, including yours, for the 12-month period ended May 31. Market Environment A happy ending was hardly assured when your fund's fiscal year began last June. The Federal Reserve was raising the federal funds rate (the overnight lending rate among banks) in a series of steps to cool the economy and dampen inflationary expectations. Longer-term rates also rose as investors worried about inflation. When the Fed's efforts to curb growth seemed ineffective as the year wore on, bond yields soared and prices plunged. Nevertheless, the bear gave way to the bull as 1994 drew to a close. Attractive yields, evidence of stable inflation, and hints that Fed policy was beginning to take hold bolstered demand for bonds, triggering a strong turnaround and improving returns. During the fund's last quarter, intermediate- and long-term rates fell significantly, but short-term rates were more stable. The result was a significant flattening of the yield curve, meaning there was little difference between yields on short- and long-term bonds. The chart shows both the sharp Chart1 - Treasury Yield Curves jump in yields across the spectrum of Treasury issues between May 31, 1994, and November 4, when the 30-year bond yield peaked, and also the subsequent drop in yields, particularly in the 2- to 10-year maturity range. As your fund's year ended, only maturities longer than 10 years offered much yield advantage over money market securities. Performance and Strategy Review Our conservative approach proved timely during the negative market environment, cushioning the fund against the worst of the drop in bond prices and enabling it to outperform its Lipper peer group average in each of the first three fiscal quarters. During the final quarter, we were a bit surprised by the extent of the economy's slowdown and consequent surge in bond prices. Reflecting our more defensive posture, the fund lagged its peer group for this three-month period. For the year, however, your fund's 11.13% return compared favorably with the Lipper group's 10.67% average, as shown below. For both periods, returns slightly trailed the unmanaged Lehman Brothers Aggregate Bond Index. Performance Comparison Periods Ended 5/31/95 _____________________ 3 Months 12 Months _____________________ New Income Fund 5.63% 11.13% Lehman Brothers Aggregate Bond Index 5.97 11.48 Lipper Average of Corporate Bond Funds - A-Rated 6.32 10.67 We made few changes to the portfolio during the quarter, maintaining a fairly even allocation among U.S. Government securities, mortgage-backed securities, and corporate bonds. Over the course of the year, we gradually trimmed our corporate position from over half of the portfolio to less than one-third in order to increase government securities, as shown in the Portfolio Diversification chart. Chart2 - Portfolio Diversification Although corporate bonds performed well on a relative basis throughout the year, our concern was to prepare the portfolio for the slower economy we believed would follow the Fed's tighter monetary policy. When growth slows markedly, investors typically favor higher-quality issues, which then tend to show the best results. As you can see in the table following this report, the fund's overall credit quality rose during the year. We continued to like the above-average income and high credit quality provided by mortgage-backed securities and maintained our allocation in the 30% to 33% range all year. These securities performed well as interest rates climbed because prepayments fell sharply, but lagged during the most recent three-month period, as falling rates raised fears of a future increase in prepayments. However, we do not expect prepayments to come close to matching the levels of the pre-1994 falling interest rate cycle, so they should not have as unfavorable an impact on prices of mortgage securities. The fund's weighted average maturity (10.1 years) and weighted average effective duration (5.1 years) are both slightly higher than a year ago but are lower than at the end of the previous quarter. (Duration measures price sensitivity to interest rate changes; a duration of five years means that the fund's price can be expected to rise or fall by 5% for each percentage point change in the level of interest rates.) As mentioned earlier, little or no yield is gained by extending out on the yield curve, but principal risk increases. Summary and Outlook Reacting to the economy's unexpectedly sharp slowdown in the first quarter and signs of a bigger dip in the second, investors pushed bond prices higher and interest rates lower in recent weeks. The rally was also spurred by hopeful signs that the budget deficit may be reduced, and by speculation that the Federal Reserve might soon cut the fed funds rate. With hindsight, our outlook for the bond market last quarter was not optimistic enough, since the rally had plenty of steam left. Nevertheless, we believe rates will not drop sharply from current levels and bond returns in coming months will be powered more by income than by robust appreciation. Without question, the much ballyhooed soft landing has hit some bumps, but we do not expect the expansion to veer off the runway. Rather, we foresee a gradual return by year-end to an annualized rate of growth closer to the long-term trend of 2% to 2.5%. In this environment, we expect to maintain our emphasis on quality. Narrow yield differences among investment-grade corporates are bound to widen, in our view, particularly if the economy remains soft. This would benefit our higher-grade holdings. In addition, we will maintain our slightly overweighted position in mortgages, both for their incremental yield and because they should outperform Treasuries if the prepayment threat has been overestimated. With this strategy, we anticipate solid results for your fund in the coming months. Respectfully submitted, Charles P. Smith President and Chairman of the Investment Advisory Committee June 19, 1995 Statistical Highlights T. Rowe Price New Income Fund / May 31, 1995 Key Statistics Periods Ended Dividend Yield* 5/31/95 ___________________________ _______________ 3 Months 6.95% 12 Months 6.97 Dividend Per Share ___________________________ 3 Months $0.15 12 Months 0.58 Change in Price Per Share ___________________________ 3 Months (From $8.64 to $8.97) $0.33 12 Months (From $8.65 to $8.97) 0.32 *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. Quality Diversification Percent of Net Assets TRPA Quality Rating* 5/31/94 2/28/95 5/31/95 __________________ _______ _______ _______ 1 45% 72% 71% 2 13 8 9 3 28 12 12 4 13 7 7 Below 4 1 1 1 ________________________________________________________________ Weighted Average 2.1 1.6 1.6 *On a scale of 1 to 10, with Grade 1 representing highest quality. Maturity Diversification Percent of Net Assets Range 5/31/94 2/28/95 5/31/95 __________________ _______ _______ _______ Short-Term (0 to 1 Year) 6% 3% 6% Short Intermediate- Term (1+ to 5 Years) 43 26 18 Long Intermediate- Term (5+ to 10 Years) 28 39 47 Long-Term (Over 10 Years) 23 32 29 ________________________________________________________________ Weighted Average Maturity 9.1 yrs. 10.7 yrs. 10.1 yrs. ________________________________________________________________ Weighted Average Effective Duration 4.9 yrs. 5.3 yrs. 5.1 yrs. Sector Diversification* Percent of Net Assets 5/31/94 2/28/95 5/31/95 _______ _______ _______ U.S. Governments, Agencies and Agency-Backed 45% 70% 68% Banking 14 5 6 Industrial 8 4 4 Electric Utilities 6 4 4 Finance and Credit 4 2 2 U.S. $ Denominated Foreign Securities 3 2 2 Commercial Paper 0 0 2 Telephone 3 2 2 *Sectors representing at least 2% of net assets on 5/31/95. Chart3 - Fiscal Year Performance Comparison Average Annual Compound Total Return Periods Ended May 31, 1995 1 Year 5 Years 10 Years _______ ________ _________ 11.13% 9.13% 9.14% Note: For the above periods ended 3/31/95, the fund's returns were 4.79%, 8.43%, and 9.12%, respectively. Total return and principal value represent past performance and will vary. Shares may be worth more or less at redemption than at original purchase. Investment Record T. Rowe Price New Income Fund The table below shows the investment record of one share of the T. Rowe Price New Income Fund purchased at the original offering price of $10.00. Over this time, interest rates have been volatile. The results shown should not be considered a representation of the dividend income or capital gain or loss which may be realized from an investment made in the fund today. With Dividends With and Capital Divi- Capital Fiscal Net Income Gain dends Gains Year Asset Divi- Distri- Rein- Rein- Total Ended Value dends butions2 vested vested2 Return ______ ______ ______ _________ ______ ________ _______ 12/31/731$ 9.97 - $ 9.97 $ 9.97 -0.30% 1974 9.39 $0.66 10.07 10.07 1.00 1975 9.66 0.79 11.27 11.27 11.92 1976 10.23 0.78 12.93 12.93 14.76 1977 10.01 0.77 13.66 13.66 5.65 1978 9.66 0.76 $0.01 14.26 14.29 4.56 1979 9.22 1.18 4 15.42 15.44 8.09 1980 8.35 1.13 15.86 15.88 2.86 1981 7.79 1.07 16.95 16.97 6.86 1982 8.46 1.07 21.03 21.07 24.12 2/28/833 8.56 0.17 21.71 21.75 3.23 1984 8.24 0.95 5 23.40 23.44 7.79 1985 8.18 0.94 26.06 26.10 11.34 1986 8.95 0.88 31.64 31.69 21.40 1987 9.17 0.75 35.17 35.23 11.17 1988 8.76 0.76 36.67 36.73 4.27 1989 8.26 0.81 38.02 38.08 3.67 1990 8.37 0.75 42.10 42.16 10.73 1991 8.60 0.70 0.01 47.00 47.12 11.77 1992 8.94 0.67 0.02 52.74 52.97 12.40 1993 9.24 0.57 58.08 58.33 10.12 1994 9.12 0.54 0.07 60.73 61.45 5.36 5/31/946 8.65 0.14 0.07 58.54 59.71 -2.84 1995 8.97 0.58 0.02 64.93 66.35 11.13 ________________________________________________________________ Total $17.42 $0.20 1 From inception 8/31/73 to 12/31/73. 2 Includes long-term capital gain of $0.01 on 1/4/78; short-term capital gain of $0.01 on 12/31/90; short-term capital gain of $0.02 on 12/31/91; long-term capital gain of $0.07 on 12/31/93; long-term capital gain of $0.07 on 3/31/94; and long-term capital gain of $0.02 on 6/30/94. 3 Fiscal year-end changed from December 31 to February 28; figures are for two months from 1/1/83 to 2/28/83. 4 Declaration of dividends changed from quarterly to monthly. 5 Declaration of dividends changed from monthly to daily. 6 Fiscal year-end changed from February 28 to May 31; figures are for three months from 3/1/94 to 5/31/94. Statement of Net Assets T. Rowe Price New Income Fund / May 31, 1995 (amounts in thousands) Corporate Bonds & Notes - 23.9% Amount Value ___________ ___________ BANKING - 5.5% ABN AMRO Bank Chicago, N.V., Sub. Notes, 7.25%, 5/31/05. . . . . . . . . . . $ 5,000 $ 5,103 Banesto Delaware, Gtd. Notes, 8.25%, 7/28/02 . . . . . . . . . . . . . . 5,700 5,907 Bank of Scotland International, (144a), 8.80%, 1/27/04 . . . . . . . . . . 10,000 11,049 Banque Paribas, 8.35%, 6/15/07 . . . . . . . . 7,500 8,032 First Chicago, MTN, 5.50%, 4/15/96 . . . . . . 5,000 4,968 8.20%, 11/14/96. . . . . . . . . . . . . . 5,000 5,136 First National Bank Boston, 8.375%, 12/15/02 . . . . . . . . . . . . . 8,000 8,576 First USA Bank Wilmington, 4.55%, 8/23/95 . . . . . . . . . . . . . . 10,000 9,982 4.80%, 9/15/95 . . . . . . . . . . . . . . 5,000 4,994 Mercantile Bankshares, Sr. Notes, 6.13%, 7/15/98 (Private Placement). . . . . . . . . . . . 5,000 4,874 Napa Valley Bancorp, Sr. Notes, 10.87%, 6/30/95. . . . . . . . . . . . . . 5,000 5,037 PNC Bank N.A., Sub. Notes, 7.875%, 4/15/05. . . . . . . . . . . . . . 12,000 12,617 86,275 BEVERAGES - 0.2% Seagram (Joseph E.) & Sons, Notes, 7.00%, 4/15/08 . . . . . . . . . . . . . . 3,000 2,952 ELECTRIC UTILITIES - 4.0% Alabama Power, 1st Mtg. Bonds, 7.75%, 2/1/23. . . . . . . . . . . . . . . 3,650 3,712 Commonwealth Edison, 1st Mtg. Bonds, 9.375%, 2/15/00. . . . . . . . . . . . . . 5,000 5,517 Consumers Power, 1st Mtg. Bonds, 6.375%, 9/15/03. . . . . . . . . . . . . . 5,000 4,702 Cooperative Utility Trust, Equip. Trust Cert., 10.70%, 9/15/17 . . . . . . . . . . 2,500 2,829 Florida Power & Light, MTN, 4.85%, 6/24/96 . . . . . . . . . . . . . . 4,600 4,538 Georgia Power, 1st Mtg. Bonds, 7.625%, 3/1/23 . . . . . . . . . . . . . . 5,750 5,290 7.95%, 2/1/23. . . . . . . . . . . . . . . 3,300 3,437 Gulf States Utilities, 1st Mtg. Bonds, 5.375%, 2/1/97 . . . . . . . . . . . . . . 4,000 3,780 Long Island Lighting, 1st Mtg. Bonds, 5.50%, 4/1/97. . . . . . . . . . . . . . . 5,500 5,357 Monongahela Power, 8.625%, 11/1/21 . . . . . . 4,720 5,057 Northern Indiana Public Service, MTN, 6.90%, 6/1/00. . . . . . . . . . . . . . . 5,000 5,050 Pacificorp, MTN, 7.12%, 8/15/02. . . . . . . . 3,900 3,981 Southern California Edison, 1st Mtg. Bonds, 9.25%, 6/15/21 . . . . . . . . . . . . . . 5,000 5,343 Texas Utilities Electric, 1st Mtg. Bonds, 7.875%, 3/1/23 . . . . . . . . . . . . . . 3,450 3,394 61,987 FINANCE & CREDIT - 2.1% Advanta, Notes, 5.125%, 11/15/96 . . . . . . . 10,000 9,802 American General Finance, 7.25%, 5/5/15. . . . . . . . . . . . . . . 6,000 6,150 GPA Leasing USA Sub I, Equip. Trust Cert., (144a), 9.125%, 12/2/96. . . . . . . . . . 9,518 8,917 Lehman Brothers, 7.625%, 8/1/98. . . . . . . . 8,000 8,058 32,927 INDUSTRIALS - 4.2% Clark Equipment, MTN, 5.57%, 6/11/96 . . . . . 5,000 4,953 Clorox, Notes, 8.80%, 7/15/01. . . . . . . . . 5,000 5,534 Deere & Company, MTN, 8.78%, 3/16/98 . . . . . 9,000 9,156 Ford Holdings, Gtd. Notes, 9.25%, 3/1/00. . . . . . . . . . . . . . . 5,000 5,522 MCA Funding, MTN, 4.88%, 5/20/96 . . . . . . . 5,000 4,872 Monsanto, Deb., 8.20%, 4/15/25 . . . . . . . . $ 11,500 $ 12,125 Qantas Airways, Sr. Notes, (144a), 6.625%, 6/30/98. . . . . . . . . . . . . . 7,000 6,968 United Technologies, Deb., 8.875%, 11/15/19 . . . . . . . . . . . . . 4,340 5,001 Weyerhaeuser, Notes, 9.05%, 2/1/03 . . . . . . 10,600 11,969 66,100 INVESTMENT DEALERS - 1.0% Bear Stearns, 7.625%, 4/15/00. . . . . . . . . 5,000 5,165 Morgan Stanley Group, 6.75%, 3/4/03. . . . . . 5,000 4,866 Paine Webber Group, 8.875%, 3/15/05. . . . . . 5,000 5,381 15,412 MISCELLANEOUS - 1.6% Capital Cities/ABC, Notes, 8.75%, 8/15/21 . . . . . . . . . . . . . . 7,900 9,090 Kaiser Foundation Health Plan, Notes, 9.00%, 11/1/01 . . . . . . . . . . . . . . 10,325 11,559 Waste Management, Deb., 7.875%, 8/15/96. . . . . . . . . . . . . . 5,000 5,091 25,740 PETROLEUM - 1.4% BP America, Gtd. Notes, 8.50%, 4/15/01 . . . . 5,000 5,481 Mobil, Deb., 7.625%, 2/23/33 . . . . . . . . . 9,250 9,350 Texaco Capital, Deb., 8.65%, 1/30/98 . . . . . 6,000 6,320 21,151 RAILROADS - 0.4% Consolidated Rail, Deb., 9.75%, 6/15/20. . . . 5,000 6,258 RETAIL - 0.7% Dayton Hudson, Notes, 7.875%, 6/15/23. . . . . 5,000 5,027 9.40%, 2/15/01 . . . . . . . . . . . . . . 5,620 6,297 11,324 SAVINGS & LOAN - 0.7% CENFED Financial, Sr. Deb., (144a), 11.17%, 12/15/01 . . . . . . . . . . . . . 5,000 5,375 Great Western Financial, 6.375%, 7/1/00 . . . . . . . . . . . . . . 6,000 5,897 11,272 TELEPHONE - 2.1% AT&T, 8.35%, 1/15/25 . . . . . . . . . . . . . 5,000 5,266 Bellsouth Telecom, 7.875%, 8/1/32. . . . . . . 6,400 6,625 GTE, Deb., 9.375%, 12/1/00 . . . . . . . . . . 10,000 11,176 Pacific Bell, 6.625%, 10/15/34 . . . . . . . . 11,200 9,870 32,937 ________________________________________________________________________ Total Corporate Bonds & Notes (Cost $362,012) 374,335 U.S. Government Mortgage-Backed Securities - 32.5% U.S. GOVERNMENT GUARANTEED OBLIGATIONS - 29.4% Government National Mortgage Assn., I, 6.00%, 12/15/23 - 4/15/24. . . . . . . . . 3,647 3,399 6.50%, 9/15/23 - 5/15/24 . . . . . . . . . 8,202 7,874 7.00%, 9/15/22 - 9/15/24 . . . . . . . . . 49,265 48,498 7.50%, 8/15/16 - 8/15/24 . . . . . . . . . 79,389 80,114 8.00%, 7/15/16 - 11/15/24. . . . . . . . . 57,931 60,014 8.50%, 9/15/16 - 5/15/25 . . . . . . . . . $ 53,938 $ 56,251 9.00%, 1/15/09 - 4/15/25 . . . . . . . . . 32,256 33,950 9.50%, 6/15/09 - 3/15/25 . . . . . . . . . 103,798 109,975 11.00%, 12/15/09 - 1/15/21 . . . . . . . . 30,797 34,098 11.50%, 3/15/10 - 10/15/15 . . . . . . . . 3,959 4,419 II, 7.00%, 12/20/23. . . . . . . . . . . . . . 1,622 1,583 9.00%, 6/20/16 - 5/20/22 . . . . . . . . . 11,879 12,357 GPM, I, 10.25%, 2/15/16 - 11/15/20 . . . . . . 7,265 7,862 460,394 U.S. GOVERNMENT AGENCY OBLIGATIONS - 3.1% Federal Home Loan Mortgage, 6.50%, 11/1/04 - 6/1/24 . . . . . . . . . . . . . 12,474 12,007 7.00%, 2/1/24. . . . . . . . . . . . . . . 5,061 4,982 7.50%, 3/1 - 6/1/24. . . . . . . . . . . . 10,660 10,710 8.00%, 6/1/08. . . . . . . . . . . . . . . 175 179 9.00%, 3/1/21 - 5/1/22 . . . . . . . . . . 9,575 9,982 9.75%, 12/1/17 . . . . . . . . . . . . . . 3,314 3,472 10.50%, 2/1/01 - 8/1/20. . . . . . . . . . 1,652 1,767 11.00%, 5/1/11 - 7/1/20. . . . . . . . . . 741 797 11.50%, 6/1/01 . . . . . . . . . . . . . . 19 20 Federal National Mortgage Assn., 8.75%, 3/1/10. . . . . . . . . . . . . . . 24 25 10.50%, 7/1/09 - 4/1/22. . . . . . . . . . 3,715 4,020 47,961 ________________________________________________________________________ Total U.S. Government Mortgage-Backed Securities (Cost $505,095) 508,355 U.S. Government Obligations - 35.6% U.S. Treasury Bonds, 6.25%, 8/15/23. . . . . . 13,295 12,472 7.50%, 11/15/24. . . . . . . . . . . . . . 4,100 4,509 7.875%, 2/15/21. . . . . . . . . . . . . . 35,000 39,534 8.00%, 11/15/21. . . . . . . . . . . . . . 42,160 48,379 8.125%, 5/15/21. . . . . . . . . . . . . . 32,140 37,307 U.S. Treasury Notes, 5.875%, 2/15/04 . . . . . 125 121 6.375%, 8/15/02. . . . . . . . . . . . . . 10,000 10,087 6.50%, 8/15/97 . . . . . . . . . . . . . . 2,700 2,734 6.50%, 5/15/05 . . . . . . . . . . . . . . 31,000 31,475 6.875%, 3/31/97. . . . . . . . . . . . . . 11,750 11,959 6.875%, 8/31/99. . . . . . . . . . . . . . 13,180 13,579 7.125%, 9/30/99. . . . . . . . . . . . . . 6,375 6,633 7.25%, 11/30/96. . . . . . . . . . . . . . 7,360 7,504 7.25%, 5/15/04 . . . . . . . . . . . . . . 109,225 116,000 7.25%, 8/15/04 . . . . . . . . . . . . . . 14,300 15,203 7.50%, 12/31/96. . . . . . . . . . . . . . 2,945 3,018 7.50%, 11/15/01. . . . . . . . . . . . . . 42,000 44,953 7.50%, 5/15/02 . . . . . . . . . . . . . . 6,000 6,441 7.50%, 2/15/05 . . . . . . . . . . . . . . 16,750 18,158 7.75%, 11/30/99. . . . . . . . . . . . . . 87,000 92,696 7.875%, 11/15/04 . . . . . . . . . . . . . $ 32,215 $ 35,698 ________________________________________________________________________ Total U.S. Government Obligations (Cost $520,017) 558,460 Asset-Backed Securities - 2.1% AUTO-BACKED - 1.4% Daimler-Benz Auto Grantor Trust, 3.90%, 10/15/98. . . . . . . . . . . . . . 3,579 3,517 Ford Credit Grantor Trust, 4.30%, 7/15/98 . . . . . . . . . . . . . . 2,967 2,915 GMAC Grantor Trust, 4.15%, 3/15/98 . . . . . . 1,866 1,845 Olympic Automobile Receivable, 4.95%, 10/15/99. . . . . . . . . . . . . . 2,227 2,176 Premier Auto Trust, 4.22%, 3/2/99. . . . . . . 6,174 6,030 RCSB Grantor Trust, 7.75%, 11/15/96. . . . . . 595 594 Toyota Auto Receivables, 3.90%, 8/17/98 . . . . . . . . . . . . . . 3,133 3,074 Zions Auto Trust, 4.65%, 6/15/99 . . . . . . . 1,821 1,810 21,961 CREDIT CARD-BACKED - 0.6% Standard Credit Card Trust, Credit Card Participation Cert., 9.375%, 8/10/96. . . . . . . . . . . . . . 10,000 10,003 WHOLE LOANS-BACKED - 0.1% Home Equity Loan, REMIC, 5.65%, 11/15/14. . . . . . . . . . . . . . 952 918 _________________________________________________________________________ Total Asset-Backed Securities (Cost $33,287) 32,882 U.S. $ Denominated Foreign Securities1 - 2.3% British Columbia Hydro & Power, Notes, 15.50%, 11/15/11 . . . . . . . . . . . . . . . 14,150 16,765 Inter-American Development Bank, Notes, 9.50%, 10/15/97. . . . . . . . . . . . . . . . 2,600 2,783 Province of Ontario, Deb., 15.75%, 3/15/12. . . . . . . . . . . . . . 9,000 10,834 17.00%, 11/5/11. . . . . . . . . . . . . . 5,000 6,011 ________________________________________________________________________ Total U.S. $ Denominated Foreign Securities (Cost $36,471) 36,393 Certificate of Deposit - 1.0% NBD Bank, N.A., 6.02%, 6/28/95 (Cost $15,000). . . . . . . . . . . . . . 15,000 15,000 Commercial Paper - 2.3% Caisse des Depots et Consignations, 5.95%, 6/19/95 . . . . . . . . . . . . . . . . 7,400 7,374 Knight-Ridder, 5.95%, 6/19/95. . . . . . . . . 5,815 5,782 President & Fellows Harvard College, 6.15%, 6/1/95. . . . . . . . . . . . . . . 2,958 2,957 Prudential Funding, 6.00%, 7/3/95. . . . . . . 20,000 19,789 _________________________________________________________________________ Total Commercial Paper (Cost $35,910) 35,902 Total Investments in Securities - 99.7% of Net Assets (Cost $1,507,792) . . . . . . . . . 1,561,327 Other Assets Less Liabilities . . . . . . . . $ 4,576 __________ Net Assets Consist of: Value __________ Accumulated net investment income - net of distributions . . . . . . . . . . . $ 2,666 Accumulated net realized gain/loss - net of distributions . . . . . . . . . . . (12,875) Net unrealized gain (loss) . . . . . . . . . . 53,535 Paid-in-capital applicable to 174,599,980 shares of $1.00 par value capital stock outstanding; 300,000,000 shares authorized. . . . . . . 1,522,577 _________ NET ASSETS . . . . . . . . . . . . . . . . . . $1,565,903 __________ __________ NET ASSET VALUE PER SHARE. . . . . . . . . . . $8.97 _____ _____ 1 - Marketable securities (payable in U.S. dollars) issued or guaranteed by a foreign government or community. GPM - Graduated Payment Mortgage MTN - Medium Term Notes REMIC - Real Estate Mortgage Investment Conduit 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 Statement of Operations T. Rowe Price New Income Fund / Year Ended May 31, 1995 (in thousands) INVESTMENT INCOME Interest income. . . . . . . . . . . . . . . . . . . . . . . $109,553 _________ Expenses Investment management . . . . . . . . . . . . . . . . . . 6,972 Shareholder servicing . . . . . . . . . . . . . . . . . . 3,334 Custodian and accounting. . . . . . . . . . . . . . . . . 427 Prospectus and shareholder reports. . . . . . . . . . . . 150 Proxy and annual meeting. . . . . . . . . . . . . . . . . 59 Registration. . . . . . . . . . . . . . . . . . . . . . . 45 Legal and audit . . . . . . . . . . . . . . . . . . . . . 33 Directors . . . . . . . . . . . . . . . . . . . . . . . . 25 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . 26 _________ Total expenses. . . . . . . . . . . . . . . . . . . . . . 11,071 _________ Net investment income. . . . . . . . . . . . . . . . . . . . 98,482 _________ REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on securities . . . . . . . . . . . (11,115) Change in net unrealized gain or loss on securities. . . . . 68,296 _________ Net realized and unrealized gain (loss). . . . . . . . . . . 57,181 _________ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS. . . . . . $155,663 _________ _________ The accompanying notes are an integral part of these financial statements. Statement of Changes in Net Assets T. Rowe Price New Income Fund (in thousands) Three Year Ended Months Ended Year Ended May 31, 1995 May 31, 1994# Feb. 28, 1994 ___________ ____________ ___________ INCREASE (DECREASE) IN NET ASSETS FROM Operations Net investment income . . . . . . . . $ 98,482 $ 22,707 $ 89,878 Net realized gain (loss) . . . . . . . . (11,115) 1,015 24,262 Change in net unrealized gain or loss . . . . . 68,296 (65,071) (32,142) __________ __________ __________ Increase (decrease) in net assets from operations . . . . . . 155,663 (41,349) 81,998 __________ __________ __________ Distributions to shareholders Net investment income . . . . . . . . (95,838) (22,682) (89,878) Net realized gain . . . . . . . . . (2,632) (11,110) (11,782) __________ __________ __________ Decrease in net assets from distributions. . . . . (98,470) (33,792) (101,660) __________ __________ __________ Capital share transactions* Shares sold. . . . . . . 355,522 60,807 323,889 Distributions reinvested . . . . . . 85,120 30,328 90,466 Shares redeemed. . . . . (306,988) (98,897) (464,033) __________ __________ __________ Increase (decrease) in net assets from capital share transactions . . . . . 133,654 (7,762) (49,678) __________ __________ __________ Increase (decrease) in net assets . . . . . . . . . 190,847 (82,903) (69,340) NET ASSETS Beginning of period. . . . 1,375,056 1,457,959 1,527,299 __________ __________ __________ End of period. . . . . . . $1,565,903 $1,375,056 $1,457,959 __________ __________ __________ __________ __________ __________ *Share information Shares sold. . . . . . . 41,628 6,891 34,796 Distributions reinvested . . . . . . . 9,921 3,456 9,735 Shares redeemed. . . . . (35,940) (11,216) (49,912) __________ __________ __________ Increase (decrease) in shares outstanding. . . . . . 15,609 (869) (5,381) __________ __________ __________ __________ __________ __________ # The fund's fiscal year-end was changed to May 31. The accompanying notes are an integral part of these financial statements. Notes to Financial Statements T. Rowe Price New Income Fund / May 31, 1995 Note 1 - Significant Accounting Policies T. Rowe Price New Income Fund (the fund) is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. A) Valuation - Debt securities are generally traded in the over-the-counter market. Investments in securities with remaining 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 remaining 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. 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. B) Premiums and Discounts - Except for mortgage-backed securities, premiums and discounts on debt securities are amortized for both financial and tax reporting purposes. In accordance with federal income tax regulations, market discounts and premiums on mortgage-backed securities are included in the gain or loss recorded upon principal repayment of the security for financial reporting purposes and ordinary income for tax purposes. C) 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 an identified cost basis. Distributions to shareholders are recorded by the fund on the ex-dividend date. Income and capital gain distributions are determined in accordance with federal income tax regulations and may differ from those determined in accordance with generally accepted accounting principles. Note 2 - Investment Transactions Consistent with its investment objective, the fund engages in the following practices to manage exposure to certain risks and enhance performance. The investment objective, policies, program, risk factors, and following practices of the fund are described more fully in the fund's Prospectus and Statement of Additional Information. A) Securities Lending - To earn additional income, the fund lends its securities to approved brokers. At May 31, 1995, the market value of securities on loan was $378,467,000, for which the fund was fully collateralized by cash. 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. B) Other - Purchases and sales of portfolio securities, other than short-term and U.S. Government securities, aggregated $89,595,000 and $450,343,000, respectively, for the year ended May 31, 1995. Purchases and sales of U.S. Government securities aggregated $735,378,000 and $307,514,000, respectively,for the year ended May 31, 1995. 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. The fund has an unused realized capital loss carryforward for federal income tax purposes of $1,115,000 which expires in 2003. The fund intends to retain gains realized in future periods that may be offset by available capital loss carryforwards. At May 31, 1995, the aggregate cost of investments for federal income tax and financial reporting purposes was $1,507,792,000 and net unrealized gain aggregated $53,535,000, of which $64,722,000 related to appreciated investments and $11,187,000 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 $642,000 was payable at May 31, 1995. 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 0.31% for assets in excess of $34 billion. At May 31, 1995, and for the year then ended, the effective annual Group Fee rate was 0.34%. 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. (TRPS) 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. Additionally, the fund is one of several T. Rowe Price mutual funds (the Underlying Funds) in which the T. Rowe Price Spectrum Income Fund (Spectrum) invests. In accordance with an Agreement among Spectrum, the Underlying Funds, the Manager and TRPS, expenses from the operation of Spectrum are borne by the Underlying Funds based on each Underlying Fund's proportionate share of assets owned by Spectrum. The fund incurred expenses pursuant to these related party agreements totaling approximately $3,124,000 for the year ended May 31, 1995, of which $318,000 was payable at year-end.
Financial Highlights T. Rowe Price New Income Fund For a share outstanding throughout each period ________________________________________________________________________ Three Months Year ended Year ended ended ____________________________________________ May 31, May 31, Feb. 28, Feb. 28, Feb. 29, Feb. 28, 1995 1994# 1994 1993 1992 1991 ________ __________ _______ _______ _______ _______ NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . $8.65 $9.12 $9.24 $8.94 $8.60 $8.37 _____ _____ _____ _____ _____ _____ Investment Activities Net investment income. . . . . . . . . . . . 0.58 0.14 0.54 0.57 0.67 0.70 Net realized and unrealized gain (loss) . . . . . . . . . 0.34 (0.40) (0.05) 0.30 0.36 0.24 _____ _____ _____ _____ _____ _____ Total from Investment Activities. . . . . . . . . . 0.92 (0.26) 0.49 0.87 1.03 0.94 _____ _____ _____ _____ _____ _____ Distributions Net investment income . . . . . (0.58) (0.14) (0.54) (0.57) (0.67) (0.70) Net realized gain . . . . . . . (0.02) (0.07) (0.07) - (0.02) (0.01) _____ _____ _____ _____ _____ _____ Total Distributions . . . . . . (0.60) (0.21) (0.61) (0.57) (0.69) (0.71) _____ _____ _____ _____ _____ _____ NET ASSET VALUE, END OF PERIOD . . . . . . . . . $8.97 $8.65 $9.12 $9.24 $8.94 $8.60 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ RATIOS/SUPPLEMENTAL DATA Total Return . . . . . . . . . . . 11.13% (2.84)% 5.36% 10.12% 12.40% 11.77% Ratio of Expenses to Average Net Assets. . . . . . . . . . . 0.78% 0.80%! 0.82% 0.84% 0.87% 0.88% Ratio of Net Investment Income to Average Net Assets . . . . . 6.95% 6.43%! 5.77% 6.36% 7.64% 8.33% Portfolio Turnover Rate. . . . . . . . . . . . . . 54.1% 91.5%! 58.3% 85.8% 49.7% 20.7% Net Assets, End of Period (in millions) . . . . . . . . . . . $1,566 $1,375 $1,458 $1,527 $1,307 $1,131 # The fund's fiscal year-end was changed to May 31. ! Annualized.
Report of Independent Accountants To the Board of Directors and Shareholders of the 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 selected per share data and information (which appears under the heading "Financial Highlights") present fairly, in all material respects, the financial position of the T. Rowe Price New Income Fund, Inc. at May 31, 1995, and the results of its operations, the changes in its net assets and the selected per share data and information for each of the fiscal periods presented, in conformity with generally accepted accounting principles. These financial statements and selected per share data and information (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 audit, which included confirmation of securities at May 31, 1995 by correspondence with custodians and brokers and, where appropriate, the application of alternative auditing procedures for unsettled security transactions, provides a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Baltimore, Maryland June 19, 1995 Chart1 - Treasury Yield Curves A three line chart showing yields for November 4, 1994, May 31, 1994, and May 31, 1995. Chart2 - Portfolio Diversification Two pie charts showing the percentage allocation of assets among mortgages, corporates, and U.S. government and agency bonds for May 31, 1994 vs. May 31, 1995. Chart3 - Fiscal Year Performance Comparison A two line chart showing TRP New Income Fund index return performance vs. competition over a ten-year period, from May 1985 to May 1995. -----END PRIVACY-ENHANCED MESSAGE-----