-----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, SoDba0XN5qouOXku6bab8Cr1tBf/hhY9dDR9YtZ7TqRjJ7f2HxKoDYc1Br3AC78H D/78a7ttEKyw2ieJE7VyEA== 0000080249-97-000013.txt : 19971231 0000080249-97-000013.hdr.sgml : 19971231 ACCESSION NUMBER: 0000080249-97-000013 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971130 FILED AS OF DATE: 19971230 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: 97746245 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 - -------------------------------------------------------------------------------- November 30, 1997 - -------------------------------------------------------------------------------- REPORT HIGHLIGHTS ================================================================================ New Income Fund o Longer-term interest rates declined on balance during the six months ended November 30, more than retracing their earlier rise and creating a positive environment for bonds. o Among high-quality bonds, corporates led the way for the past six months, but mortgage-backed securities had the best returns for the 12-month period. o The fund's six-month return exceeded both its Lipper peer group and the Lehman Aggregate Bond Index. o We lengthened duration slightly to increase appreciation opportunities and added corporates to enhance yield. o Prospects are good for continued low inflation and moderate growth- a favorable environment for bonds over time. Fellow Shareholders ================================================================================ Reversing the pattern of the preceding six months, interest rates fell and prices of high-quality bonds rose during the six months ended November 30, 1997. Bond yields more than retraced their previous rise, due in part to a flight to the safety of Treasuries when global stock markets sold off in the wake of Southeast Asia's financial crisis. Longer-term bonds and your fund generated strong returns for the past six months. [Edgar description: Interest Rate Levels - a 3-line chart showing the 30-year Treasury Bond, 5-year Treasury Note and 1-year Treasury Bill yields from 5/31/97 to 11/30/97. [wrap preceding paragraph around chart and start next paragraph if necessary] The economy maintained its momentum over the past six months, ri sing at a 3.5% annual rate during the third quarter. Inflation remained subdued, aided by the dollar's continued strength, which made imports cheaper. The U.S. bond market and the dollar were both boosted by the currency crises that began in Thailand in July and spread quickly to other Pacific Rim countries, devastating stock returns in virtually every market. Investors sought the safe haven of U.S. dollars, and, when the U.S. stock market caught a serious case of jitters in October, they rushed to buy U.S. Treasury securities. With inflation quiescent and equity markets in turmoil, the Federal Reserve understandably took no monetary policy action during this period. Long-term rates fell significantly more than short-term rates, causing the yield curve to flatten. As of November 30, the difference in yields between 30-year Treasury bonds and one-year Treasury notes had narrowed from about 115 basis points six months ago to about 58 in November (100 basis points equal one percentage point). Among high-grade bond market sectors, corporate bonds provided the best returns for the six-month period, as investors sought higher income returns in a falling rate environment. Lower-rated bonds within the investment-grade sector generated the highest returns. This is typical during periods of strong economic growth as fears of credit downgrades and defaults diminish. Mortgage-backed securities fell to third place during the period, reflecting investor concern over rising prepayment rates. (Prepayments typically pick up when rates fall.) For the last 12 months, however, mortgage-backed securities outstripped both Treasuries and corporates. ================================================================================ Performance Comparison - -------------------------------------------------------------------------------- Periods Ended 11/30/97 6 Months 12 Months - -------------------------------------------------------------------------------- New Income Fund 6.66% 6.93% Lehman Aggregate Bond Index 6.55 7.55 Lipper Average of Corporate Bond Funds A-Rated 6.58 6.93 ================================================================================ For the six-month period, the fund provided a strong return of 6.66%, generated by income of $0.29 per share and a $0.29 rise in share value. This was slightly above the benchmark Lehman index and an average of competitor funds. Despite the recent rally, the fund's share price on November 30 was only two cents above its level of a year earlier, so total return for the year was powered primarily by income. For the 12 months, the fund lagged the benchmark index but matched the average competitor fund. As the likelihood of any tightening by the Fed faded, we felt comfortable lengthening the fund's duration from 4.9 years to 5.4 years to take advantage of falling rates. (Duration measures a bond fund's sensitivity to interest rate changes. A duration of 5.0 years, for instance, means a fund's price would drop about 5% for each one-percentage-point rise in interest rates.) The principal change we made in portfolio composition during the period was to increase our investment in corporate bonds from 21% of net assets to 41% to increase yield and take advantage of a temporary widening in yield spreads between credit-quality tiers in September and October. The bonds purchased were primarily A-rated. This asset move was accomplished by trimming mortgage-backed securities from 38% to 35% of net assets to decrease exposure to prepayment risk, by reducing Treasury holdings from 27% to 18%, and also by redeploying some cash reserves. The fund's weighted average credit rating declined marginally from AA+ to AA. OUTLOOK [Edgar description: Pie chart - Security Diversification as of 11/30/97. U.S. Treasury Securities 18%; mortgage-backed securities 35%; corporate bonds 40%, reserves 6%, other 1%] [wrap preceding and following paragraphs around pie] Despite the economy's strength, we believe the recent developments in Asia and continued subdued inflation may obviate the need for any immediate action by the Federal Reserve. Indeed, we do not expect any change in policy for the next quarter or two, and it is no longer a foregone conclusion that the Fed's next move will be a tightening. Looking further ahead, we expect a continuation of good growth, but a touch slower than the recent pace. Consumers, burdened with debt and perhaps reacting a bit to the volatility on Wall Street, may pare back big-ticket purchases next year, and business fixed investment should slow from its recent torrid pace. All this points to a positive environment for fixed income securities over the coming months. Respectfully submitted, /s/ Charles P. Smith President and Chairman of the Investment Advisory Committee December 19, 1997 ================================================================================ Operating Policy Change - -------------------------------------------------------------------------------- Your fund's Board of Directors has approved a change in one of the New Income Fund's investment policies, which will become effective January 15, 1998. Currently, any security purchased by the fund must be rated within the four highest credit categories (i.e., investment grade) by at least one established public rating agency or, if unrated, must have an equivalent rating assigned by T. Rowe Price. The fund may not purchase any security rated below investment grade-below BBB-by Standard & Poor's, Moody's, or Fitch. This restriction is being changed to allow the fund to invest up to 15% of its total assets in split-rated securities, which are securities rated investment grade by at least one rating agency but below-investment grade by another rating agency. There are many cases where our own research analysts may concur with a BBB rating but one of the outside agencies does not, thereby prohibiting the fund from purchasing the security. The Directors are providing this additional flexibility because our rigorous research gives us confidence that we can take advantage of opportunities to purchase credits we believe will improve, thereby enhancing fund returns. This supplements the New Income Fund prospectus dated October 1, 1997. ================================================================================ T. Rowe Price New Income Fund ================================================================================ Portfolio Highlights - -------------------------------------------------------------------------------- Key statistics 5/31/97 11/30/97 - -------------------------------------------------------------------------------- Price Per Share ...................................... $ 8.77 $ 9.06 Dividends Per Share For 6 months .................................... 0.29 0.29 For 12 months ................................... 0.58 0.58 Dividend Yield * For 6 months .................................... 6.69% 6.53% For 12 months ................................... 6.86 6.72 Weighted Average Maturity (years) .................... 10.4 12.2 Weighted Average Effective Duration (years) .......... 4.9 5.4 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. ================================================================================ T. Rowe Price New Income Fund ================================================================================ Portfolio Highlights - -------------------------------------------------------------------------------- SECTOR DIVERSIFICATION Percent of Percent of Net Assets Net Assets 5/31/97 11/30/97 - -------------------------------------------------------------------------------- Mortgage-Backed Securities ....................... 38% 35% U.S. Treasury Securities ......................... 27 18 Banking .......................................... 8 12 Electric Utilities ............................... 6 7 Finance and Credit ............................... 1 7 Retail ........................................... 1 3 Short-Term Obligations ........................... 10 2 Investment Dealers ............................... 1 2 Insurance ........................................ 1 2 All Other ........................................ 6 9 Other Assets Less Liabilities .................... 1 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] ================================================================================ 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 11/30/97 ......... 1 Year 3 Years 5 Years 10 Years New Income Fund ................ 6.93% 9.75% 7.24% 8.55% 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 ================================================================================ Unaudited For a share outstanding throughout each period ==================================================================================================================================== Financial Highlights
6 Months Year 3 Months# Year Ended Ended Ended Ended 11/30/97 5/31/97 5/31/96 5/31/95 5/31/94 2/28/94 2/28/93 NET ASSET VALUE Beginning of period ............ $ 8.77 $ 8.70 $ 8.97 $ 8.65 $ 9.12 $ 9.24 $ 8.94 Investment activities Net investment income ...... 0.29 0.58 0.60 0.58 0.14 0.54 0.57 Net realized and unrealized gain (loss) ..... 0.29 0.07 (0.27) 0.34 (0.40) (0.05) 0.30 Total from investment activities ...... 0.58 0.65 0.33 0.92 (0.26) 0.49 0.87 Distributions Net investment income ...... (0.29) (0.58) (0.60) (0.58) (0.14) (0.54) (0.57) Net realized gain .......... -- -- -- (0.02) (0.07) (0.07) -- Total distributions ........ (0.29) (0.58) (0.60) (0.60) (0.21) (0.61) (0.57) NET ASSET VALUE End of period .................. $ 9.06 $ 8.77 $ 8.70 $ 8.97 $ 8.65 $ 9.12 $ 9.24 Ratios/Supplemental Data Total return ................... 6.66% 7.70% 3.70% 11.13% (2.84)% 5.36% 10.12% Ratio of expenses to average net assets ............. 0.71%+ 0.74% 0.75% 0.78% 0.80%+ 0.82% 0.84% Ratio of net investment income to average net assets ..................... 6.44%+ 6.65% 6.66% 6.95% 6.43%+ 5.77% 6.36% Portfolio turnover rate ........ 68.4% 87.1% 35.5% 54.1% 91.5%+ 58.3% 85.8% Net assets, end of period (in millions) .................. $ 1,894 $ 1,711 $ 1,634 $ 1,566 $ 1,375 $ 1,458 $ 1,527 ==================================================================================================================================== + 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 ================================================================================ Unaudited November 30, 1997 Statement of Net Assets Par/Shares Value In thousands - -------------------------------------------------------------------------------- CORPORATE BONDS AND NOTES 40.6% Automobiles and Related 0.4% Ford Motor Credit, Sr. Unsub. Notes, 7.20%, 6/15/07 .......... $6,820 $7,117 7,117 Banking 11.6% ABN AMRO NV, Sub. Deb., 7.30%, 12/1/26 ....................... 10,000 10,072 Banco Generale, Sr. Sub. Notes, (144a), 7.70%, 8/1/02 ........ 7,000 6,653 Banco Latinoamericano, (144a), 6.69%, 12/23/99 ............... 10,000 9,979 Banco Santiago, Sub. Notes, 7.00%, 7/18/07 ................... 5,000 5,021 Bank of Boston Capital Trust, Gtd. Notes, 8.25%, 12/15/26 .... 10,000 10,710 Bank of Oklahoma, 7.125%, 8/15/07 ............................ 12,000 12,350 Den Danske Bank, (144a), VR, 7.40%, 6/15/10 .................. 10,000 10,284 First Chicago NBD, Gtd. Bonds, (144a), 7.95%, 12/1/26 ........ 10,000 10,332 First Empire Capital Trust I, Gtd. Bonds, 8.234%, 2/1/27 ..... 10,000 10,651 Hubco Capital Trust I, 8.98%, 2/1/27 ......................... 7,000 7,499 M & I Capital Trust, 7.65%, 12/1/26 .......................... 11,300 11,222 MBNA MTN, 6.15%, 10/1/03 ...................................... 5,000 4,954 Sub. Notes, 7.25%, 9/15/02 ............................... 7,000 7,166 Mercantile Bancorporation, Sr. Notes, 7.05%, 6/15/04 ......... 15,000 15,357 Mercantile Bankshares, Sr. Notes, (144a), 6.13%, 7/15/98 + ... 5,000 5,002 Merita Bank, Non-Cum. Step-Up Perpetual Cap. Securities 7.15%, 9/11/02 ....................................... 11,000 11,181 Midland Bank, Sub. Notes, 7.625%, 6/15/06 .................... 10,000 10,554 PNC Bank, Sub. Notes, 7.875%, 4/15/05 ........................ 12,000 12,839 PNC Institutional Capital, (144a), 7.95%, 12/15/26 ........... 8,000 8,362 Santander Financial, Gtd. Sub. Notes, 7.875%, 4/15/05 ........ 8,250 8,886 Scotland International, Sub. Notes, (144a), 8.80%, 1/27/04 ... 5,000 5,589 Skandinaviska Enskilda Banken Step-Up Perpetual Sub. Notes, (144a) 8.125%, 9/6/06 ....................................... 5,000 5,358 Societe Generale, Step-Up Perpetual Sub. Notes, (144a) 7.85%, 4/30/07 ....................................... 8,000 8,331 Toronto Dominion Bank, Sub. Notes, 6.50%, 1/15/07 ............ 12,000 12,011 220,363 Beverages 0.9% Embotelladora Andina, 7.00%, 10/1/07 ......................... 5,000 4,982 Panamerican Beverages, Sr. Notes, (144a), 7.25%, 7/1/09 ...... 13,000 13,000 17,982 Building and Real Estate 0.9% Meditrust, 7.00%, 8/15/07 .................................... $ 6,500 $ 6,495 Simon Debartolo Group, 7.00%, 7/15/09 ........................ 10,000 10,031 16,526 Cable Operators 1.9% Clear Channel, Deb., 7.25%, 10/15/27 ......................... 12,000 11,914 Comcast Cable Communications, 8.375%, 5/1/07 ................. 5,000 5,465 Cox Enterprises, 7.375%, 7/15/27 ............................. 17,000 17,936 35,315 Consumer Services 0.6% Service Corporation International, 7.70%, 4/15/09 ............ 10,000 10,655 10,655 Electric Utilities 6.8% Alabama Power, 1st Mtg. Bonds, 7.75%, 2/1/23 ................. 3,650 3,777 Big Rivers, Cooperative Utility Trust Cert., 10.70%, 9/15/17 . 2,500 2,640 Consolidated Edison, Deb ..................................... 6.375%, 4/1/03 ....................................... 5,860 5,853 6.45%, 12/1/07 ....................................... 7,000 6,952 Consumers Energy, 1st Mtg. Bonds, 6.375%, 9/15/03 ............ 5,000 4,868 DR Investments, Sr. Notes, (144a), 7.45%, 5/15/07 ............ 5,000 5,282 Georgia Power 1st Mtg. Bonds 7.625%, 3/1/23 ....................................... 5,750 5,914 7.95%, 2/1/23 ........................................ 2,809 2,906 Houston Lighting & Power, 7.75%, 3/15/23 ..................... 10,000 10,351 Jersey Central Power & Light 1st Mtg. Notes, 6.75%, 11/1/25 ........................... 9,000 8,372 MTN, 6.85%, 11/27/06 ..................................... 10,000 10,160 Montana Power, 1st Mtg. Bonds, 8.25%, 2/1/07 ................. 5,000 5,503 National Rural Utilities Cooperative Finance, 6.70%, 6/15/02 . 5,000 5,091 Northern Indiana Public Service, MTN, 6.90%, 6/1/00 .......... 5,000 5,077 Pennsylvania Power & Light, 1st Mtg. Notes, 6.875%, 3/1/04 ... 5,000 5,095 Philadelphia Electric, 1st Ref. Mtg., 8.00%, 4/1/02 .......... 8,050 8,507 Public Service Electric & Gas, 1st Ref. Mtg., 6.125%, 8/1/02 . 3,450 3,416 Texas Utilities Electric, 1st Mtg. Bonds, 7.875%, 3/1/23 ..... 8,450 8,621 Virginia Electric & Power, 1st Ref. Mtg., 7.50%, 6/1/23 ...... 10,950 11,150 West Texas Utilities, 1st Mtg. Bonds, 6.375%, 10/1/05 ........ 7,860 7,867 127,402 Finance and Credit 6.0% Banesto Finance, Gtd. Sub. Notes, 7.50%, 3/25/07 ............. 5,000 5,245 CIT Capital Trust I, Gtd. Cap. Securities, 7.70%, 2/15/27 .... $10,000 $10,469 Fairfax Financial Holdings, 8.25%, 10/1/15 ................... 12,760 13,982 Hutchison Whampoa Finance, (144a), 6.95%, 8/1/07 ............. 18,000 17,558 Jefferson Pilot Capital Trust, (144a), 8.14%, 1/15/46 ........ 5,000 5,175 MCN Financing, Gtd. Notes, 6.305%, 6/1/37 .................... 15,000 15,009 National City Capital Trust I, Gtd. Notes, 6.75%, 6/1/29 ..... 17,000 17,096 Safeco Capital Trust, (144a), 8.072%, 7/15/37 ................ 15,000 15,285 Trenwick Capital Trust I, Cap. Securities, 8.82%, 2/1/37 ..... 2,925 3,224 Zurich Capital Trust, (144a), 8.376%, 6/1/37 ................. 10,000 10,751 113,794 Food Processing 0.6% Nabisco, 6.70%, 6/15/02 ...................................... 10,000 10,086 Quaker Oats, 7.44%, 3/2/26 ................................... 1,000 1,070 11,156 Food and Tobacco 0.5% Philip Morris, 7.65%, 7/1/08 ................................. 10,000 10,503 10,503 Industrials 0.6% Celulosa Arauco Y Constitucion, (144a), 7.20%, 9/15/09 ....... 12,500 12,298 12,298 Insurance 2.4% Hartford Life, 6.90%, 6/15/04 ................................ 14,850 15,127 Liberty Mutual Insurance, (144a), 8.20%, 5/4/07 .............. 12,000 13,139 Metropolitan Life Insurance, (144a), 7.80%, 11/1/25 .......... 16,850 17,808 46,074 Investment Dealers 2.3% Donaldson Lufkin & Jenrette, 6.375%, 5/26/00 ................. 10,000 10,029 Jefferies Group, Sr. Notes, (144a), 7.50%, 8/15/07 ........... 5,000 5,075 Lehman Brothers Sr. Sub. Notes 5.75%, 11/15/98 ...................................... 5,000 4,975 7.625%, 8/1/98 ....................................... 8,000 8,076 Morgan Stanley Group, 6.875%, 3/1/07 ......................... 5,000 5,080 PaineWebber Group, Sr. Notes, 7.625%, 10/15/08 ............... 10,000 10,618 43,853 Petroleum 0.3% Parker & Parsley Petroleum, Sr. Notes, 8.875%, 4/15/05 ....... 5,000 5,622 5,622 Railroads 0.6% CSX, Deb., 7.45%, 5/1/07 ..................................... $10,000 $10,540 10,540 Retail 2.9% Federated Department Stores, Sr. Deb., 7.45%, 7/15/17 ........ 17,000 17,514 Food Lion, 7.55%, 4/15/07 .................................... 6,000 6,325 Kroger, 7.65%, 4/15/07 ....................................... 9,000 9,536 Sears Roebuck, MTN, 6.93%, 11/15/02 .......................... 12,500 12,768 The Gap, 6.90%, 9/15/07 ...................................... 9,000 9,187 55,330 Savings and Loan 0.3% CENFED Financial, Sr. Deb., (144a), 11.17%, 12/15/01 ......... 5,000 5,531 5,531 Transportation 0.4% Qantas Airways, Sr. Notes, (144a), 6.625%, 6/30/98 ........... 7,000 7,026 7,026 Utilities 0.6% Western Resources, 1st Mtg. Bonds, 6.875%, 8/1/04 ............ 12,000 12,078 12,078 Total Corporate Bonds and Notes (Cost $750,761) .............. 769,165 U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES 35.0% U.S. Government Agency Asset-Backed 0.8% Federal Home Loan Mortgage, REMIC - Government National Mortgage Assn. Collateral 5.15%, 8/25/12 ....................................... 9,672 9,591 Federal National Mortgage Assn., REMIC, 8.10%, 4/25/25 ....... 4,500 4,712 14,303 U.S. Government Agency Obligations 6.9% Federal Home Loan Mortgage 6.50%, 11/1/04 - 6/1/24 .............................. 10,545 10,476 7.00%, 2/1/24 ........................................ 4,134 4,168 7.50%, 3/1 - 6/1/24 .................................. 8,622 8,807 8.00%, 6/1/08 ........................................ 95 97 9.00%, 3/1/21 - 5/1/22 ............................... 6,058 6,450 9.75%, 12/1/17 ....................................... 2,193 2,389 10.50%, 2/1/01 - 8/1/20 .............................. 871 960 11.00%, 5/1/11 - 7/1/20 .............................. 423 476 11.50%, 6/1/01 ....................................... 4 5 Federal Home Loan Mortgage REMIC 5.50%, 10/15/20 $ .................................... 5,000 $ 4,764 6.00%, 5/15/16 ....................................... 4,734 4,724 6.50%, 6/15/23 ....................................... 31,663 31,454 7.00%, 8/15/09 - 9/15/24 ............................. 40,600 40,931 7.50%, 2/15/06 ....................................... 1,957 1,977 Federal National Mortgage Assn ............................... 8.75%, 3/1/10 ........................................ 12 12 10.50%, 7/1/09 - 4/1/22 .............................. 1,990 2,208 REMIC 7.00%, 11/25/18 ...................................... 2,317 2,313 8.00%, 11/25/24 ...................................... 8,233 8,861 131,072 U.S. Government Guaranteed Obligations 27.3% Government National Mortgage Assn I 6.00%, 12/15/23 - 4/15/24 ............................ 13,160 12,735 6.50%, 4/15/23 - 9/15/27 ............................. 70,569 69,640 7.00%, 4/15/22 - 10/15/27 ............................ 112,425 113,055 7.50%, 8/15/16 - 9/15/27 ............................. 76,184 78,180 8.00%, 12/15/24 - 10/15/27 ........................... 56,660 59,138 8.50%, 9/15/16 - 3/15/27 ............................. 47,260 49,796 9.00%, 1/15/09 - 4/15/25 ............................. 16,989 18,306 9.50%, 6/15/09 - 3/15/25 ............................. 54,646 59,519 11.00%, 12/15/09 - 1/15/21 ........................... 16,165 18,365 11.50%, 3/15/10 - 10/15/15 ........................... 2,181 2,506 II 7.00%, 12/20/23 - 9/20/27 ............................ 25,794 25,756 8.50%, 9/20/26 ....................................... 150 157 9.00%, 6/20/16 - 5/20/22 ............................. 6,675 7,153 GPM, I, 10.25%, 2/15/16 - 11/15/20 ....................... 2,531 2,790 517,096 Total U.S. Government Mortgage-Backed Securities (Cost $649,748) 662,471 U.S. GOVERNMENT OBLIGATIONS 17.5% U.S. Treasury Obligations 17.5% U.S. Treasury Bonds 6.125%, 11/15/27 ..................................... 13,240 13,389 U.S. Treasury Bonds 6.375%, 8/15/27 $ .................................... 55,910 $58,138 6.50%, 11/15/26 ...................................... 8,000 8,426 6.75%, 8/15/26 ....................................... 54,550 59,289 8.00%, 11/15/21 ...................................... 16,035 19,748 8.125%, 5/15/21 ...................................... 32,140 40,009 U.S. Treasury Notes 5.75%, 11/15/00 ...................................... 10,000 9,986 6.25%, 10/31/01 ...................................... 29,000 29,380 6.375%, 1/15/00 ...................................... 48,300 48,851 7.75%, 11/30/99 ...................................... 43,750 45,336 Total U.S. Government Obligations (Cost $311,918) ............ 332,552 ASSET-BACKED SECURITIES 0.2% Auto-Backed 0.0% Premier Auto Trust, 4.22%, 3/2/99 ............................ 684 680 680 Receivables-Backed 0.2% Continental Airlines, PTC, 6.94%, 10/15/13 ................... 3,431 3,505 3,505 Total Asset-Backed Securities (Cost $4,115) .................. 4,185 EQUITY AND CONVERTIBLE SECURITIES 1.0% Banking 0.5% Chase Preferred Capital, Pfd. Stock, (Series A) .............. 400 10,425 10,425 Financial 0.5% Pinto Totta International Finance Pfd. Stock, (144a), (Series A) ........................... 9 8,671 8,671 Total Equity and Convertible Securities (Cost $18,685) ...... 19,096 MONEY MARKET FUNDS 2.4% Reserve Investment Fund, 5.71% # ............................. 44,781 44,781 Total Money Market Funds (Cost $44,781) ..................... 44,781 Total Investments in Securities 96.7% of Net Assets (Cost $1,780,008) ....................... $ 1,832,250 Other Assets Less Liabilities ................................ 61,797 NET ASSETS ................................................... $ 1,894,047 Net Assets Consist of: Accumulated net investment income - net of distributions ......................................... $ 2,699 Accumulated net realized gain/loss - net of distributions ......................................... 5,808 Net unrealized gain (loss) ................................... 52,242 Paid-in-capital applicable to 209,158,836 shares of $1.00 par value capital stock outstanding; 300,000,000 shares authorized ................... 1,833,298 NET ASSETS ................................................... $ 1,894,047 NET ASSET VALUE PER SHARE .................................... $ 9.06 + Private Placement # Seven-day yield GPM Graduated Payment Mortgage MTN Medium Term Note PTC Pass-through Certificate 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 - totalof such securities at year-end amounts to 10.9% of net assets. The accompanying notes are an integral part of these financial statements. T. Rowe Price New Income Fund ================================================================================ Unaudited Statement of Operations - -------------------------------------------------------------------------------- In thousands 6 Months Ended 11/30/97 Investment Income Interest and dividend income .................................... $ 64,955 Expenses Investment management ....................................... 4,307 Shareholder servicing ....................................... 1,795 Custody and accounting ...................................... 175 Prospectus and shareholder reports .......................... 80 Registration ................................................ 51 Legal and audit ............................................. 14 Directors ................................................... 10 Miscellaneous ............................................... 9 Total expenses .............................................. 6,441 Net investment income ........................................... 58,514 Realized and Unrealized Gain (Loss) Net realized gain (loss) on securities .......................... 12,574 Change in net unrealized gain or loss on securities ............. 44,914 Net realized and unrealized gain (loss) ......................... 57,488 INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS .......................................... $116,002 The accompanying notes are an integral part of these financial statements. T. Rowe Price New Income Fund ================================================================================ Unaudited Statement of Changes in Net Assets - -------------------------------------------------------------------------------- In thousands 6 Months Year Ended Ended 11/30/97 5/31/97 Increase (Decrease) in Net Assets Operations Net investment income ........................... $ 58,514 $ 111,049 Net realized gain (loss) ........................ 12,574 4,730 Change in net unrealized gain or loss ........... 44,914 6,965 Increase (decrease) in net assets from operations 116,002 122,744 Distributions to shareholders Net investment income ........................... (58,516) (111,027) Capital share transactions * Shares sold ..................................... 226,506 323,914 Distributions reinvested ........................ 34,922 71,848 Shares redeemed ................................. (135,597) (331,111) Increase (decrease) in net assets from capital share transactions .............................. 125,831 64,651 Net Assets Increase (decrease) during period ................... 183,317 76,368 Beginning of period ................................. 1,710,730 1,634,362 End of period ....................................... $1,894,047 $ 1,710,730 *Share information Shares sold ..................................... 25,357 36,821 Distributions reinvested ........................ 3,890 8,164 Shares redeemed ................................. (15,166) (37,672) Increase (decrease) in shares outstanding ....... 14,081 7,313 The accompanying notes are an integral part of these financial statements. T. Rowe Price New Income Fund ================================================================================ Unaudited November 30, 1997 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. 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 takes cash and U.S. Treasury securities as collateral to secure the loans. Collateral is maintained at not less than 100% of the value of loaned securities. At November 30, 1997, the value of securities on loan was $216,917,000. 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 $529,214,000 and $160,224,000, respectively, for the six months ended November 30, 1997. Purchases and sales of U.S. government securities aggregated $861,685,000 and $1,006,347,000, respectively, for the six months ended November 30, 1997. 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 November 30, 1997, the aggregate cost of investments for federal income tax and financial reporting purposes was $1,780,008,000, and net unrealized gain aggregated $52,242,000, of which $55,321,000 related to appreciated investments and $3,079,000 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 $732,000 was payable at November 30, 1997. 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 November 30, 1997, and for the six months 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 $1,074,000 for the six months ended November 30, 1997, of which $197,000 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 29.5% of the outstanding shares of the New Income Fund at November 30, 1997. For the six months then ended, the fund was allocated $615,000 of Spectrum expenses, $111,000 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 six months ended November 30, 1997, totaled $1,022,000 and are reflected as interest income in the accompanying Statement of Operations. 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*AccessRegistration Mark and T. Rowe Price OnLine. 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 your T. Rowe Price accounts. 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 11/30/97
-----END PRIVACY-ENHANCED MESSAGE-----