-----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, J4G72j2fmVY9TC29fD7zBGbeKIH62sdlk4XIiVnX4KhVYyiPGJ6eyMwAQZVMPOZM A49TRYiPF9Y9vXxLUa8M4w== 0000080249-96-000006.txt : 19960709 0000080249-96-000006.hdr.sgml : 19960709 ACCESSION NUMBER: 0000080249-96-000006 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960531 FILED AS OF DATE: 19960708 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: 96591852 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 Annual Report New Income Fund May 31, 1996 T. Rowe Price REPORT HIGHLIGHTS o The favorable bond market environment of 1995 faded quickly in 1996. Interest rates rose on news of a pickup in economic growth and rising commodity price levels. As a result, prices of high-quality bonds fell. o Reflecting the difficult market, price declines on portfolio holdings pushed the New Income Fund's six-month return into negative territory; the 12-month return was modest but positive. o We increased holdings of mortgage-backed securities because they typically hold up comparatively well in a rising rate environment. o Duration was shortened slightly as a defensive measure, and credit quality remained high. o The Federal Reserve seems likely to tighten in the coming months; this could dampen inflation fears and improve the bond market outlook. Income will probably be the principal component of returns. Fellow Shareholders The strong bond market rally of 1995 came to an abrupt halt at year-end. As 1996 got under way, the optimism that had underpinned the rally evaporated in the face of diminishing prospects for a balanced budget agreement, a bounce in the economy, and an increase in inflation. Interest rates rose, and, as a result, most high-quality bond funds had negative returns for the six months ended May 31 and positive but modest returns for the 12-month period. MARKET ENVIRONMENT The months since the start of 1996 were a mirror image of the preceding six months. In the second half of 1995, the economy looked weak, progress in federal deficit reduction seemed likely, the Federal Reserve was accommodative, and interest rates were declining across the board. In 1996, everything changed. Several developments in particular caused mounting concern among bond investors: the 2.3% increase in real GDP in the first quarter versus only 0.5% in the fourth quarter of 1995; significant increases in payroll employment in February and March (220,000 per month during the first five months of 1996); and rising prices led by oil and grains. CHART 1 - Interest Rate Levels Against this background, the yield on 30-year Treasury bonds increased 75 basis points in the six months ending May 31 after dropping 60 basis points over the previous six months. (One hundred basis points equal one percent.) The five-year Treasury note had a similar yield pattern over the same two periods. Although yields on very short-term maturities rose in recent months, they were still slightly lower on balance at the end of the 12-month period than at the beginning, as represented by the one-year Treasury bill in the chart. Mortgage-backed securities were the best-performing sector in the high-grade bond market for both the 6- and 12-month periods and the only one to eke out a positive return since the rally ended. Treasury securities outperformed corporates during the most recent six-month period but lagged them for the 12 months. PERFORMANCE AND STRATEGY REVIEW For the six-month period ending May 31, 1996, the New Income Fund had a total return of -2.12%, underperforming the Lehman Aggregate Bond Index and slightly lower than the fund's Lipper peer group average. For the fiscal year, the fund's 3.7% return again trailed the Lehman Aggregate but modestly exceeded its peer group average, as shown to the left. PERFORMANCE COMPARISON Periods Ended 5/31/96 6 Months 12 Months New Income Fund - 2.12% 3.70% Lehman Aggregate Bond Index - 1.16 4.38 Lipper Average of Corporate Bond Funds A-Rated - 2.00 3.43 Your fund lagged its benchmarks in recent months principally because its duration was longer than that of the market. (Duration measures a bond fund's price sensitivity to interest rate changes.) At the beginning of 1996, we thought rates could move a bit lower and, therefore, did not take defensive measures at that time. In fact, the 30-year Treasury bond yield began a move that took it almost 100 basis points beyond its year-end low of 5.95%. Our overweighting in the better-performing mortgage securities sector cushioned but could not totally offset the weaker performance of our Treasury holdings, whose prices are sensitive to interest rate changes. CHART 2 - SECURITY DIVERSIFICATION As evidence of the economy's strength mounted, simultaneously clouding bond market prospects, we increased our mortgage-backed holdings from 31% to 38%, and reduced exposure to Treasury issues. As we expected, the mortgage area held up better because rising interest rates slow the pace of mortgage prepayments, thus making mortgage securities more attractive to investors. This was the major portfolio shift during the past six months and led to a shorter average maturity and duration. The fund's credit quality structure was unchanged, with an average of AA+. OUTLOOK The Federal Reserve is expected to tighten monetary policy later this year. Consumer inflation has been running at about a 4% rate this year mainly due to an upsurge in energy prices, and the Fed does not want the strong economy to cause persistently higher inflation. Any increase in the key federal funds rate would be following, not leading, short-term rates onto higher ground. And since shorter-term rates have risen further than long-term rates, the yield curve has "flattened," meaning the spread between them has declined - a trend likely to continue if the Fed tightens. While the recent rise in rates is likely to dampen economic growth in the second half, the economy should be healthy enough to forestall any rise in the unemployment rate. _____________________________________________________________________________ THE FED DOES NOT WANT THE STRONG ECONOMY TO CAUSE PERSISTENTLY HIGHER INFLATION. Action by the Fed to restrain the economy could be good news for investors in longer-term bonds, as inflation fears should ease. In this environment, bond prices may stabilize, and returns should reflect coupon levels over the remainder of the year. While we hope the worst is over, we will maintain our relatively cautious stance in an effort to protect principal without undue loss of income. Respectfully submitted, Charles P. Smith President and Chairman of the Investment Advisory Committee June 20, 1996 T. Rowe Price New Income Fund PORTFOLIO HIGHLIGHTS KEY STATISTICS 11/30/95 5/31/96 _____________________________________________________________________________ Price Per Share $ 9.19 $ 8.70 Dividends Per Share For 6 months 0.30 0.30 For 12 months 0.61 0.60 Dividend Yield * For 6 months 6.81% 6.66% For 12 months 7.11 6.85 Weighted Average Maturity (years) 10.6 9.5 Weighted Average Effective Duration (years) 5.4 5.3 Weighted Average Quality ** AA+ AA+ * 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. SECTOR DIVERSIFICATION Percent of Percent of Net Assets Net Assets 11/30/95 5/31/96 _____________________________________________________________________________ U.S. Government Mortgage-Backed Securities 31% 38% U.S. Government Obligations 41 32 Banking 7 7 Electric Utilities 3 4 Industrial 4 3 Commercial Paper - 2 U.S. Dollar-Denominated Foreign Securities 2 2 Investment Dealers 2 2 Telephone 2 2 Savings and Loan 1 2 All Other 6 5 Other Assets Less Liabilities 1 1 _____________________________________________________________________________ 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. CHART 3 - New Income Fund Chart 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 5/31/96 1 Year 3 Years 5 Years 10 Years _____________________________________________________________________________ New Income Fund 3.70% 5.33% 7.37% 7.80% 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 FINANCIAL HIGHLIGHTS For a share outstanding throughout each period Year 3 Months# Year Ended Ended Ended 5/31/96 5/31/95 5/31/94 2/28/94 2/28/93 2/29/92 _____________________________________________________________________________ NET ASSET VALUE Beginning of period $ 8.97 $ 8.65 $ 9.12 $ 9.24 $ 8.94 $8.60 Investment activities Net invest- ment income 0.60 0.58 0.14 0.54 0.57 0.67 Net realized and unrealized gain (loss) (0.27) 0.34 (0.40) (0.05) 0.30 0.36 Total from investment activities 0.33 0.92 (0.26) 0.49 0.87 1.03 Distributions Net invest- ment income (0.60) (0.58) (0.14) (0.54) (0.57) (0.67) Net realized gain - (0.02) (0.07) (0.07) - (0.02) Total dis- tributions (0.60) (0.60) (0.21) (0.61) (0.57) (0.69) NET ASSET VALUE End of period $ 8.70 $ 8.97 $ 8.65 $ 9.12 $ 9.24 $8.94 Ratios/Supplemental Data Total return 3.70% 11.13% (2.84)% 5.36% 10.12% 12.40% Ratio of expenses to average net assets 0.75% 0.78% 0.80%* 0.82% 0.84% 0.87% Ratio of net investment income to average net assets 6.66% 6.95% 6.43%* 5.77% 6.36% 7.64% Portfolio turnover rate 35.5% 54.1% 91.5%* 58.3% 85.8% 49.7% Net assets, end of period (in millions) $ 1,634 $ 1,566 $ 1,375 $ 1,458 $ 1,527 $1,307 * 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, 1996 STATEMENT OF NET ASSETS Par Value In thousands CORPORATE BONDS AND NOTES 22.9% Banking 7.0% ABN AMRO Bank (Chicago), N.V., Sub. Notes, 7.25%, 5/31/05 $ 5,000 $ 4,940 Banca Commerciale Italiana, Sr. Sub. Notes, 8.25%, 7/15/07 8,070 8,098 Banco Central Hispano-Americano, C.I., Gtd. Notes, 7.50%, 6/15/05 6,000 5,876 Banesto Delaware, Gtd. Notes, 8.25%, 7/28/02 5,700 5,849 Bank of Boston, Sub. Notes, 6.625%, 12/1/05 10,000 9,373 Bank of Scotland International, (144a), 8.80%, 1/27/04 10,000 10,728 Chase Manhattan, Sub. Notes, 7.125%, 3/1/05 5,000 4,886 Den Danske Bank, (144a), 7.25%, 6/15/05 4,500 4,412 Deposit Guaranty, Sr. Notes, 7.25%, 5/1/06 10,400 10,099 Fifth Third Bank, 6.75%, 7/15/05 4,000 3,811 First National Bank of Boston, 8.375%, 12/15/02 8,000 8,389 Mercantile Bankshares, Sr. Notes, 6.13%, 7/15/98* 5,000 4,911 NationsBank N.A., 6.75%, 8/15/00 10,000 9,897 PNC Bank N.A., Sub. Notes, 7.875%, 4/15/05 12,000 12,245 Santander Financial Issuances Gtd. Sub. Notes 6.80%, 7/15/05 2,000 1,898 7.875%, 4/15/05 4,000 4,082 Union Planters, Sub. Notes, 6.75%, 11/1/05 5,000 4,685 _____________________________________________________________________________ 114,179 Electric Utilities 3.7% Alabama Power, 1st Mtg. Bonds, 7.75%, 2/1/23 3,650 3,489 Big Rivers, Cooperative Utility Trust Cert., 10.70%, 9/15/17 2,500 2,754 Commonwealth Edison 1st Mtg. Notes, 9.375%, 2/15/00 5,000 5,328 Deb., 6.40%, 10/15/05 5,000 4,428 Consumers Power, 1st Mtg. Notes, 6.375%, 9/15/03 5,000 4,596 Georgia Power 1st Mtg. Bonds 7.625%, 3/1/23 5,750 5,439 7.95%, 2/1/23 3,300 3,227 Gulf States Utilities, 1st Mtg. Bonds, 5.375%, 2/1/97 4,000 3,975 Monongahela Power, 1st Mtg. Bonds, 8.625%, 11/1/21 4,720 4,919 Montana Power, 8.25%, 2/1/07 $ 5,000 $ 5,160 Northern Indiana Public Service, MTN, 6.90%, 6/1/00 5,000 4,931 Pacificorp, MTN, 7.12%, 8/15/02 3,900 3,848 Potomac Capital Investment, MTN, (144a), 6.19%, 4/28/97 5,000 4,993 Texas Utilities Electric, 1st Mtg. Bonds, 7.875%, 3/1/23 3,450 3,291 _____________________________________________________________________________ 60,378 Finance and Credit 0.8% GPA Leasing USA Sub I, Equip. Trust Cert., (144a), 9.125%, 12/2/96 9,372 9,322 USF&G, Notes, 7.00%, 5/15/98 4,000 4,001 _____________________________________________________________________________ 13,323 Health Care 0.7% Kaiser Foundation Health Plan, Notes, 9.00%, 11/1/01 10,325 11,149 _____________________________________________________________________________ 11,149 Industrials 2.7% Clorox, Notes, 8.80%, 7/15/01 5,000 5,361 Ford Holdings, Gtd. Notes, 9.25%, 3/1/00 5,000 5,368 Lockheed, Deb., 7.875%, 3/15/23 5,000 4,858 Monsanto, Deb., 8.20%, 4/15/25 11,500 11,775 United Technologies, Deb., 8.875%, 11/15/19 4,340 4,886 Weyerhaeuser, Notes, 9.05%, 2/1/03 10,600 11,428 _____________________________________________________________________________ 43,676 Investment Dealers 2.0% Bear Stearns, Sr. Notes, 7.625%, 4/15/00 5,000 5,091 Lehman Brothers, Sr. Sub. Notes, 7.625%, 8/1/98 8,000 8,113 PaineWebber Group, Notes, 8.875%, 3/15/05 5,000 5,335 Salomon MTN, 5.47%, 8/29/97 8,500 8,389 Sr. Notes, 7.25%, 5/1/01 5,000 4,954 _____________________________________________________________________________ 31,882 Manufacturing 0.3% Burlington Industries, Notes, 7.25%, 9/15/05 5,500 5,249 _____________________________________________________________________________ 5,249 Media and Communications 0.9% Capital Cities/ABC, Deb., 8.75%, 8/15/21 7,900 8,832 Tele-Communications Sr. Notes 7.25%, 8/1/05 3,000 2,756 8.75%, 2/15/23 3,000 2,814 14,402 Petroleum 0.7% BP America, Gtd. Notes, 8.50%, 4/15/01 $ 5,000 $ 5,305 Texaco Capital, Deb., 8.65%, 1/30/98 6,000 6,202 _____________________________________________________________________________ 11,507 Savings and Loan 1.6% Abbey National, MTN, 6.69%, 10/17/05 5,000 4,748 CENFED Financial, Sr. Deb., (144a), 11.17%, 12/15/01 5,000 5,272 Great Western Financial 6.125%, 6/15/98 5,900 5,847 6.375%, 7/1/00 6,000 5,861 Washington Mutual, 7.25%, 8/15/05 5,000 4,862 _____________________________________________________________________________ 26,590 Telephone 1.9% AT&T, 8.35%, 1/15/25 5,000 5,146 BellSouth Telecom, 7.875%, 8/1/32 6,400 6,280 GTE, Deb., 9.375%, 12/1/00 10,000 10,786 Pacific Bell, 6.625%, 10/15/34 11,200 9,512 _____________________________________________________________________________ 31,724 Transportation 0.6% Continental Airlines, PTC, (144a), 6.94%, 10/15/13 3,500 3,118 Qantas Airways, Sr. Notes, (144a), 6.625%, 6/30/98 7,000 6,944 _____________________________________________________________________________ 10,062 _____________________________________________________________________________ Total Corporate Bonds and Notes (Cost $375,091) 374,121 U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES 37.7% U.S. Government Agency Obligations 2.5% Federal Home Loan Mortgage 6.50%, 11/1/04 - 5/1/24 11,792 10,947 7.00%, 2/1/24 4,753 4,553 7.50%, 3/1 - 6/1/24 9,973 9,779 8.00%, 6/1/08 136 139 9.00%, 3/1/21 - 5/1/22 7,793 8,099 9.75%, 12/1/17 2,825 3,018 10.50%, 2/1/01 - 8/1/20 1,372 1,492 11.00%, 5/1/11 - 7/1/20 670 740 11.50%, 6/1/01 13 14 Federal National Mortgage Assn. 8.75%, 3/1/10 $ 16 $ 16 10.50%, 7/1/09 - 4/1/22 2,893 3,146 _____________________________________________________________________________ 41,943 U.S. Government Guaranteed Obligations 35.2% Government National Mortgage Assn. I 6.00%, 12/15/23 - 4/15/24 3,532 3,170 6.50%, 9/15/23 - 4/15/26 61,301 56,642 7.00%, 4/15/22 - 5/15/26 113,609 108,316 7.50%, 8/15/16 - 5/15/26 124,927 122,789 8.00%, 7/15/16 - 5/15/26 68,686 69,518 8.50%, 9/15/16 - 5/15/26 50,524 52,026 9.00%, 1/15/09 - 4/15/25 30,042 31,618 9.50%, 6/15/09 - 3/15/25 78,255 84,335 11.00%, 12/15/09 - 1/15/21 23,985 26,599 11.50%, 3/15/10 - 10/15/15 2,992 3,366 II 7.00%, 12/20/23 1,519 1,438 9.00%, 6/20/16 - 5/20/22 9,170 9,516 GPM, I, 10.25%, 2/15/16 - 11/15/20 4,944 5,417 _____________________________________________________________________________ 574,750 _____________________________________________________________________________ Total U.S. Government Mortgage-Backed Securities (Cost $624,426) 616,693 U.S. GOVERNMENT OBLIGATIONS 32.4% U.S. Treasury Obligations 32.4% U.S. Treasury Bonds 6.00%, 2/15/26 3,250 2,849 6.25%, 8/15/23 10,645 9,498 7.25%, 5/15/16 5,860 5,901 7.625%, 2/15/25 1,000 1,061 7.875%, 2/15/21 35,000 37,734 8.00%, 11/15/21 42,160 46,132 8.125%, 5/15/21 32,140 35,595 U.S. Treasury Notes 5.75%, 9/30/97 7,000 6,975 5.875%, 7/31/97 5,000 4,994 6.125%, 9/30/00 $ 10,000 $ 9,817 6.50%, 8/15/97 - 8/15/05 90,075 87,958 6.875%, 8/31/99 - 5/15/06 34,805 34,968 7.125%, 9/30/99 6,375 6,488 7.25%, 5/15/04 - 8/15/04 95,185 97,577 7.50%, 11/15/01 - 2/15/05 33,400 34,683 7.75%, 11/30/99 76,250 79,097 7.875%, 11/15/04 27,215 28,963 _____________________________________________________________________________ Total U.S. Government Obligations (Cost $518,857) 530,290 ASSET-BACKED SECURITIES 0.6% Auto-Backed 0.6% Daimler-Benz Auto Grantor Trust, 3.90%, 10/15/98 1,372 1,357 Ford Credit Grantor Trust, 4.30%, 7/15/98 1,296 1,282 GMAC Grantor Trust, 4.15%, 3/16/98 611 606 Olympic Automobile Receivable, 4.95%, 10/15/99 1,080 1,070 Premier Auto Trust, 4.22%, 3/2/99 3,231 3,180 Toyota Auto Receivables, 3.90%, 8/17/98 1,163 1,145 Zions Auto Trust, 4.65%, 6/15/99 686 685 _____________________________________________________________________________ 9,325 Home Equity Loans-Backed 0.0% Home Equity Loan, REMIC, 5.65%, 11/15/14 696 672 _____________________________________________________________________________ 672 _____________________________________________________________________________ Total Asset-Backed Securities (Cost $10,124) 9,997 U.S. $ DENOMINATED FOREIGN SECURITIES1 2.1% British Columbia Hydro & Power, Notes, 15.50%, 11/15/11 14,150 15,669 Inter-American Development Bank, Notes, 9.50%, 10/15/97 2,600 2,704 Province of Ontario Deb. 15.75%, 3/15/12 9,000 10,100 17.00%, 11/5/11 5,000 5,545 _____________________________________________________________________________ Total U.S. $ Denominated Foreign Securities (Cost $36,263) 34,018 COMMERCIAL PAPER 2.5% Countrywide Funding, 5.30%, 6/20/96 $ 10,000 $ 9,971 Investments in Commercial Paper through a joint account, 5.41%, 6/3/96 19,789 19,789 Nestle Capital, 5.28%, 6/5/96 10,000 9,994 _____________________________________________________________________________ Total Commercial Paper (Cost $39,749) 39,754 BANK NOTES 0.9% Wachovia Bank of North Carolina, 5.32%, 6/12/96 15,000 15,000 _____________________________________________________________________________ Total Bank Notes (Cost $15,000) 15,000 Total Investments in Securities 99.1% of Net Assets (Cost $1,619,510) $1,619,873 Other Assets Less Liabilities 14,489 NET ASSETS $1,634,362 Net Assets Consist of: Accumulated net investment income - net of distributions $ 2,679 Accumulated net realized gain/loss - net of distributions (11,496) Net unrealized gain (loss) 363 Paid-in-capital applicable to 187,765,192 shares of $1.00 par value capital stock outstanding; 300,000,000 shares authorized 1,642,816 NET ASSETS $1,634,362 NET ASSET VALUE PER SHARE $ 8.70 * Private Placement 1 Marketable securities (payable in U.S. dollars) issued or guaranteed by a foreign government or community. GPM Graduated Payment Mortgage MTN Medium Term Note PTC Pass-Through Certificate 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 - total of such securities at year-end amounts to 2.7% 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 5/31/96 _____________________________________________________________________________ Investment Income Interest income $ 120,158 Expenses Investment management 7,886 Shareholder servicing 3,690 Custody and accounting 407 Prospectus and shareholder reports 130 Registration 43 Legal and audit 33 Directors 18 Miscellaneous 27 Total expenses 12,234 Net investment income 107,924 Realized and Unrealized Gain (Loss) Net realized gain (loss) on securities 1,379 Change in net unrealized gain or loss on securities (53,172) Net realized and unrealized gain (loss) (51,793) INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 56,131 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 Year Ended Ended 5/31/96 5/31/95 Increase (Decrease) in Net Assets Operations Net investment income $ 107,924 $ 98,482 Net realized gain (loss) 1,379 (11,115) Change in net unrealized gain or loss (53,172) 68,296 Increase (decrease) in net assets from operations 56,131 155,663 Distributions to shareholders Net investment income (107,911) (95,838) Net realized gain - (2,632) Decrease in net assets from distributions (107,911) (98,470) Capital share transactions* Shares sold 394,756 355,522 Distributions reinvested 78,213 85,120 Shares redeemed (352,730) (306,988) Increase (decrease) in net assets from capital share transactions 120,239 133,654 Net Assets Increase (decrease) during period 68,459 190,847 Beginning of period 1,565,903 1,375,056 End of period $ 1,634,362 $1,565,903 *Share information Shares sold 43,673 41,628 Distributions reinvested 8,680 9,921 Shares redeemed (39,188) (35,940) Increase (decrease) in shares outstanding 13,165 15,609 The accompanying notes are an integral part of these financial statements. T. Rowe Price New Income Fund May 31, 1996 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. 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. 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. 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. Commercial Paper Joint Account The fund, and other affiliated funds, may transfer uninvested cash into a commercial paper joint account, the daily aggregate balance of which is invested in high-grade commercial paper. All securities purchased by the joint account satisfy the fund's criteria as to quality, yield, and liquidity. Securities Lending To earn additional income, the fund lends its securities to approved brokers. At May 31, 1996, the market value of securities on loan was $227,865,000, which was fully collateralized with 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. Other Purchases and sales of portfolio securities, other than short-term and U.S. government securities, aggregated $154,005,000 and $187,613,000, respectively, for the year ended May 31, 1996. Purchases and sales of U.S. government securities aggregated $517,349,000 and $376,832,000, respectively, for the year ended May 31, 1996. 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 unused realized capital loss carryforwards for federal income tax purposes of $2,377,000, of which $1,115,000 expires in 2003, and $1,262,000 in 2004. The fund intends to retain gains realized in future periods that may be offset by available capital loss carryforwards. At May 31, 1996, the aggregate cost of investments for federal income tax and financial reporting purposes was $1,619,510,000, and net unrealized gain aggregated $363,000, of which $30,966,000 related to appreciated investments and $30,603,000 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 $668,000 was payable at May 31, 1996. 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 0.305% for assets in excess of $50 billion. At May 31, 1996, and for the year then ended, the effective annual group fee rate was 0.33% and 0.34%, respectively. 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 $3,476,000 for the year ended May 31, 1996, of which $274,000 was payable at period-end. 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, 1996, 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, 1996 by correspondence with custodians, provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Baltimore, Maryland June 19, 1996 T. ROWE PRICE SHAREHOLDER SERVICES To help shareholders monitor their current investments and make decisions that accurately reflect their financial goals, T. Rowe Price offers a wide variety of information and services - at no extra cost. Knowledgeable Service Representatives By Phone Shareholder service representatives are 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. Call 1-800-225-5132 to speak directly with a representative who will be able to assist you with your accounts. In Person Visit one of our Investor Center locations to meet with a representative who will be able to assist you with your accounts. You can also drop off applications or obtain prospectuses and other literature. Automated 24-Hour Services Tele*Access(registered trademark) Call 1-800-638-2587 to obtain information such as account balance, date and amount of your last transaction, latest dividend payment, and fund prices and yields. Additionally, you can request prospectuses, statements, new account and tax forms; reorder checks; and initiate purchase, redemption, and exchange orders for identically registered accounts. T. Rowe Price OnLine Through a personal computer via dial-up modem, you can replicate all the services available on Tele*Access. Account Services Checking Write checks for $500 or more on any money market and most bond fund accounts (except the High Yield and Emerging Markets Bond Funds). Automatic Investing Build your account over time by investing directly from your bank account or paycheck with Automatic Asset Builder. Additionally, Automatic Exchange enables you to move investments systematically from one fund account to another, such as from a money fund to a stock fund. A low $50 minimum makes it easy to get started. T. Rowe Price Shareholder Services Automatic Withdrawal If you need money from your fund account on a regular basis, you can establish scheduled, automatic redemptions. Dividend and Capital Gains Payment Options Reinvest all or some of your distributions, or take them in cash. We give you maximum flexibility and convenience. Discount Brokerage Investments Available You can trade stocks, bonds, options, precious metals, and other securities at a substantial savings over regular commission rates. To Open an Account Call a shareholder service representative at 1-800-225-5132. Investment Information Combined Statement A comprehensive overview of your T. Rowe Price accounts is provided. The summary page gives you earnings by tax category, provides total portfolio value, and lists your investments by type - stock, bond, and money market. Detail pages itemize account transactions by fund. Shareholder Reports Portfolio managers review the performance of the funds in plain language and discuss T. Rowe Price's economic outlook. The T. Rowe Price Report This is a quarterly newsletter with relevant articles on market trends, personal financial planning, and T. Rowe Price's economic perspective. Performance Update This quarterly report reviews recent market developments and provides comprehensive performance information for each T. Rowe Price fund. Insights This library of information includes reports on mutual fund tax issues, investment strategies, and financial markets. Detailed Investment Guides Our widely acclaimed Asset Mix Worksheet, College Planning Kit, Personal Strategy Planner, Retirees Financial Guide, and Retirement Planning Kit (also available on disk for PC use) help you determine and reach your investment goals. T. Rowe Price Mutual Funds Stock Funds Domestic Balanced Blue Chip Growth Capital Appreciation Capital Opportunity Dividend Growth Equity Income Equity Index Growth & Income Growth Stock Health Sciences Mid-Cap Growth Mid-Cap Value New America Growth New Era New Horizons* OTC Science & Technology Small-Cap Value* Spectrum Growth Value International/Global Emerging Markets Stock European Stock Global Stock International Discovery International Stock Japan Latin America New Asia Bond Funds Domestic Taxable Corporate Income GNMA High Yield New Income Short-Term Bond Short-Term U.S. Government Spectrum Income Summit GNMA Summit Limited-Term Bond U.S. Treasury Intermediate U.S. Treasury Long-Term Domestic Tax-Free California Tax-Free Bond Florida Insured Intermediate Tax-Free Georgia Tax-Free Bond Maryland Short-Term Tax-Free Bond Maryland Tax-Free Bond New Jersey Tax-Free Bond New York Tax-Free Bond Summit Municipal Income Summit Municipal Intermediate Tax-Free High Yield Tax-Free Income Tax-Free Insured Intermediate Bond Tax-Free Short-Intermediate Virginia Short-Term Tax-Free Bond Virginia Tax-Free Bond International/Global Emerging Markets Bond Global Government Bond International Bond Short-Term Global Income Money Market Taxable Prime Reserve Summit Cash Reserves U.S. Treasury Money Tax-Free California Tax-Free Money New York Tax-Free Money Summit Municipal Money Market Tax-Exempt Money Blended Asset Personal Strategy Balanced Personal Strategy Growth Personal Strategy Income T. Rowe Price No-Load Variable Annuity Equity Income Portfolio International Stock Portfolio Limited-Term Bond Portfolio New America Growth Portfolio Personal Strategy Balanced Portfolio *Closed to new investors. For yield, price, last transaction, and current balance, 24 hours, 7 days a week, call: 1-800-638-2587 toll free For assistance with your existing fund account, call: Shareholder Service Center 1-800-225-5132 toll free 625-6500 Baltimore area T. Rowe Price 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(registered trademark). T. Rowe Price Investment Services, Inc., Distributor RPRTNIF 5/31/96 Chart 1 - Interest Rate Levels-A 3-line chart showing yields on the 30-year Treasury bond, the 5-year Treasury note, and the 1-year Treasury bill from 5/31/95 to 5/31/96. Chart 2 - Security Diversification-A pie chart showing security diversification for 5/31/96: U.S. Governments and Agencies 32%, Corporates 23%, Mortgage-Backed 38%, and Other 7%. Chart 3 - New Income Fund Chart A line chart showing the cumulative growth of $10,000 invested in the New Income Fund over the past 10 years compared with $10,000 invested in a broad-based index over the same period. -----END PRIVACY-ENHANCED MESSAGE-----