0000949820-01-500009.txt : 20011010
0000949820-01-500009.hdr.sgml : 20011010
ACCESSION NUMBER: 0000949820-01-500009
CONFORMED SUBMISSION TYPE: 497
PUBLIC DOCUMENT COUNT: 1
FILED AS OF DATE: 20011005
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PRICE T ROWE U S TREASURY FUNDS INC
CENTRAL INDEX KEY: 0000853437
STANDARD INDUSTRIAL CLASSIFICATION: []
FISCAL YEAR END: 0531
FILING VALUES:
FORM TYPE: 497
SEC ACT: 1933 Act
SEC FILE NUMBER: 033-30531
FILM NUMBER: 1752920
BUSINESS ADDRESS:
STREET 1: 100 E PRATT ST
STREET 2: 8TH FLOOR, LEGAL DEPT.
CITY: BALTIMORE
STATE: MD
ZIP: 21202
BUSINESS PHONE: 3015472000
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PRICE T ROWE SHORT TERM BOND FUND INC
CENTRAL INDEX KEY: 0000731890
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 521332477
FISCAL YEAR END: 0531
FILING VALUES:
FORM TYPE: 497
SEC ACT: 1933 Act
SEC FILE NUMBER: 002-87568
FILM NUMBER: 1752921
BUSINESS ADDRESS:
STREET 1: 100 EAST PRATT ST
CITY: BALTIMORE
STATE: MD
ZIP: 21202
BUSINESS PHONE: 4105472000
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PRICE T ROWE PRIME RESERVE FUND INC
CENTRAL INDEX KEY: 0000316968
STANDARD INDUSTRIAL CLASSIFICATION: []
IRS NUMBER: 521040467
FISCAL YEAR END: 0531
FILING VALUES:
FORM TYPE: 497
SEC ACT: 1933 Act
SEC FILE NUMBER: 002-54926
FILM NUMBER: 1752922
BUSINESS ADDRESS:
STREET 1: 100 EAST PRATT ST
CITY: BALTIMORE
STATE: MD
ZIP: 21202
BUSINESS PHONE: 4105472000
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: 497
SEC ACT: 1933 Act
SEC FILE NUMBER: 002-48848
FILM NUMBER: 1752924
BUSINESS ADDRESS:
STREET 1: 100 EAST PRATT ST
CITY: BALTIMORE
STATE: MD
ZIP: 21202
BUSINESS PHONE: 4105472000
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PRICE T ROWE HIGH YIELD FUND INC
CENTRAL INDEX KEY: 0000754915
STANDARD INDUSTRIAL CLASSIFICATION: []
FISCAL YEAR END: 0531
FILING VALUES:
FORM TYPE: 497
SEC ACT: 1933 Act
SEC FILE NUMBER: 002-93707
FILM NUMBER: 1752925
BUSINESS ADDRESS:
STREET 1: 100 E PRATT ST
CITY: BALTIMORE
STATE: MD
ZIP: 21202
BUSINESS PHONE: 3015472000
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PRICE T ROWE GNMA FUND
CENTRAL INDEX KEY: 0000779785
STANDARD INDUSTRIAL CLASSIFICATION: []
FISCAL YEAR END: 0531
FILING VALUES:
FORM TYPE: 497
SEC ACT: 1933 Act
SEC FILE NUMBER: 033-01041
FILM NUMBER: 1752926
BUSINESS ADDRESS:
STREET 1: 100 E PRATT ST
CITY: BALTIMORE
STATE: MD
ZIP: 21202
BUSINESS PHONE: 4105472000
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PRICE T ROWE CORPORATE INCOME FUND INC
CENTRAL INDEX KEY: 0000949820
STANDARD INDUSTRIAL CLASSIFICATION: []
STATE OF INCORPORATION: MD
FISCAL YEAR END: 0531
FILING VALUES:
FORM TYPE: 497
SEC ACT: 1933 Act
SEC FILE NUMBER: 033-62275
FILM NUMBER: 1752919
BUSINESS ADDRESS:
STREET 1: 100 E PRATT ST
CITY: BALTIMORE
STATE: MD
ZIP: 21202
BUSINESS PHONE: 3015472000
MAIL ADDRESS:
STREET 1: 100 EAST PRATT STREET
CITY: BALTIMORE
STATE: MD
ZIP: 21202
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PRICE T ROWE PERSONAL STRATEGY FUNDS INC
CENTRAL INDEX KEY: 0000923084
STANDARD INDUSTRIAL CLASSIFICATION: []
STATE OF INCORPORATION: MD
FISCAL YEAR END: 0531
FILING VALUES:
FORM TYPE: 497
SEC ACT: 1933 Act
SEC FILE NUMBER: 033-53675
FILM NUMBER: 1752923
BUSINESS ADDRESS:
STREET 1: C/O T ROWE PRICE ASSOCIATES INC
STREET 2: 100 EAST PRATT ST
CITY: BALTIMORE
STATE: MD
ZIP: 21202
BUSINESS PHONE: 4105472000
MAIL ADDRESS:
STREET 1: C/O T ROWE PRICE ASSOCIATES INC
STREET 2: 100 E PRATT ST
CITY: BALTIMORE
STATE: MD
ZIP: 21202
497
1
income49701.txt
STATEMENT OF ADDITIONAL INFORMATION 10-1-01
STATEMENT OF ADDITIONAL INFORMATION
The date of this Statement of Additional Information is October 1, 2001.
T. ROWE PRICE CORPORATE INCOME FUND, INC.
T. ROWE PRICE GNMA FUND
T. ROWE PRICE HIGH YIELD FUND, INC.
T. Rowe Price High Yield Fund-Advisor Class
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PERSONAL STRATEGY FUNDS, INC.
T. Rowe Price Personal Strategy Balanced Fund
T. Rowe Price Personal Strategy Growth Fund
T. Rowe Price Personal Strategy Income Fund
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. Rowe Price Prime Reserve Fund
T. Rowe Price Prime Reserve Fund-PLUS Class
T. ROWE PRICE RESERVE INVESTMENT FUNDS, INC.
T. Rowe Price Government Reserve Investment Fund
T. Rowe Price Reserve Investment Fund
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
and
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
-------------------------------------------------------------------------------
Mailing Address: T. Rowe Price Investment Services, Inc. 100 East Pratt
Street Baltimore, Maryland 21202 1-800-638-5660
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the appropriate fund prospectus dated October 1,
2001, which may be obtained from T. Rowe Price Investment Services, Inc.
("Investment Services").
Each fund's financial statements for the year ended May 31, 2001, and the
report of independent accountants are included in each fund's Annual Report
and incorporated by reference into this Statement of Additional Information.
If you would like a prospectus or an annual or semiannual shareholder report
for a fund of which you are not a shareholder, please call 1-800-638-5660. A
prospectus with more complete information, including management fees and
expenses, will be sent to you. Please read it carefully.
Government Reserve Investment Fund ("GRF") and Reserve Investment Fund
("RIF") are not available for direct purchase by members of the public.
C22-043 10/1/01
TABLE OF CONTENTS
-----------------
Page Page
---- ----
Capital Stock 6 Management of the Funds 38
6
------------------------------ --------------------------------------------
Code of Ethics 53 Net Asset Value Per Share 6
1
------------------------------ --------------------------------------------
Custodian 53 Portfolio Management Practices 20
------------------------------ --------------------------------------------
Distributor for the 5 Portfolio Transactions 5
Fund 2 4
------------------------------ --------------------------------------------
Dividends and 6 Pricing of Securities 5
Distributions 1 9
------------------------------ --------------------------------------------
Federal Registration 67 Principal Holders of Securities 46
of Shares
------------------------------ --------------------------------------------
Independent 67 Ratings of Commercial Paper 69
Accountants
------------------------------ --------------------------------------------
Investment Management 47 Ratings of Corporate Debt Securities 70
Services
------------------------------ --------------------------------------------
Investment Objectives 2 Risk Factors 3
and Policies
------------------------------ --------------------------------------------
Investment Performance 63 Services 51
by Outside Parties
------------------------------ --------------------------------------------
Investment Program 7 Tax Status 61
------------------------------ --------------------------------------------
Investment 35 Yield Information 62
Restrictions
------------------------------ --------------------------------------------
Legal Counsel 67
------------------------------ --------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
-------------------------------------------------------------------------------
The following information supplements the discussion of each fund's
investment objectives and policies discussed in each fund's prospectus.
Shareholder approval is required to substantively change fund objectives.
Unless otherwise specified, the investment programs and restrictions of the
funds are not fundamental policies. Each fund's operating policies are
subject to change by each Board of Directors/Trustees without shareholder
approval. However, shareholders will be notified of a material change in an
operating policy. Each fund's fundamental policies may not be changed without
the approval of at least a majority of the outstanding shares of the fund or,
if it is less, 67% of the shares represented at a meeting of shareholders at
which the holders of 50% or more of the shares are represented. References to
the following are as indicated:
Investment Company Act of 1940 ("1940 Act")
Securities and Exchange Commission ("SEC")
T. Rowe Price Associates, Inc. ("T. Rowe Price")
Moody's Investors Service, Inc. ("Moody's")
Standard & Poor's Corporation ("S&P")
Internal Revenue Code of 1986 ("Code")
T. Rowe Price International, Inc. ("T. Rowe Price
International")
Throughout this Statement of Additional Information, "the fund" is intended
to refer to each fund listed on the cover page, unless otherwise indicated.
RISK FACTORS
-------------------------------------------------------------------------------
Reference is also made to the sections entitled "Types of Securities" and
"Portfolio Management Practices" for discussions of the risks associated with
the investments and practices described therein as they apply to the fund.
All funds
Debt Obligations
Yields on short-, intermediate-, and long-term debt securities are dependent
on a variety of factors, including the general conditions of the money and
bond markets, the maturity of the obligation, and the credit quality and
rating of the issue. Debt securities with longer maturities tend to have
higher yields and are generally subject to potentially greater capital
appreciation and depreciation than obligations with shorter maturities and
lower yields. The market prices of debt securities usually vary, depending
upon available yields. An increase in interest rates will generally reduce
the value of portfolio debt securities, and a decline in interest rates will
generally increase the value of portfolio debt securities. The ability of the
fund to achieve its investment objective is also dependent on the continuing
ability of the issuers of the debt securities in which the fund invests to
meet their obligations for the payment of interest and principal when due.
Although the fund seeks to reduce risk by portfolio diversification, credit
analysis, and attention to trends in the economy, industries, and financial
markets, such efforts will not eliminate all risk. There can, of course, be
no assurance that the fund will achieve its investment objective.
After purchase by the fund, a debt security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the fund.
Neither event will require a sale of such security by the fund. However, T.
Rowe Price will consider such events in its determination of whether the fund
should continue to hold the security. To the extent that the ratings given by
Moody's or S&P may change as a result of changes in such organizations or
their rating systems, the fund will attempt to use comparable ratings as
standards for investments in accordance with the investment policies
contained in the prospectus. When purchasing unrated securities, T. Rowe
Price, under the supervision of the fund's Board of Directors/Trustees,
determines whether the unrated security is of a quality comparable to that
which the fund is allowed to purchase.
Government Reserve Investment, Prime Reserve, Reserve Investment, and U.S.
Treasury Money Funds
There can be no assurance that the fund will achieve its investment objective
or be able to maintain its net asset value per share at $1.00. The price of
the fund is not guaranteed or insured by the U.S. government and its yield is
not fixed. An increase in interest rates could reduce the value of the fund's
portfolio investments, and a decline in interest rates could increase the
value.
All funds except Government Reserve Investment, Prime Reserve, Reserve
Investment, and U.S. Treasury Money Funds
Because of its investment policy, the fund may or may not be suitable or
appropriate for any particular investor. The fund is not a money market fund
and is not an appropriate investment for those whose primary objective is
principal stability. The value of the portfolio securities of the fund will
fluctuate based upon market conditions. Although the fund seeks to reduce
risk by investing in a diversified portfolio, such diversification does not
eliminate all risk.
Mortgage-backed securities differ from conventional bonds in that principal
is paid back over the life of the security rather than at maturity. As a
result, the holder of a mortgage-backed security (i.e., the fund) receives
monthly scheduled payments of principal and interest, and may receive
unscheduled principal payments representing prepayments on the underlying
mortgages. The incidence of unscheduled principal prepayments is also likely
to increase in mortgage pools owned by the fund when prevailing mortgage loan
rates fall below the mortgage rates of the securities underlying the
individual pool. The effect of such prepayments in a falling rate environment
is to (1) cause the fund to reinvest principal payments at the then lower
prevailing interest rate, and (2) reduce the potential for capital
appreciation beyond the face amount of the security. Conversely,
the fund may realize a gain on prepayments of mortgage pools trading at a
discount. Such prepayments will provide an early return of principal which
may then be reinvested at the then higher prevailing interest rate.
The market value of adjustable rate mortgage securities ("ARMs"), like other
U.S. government securities, will generally vary inversely with changes in
market interest rates, declining when interest rates rise and rising when
interest rates decline. Because of their periodic adjustment feature, ARMs
should be more sensitive to short-term interest rates than long-term rates.
They should also display less volatility than long-term mortgage-backed
securities. Thus, while having less risk of a decline during periods of
rapidly rising rates, ARMs may also have less potential for capital
appreciation than other investments of comparable maturities. Interest rate
caps on mortgages underlying ARM securities may prevent income on the ARM
from increasing to prevailing interest rate levels and cause the securities
to decline in value. In addition, to the extent ARMs are purchased at a
premium, mortgage foreclosures and unscheduled principal prepayments may
result in some loss of the holders' principal investment to the extent of the
premium paid. On the other hand, if ARMs are purchased at a discount, both a
scheduled payment of principal and an unscheduled prepayment of principal
will increase current and total returns and will accelerate the recognition
of income which when distributed to shareholders will be taxable as ordinary
income.
Corporate Income, High Yield, and Personal Strategy Funds
Special Risks of Investing in Junk Bonds The following special considerations
are additional risk factors associated with the fund's investments in
lower-rated debt securities.
. Youth and Growth of the Lower-Rated Debt Securities Market The market for
lower-rated debt securities is relatively new and its growth has paralleled a
long economic expansion. Past experience may not, therefore, provide an
accurate indication of future performance of this market, particularly during
periods of economic recession. An economic downturn or increase in interest
rates is likely to have a greater negative effect on this market, the value
of lower-rated debt securities in the fund's portfolio, the fund's net asset
value and the ability of the bonds' issuers to repay principal and interest,
meet projected business goals, and obtain additional financing than on
higher-rated securities. These circumstances also may result in a higher
incidence of defaults than with respect to higher-rated securities. An
investment in the fund is more risky than investment in shares of a fund
which invests only in higher-rated debt securities.
. Sensitivity to Interest Rate and Economic Changes Prices of lower-rated debt
securities may be more sensitive to adverse economic changes or corporate
developments than higher-rated investments. Debt securities with longer
maturities, which may have higher yields, may increase or decrease in value
more than debt securities with shorter maturities. Market prices of
lower-rated debt securities structured as zero coupon or pay-in-kind
securities are affected to a greater extent by interest rate changes and may
be more volatile than securities which pay interest periodically and in cash.
Where it deems it appropriate and in the best interests of fund shareholders,
the fund may incur additional expenses to seek recovery on a debt security on
which the issuer has defaulted and to pursue litigation to protect the
interests of security holders of its portfolio companies.
. Liquidity and Valuation Because the market for lower-rated securities may be
thinner and less active than for higher-rated securities, there may be market
price volatility for these securities and limited liquidity in the resale
market. Nonrated securities are usually not as attractive to as many buyers
as rated securities are, a factor which may make nonrated securities less
marketable. These factors may have the effect of limiting the availability of
the securities for purchase by the fund and may also limit the ability of the
fund to sell such securities at their fair value either to meet redemption
requests or in response to changes in the economy or the financial markets.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of lower-rated
debt securities, especially in a thinly traded market. To the extent the fund
owns or may acquire illiquid or restricted lower-rated securities, these
securities may involve special registration responsibilities, liabilities and
costs, and liquidity and valuation difficulties. Changes in values of debt
securities which the fund owns will affect its net asset value per share. If
market quotations are not readily available for the fund's lower-rated or
nonrated securities, these securities will be valued by a method that the
fund's Board of Directors believes accurately reflects fair value. Judgment
plays a greater role in
valuing lower-rated debt securities than with respect to securities for which
more external sources of quotations and last sale information are available.
. Taxation Special tax considerations are associated with investing in
lower-rated debt securities structured as zero coupon or pay-in-kind
securities. The fund accrues income on these securities prior to the receipt
of cash payments. The fund must distribute substantially all of its income to
its shareholders to qualify for pass-through treatment under the tax laws and
may, therefore, have to dispose of its portfolio securities to satisfy
distribution requirements.
Corporate Income, High Yield, New Income, Personal Strategy, and Short-Term
Bond Funds
. Risk Factors of Foreign Investing There are special risks in foreign
investing. Certain of these risks are inherent in any mutual fund while
others relate more to the countries in which the fund will invest. Many of
the risks are more pronounced for investments in developing or emerging
market countries, such as many of the countries of Asia, Latin America,
Eastern Europe, Russia, Africa, and the Middle East. Although there is no
universally accepted definition, a developing country is generally considered
to be a country which is in the initial stages of its industrialization cycle
with a per capita gross national product of less than $8,000.
. Political and Economic Factors Individual foreign economies of some
countries differ favorably or unfavorably from the United States' economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
The internal politics of some foreign countries are not as stable as in the
United States. For example, in 1991, the existing government in Thailand was
overthrown in a military coup. In 1994-1995, the Mexican peso plunged in
value, setting off a severe crisis in the Mexican economy. Asia is still
coming to terms with its own crisis and recessionary conditions sparked by
widespread currency weakness in late 1997. In 1998, there was substantial
turmoil in markets throughout the world. In 1999, the democratically elected
government of Pakistan was overthrown by a military coup. The Russian
government also defaulted on all its domestic debt. In addition, significant
external political risks currently affect some foreign countries. Both Taiwan
and China still claim sovereignty of one another and there is a demilitarized
border and hostile relations between North and South Korea.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could have a significant
effect on market prices of securities and payment of dividends. The economies
of many foreign countries are heavily dependent upon international trade and
are accordingly affected by protective trade barriers and economic conditions
of their trading partners. The enactment by these trading partners of
protectionist trade legislation could have a significant adverse effect upon
the securities markets of such countries.
. Currency Fluctuations The fund invests in securities denominated in various
currencies. Accordingly, a change in the value of any such currency against
the U.S. dollar will result in a corresponding change in the U.S. dollar
value of the fund's assets denominated in that currency. Such changes will
also affect the fund's income. Generally, when a given currency appreciates
against the dollar (the dollar weakens), the value of the fund's securities
denominated in that currency will rise. When a given currency depreciates
against the dollar (the dollar strengthens), the value of the fund's
securities denominated in that currency would be expected to decline.
. Investment and Repatriation Restrictions Foreign investment in the
securities markets of certain foreign countries is restricted or controlled
to varying degrees. These restrictions limit at times and preclude investment
in certain of such countries and increase the cost and expenses of the fund.
Investments by foreign investors are subject to a variety of restrictions in
many developing countries. These restrictions may take the form of prior
governmental approval, limits on the amount or type of securities held by
foreigners, and limits on the types of companies in which foreigners may
invest. Additional or different restrictions may be imposed at any time by
these or other countries in which the fund invests. In addition, the
repatriation of both investment income and capital from several foreign
countries is restricted and controlled under certain regulations, including
in some cases the need for certain government consents. For example, capital
invested in Chile normally cannot be repatriated for one year. In 1998, the
government of Malaysia imposed currency
controls which effectively made it impossible for foreign investors to
convert Malaysian ringgits to foreign currencies.
. Market Characteristics It is contemplated that most foreign securities will
be purchased in over-the-counter markets or on securities exchanges located
in the countries in which the respective principal offices of the issuers of
the various securities are located, if that is the best available market.
Investments in certain markets may be made through American Depository
Receipts ("ADRs") and Global Depository Receipts ("GDRs") traded in the
United States or on foreign exchanges. Foreign securities markets are
generally not as developed or efficient as, and more volatile than, those in
the United States. While growing in volume, they usually have substantially
less volume than U.S. markets and the fund's portfolio securities may be less
liquid and subject to more rapid and erratic price movements than securities
of comparable U.S. companies. Securities may trade at price/earnings
multiples higher than comparable United States securities and such levels may
not be sustainable. Commissions on foreign securities trades are generally
higher than commissions on United States exchanges, and while there are an
increasing number of overseas securities markets that have adopted a system
of negotiated rates, a number are still subject to an established schedule of
minimum commission rates. There is generally less government supervision and
regulation of foreign securities exchanges, brokers, and listed companies
than in the United States. Moreover, settlement practices for transactions in
foreign markets may differ from those in United States markets. Such
differences include delays beyond periods customary in the United States and
practices, such as delivery of securities prior to receipt of payment, which
increase the likelihood of a "failed settlement." Failed settlements can
result in losses to the fund.
. Investment Funds The fund may invest in investment funds which have been
authorized by the governments of certain countries specifically to permit
foreign investment in securities of companies listed and traded on the stock
exchanges in these respective countries. The fund's investment in these funds
is subject to the provisions of the 1940 Act. If the fund invests in such
investment funds, the fund's shareholders will bear not only their
proportionate share of the expenses of the fund (including operating expenses
and the fees of the investment manager), but also will bear indirectly
similar expenses of the underlying investment funds. In addition, the
securities of these investment funds may trade at a premium over their net
asset value.
. Information and Supervision There is generally less publicly available
information about foreign companies comparable to reports and ratings that
are published about companies in the United States. Foreign companies are
also generally not subject to uniform accounting, auditing, and financial
reporting standards, practices, and requirements comparable to those
applicable to United States companies. It also is often more difficult to
keep currently informed of corporate actions which affect the prices of
portfolio securities.
. Taxes The dividends and interest payable on certain of the fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the fund's
shareholders.
. Other With respect to certain foreign countries, especially developing and
emerging ones, there is the possibility of adverse changes in investment or
exchange control regulations, expropriation or confiscatory taxation,
limitations on the removal of funds or other assets of the fund, political or
social instability, or diplomatic developments which could affect investments
by U.S. persons in those countries.
. Eastern Europe and Russia Changes occurring in Eastern Europe and Russia
today could have long-term potential consequences. As restrictions fall, this
could result in rising standards of living, lower manufacturing costs,
growing consumer spending, and substantial economic growth. However,
investment in most countries of Eastern Europe and Russia is highly
speculative at this time. Political and economic reforms are too recent to
establish a definite trend away from centrally planned economies and
state-owned industries. The collapse of the ruble from its crawling peg
exchange rate against the U.S. dollar has set back the path of reform for
several years. In many of the countries of Eastern Europe and Russia, there
is no stock exchange or formal market for securities. Such countries may also
have government exchange controls, currencies with no recognizable market
value relative to the established currencies of western market economies,
little or no experience in trading in securities, no financial reporting
standards, a lack of a banking and securities infrastructure to handle such
trading, and a legal tradition which does not recognize rights in private
property. In addition, these countries may have national policies which
restrict investments in companies deemed
sensitive to the country's national interest. Further, the governments in
such countries may require governmental or quasi-governmental authorities to
act as custodian of the fund's assets invested in such countries, and these
authorities may not qualify as a foreign custodian under the 1940 Act and
exemptive relief from such Act may be required. All of these considerations
are among the factors which cause significant risks and uncertainties to
investment in Eastern Europe and Russia.
. Latin America
Inflation Most Latin American countries have experienced, at one time or
another, severe and persistent levels of inflation, including, in some cases,
hyperinflation. This has, in turn, led to high interest rates, extreme
measures by governments to keep inflation in check, and a generally
debilitating effect on economic growth. Although inflation in many countries
has lessened, there is no guarantee it will remain at lower levels.
Political Instability The political history of certain Latin American
countries has been characterized by political uncertainty, intervention by
the military in civilian and economic spheres, and political corruption. Such
developments, if they were to reoccur, could reverse favorable trends toward
market and economic reform, privatization, and removal of trade barriers, and
result in significant disruption in securities markets.
Foreign Currency Certain Latin American countries may experience sudden and
large adjustments in their currency which, in turn, can have a disruptive and
negative effect on foreign investors. For example, in late 1994 the value of
the Mexican peso lost more than one-third of its value relative to the
dollar. In 1999, the Brazilian real lost 30% of its value against the U.S.
dollar. Certain Latin American countries may impose restrictions on the free
conversion of their currency into foreign currencies, including the U.S.
dollar. There is no significant foreign exchange market for many currencies
and it would, as a result, be difficult for the fund to engage in foreign
currency transactions designed to protect the value of the fund's interests
in securities denominated in such currencies.
Sovereign Debt A number of Latin American countries are among the largest
debtors of developing countries. There have been moratoria on, and
reschedulings of, repayment with respect to these debts. Such events can
restrict the flexibility of these debtor nations in the international markets
and result in the imposition of onerous conditions on their economies.
INVESTMENT PROGRAM
-------------------------------------------------------------------------------
Types of Securities
Set forth below is additional information about certain of the investments
described in each fund's prospectus.
Debt Securities
Fixed income securities in which the fund may invest include, but are not
limited to, those described below.
All funds
. U.S. Government Obligations Bills, notes, bonds, and other debt securities
issued by the U.S. Treasury. These are direct obligations of the U.S.
government and differ mainly in the length of their maturities.
. U.S. Government Agency Securities Issued or guaranteed by U.S.
government-sponsored enterprises and federal agencies. These include
securities issued by the Federal National Mortgage Association ("Fannie Mae"
or "FNMA"), Government National Mortgage Association ("Ginnie Mae" or
"GNMA"), Federal Home Loan Bank, Federal Land Banks, Farmers Home
Administration, Banks for Cooperatives, Federal Intermediate Credit Banks,
Federal Financing Bank, Farm Credit Banks, the Small Business Association,
and the Tennessee Valley Authority. Some of these securities are supported by
the full faith and credit of the U.S. Treasury; the remainder are supported
only by the credit of the instrumentality, which may or may not include the
right of the issuer to borrow from the Treasury.
The GNMA, U.S. Treasury Money, U.S. Treasury Intermediate, U.S. Treasury
Long-Term, and Government Reserve Investment Funds may only invest in these
securities if they are supported by the full faith and credit of the U.S.
government.
All funds except GNMA, Government Reserve Investment, U.S. Treasury Money,
U.S. Treasury Intermediate, and U.S. Treasury Long-Term Funds
. Bank Obligations Certificates of deposit, banker's acceptances, and other
short-term debt obligations. Certificates of deposit are short-term
obligations of commercial banks. A banker's acceptance is a time draft drawn
on a commercial bank by a borrower, usually in connection with international
commercial transactions. Certificates of deposit may have fixed or variable
rates. The fund may invest in U.S. banks, foreign branches of U.S. banks,
U.S. branches of foreign banks, and foreign branches of foreign banks.
. Corporate Debt Securities Outstanding corporate debt securities (e.g.,
bonds and debentures). Corporate notes may have fixed, variable, or floating
rates.
. Commercial Paper and Commercial Notes Short-term promissory notes issued by
corporations primarily to finance short-term credit needs. Certain notes may
have floating or variable rates and may contain options, exercisable by
either the buyer or the seller, that extend or shorten the maturity of the
note.
. Foreign Government Securities Issued or guaranteed by a foreign government,
province, instrumentality, political subdivision, or similar unit thereof.
. Savings and Loan Obligations Negotiable certificates of deposit and other
short-term debt obligations of savings and loan associations.
. Supranational Agencies Securities of certain supranational entities, such
as the International Development Bank.
All funds except Government Reserve Investment, Prime Reserve, Reserve
Investment, and U.S. Treasury Money Funds
Mortgage-Related Securities
Mortgage-related securities in which the fund may invest include, but are not
limited to, those described below. The GNMA, U.S. Treasury Intermediate and
U.S. Treasury Long-Term Funds may only invest in these securities to the
extent they are backed by the full faith and credit of the U.S. government.
. Mortgage-Backed Securities Mortgage-backed securities are securities
representing an interest in a pool of mortgages. The mortgages may be of a
variety of types, including adjustable rate, conventional 30-year fixed rate,
graduated payment, and 15-year. Principal and interest payments made on the
mortgages in the underlying mortgage pool are passed through to the fund.
This is in contrast to traditional bonds where principal is normally paid
back at maturity in a lump sum. Unscheduled prepayments of principal shorten
the securities' weighted average life and may lower their total return. (When
a mortgage in the underlying mortgage pool is prepaid, an unscheduled
principal prepayment is passed through to the fund. This principal is
returned to the fund at par. As a result, if a mortgage security were trading
at a premium, its total return would be lowered by prepayments, and if a
mortgage security were trading at a discount, its total return would be
increased by prepayments.) The value of these securities also may change
because of changes in the market's perception of the creditworthiness of the
federal agency that issued them. In addition, the mortgage securities market
in general may be adversely affected by changes in governmental regulation or
tax policies.
. U.S. Government Agency Mortgage-Backed Securities These are obligations
issued or guaranteed by the United States government or one of its agencies
or instrumentalities, such as GNMA, FNMA, the Federal Home Loan Mortgage
Corporation ("Freddie Mac" or "FHLMC"), and the Federal Agricultural Mortgage
Corporation ("Farmer Mac" or "FAMC"). FNMA, FHLMC, and FAMC obligations are
not backed by the full faith and credit of the U.S. government as GNMA
certificates are, but they are supported by the instrumentality's right to
borrow from the United States Treasury. U.S. Government Agency
Mortgage-Backed Certificates provide for the pass-through to investors of
their pro-rata share of monthly payments (including any prepayments) made by
the individual borrowers on the pooled mortgage loans, net of any fees paid
to the
guarantor of such securities and the servicer of the underlying mortgage
loans. Each of GNMA, FNMA, FHLMC, and FAMC guarantees timely distributions of
interest to certificate holders. GNMA and FNMA guarantee timely distributions
of scheduled principal. FHLMC has in the past guaranteed only the ultimate
collection of principal of the underlying mortgage loan; however, FHLMC now
issues mortgage-backed securities (FHLMC Gold PCS) which also guarantee
timely payment of monthly principal reductions.
. Ginnie Mae Certificates Ginnie Mae is a wholly owned corporate
instrumentality of the United States within the Department of Housing and
Urban Development. The National Housing Act of 1934, as amended (the "Housing
Act"), authorizes Ginnie Mae to guarantee the timely payment of the principal
of and interest on certificates that are based on and backed by a pool of
mortgage loans insured by the Federal Housing Administration under the
Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or
guaranteed by the Department of Veterans Affairs under the Servicemen's
Readjustment Act of 1944, as amended ("VA Loans"), or by pools of other
eligible mortgage loans. The Housing Act provides that the full faith and
credit of the United States government is pledged to the payment of all
amounts that may be required to be paid under any guaranty. In order to meet
its obligations under such guaranty, Ginnie Mae is authorized to borrow from
the United States Treasury with no limitations as to amount.
. Fannie Mae Certificates Fannie Mae is a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act of 1938. FNMA Certificates represent a pro-rata
interest in a group of mortgage loans purchased by Fannie Mae. FNMA
guarantees the timely payment of principal and interest on the securities it
issues. The obligations of FNMA are not backed by the full faith and credit
of the U.S. government.
. Freddie Mac Certificates Freddie Mac is a corporate instrumentality of the
United States created pursuant to the Emergency Home Finance Act of 1970, as
amended ("FHLMC Act"). Freddie Mac Certificates represent a pro-rata interest
in a group of mortgage loans purchased by Freddie Mac. Freddie Mac guarantees
timely payment of interest and principal on certain securities it issues and
timely payment of interest and eventual payment of principal on other
securities it issues. The obligations of Freddie Mac are obligations solely
of Freddie Mac and are not backed by the full faith and credit of the U.S.
government.
. Farmer Mac Certificates Farmer Mac is a federally chartered instrumentality
of the United States established by Title VIII of the Farm Credit Act of
1971, as amended ("Charter Act"). Farmer Mac was chartered primarily to
attract new capital for financing of agricultural real estate by making a
secondary market in certain qualified agricultural real estate loans. Farmer
Mac provides guarantees of timely payment of principal and interest on
securities representing interests in, or obligations backed by, pools of
mortgages secured by first liens on agricultural real estate. Similar to
Fannie Mae and Freddie Mac, Farmer Mac Certificates are not supported by the
full faith and credit of the U.S. government; rather, Farmer Mac may borrow
from the U.S. Treasury to meet its guaranty obligations.
As discussed above, prepayments on the underlying mortgages and their effect
upon the rate of return of a mortgage-backed security, is the principal
investment risk for a purchaser of such securities, like the fund. Over time,
any pool of mortgages will experience prepayments due to a variety of
factors, including (1) sales of the underlying homes (including
foreclosures), (2) refinancings of the underlying mortgages, and (3)
increased amortization by the mortgagee. These factors, in turn, depend upon
general economic factors, such as level of interest rates and economic
growth. Thus, investors normally expect prepayment rates to increase during
periods of strong economic growth or declining interest rates, and to
decrease in recessions and rising interest rate environments. Accordingly,
the life of the mortgage-backed security is likely to be substantially
shorter than the stated maturity of the mortgages in the underlying pool.
Because of such variation in prepayment rates, it is not possible to predict
the life of a particular mortgage-backed security, but FHA statistics
indicate that 25- to 30-year single family dwelling mortgages have an average
life of approximately 12 years. The majority of Ginnie Mae Certificates are
backed by mortgages of this type, and, accordingly, the generally accepted
practice treats Ginnie Mae Certificates as 30-year securities which prepay in
full in the 12th year. FNMA and Freddie Mac Certificates may have differing
prepayment characteristics.
Fixed rate mortgage-backed securities bear a stated "coupon rate" which
represents the effective mortgage rate at the time of issuance, less certain
fees to GNMA, FNMA, and FHLMC for providing the guarantee, and the issuer for
assembling the pool and for passing through monthly payments of interest and
principal.
Payments to holders of mortgage-backed securities consist of the monthly
distributions of interest and principal less the applicable fees. The actual
yield to be earned by a holder of mortgage-backed securities is calculated by
dividing interest payments by the purchase price paid for the mortgage-backed
securities (which may be at a premium or a discount from the face value of
the certificate).
Monthly distributions of interest, as contrasted to semiannual distributions
which are common for other fixed interest investments, have the effect of
compounding and thereby raising the effective annual yield earned on
mortgage-backed securities. Because of the variation in the life of the pools
of mortgages which back various mortgage-backed securities, and because it is
impossible to anticipate the rate of interest at which future principal
payments may be reinvested, the actual yield earned from a portfolio of
mortgage-backed securities will differ significantly from the yield estimated
by using an assumption of a certain life for each mortgage-backed security
included in such a portfolio as described above.
. Collateralized Mortgage Obligations ("CMOs") CMOs are bonds that are
collateralized by whole loan mortgages or mortgage pass-through securities.
The bonds issued in a CMO deal are divided into groups, and each group of
bonds is referred to as a "tranche." Under the traditional CMO structure, the
cash flows generated by the mortgages or mortgage pass-through securities in
the collateral pool are used to first pay interest and then pay principal to
the CMO bondholders. The bonds issued under such CMO structure are retired
sequentially as opposed to the pro-rata return of principal found in
traditional pass-through obligations. Subject to the various provisions of
individual CMO issues, the cash flow generated by the underlying collateral
(to the extent it exceeds the amount required to pay the stated interest) is
used to retire the bonds. Under the CMO structure, the repayment of principal
among the different tranches is prioritized in accordance with the terms of
the particular CMO issuance. The "fastest-pay" tranche of bonds, as specified
in the prospectus for the issuance, would initially receive all principal
payments. When that tranche of bonds is retired, the next tranche, or
tranches, in the sequence, as specified in the prospectus, receive all of the
principal payments until they are retired. The sequential retirement of bond
groups continues until the last tranche, or group of bonds, is retired.
Accordingly, the CMO structure allows the issuer to use cash flows of long
maturity, monthly-pay collateral to formulate securities with short,
intermediate and long final maturities and expected average lives.
In recent years, new types of CMO tranches have evolved. These include
floating rate CMOs, planned amortization classes, accrual bonds and CMO
residuals. These newer structures affect the amount and timing of principal
and interest received by each tranche from the underlying collateral. Under
certain of these new structures, given classes of CMOs have priority over
others with respect to the receipt of prepayments on the mortgages.
Therefore, depending on the type of CMOs in which the fund invests, the
investment may be subject to a greater or lesser risk of prepayment than
other types of mortgage-related securities.
The primary risk of any mortgage security is the uncertainty of the timing of
cash flows. For CMOs, the primary risk results from the rate of prepayments
on the underlying mortgages serving as collateral and from the structure of
the deal (priority of the individual tranches). An increase or decrease in
prepayment rates (resulting from a decrease or increase in mortgage interest
rates) will affect the yield, average life and price of CMOs. The prices of
certain CMOs, depending on their structure and the rate of prepayments, can
be volatile. Some CMOs may also not be as liquid as other securities.
. U.S. Government Agency Multi-class Pass-Through Securities Unlike CMOs, U.S.
Government Agency Multi-class Pass-Through Securities, which include FNMA
Guaranteed REMIC Pass-Through Certificates and FHLMC Multi-Class Mortgage
Participation Certificates, are ownership interests in a pool of Mortgage
Assets. Unless the context indicates otherwise, all references herein to CMOs
include multi-class pass-through securities.
. Multi-Class Residential Mortgage Securities Such securities represent
interests in pools of mortgage loans to residential home buyers made by
commercial banks, savings and loan associations, or other financial
institutions. Unlike GNMA, FNMA and FHLMC securities, the payment of
principal and interest on Multi-Class Residential Mortgage Securities is not
guaranteed by the U.S. government or any of its agencies. Accordingly, yields
on Multi-Class Residential Mortgage Securities have been historically higher
than the yields on U.S. government mortgage securities. However, the risk of
loss due to default on such instruments is higher since they are not
guaranteed by the U.S. government or its agencies. Additionally, pools of
such securities may be divided into senior or subordinated segments. Although
subordinated mortgage securities may have a higher yield than senior mortgage
securities, the risk of loss of principal is greater because losses on the
underlying mortgage loans must be borne by persons holding subordinated
securities before those holding senior mortgage securities.
. Privately Issued Mortgage-Backed Certificates These are pass-through
certificates issued by non-governmental issuers. Pools of conventional
residential or commercial mortgage loans created by such issuers generally
offer a higher rate of interest than government and government-related pools
because there are no direct or indirect government guarantees of payment.
Timely payment of interest and principal of these pools is, however,
generally supported by various forms of insurance or guarantees, including
individual loan, title, pool, and hazard insurance. The insurance and
guarantees are issued by government entities, private insurance, or the
mortgage poolers. Such insurance and guarantees and the creditworthiness of
the issuers thereof will be considered in determining whether a
mortgage-related security meets the fund's quality standards. The fund may
buy mortgage-related securities without insurance or guarantees if through an
examination of the loan experience and practices of the poolers, the
investment manager determines that the securities meet the fund's quality
standards.
. Stripped Mortgage-Backed Securities These instruments are a type of
potentially high-risk derivative. They represent interests in a pool of
mortgages, the cash flow of which has been separated into its interest and
principal components. Interest only securities ("IOs") receive the interest
portion of the cash flow while principal only securities ("POs") receive the
principal portion. IOs and POs are usually structured as tranches of a CMO.
Stripped Mortgage-Backed Securities may be issued by U.S. government agencies
or by private issuers similar to those described above with respect to CMOs
and privately issued mortgage-backed certificates. As interest rates rise and
fall, the value of IOs tends to move in the same direction as interest rates.
The value of the other mortgage-backed securities described herein, like
other debt instruments, will tend to move in the opposite direction compared
to interest rates. Under the Code, POs may generate taxable income from the
current accrual of original issue discount, without a corresponding
distribution of cash to the fund.
The cash flows and yields on IO and PO classes are extremely sensitive to the
rate of principal payments (including prepayments) on the related underlying
mortgage assets. In the case of IOs, prepayments affect the amount, but not
the timing, of cash flows provided to the investor. In contrast, prepayments
on the mortgage pool affect the timing, but not the amount, of cash flows
received by investors in POs. For example, a rapid or slow rate of principal
payments may have a material adverse effect on the prices of IOs or POs,
respectively. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, an investor may fail to fully recoup
its initial investment in an IO class of a stripped mortgage-backed security,
even if the IO class is rated AAA or Aaa or is derived from a full faith and
credit obligation. Conversely, if the underlying mortgage assets experience
slower than anticipated prepayments of principal, the price on a PO class
will be affected more severely than would be the case with a traditional
mortgage-backed security.
The staff of the SEC has advised the fund that it believes the fund should
treat IOs and POs, other than government-issued IOs or POs backed by fixed
rate mortgages, as illiquid securities and, accordingly, limit its
investments in such securities, together with all other illiquid securities,
to 15% of the fund's net assets. Under the staff's position, the
determination of whether a particular government-issued IO or PO backed by
fixed rate mortgages is liquid may be made on a case by case basis under
guidelines and standards established by the fund's Board of
Directors/Trustees. The fund's Board of Directors/Trustees has delegated to
T. Rowe Price the authority to determine the liquidity of these investments
based on the following guidelines: the type of issuer; type of collateral,
including age and prepayment characteristics; rate of interest on coupon
relative to current market rates and the effect of the rate on the potential
for prepayments; complexity of the issue's structure, including the number of
tranches; and size of the issue and the number of dealers who make a market
in the IO or PO.
. Adjustable Rate Mortgage Securities ARMs, like fixed rate mortgages, have a
specified maturity date, and the principal amount of the mortgage is repaid
over the life of the mortgage. Unlike fixed rate mortgages, the interest rate
on ARMs is adjusted at regular intervals based on a specified, published
interest rate "index" such as a Treasury rate index. The new rate is
determined by adding a specific interest amount, the "margin," to the
interest rate of the index. Investment in ARM securities allows the fund to
participate in changing interest rate levels through regular adjustments in
the coupons of the underlying mortgages, resulting in more variable current
income and lower price volatility than longer-term fixed rate mortgage
securities. ARM securities are a less effective means of locking in long-term
rates than fixed rate mortgages since the income from adjustable rate
mortgages will increase during periods of rising interest rates and decline
during periods of falling rates.
. Other Mortgage-Related Securities The fund expects that governmental,
government-related, or private entities may create mortgage loan pools
offering pass-through investments in addition to those described above. The
mortgages underlying these securities may be alternative mortgage
instruments, that is, mortgage instruments whose principal or interest
payments may vary or whose terms to maturity may differ from customary
long-term fixed rate mortgages. As new types of mortgage-related securities
are developed and offered to investors, the investment manager will,
consistent with the fund's objective, policies and quality standards,
consider making investments in such new types of securities.
All funds except GNMA, Government Reserve Investment, U.S. Treasury Money,
U.S. Treasury Intermediate, and U.S. Treasury Long-Term Funds
Asset-Backed Securities
The credit quality of most asset-backed securities depends primarily on the
credit quality of the assets underlying such securities, how well the entity
issuing the security is insulated from the credit risk of the originator or
any other affiliated entities, and the amount and quality of any credit
support provided to the securities. The rate of principal payment on
asset-backed securities generally depends on the rate of principal payments
received on the underlying assets, which in turn may be affected by a variety
of economic and other factors. As a result, the yield on any asset-backed
security is difficult to predict with precision and actual yield to maturity
may be more or less than the anticipated yield to maturity. Asset-backed
securities may be classified as pass-through certificates or collateralized
obligations.
Pass-through certificates are asset-backed securities which represent an
undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and
interest received to be passed through to their holders, usually after
deduction for certain costs and expenses incurred in administering the pool.
Because pass-through certificates represent an ownership interest in the
underlying assets, the holders thereof bear directly the risk of any defaults
by the obligors on the underlying assets not covered by any credit support.
See "Types of Credit Support."
Asset-backed securities issued in the form of debt instruments, also known as
collateralized obligations, are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Such assets are most often trade, credit card, or
automobile receivables. The assets collateralizing such asset-backed
securities are pledged to a trustee or custodian for the benefit of the
holders thereof. Such issuers generally hold no assets other than those
underlying the asset-backed securities and any credit support provided. As a
result, although payments on such asset-backed securities are obligations of
the issuers, in the event of defaults on the underlying assets not covered by
any credit support (see "Types of Credit Support"), the issuing entities are
unlikely to have sufficient assets to satisfy their obligations on the
related asset-backed securities.
. Methods of Allocating Cash Flows While many asset-backed securities are
issued with only one class of security, many asset-backed securities are
issued in more than one class, each with different payment terms. Multiple
class asset-backed securities are issued for two main reasons. First,
multiple classes may be used as a method of providing credit support. This is
accomplished typically through creation of one or more classes whose right to
payments on the asset-backed security is made subordinate to the right to
such payments of the remaining class or classes. See "Types of Credit
Support." Second, multiple classes may permit the issuance of
securities with payment terms, interest rates or other characteristics
differing both from those of each other and from those of the underlying
assets. Examples include so-called "strips" (asset-backed securities
entitling the holder to disproportionate interests with respect to the
allocation of interest and principal of the assets backing the security), and
securities with class or classes having characteristics which mimic the
characteristics of non-asset-backed securities, such as floating interest
rates (i.e., interest rates which adjust as a specified benchmark changes) or
scheduled amortization of principal.
Asset-backed securities in which the payment streams on the underlying assets
are allocated in a manner different than those described above may be issued
in the future. The fund may invest in such asset-backed securities if such
investment is otherwise consistent with its investment objectives and
policies and with the investment restrictions of the fund.
. Types of Credit Support Asset-backed securities are often backed by a pool
of assets representing the obligations of a number of different parties. To
lessen the effect of failures by obligors on underlying assets to make
payments, such securities may contain elements of credit support. Such credit
support falls into two classes: liquidity protection and protection against
ultimate default by an obligor on the underlying assets. Liquidity protection
refers to the provision of advances, generally by the entity administering
the pool of assets, to ensure that scheduled payments on the underlying pool
are made in a timely fashion. Protection against ultimate default ensures
ultimate payment of the obligations on at least a portion of the assets in
the pool. Such protection may be provided through guarantees, insurance
policies, or letters of credit obtained from third parties "external credit
enhancement," through various means of structuring the transaction "internal
credit enhancement," or through a combination of such approaches. Examples of
asset-backed securities with credit support arising out of the structure of
the transaction include "senior-subordinated securities" (multiple class
asset-backed securities with certain classes subordinate to other classes as
to the payment of principal thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class)
and asset-backed securities that have "reserve funds" (where cash or
investments, sometimes funded from a portion of the initial payments on the
underlying assets, are held in reserve against future losses) or that have
been "over collateralized" (where the scheduled payments on, or the principal
amount of, the underlying assets substantially exceeds that required to make
payment of the asset-backed securities and pay any servicing or other fees).
The degree of credit support provided on each issue is based generally on
historical information respecting the level of credit risk associated with
such payments. Depending upon the type of assets securitized, historical
information on credit risk and prepayment rates may be limited or even
unavailable. Delinquency or loss in excess of that anticipated could
adversely affect the return on an investment in an asset-backed security.
. Automobile Receivable Securities The fund may invest in asset-backed
securities which are backed by receivables from motor vehicle installment
sales contracts or installment loans secured by motor vehicles ("Automobile
Receivable Securities"). Since installment sales contracts for motor vehicles
or installment loans related thereto ("Automobile Contracts") typically have
shorter durations and lower incidences of prepayment, Automobile Receivable
Securities generally will exhibit a shorter average life and are less
susceptible to prepayment risk.
Most entities that issue Automobile Receivable Securities create an
enforceable interest in their respective Automobile Contracts only by filing
a financing statement and by having the servicer of the Automobile Contracts,
which is usually the originator of the Automobile Contracts, take custody
thereof. In such circumstances, if the servicer of the Automobile Contracts
were to sell the same Automobile Contracts to another party, in violation of
its obligation not to do so, there is a risk that such party could acquire an
interest in the Automobile Contracts superior to that of the holders of
Automobile Receivable Securities. Also, although most Automobile Contracts
grant a security interest in the motor vehicle being financed, in most states
the security interest in a motor vehicle must be noted on the certificate of
title to create an enforceable security interest against competing claims of
other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the Automobile
Contracts underlying the Automobile Receivable Security, usually is not
amended to reflect the assignment of the seller's security interest for the
benefit of the holders of the Automobile Receivable Securities. Therefore,
there is the possibility that recoveries on repossessed collateral may not,
in some cases, be available to support payments
on the securities. In addition, various state and federal securities laws
give the motor vehicle owner the right to assert against the holder of the
owner's Automobile Contract certain defenses such owner would have against
the seller of the motor vehicle. The assertion of such defenses could reduce
payments on the Automobile Receivable Securities.
. Credit Card Receivable Securities The fund may invest in asset-backed
securities backed by receivables from revolving credit card agreements
("Credit Card Receivable Securities"). Credit balances on revolving credit
card agreements ("Accounts") are generally paid down more rapidly than are
Automobile Contracts. Most of the Credit Card Receivable Securities issued
publicly to date have been Pass-Through Certificates. In order to lengthen
the maturity of Credit Card Receivable Securities, most such securities
provide for a fixed period during which only interest payments on the
underlying Accounts are passed through to the security holder and principal
payments received on such Accounts are used to fund the transfer to the pool
of assets supporting the related Credit Card Receivable Securities of
additional credit card charges made on an Account. The initial fixed period
usually may be shortened upon the occurrence of specified events which signal
a potential deterioration in the quality of the assets backing the security,
such as the imposition of a cap on interest rates. The ability of the issuer
to extend the life of an issue of Credit Card Receivable Securities thus
depends upon the continued generation of additional principal amounts in the
underlying account during the initial period and the non-occurrence of
specified events. An acceleration in cardholders' payment rates or any other
event which shortens the period during which additional credit card charges
on an Account may be transferred to the pool of assets supporting the related
Credit Card Receivable Security could shorten the weighted average life and
yield of the Credit Card Receivable Security.
Credit cardholders are entitled to the protection of a number of state and
federal consumer credit laws, many of which give such holder the right to set
off certain amounts against balances owed on the credit card, thereby
reducing amounts paid on Accounts. In addition, unlike most other
asset-backed securities, Accounts are unsecured obligations of the
cardholder.
. Other Assets Asset-backed securities backed by assets other than those
described above, including, but not limited to, home equity loans,
small-business loans and accounts receivable, equipment leases, commercial
real estate loans, boat loans and manufacturing housing loans. The fund may
invest in such securities in the future if such investment is otherwise
consistent with its investment objective and policies.
There are, of course, other types of securities that are, or may become
available, which are similar to the foregoing and the fund may invest in
these securities.
High Yield Fund
Collateralized Bond or Loan Obligations
Collateralized Bond Obligations ("CBOs") are bonds collateralized by
corporate bonds, mortgages, or asset-backed securities and Collateralized
Loan Obligations ("CLOs") are bonds collateralized by bank loans. CBOs and
CLOs are structured into tranches, and payments are allocated such that each
tranche has a predictable cash flow stream and average life. CBOs are fairly
recent entrants to the fixed income market. Most CBOs issued to date have
been collateralized by high yield bonds or loans, with heavy credit
enhancement.
Loan Participations and Assignments
Loan participations and assignments (collectively "participations") will
typically be participating interests in loans made by a syndicate of banks,
represented by an agent bank which has negotiated and structured the loan, to
corporate borrowers to finance internal growth, mergers, acquisitions, stock
repurchases, leveraged buy-outs and other corporate activities. Such loans
may also have been made to governmental borrowers, especially governments of
developing countries which is referred to as Loans to Developing Countries
debt ("LDC debt"). LDC debt will involve the risk that the governmental
entity responsible for the repayment of the debt may be unable or unwilling
to do so when due. The loans underlying such participations may be secured or
unsecured, and the fund may invest in loans collateralized by mortgages on
real property or which have no collateral. The loan participations themselves
may extend for the entire term of the loan or may extend only for short
"strips" that correspond to a quarterly or monthly floating rate interest
period on the
underlying loan. Thus, a term or revolving credit that extends for several
years may be subdivided into shorter periods.
The loan participations in which the fund will invest will also vary in legal
structure. Occasionally, lenders assign to another institution both the
lender's rights and obligations under a credit agreement. Since this type of
assignment relieves the original lender of its obligations, it is called a
novation. More typically, a lender assigns only its right to receive payments
of principal and interest under a promissory note, credit agreement or
similar document. A true assignment shifts to the assignee the direct
debtor-creditor relationship with the underlying borrower. Alternatively, a
lender may assign only part of its rights to receive payments pursuant to the
underlying instrument or loan agreement. Such partial assignments, which are
more accurately characterized as "participating interests," do not shift the
debtor-creditor relationship to the assignee, who must rely on the original
lending institution to collect sums due and to otherwise enforce its rights
against the agent bank which administers the loan or against the underlying
borrower.
There may not be a recognizable, liquid public market for loan
participations. To the extent this is the case, the fund would consider the
loan participation as illiquid and subject to the fund's restriction on
investing no more than 15% of its net assets in illiquid securities.
Where required by applicable SEC positions, the fund will treat both the
corporate borrower and the bank selling the participation interest as an
issuer for purposes of its fundamental investment restriction on
diversification.
Various service fees received by the fund from loan participations, may be
treated as non-interest income depending on the nature of the fee
(commitment, takedown, commission, service or loan origination). To the
extent the service fees are not interest income, they will not qualify as
income under Section 851(b) of the Code. Thus the sum of such fees plus any
other non-qualifying income earned by the fund cannot exceed 10% of total
income.
Trade Claims
Trade claims are non-securitized rights of payment arising from obligations
other than borrowed funds. Trade claims typically arise when, in the ordinary
course of business, vendors and suppliers extend credit to a company by
offering payment terms. Generally, when a company files for bankruptcy
protection, payments on these trade claims cease and the claims are subject
to compromise along with the other debts of the company. Trade claims
typically are bought and sold at a discount reflecting the degree of
uncertainty with respect to the timing and extent of recovery. In addition to
the risks otherwise associated with low-quality obligations, trade claims
have other risks, including the possibility that the amount of the claim may
be disputed by the obligor.
Over the last few years a market for the trade claims of bankrupt companies
has developed. Many vendors are either unwilling or lack the resources to
hold their claim through the extended bankruptcy process with an uncertain
outcome and timing. Some vendors are also aggressive in establishing reserves
against these receivables, so that the sale of the claim at a discount may
not result in the recognition of a loss.
Trade claims can represent an attractive investment opportunity because these
claims typically are priced at a discount to comparable public securities.
This discount is a reflection of both a less liquid market, a smaller
universe of potential buyers and the risks peculiar to trade claim investing.
It is not unusual for trade claims to be priced at a discount to public
securities that have an equal or lower priority claim.
As noted above, investing in trade claims does carry some unique risks which
include:
. Establishing the Amount of the Claim Frequently, the supplier's estimate of
its receivable will differ from the customer's estimate of its payable.
Resolution of these differences can result in a reduction in the amount of
the claim. This risk can be reduced by only purchasing scheduled claims
(claims already listed as liabilities by the debtor) and seeking
representations from the seller.
. Defenses to Claims The debtor has a variety of defenses that can be asserted
under the bankruptcy code against any claim. Trade claims are subject to
these defenses, the most common of which for trade claims relates to
preference payments. (Preference payments are all payments made by the debtor
during the 90 days
prior to the filing. These payments are presumed to have benefited the
receiving creditor at the expense of the other creditors. The receiving
creditor may be required to return the payment unless it can show the
payments were received in the ordinary course of business.) While none of
these defenses can result in any additional liability of the purchaser of the
trade claim, they can reduce or wipe out the entire purchased claim. This
risk can be reduced by seeking representations and indemnification from the
seller.
. Documentation/Indemnification Each trade claim purchased requires
documentation that must be negotiated between the buyer and seller. This
documentation is extremely important since it can protect the purchaser from
losses such as those described above. Legal expenses in negotiating a
purchase agreement can be fairly high. Additionally, it is important to note
that the value of an indemnification depends on the seller's credit.
. Volatile Pricing Due to Illiquid Market There are only a handful of brokers
for trade claims and the quoted price of these claims can be volatile.
Generally, it is expected that Trade Claims would be considered illiquid
investments.
. No Current Yield/Ultimate Recovery Trade claims are almost never entitled to
earn interest. As a result, the return on such an investment is very
sensitive to the length of the bankruptcy, which is uncertain. Although not
unique to trade claims, it is worth noting that the ultimate recovery on the
claim is uncertain and there is no way to calculate a conventional yield to
maturity on this investment. Additionally, the exit for this investment is a
plan of reorganization which may include the distribution of new securities.
These securities may be as illiquid as the original trade claim investment.
. Tax Issue Although the issue is not free from doubt, it is likely that Trade
Claims would be treated as non-securities investments. As a result, any gains
would be considered "non-qualifying" under the Code. The fund may have up to
10% of its gross income (including capital gains) derived from non-qualifying
sources.
Zero Coupon and Pay-in-Kind Bonds
A zero coupon security has no cash coupon payments. Instead, the issuer sells
the security at a substantial discount from its maturity value. The interest
received by the investor from holding this security to maturity is the
difference between the maturity value and the purchase price. The advantage
to the investor is that reinvestment risk of the income received during the
life of the bond is eliminated. However, zero-coupon bonds, like other bonds,
retain interest rate and credit risk and usually display more price
volatility than those securities that pay a cash coupon.
Pay-in-Kind ("PIK") Instruments are securities that pay interest in either
cash or additional securities, at the issuer's option, for a specified
period. PIKs, like zero coupon bonds, are designed to give an issuer
flexibility in managing cash flow. PIK bonds can be either senior or
subordinated debt and trade flat (i.e., without accrued interest). The price
of PIK bonds is expected to reflect the market value of the underlying debt
plus an amount representing accrued interest since the last payment. PIK's
are usually less volatile than zero coupon bonds, but more volatile than cash
pay securities.
For federal income tax purposes, these types of bonds will require the
recognition of gross income each year even though no cash may be paid to the
fund until the maturity or call date of the bond. The fund will nonetheless
be required to distribute substantially all of this gross income each year to
comply with the Internal Revenue Code, and such distributions could reduce
the amount of cash available for investment by the fund.
Corporate Income, High Yield, New Income, and Personal Strategy Funds
Warrants
The fund may acquire warrants. Warrants can be highly volatile and have no
voting rights, pay no dividends, and have no rights with respect to the
assets of the corporation issuing them. Warrants basically are options to
purchase securities at a specific price valid for a specific period of time.
They do not represent ownership of the securities, but only the right to buy
them. Warrants differ from call options in that warrants are issued by the
issuer of the security which may be purchased on their exercise, whereas call
options may be written or issued by anyone. The prices of warrants do not
necessarily move parallel to the prices of the underlying securities.
Corporate Income, High Yield, New Income, Personal Strategy, and Short-Term
Bond Funds
Hybrid Instruments
Hybrid instruments (a type of potentially high-risk derivative) have been
developed and combine the elements of futures contracts or options with those
of debt, preferred equity, or a depository instrument (hereinafter "hybrid
instruments"). Generally, a hybrid instrument will be a debt security,
preferred stock, depository share, trust certificate, certificate of deposit,
or other evidence of indebtedness on which a portion of or all interest
payments, and/or the principal or stated amount payable at maturity,
redemption, or retirement, is determined by reference to prices, changes in
prices, or differences between prices of securities, currencies, intangibles,
goods, articles, or commodities (collectively "underlying assets") or by
another objective index, economic factor, or other measure, such as interest
rates, currency exchange rates, commodity indices, and securities indices
(collectively "benchmarks"). Thus, hybrid instruments may take a variety of
forms, including, but not limited to, debt instruments with interest or
principal payments or redemption terms determined by reference to the value
of a currency or commodity or securities index at a future point in time,
preferred stock with dividend rates determined by reference to the value of a
currency, or convertible securities with the conversion terms related to a
particular commodity.
Hybrid instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing
total return. For example, a fund may wish to take advantage of expected
declines in interest rates in several European countries, but avoid the
transaction costs associated with buying and currency-hedging the foreign
bond positions. One solution would be to purchase a U.S. dollar-denominated
hybrid instrument whose redemption price is linked to the average three-year
interest rate in a designated group of countries. The redemption price
formula would provide for payoffs of greater than par if the average interest
rate was lower than a specified level, and payoffs of less than par if rates
were above the specified level. Furthermore, the fund could limit the
downside risk of the security by establishing a minimum redemption price so
that the principal paid at maturity could not be below a predetermined
minimum level if interest rates were to rise significantly. The purpose of
this arrangement, known as a structured security with an embedded put option,
would be to give the fund the desired European bond exposure while avoiding
currency risk, limiting downside market risk, and lowering transactions
costs. Of course, there is no guarantee that the strategy will be successful,
and the fund could lose money if, for example, interest rates do not move as
anticipated or credit problems develop with the issuer of the hybrid
instruments.
The risks of investing in hybrid instruments reflect a combination of the
risks of investing in securities, options, futures, and currencies. Thus, an
investment in a hybrid instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that
has a fixed principal amount, is denominated in U.S. dollars, or bears
interest either at a fixed rate or a floating rate determined by reference to
a common, nationally published benchmark. The risks of a particular hybrid
instrument will, of course, depend upon the terms of the instrument, but may
include, without limitation, the possibility of significant changes in the
benchmarks or the prices of underlying assets to which the instrument is
linked. Such risks generally depend upon factors which are unrelated to the
operations or credit quality of the issuer of the hybrid instrument and which
may not be readily foreseen by the purchaser, such as economic and political
events, the supply and demand for the underlying assets, and interest rate
movements. In recent years, various benchmarks and prices for underlying
assets have been highly volatile, and such volatility may be expected in the
future. Reference is also made to the discussion of futures, options, and
forward contracts herein for a discussion of the risks associated with such
investments.
Hybrid instruments are potentially more volatile and carry greater market
risks than traditional debt instruments. Depending on the structure of the
particular hybrid instrument, changes in a benchmark may be magnified by the
terms of the hybrid instrument and have an even more dramatic and substantial
effect upon the value of the hybrid instrument. Also, the prices of the
hybrid instrument and the benchmark or underlying asset may not move in the
same direction or at the same time.
Hybrid instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, hybrid instruments
may bear interest at above market rates but bear an increased risk of
principal loss (or gain). The latter scenario may result if "leverage" is
used to structure the hybrid instrument. Leverage risk occurs when the hybrid
instrument is structured so that a given change in a benchmark or underlying
asset is multiplied to produce a greater value change in the hybrid
instrument, thereby magnifying the risk of loss as well as the potential for
gain.
Hybrid instruments may also carry liquidity risk since the instruments are
often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
hybrid instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
fund and the issuer of the hybrid instrument, the creditworthiness of the
counterparty or issuer of the hybrid instrument would be an additional risk
factor which the fund would have to consider and monitor. Hybrid instruments
also may not be subject to regulation of the Commodities Futures Trading
Commission ("CFTC"), which generally regulates the trading of commodity
futures by U.S. persons, the SEC, which regulates the offer and sale of
securities by and to U.S. persons, or any other governmental regulatory
authority.
The various risks discussed above, particularly the market risk of such
instruments, may in turn cause significant fluctuations in the net asset
value of the fund. Accordingly, the fund will limit its investments in hybrid
instruments to 10% of total assets. However, because of their volatility, it
is possible that the fund's investment in hybrid instruments will account for
more than 10% of the fund's return (positive or negative).
All funds
When-Issued Securities and Forward Commitment Contracts
The price of such securities, which may be expressed in yield terms, is fixed
at the time the commitment to purchase is made, but delivery and payment take
place at a later date. Normally, the settlement date occurs within 90 days of
the purchase for when-issueds, but may be substantially longer for forwards.
During the period between purchase and settlement, no payment is made by the
fund to the issuer and no interest accrues to the fund. The purchase of these
securities will result in a loss if their values decline prior to the
settlement date. This could occur, for example, if interest rates increase
prior to settlement. The longer the period between purchase and settlement,
the greater the risks are. At the time the fund makes the commitment to
purchase these securities, it will record the transaction and reflect the
value of the security in determining its net asset value. The fund will cover
these securities by maintaining cash, liquid, high-grade debt securities, or
other suitable cover as permitted by the SEC with its custodian bank equal in
value to commitments for them during the time between the purchase and the
settlement. Therefore, the longer this period, the longer the period during
which alternative investment options are not available to the fund (to the
extent of the securities used for cover). Such securities either will mature
or, if necessary, be sold on or before the settlement date.
To the extent the fund remains fully or almost fully invested (in securities
with a remaining maturity of more than one year) at the same time it
purchases these securities, there will be greater fluctuations in the fund's
net asset value than if the fund did not purchase them.
Additional Adjustable Rate Securities
Certain securities may be issued with adjustable interest rates that are
reset periodically by predetermined formulas or indexes in order to minimize
movements in the principal value of the investment. Such securities may have
long-term maturities, but may be treated as a short-term investment under
certain conditions. Generally, as interest rates decrease or increase, the
potential for capital appreciation or depreciation on these securities is
less than for fixed-rate obligations. These securities may take the following
forms:
Variable Rate Securities Variable rate instruments are those whose terms
provide for the adjustment of their interest rates on set dates and which,
upon such adjustment, can reasonably be expected to have a market value that
approximates its par value. A variable rate instrument, the principal amount
of which is scheduled to be paid in 397 days or less, is deemed to have a
maturity equal to the period remaining until the next readjustment of the
interest rate. A variable rate instrument which is subject to a demand
feature entitles the purchaser to receive the principal amount of the
underlying security or securities, either (i) upon notice of no
more than 30 days or (ii) at specified intervals not exceeding 397 days and
upon no more than 30 days' notice, is deemed to have a maturity equal to the
longer of the period remaining until the next readjustment of the interest
rate or the period remaining until the principal amount can be recovered
through demand.
Floating Rate Securities Floating rate instruments are those whose terms
provide for the adjustment of their interest rates whenever a specified
interest rate changes and which, at any time, can reasonably be expected to
have a market value that approximates its par value. The maturity of a
floating rate instrument is deemed to be the period remaining until the date
(noted on the face of the instrument) on which the principal amount must be
paid, or in the case of an instrument called for redemption, the date on
which the redemption payment must be made. Floating rate instruments with
demand features are deemed to have a maturity equal to the period remaining
until the principal amount can be recovered through demand.
Put Option Bonds Long-term obligations with maturities longer than one year
may provide purchasers an optional or mandatory tender of the security at par
value at predetermined intervals, often ranging from one month to several
years (e.g., a 30-year bond with a five-year tender period). These
instruments are deemed to have a maturity equal to the period remaining to
the put date.
Corporate Income, High Yield, New Income, Personal Strategy, Prime Reserve,
Reserve Investment, and Short-Term Bond Funds
Illiquid or Restricted Securities
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933 (the "1933 Act"). Where registration
is required, the fund may be obligated to pay all or part of the registration
expenses, and a considerable period may elapse between the time of the
decision to sell and the time the fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the fund might obtain a less favorable
price than prevailed when it decided to sell. Restricted securities will be
priced at fair value as determined in accordance with procedures prescribed
by the fund's Board of Directors/Trustees. If, through the appreciation of
illiquid securities or the depreciation of liquid securities, the fund should
be in a position where more than 15% (10% for Government Reserve Investment,
Prime Reserve, Reserve Investment, and U.S. Treasury Money Funds) of the
value of its net assets is invested in illiquid assets, including restricted
securities, the fund will take appropriate steps to protect liquidity.
Notwithstanding the above, the fund may purchase securities which, while
privately placed, are eligible for purchase and sale under Rule 144A under
the 1933 Act. This rule permits certain qualified institutional buyers, such
as the fund, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. T. Rowe Price, under the
supervision of the fund's Board of Directors/Trustees, will consider whether
securities purchased under Rule 144A are illiquid and thus subject to the
fund's restriction of investing no more than 15% (10% for Government Reserve
Investment, Prime Reserve, Reserve Investment, and U.S. Treasury Money Funds)
of its net assets in illiquid securities. A determination of whether a Rule
144A security is liquid or not is a question of fact. In making this
determination, T. Rowe Price will consider the trading markets for the
specific security taking into account the unregistered nature of a Rule 144A
security. In addition, T. Rowe Price could consider the following: (1)
frequency of trades and quotes; (2) number of dealers and potential
purchasers; (3) dealer undertakings to make a market; and (4) the nature of
the security and of marketplace trades (e.g., the time needed to dispose of
the security, the method of soliciting offers, and the mechanics of
transfer). The liquidity of Rule 144A securities would be monitored and, if
as a result of changed conditions it is determined that a Rule 144A security
is no longer liquid, the fund's holdings of illiquid securities would be
reviewed to determine what, if any, steps are required to assure that the
fund does not invest more than 15% (10% for Government Reserve Investment,
Prime Reserve, Reserve Investment, and U.S. Treasury Money Funds) of its net
assets in illiquid securities. Investing in Rule 144A securities could have
the effect of increasing the amount of the fund's assets invested in illiquid
securities if qualified institutional buyers are unwilling to purchase such
securities.
New Income and Short-Term Bond Funds
Industry Concentration
When the market for corporate debt securities is dominated by issues in the
gas utility, gas transmission utility, electric utility, telephone utility,
or petroleum industry, the fund will as a matter of fundamental policy
concentrate 25% or more, but not more than 50%, of its assets, in any one
such industry, if the fund has cash for such investment (i.e., the fund will
not sell portfolio securities to raise cash) and, if in T. Rowe Price's
judgment, the return available and the marketability, quality, and
availability of the debt securities of such industry justifies such
concentration in light of the fund's investment objectives. Domination would
exist with respect to any one such industry, when, in the preceding 30-day
period, more than 25% of all new-issue corporate debt offerings (within the
four highest grades of Moody's or S&P's and with maturities of 10 years or
less) of $25,000,000 or more consisted of issues in such industry. Although
the fund will normally purchase corporate debt securities in the secondary
market as opposed to new offerings, T. Rowe Price believes that the new
issue-based dominance standard, as defined above, is appropriate because it
is easily determined and represents an accurate correlation to the secondary
market. Investors should understand that concentration in any industry may
result in increased risk. Investments in any of these industries may be
affected by environmental conditions, energy conservation programs, fuel
shortages, difficulty in obtaining adequate return on capital in financing
operations and large construction programs, and the ability of the capital
markets to absorb debt issues. In addition, it is possible that the public
service commissions which have jurisdiction over these industries may not
grant future increases in rates sufficient to offset increases in operating
expenses. These industries also face numerous legislative and regulatory
uncertainties at both federal and state government levels. Management
believes that any risk to the fund which might result from concentration in
any industry will be minimized by the fund's practice of diversifying its
investments in other respects. The fund's policy with respect to industry
concentration is a fundamental policy. (For investment restriction on
industry concentration, see "Investment Restrictions").
PORTFOLIO MANAGEMENT PRACTICES
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Lending of Portfolio Securities
Securities loans are made to broker-dealers, institutional investors, or
other persons, pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value
of the securities lent, marked to market on a daily basis. The collateral
received will consist of cash, U.S. government securities, letters of credit,
or such other collateral as may be permitted under its investment program.
While the securities are being lent, the fund will continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities,
as well as interest on the investment of the collateral or a fee from the
borrower. The fund has a right to call each loan and obtain the securities,
within such period of time which coincides with the normal settlement period
for purchases and sales of such securities in the respective markets. The
fund will not have the right to vote on securities while they are being lent,
but it will call a loan in anticipation of any important vote. The risks in
lending portfolio securities, as with other extensions of secured credit,
consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. Loans will only be made to firms deemed
by T. Rowe Price to be of good standing and will not be made unless, in the
judgment of T. Rowe Price, the consideration to be earned from such loans
would justify the risk.
Interfund Borrowing and Lending
The fund is a party to an exemptive order received from the SEC on December
8, 1998, amended on November 23, 1999, that permits it to borrow money from
and/or lend money to other funds in the T. Rowe Price complex ("Price
Funds"). All loans are set at an interest rate between rates charged on
overnight repurchase agreements and short-term bank loans. All loans are
subject to numerous conditions designed to ensure fair and equitable
treatment of all participating funds. The program is subject to the oversight
and periodic review of the Boards of Directors of the Price Funds.
Repurchase Agreements
The fund may enter into a repurchase agreement through which an investor
(such as the fund) purchases a security (known as the "underlying security")
from a well-established securities dealer or a bank that is a member of the
Federal Reserve System. Any such dealer or bank will be on T. Rowe Price's
approved list. At that time, the bank or securities dealer agrees to
repurchase the underlying security at the same price, plus specified
interest. Repurchase agreements are generally for a short period of time,
often less than a week. Repurchase agreements which do not provide for
payment within seven days will be treated as illiquid securities. The fund
will only enter into repurchase agreements where (i) (A) Prime Reserve, U.S.
Treasury Money, Government Reserve Investment, and Reserve Investment
Funds--the underlying securities are either U.S. government securities or
securities that, at the time the repurchase agreement is entered into, are
rated in the highest rating category by the requisite number of NRSROs (as
required by Rule 2a-7 under the 1940 Act) and otherwise are of the type
(excluding maturity limitations) which the fund's investment guidelines would
allow it to purchase directly, (B) Corporate Income, GNMA, High Yield, New
Income, Personal Strategy, Short-Term Bond, U.S. Treasury Intermediate, and
U.S. Treasury Long-Term Funds--the underlying securities are of the type
(excluding maturity limitations) which the fund's investment guidelines would
allow it to purchase directly; (ii) the market value of the underlying
security, including interest accrued, will be equal to or exceed the value of
the repurchase agreement; and (iii) payment for the underlying security is
made only upon physical delivery or evidence of book-entry transfer to the
account of the custodian or a bank acting as agent. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the fund
could experience both delays in liquidating the underlying security and
losses, including: (a) possible decline in the value of the underlying
security during the period while the fund seeks to enforce its rights
thereto; (b) possible subnormal levels of income and lack of access to income
during this period; and (c) expenses of enforcing its rights.
Reverse Repurchase Agreements
Although the fund has no current intention of engaging in reverse repurchase
agreements, the fund reserves the right to do so. Reverse repurchase
agreements are ordinary repurchase agreements in which a fund is the seller
of, rather than the investor in, securities, and agrees to repurchase them at
an agreed upon time and price. Use of a reverse repurchase agreement may be
preferable to a regular sale and later repurchase of the securities because
it avoids certain market risks and transaction costs. A reverse repurchase
agreement may be viewed as a type of borrowing by the fund, subject to
Investment Restriction (1). (See "Investment Restrictions.")
All funds except Government Reserve Investment and Reserve Investment Funds
Money Market Reserves
It is expected that the fund will invest its cash reserves primarily in one
or more money market funds established for the exclusive use of the T. Rowe
Price family of mutual funds and other clients of T. Rowe Price. Currently,
two such money market funds are in operation RIF and GRF, each a series of
the T. Rowe Price Reserve Investment Funds, Inc. (The Prime Reserve and U.S.
Treasury Money Funds will not purchase shares of either fund, and the GNMA,
U.S. Treasury Intermediate, and U.S. Treasury Long-Term Funds can only
purchase shares of GRF.) Additional series may be created in the future.
These funds were created and operate under an Exemptive Order issued by the
SEC (Investment Company Act Release No. IC-22770, July 29, 1997).
Both funds must comply with the requirements of Rule 2a-7 under the 1940 Act
governing money market funds. The RIF invests at least 95% of its total
assets in prime money market instruments receiving the highest credit rating.
The GRF invests primarily in a portfolio of U.S. government-backed
securities, primarily U.S. Treasuries, and repurchase agreements thereon.
The RIF and GRF provide a very efficient means of managing the cash reserves
of the fund. While neither RIF or GRF pay an advisory fee to the Investment
Manager, they will incur other expenses. However, the RIF and GRF are
expected by T. Rowe Price to operate at very low expense ratios. The fund
will only invest in RIF or GRF to the extent it is consistent with its
objective and program.
Neither fund is insured or guaranteed by the FDIC or any other government
agency. Although the funds seek to maintain a stable net asset value of $1.00
per share, it is possible to lose money by investing in them.
High Yield Fund
Short Sales
The fund may make short sales for hedging purposes to protect the fund
against companies whose credit is deteriorating. Short sales are transactions
in which the fund sells a security it does not own in anticipation of a
decline in the market value of that security. The fund's short sales would be
limited to situations where the fund owns a debt security of a company and
would sell short the common or preferred stock or another debt security at a
different level of the capital structure of the same company. No securities
will be sold short if, after the effect is given to any such short sale, the
total market value of all securities sold short would exceed 2% of the value
of the fund's net assets.
To complete a short sale transaction, the fund must borrow the security to
make delivery to the buyer. The fund then is obligated to replace the
security borrowed by purchasing it at the market price at the time of
replacement. The price at such time may be more or less than the price at
which the security was sold by the fund. Until the security is replaced, the
fund is required to pay to the lender amounts equal to any dividends or
interest which accrue during the period of the loan. To borrow the security,
the fund also may be required to pay a premium, which would increase the cost
of the security sold. The proceeds of the short sale will be retained by the
broker, to the extent necessary to meet margin requirements, until the short
position is closed out.
Until the fund replaces a borrowed security in connection with a short sale,
the fund will: (a) maintain daily a segregated account, containing cash, U.S.
government securities, or other suitable cover as permitted by the SEC, at
such a level that (i) the amount deposited in the account plus the amount
deposited with the broker as collateral will equal the current value of the
security sold short and (ii) the amount deposited in the segregated account
plus the amount deposited with the broker as collateral will not be less than
the market value of the security at the time its was sold short; or (b)
otherwise cover its short position.
The fund will incur a loss as a result of the short sale if the price of the
security sold short increases between the date of the short sale and the date
on which the fund replaces the borrowed security. The fund will realize a
gain if the security sold short declines in price between those dates. This
result is the opposite of what one would expect from a cash purchase of a
long position in a security. The amount of any gain will be decreased, and
the amount of any loss increased, by the amount of any premium, dividends, or
interest the fund may be required to pay in connection with a short sale. Any
gain or loss on the security sold short would be separate from a gain or loss
on the fund security being hedged by the short sale.
The Taxpayer Relief Act of 1997 requires a mutual fund to recognize gain upon
entering into a constructive sale of stock, a partnership interest, or
certain debt positions occurring after June 8, 1997. A constructive sale is
deemed to occur if the fund enters into a short sale, an offsetting notional
principal contract, or a futures or forward contract which is substantially
identical to the appreciated position. Some of the transactions in which the
fund is permitted to invest may cause certain appreciated positions in
securities held by the fund to qualify as a "constructive sale," in which
case it would be treated as sold and the resulting gain subjected to tax or,
in the case of a mutual fund, distributed to shareholders. If this were to
occur, the fund would be required to distribute such gains even though it
would receive no cash until the later sale of the security. Such
distributions could reduce the amount of cash available for investment by the
fund. Because these rules do not apply to "straight" debt transactions, it is
not anticipated that they will have a significant impact on the fund;
however, the effect cannot be determined until the issuance of clarifying
regulations.
All funds except Government Reserve Investment, Prime Reserve, Reserve
Investment, and U.S. Treasury Money Funds
Options
Options are a type of potentially high-risk derivative.
Writing Covered Call Options
The fund may write (sell) American or European style "covered" call options
and purchase options to close out options previously written by the fund. In
writing covered call options, the fund expects to generate additional premium
income which should serve to enhance the fund's total return and reduce the
effect of any price decline of the security or currency involved in the
option. Covered call options will generally be written on securities or
currencies which, in T. Rowe Price's opinion, are not expected to have any
major price increases or moves in the near future but which, over the long
term, are deemed to be attractive investments for the fund.
A call option gives the holder (buyer) the right to purchase, and the writer
(seller) has the obligation to sell, a security or currency at a specified
price (the exercise price) at expiration of the option (European style) or at
any time until a certain date (the expiration date) (American style). So long
as the obligation of the writer of a call option continues, he may be
assigned an exercise notice by the broker-dealer through whom such option was
sold, requiring him to deliver the underlying security or currency against
payment of the exercise price. This obligation terminates upon the expiration
of the call option, or such earlier time at which the writer effects a
closing purchase transaction by repurchasing an option identical to that
previously sold. To secure his obligation to deliver the underlying security
or currency in the case of a call option, a writer is required to deposit in
escrow the underlying security or currency or other assets in accordance with
the rules of a clearing corporation.
The fund generally will write only covered call options. This means that the
fund will either own the security or currency subject to the option or an
option to purchase the same underlying security or currency, having an
exercise price equal to or less than the exercise price of the "covered"
option. From time to time, the fund will write a call option that is not
covered as indicated above but where the fund will establish and maintain
with its custodian for the term of the option, an account consisting of cash,
U.S. government securities, other liquid high-grade debt obligations, or
other suitable cover as permitted by the SEC having a value equal to the
fluctuating market value of the optioned securities or currencies. While such
an option would be "covered" with sufficient collateral to satisfy SEC
prohibitions on issuing senior securities, this type of strategy would expose
the fund to the risks of writing uncovered options.
Portfolio securities or currencies on which call options may be written will
be purchased solely on the basis of investment considerations consistent with
the fund's investment objective. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk
(in contrast to the writing of naked or uncovered options, which the fund
generally will not do), but capable of enhancing the fund's total return.
When writing a covered call option, a fund, in return for the premium, gives
up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely retains the
risk of loss should the price of the security or currency decline. Unlike one
who owns securities or currencies not subject to an option, the fund has no
control over when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any time prior to
the expiration of its obligation as a writer. If a call option which the fund
has written expires, the fund will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security or currency during the option period. If the call
option is exercised, the fund will realize a gain or loss from the sale of
the underlying security or currency. The fund does not consider a security or
currency covered by a call to be "pledged" as that term is used in the fund's
policy which limits the pledging or mortgaging of its assets. If the fund
writes an uncovered option as described above, it will bear the risk of
having to purchase the security subject to the option at a price higher than
the exercise price of the option. As the price of a security could appreciate
substantially, the fund's loss could be significant.
The premium received is the market value of an option. The premium the fund
will receive from writing a call option will reflect, among other things, the
current market price of the underlying security or currency, the relationship
of the exercise price to such market price, the historical price volatility
of the underlying security or currency, and the length of the option period.
Once the decision to write a call option has been made, T. Rowe Price, in
determining whether a particular call option should be written on a
particular security or currency, will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will
exist for those options. The premium received by the fund for writing covered
call options will be recorded as a liability of the fund in the portfolio of
investments. This liability will be adjusted daily to the option's current
market value, which will be the latest sale price at the time at which the
net asset value per share of the fund is computed (close of the New York
Stock Exchange), or, in the absence of such sale, the mean of the latest bid
and asked prices. The option will be terminated upon expiration of the
option, the purchase of an identical option in a closing transaction, or
delivery of the underlying security or currency upon the exercise of the
option.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security or currency from
being called, or to permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit the fund to write
another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If the fund desires to
sell a particular security or currency from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security
or currency. There is, of course, no assurance that the fund will be able to
effect such closing transactions at favorable prices. If the fund cannot
enter into such a transaction, it may be required to hold a security or
currency that it might otherwise have sold. When the fund writes a covered
call option, it runs the risk of not being able to participate in the
appreciation of the underlying securities or currencies above the exercise
price, as well as the risk of being required to hold on to securities or
currencies that are depreciating in value. This could result in higher
transaction costs. The fund will pay transaction costs in connection with the
writing of options to close out previously written options. Such transaction
costs are normally higher than those applicable to purchases and sales of
portfolio securities.
Call options written by the fund will normally have expiration dates of less
than nine months from the date written. The exercise price of the options may
be below, equal to, or above the current market values of the underlying
securities or currencies at the time the options are written. From time to
time, the fund may purchase an underlying security or currency for delivery
in accordance with an exercise notice of a call option assigned to it, rather
than delivering such security or currency from its portfolio. In such cases,
additional costs may be incurred.
The fund will realize a profit or loss from a closing purchase transaction if
the cost of the transaction is less or more than the premium received from
the writing of the option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security or currency, any loss resulting from the repurchase of a call option
is likely to be offset in whole or in part by appreciation of the underlying
security or currency owned by the fund.
The fund will not write a covered call option if, as a result, the aggregate
market value of all portfolio securities or currencies covering written call
or put options exceeds 25% of the market value of the fund's total assets. In
calculating the 25% limit, the fund will offset the value of securities
underlying purchased calls and puts on identical securities or currencies
with identical maturity dates.
Writing Covered Put Options
The fund may write American or European style covered put options and
purchase options to close out options previously written by the fund. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) has the obligation to buy, the underlying security or currency at
the exercise price during the option period (American style) or at the
expiration of the option (European style). So long as the obligation of the
writer continues, he may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring him to make payment to the
exercise price against delivery of the underlying security or
currency. The operation of put options in other respects, including their
related risks and rewards, is substantially identical to that of call
options.
The fund would write put options only on a covered basis, which means that
the fund would maintain in a segregated account cash, U.S. government
securities, other liquid high-grade debt obligations, or other suitable cover
as determined by the SEC, in an amount not less than the exercise price or
the fund will own an option to sell the underlying security or currency
subject to the option having an exercise price equal to or greater than the
exercise price of the "covered" option at all times while the put option is
outstanding. (The rules of a clearing corporation currently require that such
assets be deposited in escrow to secure payment of the exercise price.)
The fund would generally write covered put options in circumstances where T.
Rowe Price wishes to purchase the underlying security or currency for the
fund's portfolio at a price lower than the current market price of the
security or currency. In such event the fund would write a put option at an
exercise price which, reduced by the premium received on the option, reflects
the lower price it is willing to pay. Since the fund would also receive
interest on debt securities or currencies maintained to cover the exercise
price of the option, this technique could be used to enhance current return
during periods of market uncertainty. The risk in such a transaction would be
that the market price of the underlying security or currency would decline
below the exercise price less the premiums received. Such a decline could be
substantial and result in a significant loss to the fund. In addition, the
fund, because it does not own the specific securities or currencies which it
may be required to purchase in exercise of the put, cannot benefit from
appreciation, if any, with respect to such specific securities or currencies.
The fund will not write a covered put option if, as a result, the aggregate
market value of all portfolio securities or currencies covering put or call
options exceeds 25% of the market value of the fund's total assets. In
calculating the 25% limit, the fund will offset the value of securities
underlying purchased puts and calls on identical securities or currencies
with identical maturity dates.
Purchasing Put Options
The fund may purchase American or European style put options. As the holder
of a put option, the fund has the right to sell the underlying security or
currency at the exercise price at any time during the option period (American
style) or at the expiration of the option (European style). The fund may
enter into closing sale transactions with respect to such options, exercise
them, or permit them to expire. The fund may purchase put options for
defensive purposes in order to protect against an anticipated decline in the
value of its securities or currencies. An example of such use of put options
is provided next.
The fund may purchase a put option on an underlying security or currency (a
"protective put") owned by the fund as a defensive technique in order to
protect against an anticipated decline in the value of the security or
currency. Such hedge protection is provided only during the life of the put
option when the fund, as the holder of the put option, is able to sell the
underlying security or currency at the put exercise price regardless of any
decline in the underlying security's market price or currency's exchange
value. For example, a put option may be purchased in order to protect
unrealized appreciation of a security or currency where T. Rowe Price deems
it desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any capital gain otherwise available for distribution when the
security or currency is eventually sold.
The fund may also purchase put options at a time when the fund does not own
the underlying security or currency. By purchasing put options on a security
or currency it does not own, the fund seeks to benefit from a decline in the
market price of the underlying security or currency. If the put option is not
sold when it has remaining value, and if the market price of the underlying
security or currency remains equal to or greater than the exercise price
during the life of the put option, the fund will lose its entire investment
in the put option. In order for the purchase of a put option to be
profitable, the market price of the underlying security or currency must
decline sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale
transaction.
The fund will not commit more than 5% of its assets to premiums when
purchasing put and call options. The premium paid by the fund when purchasing
a put option will be recorded as an asset of the fund in the portfolio of
investments. This asset will be adjusted daily to the option's current market
value, which will be the latest sale price at the time at which the net asset
value per share of the fund is computed (close of New York Stock Exchange),
or, in the absence of such sale, the mean of the latest bid and asked prices.
This asset will be terminated upon expiration of the option, the selling
(writing) of an identical option in a closing transaction, or the delivery of
the underlying security or currency upon the exercise of the option.
Purchasing Call Options
The fund may purchase American or European style call options. As the holder
of a call option, the fund has the right to purchase the underlying security
or currency at the exercise price at any time during the option period
(American style) or at the expiration of the option (European style). The
fund may enter into closing sale transactions with respect to such options,
exercise them, or permit them to expire. The fund may purchase call options
for the purpose of increasing its current return or avoiding tax consequences
which could reduce its current return. The fund may also purchase call
options in order to acquire the underlying securities or currencies. Examples
of such uses of call options are provided next.
Call options may be purchased by the fund for the purpose of acquiring the
underlying securities or currencies for its portfolio. Utilized in this
fashion, the purchase of call options enables the fund to acquire the
securities or currencies at the exercise price of the call option plus the
premium paid. At times the net cost of acquiring securities or currencies in
this manner may be less than the cost of acquiring the securities or
currencies directly. This technique may also be useful to the fund in
purchasing a large block of securities or currencies that would be more
difficult to acquire by direct market purchases. So long as it holds such a
call option rather than the underlying security or currency itself, the fund
is partially protected from any unexpected decline in the market price of the
underlying security or currency and in such event could allow the call option
to expire, incurring a loss only to the extent of the premium paid for the
option.
The fund will not commit more than 5% of its assets to premiums when
purchasing call and put options. The fund may also purchase call options on
underlying securities or currencies it owns in order to protect unrealized
gains on call options previously written by it. A call option would be
purchased for this purpose where tax considerations make it inadvisable to
realize such gains through a closing purchase transaction. Call options may
also be purchased at times to avoid realizing losses.
Dealer (Over-the-Counter) Options
The fund may engage in transactions involving dealer options. Certain risks
are specific to dealer options. While the fund would look to a clearing
corporation to exercise exchange-traded options, if the fund were to purchase
a dealer option, it would rely on the dealer from whom it purchased the
option to perform if the option were exercised. Failure by the dealer to do
so would result in the loss of the premium paid by the fund as well as loss
of the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options have none. Consequently, the fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it
or reselling it to the dealer who issued it. Similarly, when the fund writes
a dealer option, it generally will be able to close out the option prior to
its expiration only by entering into a closing purchase transaction with the
dealer to which the fund originally wrote the option. While the fund will
seek to enter into dealer options only with dealers who will agree to and
which are expected to be capable of entering into closing transactions with
the fund, there can be no assurance that the fund will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. Until the
fund, as a covered dealer call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) or currencies used as cover until the option expires or is exercised.
In the event of insolvency of the contra party, the fund may be unable to
liquidate a dealer option. With respect to options written by the fund, the
inability to enter into a closing transaction may result in material losses
to the fund. For example, since the fund must maintain a secured position
with respect to any call option on a security it writes, the fund may not
sell the assets which it has segregated to secure the position while it is
obligated under the option. This
requirement may impair a fund's ability to sell portfolio securities or
currencies at a time when such sale might be advantageous.
The staff of the SEC has taken the position that purchased dealer options and
the assets used to secure the written dealer options are illiquid securities.
The fund may treat the cover used for written Over-the-Counter ("OTC")
options as liquid if the dealer agrees that the fund may repurchase the OTC
option it has written for a maximum price to be calculated by a predetermined
formula. In such cases, the OTC option would be considered illiquid only to
the extent the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
High Yield Fund
Spread Option Transactions
The fund may purchase from and sell to securities dealers covered spread
options. Such covered spread options are not presently exchange listed or
traded. The purchase of a spread option gives the fund the right to put, or
sell, a security that it owns at a fixed dollar spread or fixed yield spread
in relationship to another security that the fund does not own, but which is
used as a benchmark. The risk to the fund in purchasing covered spread
options is the cost of the premium paid for the spread options and any
transaction costs. In addition, there is no assurance that closing
transactions will be available. The purchase of spread options will be used
to protect the fund against adverse changes in prevailing credit quality
spreads, i.e., the yield spread between high-quality and lower-quality
securities. Such protection is only provided during the life of the spread
option. The security covering the spread option will be maintained in a
segregated account by the fund's custodian. The fund does not consider a
security covered by a spread option to be "pledged" as that term is used in
the fund's policy limiting the pledging or mortgaging of its assets. The fund
may also buy and sell uncovered spread options. Such options would be used
for the same purposes and be subject to similar risks as covered spread
options. However, in an uncovered spread option, the fund would not own
either of the securities involved in the spread.
All funds except Government Reserve Investment, Prime Reserve, Reserve
Investment, and U.S. Treasury Money Funds
Futures Contracts
Futures contracts are a type of potentially high-risk derivative.
Transactions in Futures
The fund may enter into futures contracts including stock index, interest
rate, and currency futures ("futures" or "futures contracts").
Stock index futures contracts may be used to provide a hedge for a portion of
the fund's portfolio, as a cash management tool, or as an efficient way for
T. Rowe Price to implement either an increase or decrease in portfolio market
exposure in response to changing market conditions. The fund may purchase or
sell futures contracts with respect to any stock index. Nevertheless, to
hedge the fund's portfolio successfully, the fund must sell futures contacts
with respect to indices or subindices whose movements will have a significant
correlation with movements in the prices of the fund's portfolio securities.
Interest rate or currency futures contracts may be used as a hedge against
changes in prevailing levels of interest rates or currency exchange rates in
order to establish more definitely the effective return on securities or
currencies held or intended to be acquired by the fund. In this regard, the
fund could sell interest rate or currency futures as an offset against the
effect of expected increases in interest rates or currency exchange rates and
purchase such futures as an offset against the effect of expected declines in
interest rates or currency exchange rates.
The fund will enter into futures contracts which are traded on national or
foreign futures exchanges, and are standardized as to maturity date and
underlying financial instrument. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the CFTC. Although
techniques other than
the sale and purchase of futures contracts could be used for the
above-referenced purposes, futures contracts offer an effective and
relatively low cost means of implementing the fund's objectives in these
areas.
Regulatory Limitations
If the fund purchases or sells futures contracts or related options which do
not qualify as bona fide hedging under applicable CFTC rules, the aggregate
initial margin deposits and premium required to establish those positions
cannot exceed 5% of the liquidation value of the fund after taking into
account unrealized profits and unrealized losses on any such contracts it has
entered into; provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be excluded
in calculating the 5% limitation. For purposes of this policy, options on
futures contracts and foreign currency options traded on a commodities
exchange will be considered "related options." This policy may be modified by
the Board of Directors/Trustees without a shareholder vote and does not limit
the percentage of the fund's assets at risk to 5%.
In instances involving the purchase of futures contracts or the writing of
call or put options thereon by the fund, an amount of cash, liquid assets, or
other suitable cover as permitted by the SEC, equal to the market value of
the futures contracts and options thereon (less any related margin deposits),
will be identified by the fund to cover the position, or alternative cover
(such as owning an offsetting position) will be employed. Assets used as
cover or held in an identified account cannot be sold while the position in
the corresponding option or future is open, unless they are replaced with
similar assets. As a result, the commitment of a large portion of a fund's
assets to cover or identified accounts could impede portfolio management or
the fund's ability to meet redemption requests or other current obligations.
If the CFTC or other regulatory authorities adopt different (including less
stringent) or additional restrictions, the fund would comply with such new
restrictions.
Trading in Futures Contracts
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific financial instrument (e.g.,
units of a debt security) for a specified price, date, time, and place
designated at the time the contract is made. Brokerage fees are incurred when
a futures contract is bought or sold and margin deposits must be maintained.
Entering into a contract to buy is commonly referred to as buying or
purchasing a contract or holding a long position. Entering into a contract to
sell is commonly referred to as selling a contract or holding a short
position.
Unlike when the fund purchases or sells a security, no price would be paid or
received by the fund upon the purchase or sale of a futures contract. Upon
entering into a futures contract, and to maintain the fund's open positions
in futures contracts, the fund would be required to deposit with its
custodian in a segregated account in the name of the futures broker an amount
of cash, or liquid assets known as "initial margin." The margin required for
a particular futures contract is set by the exchange on which the contract is
traded, and may be significantly modified from time to time by the exchange
during the term of the contract. Futures contracts are customarily purchased
and sold on margins that may range upward from less than 5% of the value of
the contract being traded.
If the price of an open futures contract changes (by increase in the case of
a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the
margin. However, if the value of a position increases because of favorable
price changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the fund.
These subsequent payments, called "variation margin," to and from the futures
broker, are made on a daily basis as the price of the underlying assets
fluctuate, making the long and short positions in the futures contract more
or less valuable, a process known as "marking to market."
Although certain futures contracts, by their terms, require actual future
delivery of and payment for the underlying instruments, in practice most
futures contracts are usually closed out before the delivery date. Closing
out an open futures contract purchase or sale is effected by entering into an
offsetting futures contract
sale or purchase, respectively, for the same aggregate amount of the
identical securities and the same delivery date. If the offsetting purchase
price is less than the original sale price, the fund realizes a gain; if it
is more, the fund realizes a loss. Conversely, if the offsetting sale price
is more than the original purchase price, the fund realizes a gain; if it is
less, the fund realizes a loss. The transaction costs must also be included
in these calculations. There can be no assurance, however, that the fund will
be able to enter into an offsetting transaction with respect to a particular
futures contract at a particular time. If the fund is not able to enter into
an offsetting transaction, the fund will continue to be required to maintain
the margin deposits on the futures contract.
As an example of an offsetting transaction in which the underlying instrument
is not delivered, the contractual obligations arising from the sale of one
contract of September Treasury bills on an exchange may be fulfilled at any
time before delivery of the contract is required (i.e., on a specified date
in September, the "delivery month") by the purchase of one contract of
September Treasury bills on the same exchange. In such instance, the
difference between the price at which the futures contract was sold and the
price paid for the offsetting purchase, after allowance for transaction
costs, represents the profit or loss to the fund.
For example, the S&P 500 Stock Index is made up of 500 selected common
stocks, most of which are listed on the New York Stock Exchange. The S&P 500
Index assigns relative weightings to the common stocks included in the Index,
and the Index fluctuates with changes in the market values of those common
stocks. In the case of futures contracts on the S&P 500 Index, the contracts
are to buy or sell 250 units. Thus, if the value of the S&P 500 Index were
$150, one contract would be worth $37,500 (250 units x $150). The stock index
futures contract specifies that no delivery of the actual stocks making up
the index will take place. Instead, settlement in cash occurs. Over the life
of the contract, the gain or loss realized by the fund will equal the
difference between the purchase (or sale) price of the contract and the price
at which the contract is terminated. For example, if the fund enters into a
futures contract to buy 250 units of the S&P 500 Index at a specified future
date at a contract price of $150 and the S&P 500 Index is at $154 on that
future date, the fund will gain $1,000 (250 units x gain of $4). If the fund
enters into a futures contract to sell 250 units of the stock index at a
specified future date at a contract price of $150 and the S&P 500 Index is at
$152 on that future date, the fund will lose $500 (250 units x loss of $2).
Special Risks of Transactions in Futures Contracts
. Volatility and Leverage The prices of futures contracts are volatile and are
influenced, among other things, by actual and anticipated changes in the
market and interest rates, which in turn are affected by fiscal and monetary
policies and national and international political and economic events.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of
a trading session. Once the daily limit has been reached in a particular type
of futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular
trading day and therefore does not limit potential losses, because the limit
may prevent the liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial losses.
Margin deposits required on futures trading are low. As a result, a
relatively small price movement in a futures contract may result in immediate
and substantial loss, as well as gain, to the investor. For example, if at
the time of purchase, 10% of the value of the futures contract is deposited
as margin, a subsequent 10% decrease in the value of the futures contract
would result in a total loss of the margin deposit, before any deduction for
the transaction costs, if the account were then closed out. A 15% decrease
would result in a loss equal to 150% of the original margin deposit, if the
contract were closed out. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
. Liquidity The fund may elect to close some or all of its futures positions
at any time prior to their expiration. The fund would do so to reduce
exposure represented by long futures positions or short futures positions.
The
fund may close its positions by taking opposite positions which would operate
to terminate the fund's position in the futures contracts. Final
determinations of variation margin would then be made, additional cash would
be required to be paid by or released to the fund, and the fund would realize
a loss or a gain.
Futures contracts may be closed out only on the exchange or board of trade
where the contracts were initially traded. Although the fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular
contract at any particular time. In such event, it might not be possible to
close a futures contract, and in the event of adverse price movements, the
fund would continue to be required to make daily cash payments of variation
margin. However, in the event futures contracts have been used to hedge the
underlying instruments, the fund would continue to hold the underlying
instruments subject to the hedge until the futures contracts could be
terminated. In such circumstances, an increase in the price of underlying
instruments, if any, might partially or completely offset losses on the
futures contract. However, as described next, there is no guarantee that the
price of the underlying instruments will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
. Hedging Risk A decision of whether, when, and how to hedge involves skill
and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of unexpected market behavior, market or interest rate trends.
There are several risks in connection with the use by the fund of futures
contracts as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures contracts and
movements in the prices of the underlying instruments which are the subject
of the hedge. T. Rowe Price will, however, attempt to reduce this risk by
entering into futures contracts whose movements, in its judgment, will have a
significant correlation with movements in the prices of the fund's underlying
instruments sought to be hedged.
Successful use of futures contracts by the fund for hedging purposes is also
subject to T. Rowe Price's ability to correctly predict movements in the
direction of the market. It is possible that, when the fund has sold futures
to hedge its portfolio against a decline in the market, the index, indices,
or instruments underlying futures might advance and the value of the
underlying instruments held in the fund's portfolio might decline. If this
were to occur, the fund would lose money on the futures and also would
experience a decline in value in its underlying instruments. However, while
this might occur to a certain degree, T. Rowe Price believes that over time
the value of the fund's portfolio will tend to move in the same direction as
the market indices used to hedge the portfolio. It is also possible that, if
the fund were to hedge against the possibility of a decline in the market
(adversely affecting the underlying instruments held in its portfolio) and
prices instead increased, the fund would lose part or all of the benefit of
increased value of those underlying instruments that it has hedged, because
it would have offsetting losses in its futures positions. In addition, in
such situations, if the fund had insufficient cash, it might have to sell
underlying instruments to meet daily variation margin requirements. Such
sales of underlying instruments might be, but would not necessarily be, at
increased prices (which would reflect the rising market). The fund might have
to sell underlying instruments at a time when it would be disadvantageous to
do so.
In addition to the possibility that there might be an imperfect correlation,
or no correlation at all, between price movements in the futures contracts
and the portion of the portfolio being hedged, the price movements of futures
contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions, which could distort the normal relationship between the
underlying instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements in the
securities markets and, as a result, the futures market might attract more
speculators than the securities markets. Increased participation by
speculators in the futures market might also cause temporary price
distortions. Due to the possibility of price distortion in the futures market
and also because of imperfect correlation between price movements in the
underlying instruments and movements in the prices of futures contracts, even
a correct forecast of general market trends by T. Rowe Price might not result
in a successful hedging transaction over a very short time period.
Options on Futures Contracts
The fund may purchase and sell options on the same types of futures in which
it may invest.
Options (another type of potentially high-risk derivative) on futures are
similar to options on underlying instruments except that options on futures
give the purchaser the right, in return for the premium paid, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase or sell the
futures contract, at a specified exercise price at any time during the period
of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by the delivery of the accumulated balance in the writer's
futures margin account which represents the amount by which the market price
of the futures contract, at exercise, exceeds (in the case of a call) or is
less than (in the case of a put) the exercise price of the option on the
futures contract. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
As an alternative to writing or purchasing call and put options on interest
rate futures, the fund may write or purchase call and put options on
financial indices. Such options would be used in a manner similar to the use
of options on futures contracts. From time to time, a single order to
purchase or sell futures contracts (or options thereon) may be made on behalf
of the fund and other T. Rowe Price funds. Such aggregated orders would be
allocated among the funds and the other T. Rowe Price funds in a fair and
nondiscriminatory manner.
Special Risks of Transactions in Options on Futures Contracts
The risks described under "Special Risks in Transactions on Futures
Contracts" are substantially the same as the risks of using options on
futures. If the fund were to write an option on a futures contract, it would
be required to deposit and maintain initial and variation margin in the same
manner as a regular futures contract. In addition, where the fund seeks to
close out an option position by writing or buying an offsetting option
covering the same index, underlying instrument, or contract and having the
same exercise price and expiration date, its ability to establish and close
out positions on such options will be subject to the maintenance of a liquid
secondary market. Reasons for the absence of a liquid secondary market on an
exchange include the following: (1) there may be insufficient trading
interest in certain options; (2) restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; (3) trading halts,
suspensions, or other restrictions may be imposed with respect to particular
classes or series of options, or underlying instruments; (4) unusual or
unforeseen circumstances may interrupt normal operations on an exchange; (5)
the facilities of an exchange or a clearing corporation may not at all times
be adequate to handle current trading volume; or (6) one or more exchanges
could, for economic or other reasons, decide or be compelled at some future
date to discontinue the trading of options (or a particular class or series
of options), in which event the secondary market on that exchange (or in the
class or series of options) would cease to exist, although outstanding
options on the exchange that had been issued by a clearing corporation as a
result of trades on that exchange would continue to be exercisable in
accordance with their terms. There is no assurance that higher than
anticipated trading activity or other unforeseen events might not, at times,
render certain of the facilities of any of the clearing corporations
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers'
orders.
Additional Futures and Options Contracts
Although the fund has no current intention of engaging in futures or options
transactions other than those described above, it reserves the right to do
so. Such futures and options trading might involve risks which differ from
those involved in the futures and options described above.
Foreign Futures and Options
Participation in foreign futures and foreign options transactions involves
the execution and clearing of trades on or subject to the rules of a foreign
board of trade. Neither the National Futures Association nor any domestic
exchange regulates activities of any foreign boards of trade, including the
execution, delivery, and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable
foreign law. This is true even if the exchange is formally linked to a
domestic market so that a
position taken on the market may be liquidated by a transaction on another
market. Moreover, such laws or regulations will vary depending on the foreign
country in which the foreign futures or foreign options transaction occurs.
For these reasons, when the fund trades foreign futures or foreign options
contracts, it may not be afforded certain of the protective measures provided
by the Commodity Exchange Act, the CFTC's regulations, and the rules of the
National Futures Association and any domestic exchange, including the right
to use reparations proceedings before the CFTC and arbitration proceedings
provided by the National Futures Association or any domestic futures
exchange. In particular, funds received from the fund for foreign futures or
foreign options transactions may not be provided the same protections as
funds received in respect of transactions on United States futures exchanges.
In addition, the price of any foreign futures or foreign options contract
and, therefore, the potential profit and loss thereon may be affected by any
variance in the foreign exchange rate between the time the fund's order is
placed and the time it is liquidated, offset, or exercised.
Corporate Income, High Yield, New Income, Personal Strategy, and Short-Term
Bond Funds
Swap Agreements
The fund may enter into interest rate, index, total return, credit, and, to
the extent it may invest in foreign currency-denominated securities, currency
rate swap agreements. The fund may also enter into options on swap agreements
("swap options") on the types of swaps listed above.
Swap agreements are two party contracts entered into primarily by
institutional investors for a specified period of time. In a standard swap
transaction, two parties agree to exchange the returns (or differentials in
rates of return) earned or realized on a particular predetermined investment,
index or currency. The gross returns to be exchanged or swapped between the
parties are generally calculated with respect to a notional amount, i.e., the
return on or increase in value of a particular dollar amount invested at a
particular interest rate, in a particular foreign currency, or in a basket of
securities representing a particular index. A swap option is a contract that
gives a counterparty the right (but not the obligation) to enter into a new
swap agreement or to shorten, extend, cancel, or otherwise modify an existing
swap agreement at some designated future time on specified terms. The fund
may write (sell) and purchase put and call swap options.
One example of the use of swaps within a fund may be to manage the interest
rate sensitivity of the fund. The fund might receive or pay a fixed-rate
interest rate of a particular maturity and pay or receive a floating rate in
order to increase or decrease the duration of the fund. Or, the fund may buy
or sell swap options to effect the same result. The fund may also replicate a
security by selling it, placing the proceeds in cash deposits and receiving a
fixed rate in the swap market.
Another example is the use of credit default swaps to buy or sell credit
protection. A default swap is a bilateral contract that enables an investor
to buy/sell protection against a defined-issuer credit event. The seller of
credit protection against a security or basket of securities receives an
up-front or periodic payment to compensate against potential default
event(s). The fund may enhance income by selling protection or protect credit
risk by buying protection. Market supply and demand factors may cause
distortions between the cash securities market and the default swap market.
The credit protection market is still relatively new and should be considered
illiquid.
Most swap agreements entered into by the fund would calculate the obligations
of the parties to the agreement on a "net basis." Consequently, the fund's
current obligations (or rights) under a swap agreement will generally be
equal only to the net amount to be paid or received under the agreement based
on the relative values of the positions held by each party to the agreement
(the "net amount"). The fund's current obligations under a net swap agreement
will be accrued daily (offset against any amounts owed to the fund) and any
accrued but unpaid net amounts owed to a swap counterparty will be covered by
assets determined to be liquid by T. Rowe Price.
The use of swap agreements by the fund entails certain risks. Interest rate
and currency swaps could result in losses if interest rate or currency
changes are not correctly anticipated by the fund. Total return swaps could
result in losses if the reference index, security, or investments do not
perform as anticipated by the fund. Credit default swaps could result in
losses if the fund does not correctly evaluate the creditworthiness of the
company on which the credit default swap is based.
The fund will generally incur a greater degree of risk when it writes a swap
option than when it purchases a swap option. When the fund purchases a swap
option it risks losing only the amount of the premium it has paid should it
decide to let the option expire unexercised. However, when the fund writes a
swap option it will become obligated, upon exercise of the option, according
to the terms of the underlying agreement.
Because swaps are two party contracts and because they may have terms of
greater than seven days, swap agreements may be considered to be illiquid.
Moreover, the fund bears the risk of loss of the amount expected to be
received under a swap agreement in the event of the default or bankruptcy of
a swap agreement counterparty. The fund will enter into swap agreements only
with counterparties that meet certain standards of creditworthiness. The
swaps market is a relatively new market and is largely unregulated. It is
possible that developments in the swaps market, including potential
government regulation, could adversely affect the fund's ability to terminate
existing swap agreements or to realize amounts to be received under such
agreements.
U.S. Treasury Intermediate and U.S. Treasury Long-Term Funds
Limitations on Futures and Options for Intermediate and Long-Term Funds
The funds will not purchase a futures contract or option thereon if, with
respect to positions in futures or options on futures which do not represent
bona fide hedging, the aggregate initial margin and premiums on such
positions would exceed 5% of the fund's net asset value. In addition, neither
of the funds will enter into a futures transaction if it would be obligated
to purchase or deliver under outstanding open futures contracts amounts which
would exceed 15% of the fund's total assets.
A fund will not write a covered call option if, as a result, the aggregate
market value of all portfolio securities covering call options or subject to
delivery under put options exceeds 15% of the market value of the fund's
total assets.
A fund will not write a covered put option if, as a result, the aggregate
market value of all portfolio securities subject to such put options or
covering call options exceeds 15% of the market value of the fund's total
assets.
The funds have no current intention of investing in options on securities.
However, they reserve the right to do so in the future and could be subject
to the following limitations: a fund may invest up to 15% of its total assets
in premiums on put options and 15% of its total assets in premiums on call
options. The total amount of a fund's total assets invested in futures and
options will not exceed 15% of the fund's total assets.
Corporate Income, High Yield, New Income, Personal Strategy, and Short-Term
Bond Funds
Foreign Currency Transactions
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are principally traded
in the interbank market conducted directly between currency traders (usually
large, commercial banks) and their customers. A forward contract generally
has no deposit requirement, and no commissions are charged at any stage for
trades.
The fund may enter into forward contracts for a variety of purposes in
connection with the management of the foreign securities portion of its
portfolio. The fund's use of such contracts would include, but not be limited
to, the following:
First, when the fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to "lock in" the
U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transactions, the fund will be
able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received.
Second, when T. Rowe Price believes that one currency may experience a
substantial movement against another currency, including the U.S. dollar, it
may enter into a forward contract to sell or buy the amount of the former
foreign currency, approximating the value of some or all of the fund's
portfolio securities
denominated in such foreign currency. Alternatively, where appropriate, the
fund may hedge all or part of its foreign currency exposure through the use
of a basket of currencies or a proxy currency where such currency or
currencies act as an effective proxy for other currencies. In such a case,
the fund may enter into a forward contract where the amount of the foreign
currency to be sold exceeds the value of the securities denominated in such
currency. The use of this basket hedging technique may be more efficient and
economical than entering into separate forward contracts for each currency
held in the fund. The precise matching of the forward contract amounts and
the value of the securities involved will not generally be possible since the
future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. The
projection of short-term currency market movement is extremely difficult, and
the successful execution of a short-term hedging strategy is highly
uncertain. Under normal circumstances, consideration of the prospect for
relative currency values will be incorporated into the longer-term investment
decisions made with regard to overall diversification strategies. However, T.
Rowe Price believes that it is important to have the flexibility to enter
into such forward contracts when it determines that the best interest of the
fund will be served.
Third, the fund may use forward contracts when the fund wishes to hedge out
of the dollar into a foreign currency in order to create a synthetic bond or
money market instrument-the security would be issued in U.S. dollars but the
dollar component would be transformed into a foreign currency through a
forward contract.
The fund may enter into forward contacts for any other purpose consistent
with the fund's investment objective and program. However, the fund will not
enter into a forward contract, or maintain exposure to any such contract(s),
if the amount of foreign currency required to be delivered thereunder would
exceed the fund's holdings of liquid, high-grade debt securities, currency
available for cover of the forward contract(s), or other suitable cover as
permitted by the SEC. In determining the amount to be delivered under a
contract, the fund may net offsetting positions.
At the maturity of a forward contract, the fund may sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and either extend the maturity of the forward contract (by "rolling"
that contract forward) or may initiate a new forward contract.
If the fund retains the portfolio security and engages in an offsetting
transaction, the fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward prices increase, the
fund will suffer a loss to the extent of the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the fund is
not required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate
by T. Rowe Price. It also should be realized that this method of hedging
against a decline in the value of a currency does not eliminate fluctuations
in the underlying prices of the securities. It simply establishes a rate of
exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result from an increase in the value of that currency.
Although the fund values its assets daily in terms of U.S. dollars, it does
not intend to convert its holdings of foreign currencies into U.S. dollars on
a daily basis. It will do so from time to time, and there are costs
associated with currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to
the fund at one rate, while offering a lesser rate of exchange should the
fund desire to resell that currency to the dealer.
Federal Tax Treatment of Options, Futures Contracts, and Forward Foreign
Exchange Contracts
The fund may enter into certain options, futures, forward foreign exchange
contracts, and swaps, including options and futures on currencies, which will
be treated as Section 1256 contracts or straddles.
These transactions may be considered Section 1256 contracts will be
considered to have been closed at the end of the fund's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains
or losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain (taxable at a maximum rate of
20%) or loss and 40% short-term capital gain or loss regardless of the
holding period of the instrument (ordinary income or loss for foreign
exchange contracts). The fund will be required to distribute net gains on
such transactions to shareholders even though it may not have closed the
transaction and received cash to pay such distributions.
Options, futures, forward foreign exchange contracts, and swaps, including
options and futures on currencies, which offset a foreign dollar-denominated
bond or currency position, may be considered straddles for tax purposes, in
which case a loss on any position in a straddle will be subject to deferral
to the extent of unrealized gain in an offsetting position. The holding
period of the securities or currencies comprising the straddle will be deemed
not to begin until the straddle is terminated. The holding period of the
security offsetting an "in-the-money qualified covered call" option on an
equity security will not include the period of time the option is
outstanding.
Losses on written covered calls and purchased puts on securities, excluding
certain "qualified covered call" options on equity securities, may be
long-term capital losses, if the security covering the option was held for
more than 12 months prior to the writing of the option.
In order for the fund to continue to qualify for federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income, i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Tax regulations could be issued limiting the extent
that net gain realized from options, futures, or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement.
Entering into certain options, futures contracts, swaps, or foreign forward
contracts may result in the "constructive sale" of offsetting stocks or debt
securities of the fund. See "Portfolio Management Practices-Short Sales" for
further discussion.
The Internal Revenue Service has issued a notice proposing alternative
methods for the inclusion or deduction of certain payments made under swap
contracts. Although not anticipated, it is possible that final rules could
result in changes to the amounts recorded by the fund, potentially impacting
the tax results of the fund.
INVESTMENT RESTRICTIONS
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Fundamental policies may not be changed without the approval of the lesser of
(1) 67% of the fund's shares present at a meeting of shareholders if the
holders of more than 50% of the outstanding shares are present in person or
by proxy or (2) more than 50% of a fund's outstanding shares. Other
restrictions in the form of operating policies are subject to change by the
fund's Board of Directors/Trustees without shareholder approval. Any
investment restriction which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowings by, the fund. Calculation of the
fund's total assets for compliance with any of the following fundamental or
operating policies or any other investment restrictions set forth in the
fund's prospectus or Statement of Additional Information will not include
cash collateral held in connection with securities lending activities.
Fundamental Policies
As a matter of fundamental policy, the fund may not:
(1) Borrowing Borrow money except that the fund may (i) borrow for
non-leveraging, temporary, or emergency purposes; and (ii) engage in
reverse repurchase agreements and make other investments or engage in
other transactions, which may involve a borrowing, in a manner consistent
with the fund's investment objective and program, provided that the
combination of (i) and (ii) shall not exceed 33/1//\\/3/\\% of the value
of the fund's total assets (including the amount borrowed) less
liabilities (other than borrowings) or such other percentage permitted by
law. Any borrowings which come to exceed this amount will be reduced in
accordance with applicable law. The fund may borrow from banks, other
Price Funds, or other persons to the extent permitted by applicable law;
(2) Commodities Purchase or sell physical commodities; except that the fund
(other than the Prime Reserve, U.S. Treasury Money, Government Reserve
Investment, and Reserve Investment Funds) may enter into futures
contracts and options thereon;
(3) (a)
Industry Concentration (All funds except High Yield, New Income, Prime
Reserve, Reserve Investment, and Short-Term Bond Funds) Purchase the
securities of any issuer if, as a result, more than 25% of the value of
the fund's total assets would be invested in the securities of issuers
having their principal business activities in the same industry;
(b)
Industry Concentration (High Yield Fund) Purchase the securities of any
issuer if, as a result, more than 25% of the value of the fund's total
assets would be invested in the securities of issuers having their
principal business activities in the same industry; provided, however,
that the fund will normally concentrate 25% or more of its assets in
securities of the banking industry when the fund's position in issues
maturing in one year or less equals 35% or more of the fund's total
assets;
(c) Industry Concentration (New Income Fund) Purchase the securities of
any issuer if, as a result, more than 25% of the value of the fund's
total assets would be invested in the securities of issuers having their
principal business activities in the same industry; provided, however,
that the fund will invest more than 25% of its total assets, but not more
than 50%, in any one of the gas utility, gas transmission utility,
electric utility, telephone utility, and petroleum industries under
certain circumstances, and further provided that this limitation does not
apply to securities of the banking industry including, but not limited
to, certificates of deposit and banker's acceptances;
(d)
Industry Concentration (Prime Reserve and Reserve Investment Funds)
Purchase the securities of any issuer if, as a result, more than 25% of
the value of the fund's total assets would be invested in the securities
of issuers having their principal business activities in the same
industry; provided, however, that this limitation does not apply to
securities of the banking industry including, but not limited to,
certificates of deposit and banker's acceptances; and
(e)
Industry Concentration (Short-Term Bond Fund) Purchase the securities of
any issuer if, as a result, more than 25% of the value of the fund's
total assets would be invested in the securities of issuers having their
principal business activities in the same industry; provided, however,
that the fund will normally invest more than 25% of its total assets in
the securities of the banking industry including, but not limited to,
bank certificates of deposit and banker's acceptances when the fund's
position in issues maturing in one year or less equals 35% or more of the
fund's total assets; provided, further, that the fund will invest more
than 25% of its total assets, but not more than 50%, in any one of the
gas utility, gas transmission utility, electric utility, telephone
utility, and petroleum industries under certain circumstances;
(4) Loans Make loans, although the fund may (i) lend portfolio securities and
participate in an interfund lending program with other Price Funds
provided that no such loan may be made if, as a result, the aggregate of
such loans would exceed 33/1//\\/3/\\% of the value of the fund's total
assets; (ii) purchase money market securities and enter into repurchase
agreements; and (iii) acquire publicly distributed or privately placed
debt securities and purchase debt;
(5) Percent Limit on Assets Invested in Any One Issuer Purchase a security
if, as a result, with respect to 75% of the value of its total assets,
more than 5% of the value of the fund's total assets would be invested in
the securities of a single issuer, except securities issued or guaranteed
by the U.S. government or any of its agencies or instrumentalities;
(6) Percent Limit on Share Ownership of Any One Issuer Purchase a security
if, as a result, with respect to 75% of the value of the fund's total
assets, more than 10% of the outstanding voting securities of any issuer
would be held by the fund (other than obligations issued or guaranteed by
the U.S. government, its agencies, or instrumentalities);
(7) Real Estate Purchase or sell real estate, including limited partnership
interests therein, unless acquired as a result of ownership of securities
or other instruments (but this shall not prevent the fund from investing
in securities or other instruments backed by real estate or securities of
companies engaged in the real estate business);
(8) Senior Securities Issue senior securities except in compliance with the
1940 Act; or
(9) Underwriting Underwrite securities issued by other persons, except to the
extent that the fund may be deemed to be an underwriter within the
meaning of the 1933 Act in connection with the purchase and sale of its
portfolio securities in the ordinary course of pursuing its investment
program.
NOTES
The following Notes should be read in connection with the above-described
fundamental policies. The Notes are not fundamental policies.
With respect to investment restriction (1), the Government Reserve
Investment, Prime Reserve, Reserve Investment, and U.S. Treasury Money
Funds have no current intention of engaging in any borrowing
transactions.
With respect to investment restriction (2), the fund does not consider
currency contracts or hybrid investments to be commodities.
For purposes of investment restriction (3), U.S., state, or local
governments, or related agencies or instrumentalities, are not considered
an industry. Industries are determined by reference to the
classifications of industries set forth in the fund's semiannual and
annual reports. It is the position of the staff of the SEC that foreign
governments are industries for purposes of this restriction.
For purposes of investment restriction (4), the fund will consider the
acquisition of a debt security to include the execution of a note or
other evidence of an extension of credit with a term of more than nine
months.
For purposes of investment restriction (5), the fund will consider a
repurchase agreement fully collateralized with U.S. government securities
to be U.S. government securities.
Operating Policies
As a matter of operating policy, the fund may not:
(1) Borrowing Purchase additional securities when money borrowed exceeds 5%
of its total assets;
(2) Control of Portfolio Companies Invest in companies for the purpose of
exercising management or control;
(3) (a)
Equity Securities (All funds, except High Yield and New Income Funds)
Purchase any equity security or security convertible into an equity
security except as set forth in its prospectus and operating policy on
investment companies;
(b)
Equity Securities (High Yield Fund) Invest more than 20% of the fund's
total assets in equity securities (including up to 10% in warrants);
(c)
Equity Securities (New Income Fund) Invest more than 25% of the fund's
total assets in equity securities;
(4) Futures Contracts Purchase a futures contract or an option thereon, if,
with respect to positions in futures or options on futures which do not
represent bona fide hedging, the aggregate initial margin and premiums on
such options would exceed 5% of the fund's net asset value;
(5) Illiquid Securities Purchase illiquid securities if, as a result, more
than 15% (10% for the Government Reserve Investment, Prime Reserve,
Reserve Investment, and U.S. Treasury Money Funds) of its net assets
would be invested in such securities;
(6) Investment Companies Purchase securities of open-end or closed-end
investment companies except (i) in compliance with the 1940 Act; (ii)
securities of the Government Reserve Investment and Reserve Investment
Funds; or (iii) in the case of the Government Reserve Investment, Prime
Reserve, Reserve Investment, and U.S. Treasury Money Funds, only
securities of other money market funds;
(7) Margin Purchase securities on margin, except (i) for use of short-term
credit necessary for clearance of purchases of portfolio securities and
(ii) it may make margin deposits in connection with futures contracts or
other permissible investments;
(8) Mortgaging Mortgage, pledge, hypothecate, or, in any manner, transfer any
security owned by the fund as security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and
then such mortgaging, pledging, or hypothecating may not exceed
33/1//\\/3/\\% of the fund's total assets at the time of borrowing or
investment;
(9) Oil and Gas Programs Purchase participations or other direct interests
in, or enter into leases with respect to oil, gas, or other mineral
exploration or development programs if, as a result thereof, more than 5%
of the value of the total assets of the fund would be invested in such
programs;
(10) Options, etc. Invest in puts, calls, straddles, spreads, or any
combination thereof, except to the extent permitted by the prospectus and
Statement of Additional Information;
(11) (a) Short Sales (All funds except High Yield Fund) Effect short sales of
securities;
(b)
Short Sales (High Yield Fund) Effect short sales of securities, other
than as set forth in its prospectus and Statement of Additional
Information; or
(12) Warrants Invest in warrants if, as a result thereof, more than 10% of
the value of the net assets of the fund would be invested in warrants.
Personal Strategy Funds
Notwithstanding anything in the above fundamental and operating restrictions
to the contrary, the fund may invest all of its assets in a single investment
company or a series thereof in connection with a "master-feeder" arrangement.
Such an investment would be made where the fund (a "Feeder"), and one or more
other funds with the same investment objective and program as the fund,
sought to accomplish its investment objective and program by investing all of
its assets in the shares of another investment company (the "Master"). The
Master would, in turn, have the same investment objective and program as the
fund. The fund would invest in this manner in an effort to achieve the
economies of scale associated with having a Master fund make investments in
portfolio companies on behalf of a number of Feeder funds.
MANAGEMENT OF THE FUNDS
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The officers and directors/trustees of the fund are listed below. Unless
otherwise noted, the address of each is 100 East Pratt Street, Baltimore,
Maryland 21202. Except as indicated, each has been an employee of T. Rowe
Price for more than five years. In the list below, the fund's
directors/trustees who are considered "interested persons" of T. Rowe Price
as defined under Section 2(a)(19) of the 1940 Act are noted with an asterisk
(*).
These directors/trustees are referred to as inside directors by virtue of
their officership, directorship, and/or employment with T. Rowe Price.
Independent Directors/Trustees/(a)/
Name, Date of Birth, Address, and
Principal Occupations/a/ Title and Fund(s) Served
-------------------------------------------------------------------------------
Calvin W. Burnett, Ph.D., 3/16/32 Director/Trustee, all funds except
2500 West North Avenue, Baltimore, Personal Strategy Funds
Maryland 21216
President, Coppin State College; Director,
Provident Bank of Maryland
-------------------------------------------------------------------------------
Anthony W. Deering, 1/28/45 Director/Trustee, all funds except
10275 Little Patuxent Parkway, Columbia, Personal Strategy Funds
Maryland 21044
Director, Chairman of the Board,
President, and Chief Executive Officer,
The Rouse Company, real estate developers
-------------------------------------------------------------------------------
Donald W. Dick, Jr., 1/27/43 Director, Personal Strategy Funds
EuroCapital Advisors, LLC, P.O. Box 491,
Chilmark,
Massachusetts 02535
Principal, EuroCapital Advisors, LLC, an
acquisition and management advisory firm;
Director, ThinkSharp, Inc. (1/98 to
present), The Haven Group, f/k/a Haven
Acquisition Corp. (6/98 to present), Haven
Homes, Inc. (6/98 to present), LaPointe
International Corp. (since 3/99),
LaPointe, Ltd. (UK) (since 7/99), and
Sequor Industries, N.V. (The Netherlands)
-------------------------------------------------------------------------------
David K. Fagin, 4/9/38 Director, Personal Strategy Funds
33 Glenmoor Drive, Englewood, Colorado
80110-7115
Director, Dayton Mining Corporation (6/98
to present), Golden Star Resources Ltd.,
and Canyon Resources, Corp.
(5/00 to present); Chairman and President,
Nye Corporation; formerly, Director,
Nescor Corporation and Chairman of the
Board and Director, Western Exploration
and Development, Ltd.
-------------------------------------------------------------------------------
F. Pierce Linaweaver, 8/22/34 Director/Trustee, all funds except
Green Spring Station, 2360 West Joppa Personal Strategy Funds
Road, Suite 224,
Lutherville, Maryland 21093
President, F. Pierce Linaweaver &
Associates, Inc., consulting environmental
and civil engineers; Director,
Daft-McCune-Walker, Inc. (1998 to present)
-------------------------------------------------------------------------------
Hanne M. Merriman, 11/16/41 Director, Personal Strategy Funds
3201 New Mexico Avenue, N.W., Suite 350,
Washington, D.C.
20016
Retail Business Consultant; Director, Ann
Taylor Stores Corporation, Central
Illinois Public Service Company, Ameren
Corp., Finlay Enterprises, Inc., The Rouse
Company, State Farm Mutual Automobile
Insurance Company, and US Airways Group,
Inc.
-------------------------------------------------------------------------------
John G. Schreiber, 10/21/46 Director/Trustee, all funds except
Centaur Capital Partners, One Westminster Personal Strategy Funds
Place, Suite 300,
Lake Forest, Illinois 60045
Owner/President, Centaur Capital Partners,
Inc., a real estate investment company;
Director, AMLI Residential Properties
Trust, The Brickman Group, Ltd., and Host
Marriott Corporation; Partner, Blackstone
Real Estate Partners, L.P.; Director, and
formerly Executive Vice President, JMB
Realty Corporation
-------------------------------------------------------------------------------
Hubert D. Vos, 8/2/33 Director, Personal Strategy Funds
1114 State Street, Suite 247, P.O. Box
90409, Santa Barbara,
California 93190-0409
Owner/President, Stonington Capital
Corporation, a private investment company
-------------------------------------------------------------------------------
Paul M. Wythes, 6/23/33 Director, Personal Strategy Funds
755 Page Mill Road, Suite A200, Palo Alto,
California
94304-1005
Founding Partner of Sutter Hill Ventures,
a venture capital limited partnership,
providing equity capital to young high
technology companies throughout the United
States; Director, Teltone Corporation and
Sutter Hill Investments Maritius Ltd.
-------------------------------------------------------------------------------
(a) Unless otherwise indicated, the Independent Directors/Trustees have been at
their respective companies for at least five years.
Inside Directors/Trustees/Officers
Name, Date of Birth, Address, and
Principal Occupations Title and Fund(s) Served
-------------------------------------------------------------------------------
Connice A. Bavely, 3/5/51 President, GNMA Fund; Vice
Vice President, T. Rowe Price and T. Rowe President, New Income and
Price Group, Inc. Short-Term Bond Funds
-------------------------------------------------------------------------------
Stephen W. Boesel, 12/28/44 Executive Vice President, Personal
Managing Director, T. Rowe Price and T. Strategy Funds
Rowe Price Group, Inc.; Vice President,
T. Rowe Price Trust Company
-------------------------------------------------------------------------------
Brian J. Brennan, 7/14/64 Vice President, New Income Fund
Vice President, T. Rowe Price and T. Rowe
Price Group, Inc.
-------------------------------------------------------------------------------
Andrew M. Brooks, 2/16/56 Vice President, High Yield Fund
Vice President, T. Rowe Price and T. Rowe
Price Group, Inc.
-------------------------------------------------------------------------------
Steven G. Brooks, 8/5/54 Vice President, Corporate Income
Vice President, T. Rowe Price and T. Rowe and Short-Term Bond Funds
Price Group, Inc.
-------------------------------------------------------------------------------
Brian E. Burns, 10/6/60 Vice President, Prime Reserve,
Assistant Vice President, T. Rowe Price Reserve Investment, and U.S.
Treasury Funds
-------------------------------------------------------------------------------
Joseph A. Carrier, 12/30/60 Treasurer, all funds
Vice President, T. Rowe Price, T. Rowe
Price Group, Inc., and T. Rowe Price
Investment Services, Inc.
-------------------------------------------------------------------------------
Patrick S. Cassidy, 8/27/64 Vice President, Corporate Income,
Vice President, T. Rowe Price and T. Rowe New Income, Prime Reserve, Reserve
Price Group, Inc. Investment, and Short-Term Bond
Funds
-------------------------------------------------------------------------------
Jerome A. Clark, 1/2/61 Vice President, U.S. Treasury Funds
Vice President, T. Rowe Price, T. Rowe
Price Group, Inc., T. Rowe Price
Investment Services, and T. Rowe Price
Trust Company
-------------------------------------------------------------------------------
Robert N. Gensler, 10/18/57 Vice President, High Yield Fund
Vice President, T. Rowe Price and T. Rowe
Price Group, Inc.
-------------------------------------------------------------------------------
Charles B. Hill, 9/22/61 Vice President, Short-Term Bond and
Vice President, T. Rowe Price and T. Rowe U.S. Treasury Funds
Price Group, Inc.
-------------------------------------------------------------------------------
Henry H. Hopkins, 12/23/42 Vice President, all funds
Managing Director, T. Rowe Price;
Director and Managing Director, T. Rowe
Price Group, Inc.; Vice President, T.
Rowe Price International, Inc. and T.
Rowe Price Retirement Plan Services,
Inc.; Vice President and Director, T.
Rowe Price Investment Services, Inc., T.
Rowe Price Services, Inc., and T. Rowe
Price Trust Company
-------------------------------------------------------------------------------
Paul A. Karpers, 11/14/67 Vice President, High Yield Fund
Vice President, T. Rowe Price and T. Rowe
Price Group, Inc.
-------------------------------------------------------------------------------
*James A.C. Kennedy, 8/17/53 Director, Personal Strategy Funds
Director and Managing Director, T. Rowe
Price and T. Rowe Price Group, Inc.;
Chartered Financial Analyst
-------------------------------------------------------------------------------
J. Jeffrey Lang, 1/10/62 Vice President, Personal Strategy
Vice President, T. Rowe Price and T. Rowe Funds
Price Trust Company
-------------------------------------------------------------------------------
John H. Laporte, 7/26/45 Vice President, Personal Strategy
Managing Director, T. Rowe Price; Funds
Managing Director and Director, T. Rowe
Price Group, Inc.
-------------------------------------------------------------------------------
Alan D. Levenson, 7/17/58 Vice President, GNMA, New Income,
Vice President, T. Rowe Price and T. Rowe and U.S. Treasury Funds
Price Group, Inc.; formerly Senior Vice
President and Director of Research at
Aubrey G. Lanston & Co., Inc.
-------------------------------------------------------------------------------
Nathaniel S. Levy, 7/13/62 Vice President, High Yield Fund
Vice President, T. Rowe Price and T. Rowe
Price Group, Inc.
-------------------------------------------------------------------------------
Patricia B. Lippert, 1/12/53 Secretary, all funds
Assistant Vice President, T. Rowe Price
and T. Rowe Price Investment Services,
Inc.
-------------------------------------------------------------------------------
Kevin P. Loome, 10/19/67 Vice President, High Yield Fund
Vice President, T. Rowe Price, T. Rowe
Price Group, Inc., and T. Rowe Price
International, Inc.
-------------------------------------------------------------------------------
Joseph K. Lynagh, 6/9/58 Vice President, Prime Reserve,
Vice President, T. Rowe Price and T. Rowe Reserve Investment, and U.S.
Price Group, Inc.; formerly Corporate Treasury Funds
Banking Officer with NationsBank;
Chartered Financial Analyst
-------------------------------------------------------------------------------
James M. McDonald, 9/29/49 Executive Vice President, Prime
Vice President, T. Rowe Price, T. Rowe Reserve and Reserve Investment
Price Group, Inc., and T. Rowe Price Funds; Vice President, U.S.
Trust Company Treasury Funds
-------------------------------------------------------------------------------
Michael J. McGonigle, 10/14/66 Vice President, High Yield Fund
Vice President, T. Rowe Price and T. Rowe
Price Group, Inc.
-------------------------------------------------------------------------------
Cheryl A. Mickel, 1/11/67 Vice President, Short-Term Bond and
Vice President, T. Rowe Price and T. Rowe U.S. Treasury Funds
Price Group, Inc.
-------------------------------------------------------------------------------
David S. Middleton, 1/18/56 Controller, all funds
Vice President, T. Rowe Price, T. Rowe
Price Group, Inc., and T. Rowe Price
Trust Company
-------------------------------------------------------------------------------
M Christine Munoz, 12/2/62 Vice President, Personal Strategy
Assistant Vice President, T. Rowe Price Funds
-------------------------------------------------------------------------------
Edmund M. Notzon, 10/1/45 President, Personal Strategy Funds;
Managing Director, T. Rowe Price and T. Vice President, GNMA and New Income
Rowe Price Group, Inc.; Vice President, Funds
T. Rowe Price Investment Services, Inc.
and T. Rowe Price Trust Company
-------------------------------------------------------------------------------
Donald J. Peters, 7/3/59 Vice President, Personal Strategy
Vice President, T. Rowe Price and T. Rowe Funds
Price Group, Inc.
-------------------------------------------------------------------------------
Joan R. Potee, 11/23/47 Vice President, Prime Reserve,
Vice President, T. Rowe Price and T. Rowe Reserve Investment, and U.S.
Price Group, Inc. Treasury Funds
-------------------------------------------------------------------------------
Larry J. Puglia, 8/25/60 Executive Vice President, Personal
Managing Director, T. Rowe Price and T. Strategy Funds
Rowe Price Group, Inc.; Chartered
Financial Analyst
-------------------------------------------------------------------------------
Vernon A. Reid Jr., 5/14/54 Vice President, Corporate Income,
Vice President, T. Rowe Price and T. Rowe New Income, and U.S. Treasury Funds
Price Group, Inc.
-------------------------------------------------------------------------------
*William T. Reynolds, 5/26/48 Director/Trustee, all funds except
Director and Managing Director, T. Rowe Personal Strategy Funds; Chairman
Price and T. Rowe Price Group, Inc.; of the Board, Corporate Income,
Chartered Financial Analyst High Yield, Prime Reserve, Reserve
Investment, and Short-Term Bond
Funds; President, New Income and
U.S. Treasury Funds; Vice
President, Personal Strategy Funds
-------------------------------------------------------------------------------
*James S. Riepe, 6/25/43 Director/Trustee and Vice
Vice Chairman of the Board, Director, and President, all funds
Managing Director, T. Rowe Price Group,
Inc.; Director and Managing Director, T.
Rowe Price; Chairman of the Board, T.
Rowe Price Investment Services, Inc., T.
Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Services, Inc.;
Chairman of the Board, President and
Trust Officer, T. Rowe Price Trust
Company; Director, T. Rowe Price
International, Inc.
-------------------------------------------------------------------------------
Brian C. Rogers, 6/27/55 Vice President, Personal Strategy
Managing Director, T. Rowe Price; Funds
Director and Managing Director, T. Rowe
Price Group, Inc.; Vice President, T.
Rowe Price Trust Company
-------------------------------------------------------------------------------
Robert M. Rubino, 8/2/53 President, Corporate Income Fund;
Vice President, T. Rowe Price and T. Rowe Vice President, New Income and
Price Group, Inc. Short-Term Bond Funds
-------------------------------------------------------------------------------
Daniel O. Shackelford, 3/11/58 Vice President, New Income and U.S.
Vice President, T. Rowe Price and T. Rowe Treasury Funds
Price Group, Inc.
-------------------------------------------------------------------------------
Hubert M. Stiles, Jr., 6/22/47 Vice President, High Yield Fund
Vice President, T. Rowe Price and T. Rowe
Price Group, Inc.
-------------------------------------------------------------------------------
Walter P. Stuart, 3/27/60 Vice President, High Yield Fund
Assistant Vice President, T. Rowe Price
-------------------------------------------------------------------------------
*M. David Testa, 4/22/44 Director/Trustee, all funds
Vice Chairman of the Board, Chief
Investment Officer, Director, and
Managing Director, T. Rowe Price Group,
Inc.; Chief Investment Officer, Director,
and Managing Director, T. Rowe Price;
Vice President and Director, T. Rowe
Price Trust Company; Director, T. Rowe
Price International, Inc.; Chartered
Financial Analyst
-------------------------------------------------------------------------------
Thomas E. Tewksbury, 8/1/61 Vice President, High Yield Fund
Vice President, T. Rowe Price and T. Rowe
Price Group, Inc.
-------------------------------------------------------------------------------
Susan G. Troll, 8/27/66 Vice President, Prime Reserve Fund
Vice President, T. Rowe Price and T. Rowe
Price Group, Inc.
-------------------------------------------------------------------------------
Mark J. Vaselkiv, 7/22/58 President, High Yield Fund;
Managing Director, T. Rowe Price and T. Executive Vice President, Corporate
Rowe Price Group, Inc. Income Fund; Vice President,
Personal Strategy Funds
-------------------------------------------------------------------------------
John Wells, 8/17/70 Vice President, GNMA Fund
Vice President, T. Rowe Price and T. Rowe
Price Group, Inc.
-------------------------------------------------------------------------------
Richard T. Whitney, 5/7/58 Vice President, Personal Strategy
Managing Director, T. Rowe Price and T. Funds
Rowe Price Group, Inc.; Vice President,
T. Rowe Price Trust Company and T. Rowe
Price International, Inc.
-------------------------------------------------------------------------------
Edward A. Wiese, 4/12/59 President, Prime Reserve, Reserve
Vice President, T. Rowe Price, T. Rowe Investment, and Short-Term Bond
Price Group, Inc., and T. Rowe Price Funds; Executive Vice President,
Trust Company; Vice President, Director, U.S. Treasury Funds
and Chief Investment Officer, T. Rowe
Price Savings Bank; Chartered Financial
Analyst
-------------------------------------------------------------------------------
Thea N. Williams, 12/20/61 Vice President, Corporate Income
Vice President, T. Rowe Price and T. Rowe and High Yield Funds
Price Group, Inc.
-------------------------------------------------------------------------------
Compensation Table
The fund does not pay pension or retirement benefits to its officers or
directors/trustees. Also, any director/trustee of the fund who is an officer
or employee of T. Rowe Price or T. Rowe Price International does not receive
any remuneration from the fund.
Name of Person, Aggregate Compensation from Total Compensation from Fund and
Position Fund(a) Fund Complex Paid to Directors/
-------- -------------------------------------------- Trustees(b)
--------------------------------------------------
-----------------------
Corporate Income Fund
Calvin W. Burnett, Ph.D.,
Trustee $1,373 $83,750
Anthony W. Deering, Trustee 1,607 92,500
F. Pierce Linaweaver, Trustee 1,411 85,750
John G. Schreiber, Trustee 1,411 85,750
-----------------------------------------------------------------------------------------------------------------------------------
GNMA Fund
Calvin W. Burnett, Ph.D.,
Trustee $2,388 $83,750
Anthony W. Deering, Trustee 2,796 92,500
F. Pierce Linaweaver, Trustee 2,454 85,750
John G. Schreiber, Trustee 2,454 85,750
-----------------------------------------------------------------------------------------------------------------------------------
High Yield Fund
Calvin W. Burnett, Ph.D.,
Director $2,864 $83,750
Anthony W. Deering, Director 3,352 92,500
F. Pierce Linaweaver, Director 2,943 85,750
John G. Schreiber, Director 2,943 85,750
-----------------------------------------------------------------------------------------------------------------------------------
New Income Fund
Calvin W. Burnett, Ph.D.,
Director $3,003 $83,750
Anthony W. Deering, Director 3,515 92,500
F. Pierce Linaweaver, Director 3,086 85,750
John G. Schreiber, Director 3,086 85,750
-----------------------------------------------------------------------------------------------------------------------------------
Personal Strategy Balanced Fund
Donald W. Dick, Jr., Director $1,403 $92,500
David K. Fagin, Director 1,199 83,750
Hanne M. Merriman, Director 1,199 83,750
Hubert D. Vos, Director 1,232 85,750
Paul M. Wythes, Director 1,435 94,500
-----------------------------------------------------------------------------------------------------------------------------------
Personal Strategy Growth Fund
Donald W. Dick, Jr., Director $1,287 $92,500
David K. Fagin, Director 1,100 83,750
Hanne M. Merriman, Director 1,100 83,750
Hubert D. Vos, Director 1,130 85,750
Paul M. Wythes, Director 1,318 94,500
-----------------------------------------------------------------------------------------------------------------------------------
Personal Strategy Income Fund
Donald W. Dick, Jr., Director $1,267 $92,500
David K. Fagin, Director 1,083 83,750
Hanne M. Merriman, Director 1,083 83,750
Hubert D. Vos, Director 1,113 85,750
Paul M. Wythes, Director 1,297 94,500
-----------------------------------------------------------------------------------------------------------------------------------
Prime Reserve Fund
Calvin W. Burnett, Ph.D.,
Director $6,981 $83,750
Anthony W. Deering, Director 8,170 92,500
F. Pierce Linaweaver, Director 7,173 85,750
John G. Schreiber, Director 7,173 85,750
-----------------------------------------------------------------------------------------------------------------------------------
Short-Term Bond Fund
Calvin W. Burnett, Ph.D.,
Director $1,691 $83,750
Anthony W. Deering, Director 1,980 92,500
F. Pierce Linaweaver, Director 1,739 85,750
John G. Schreiber, Director 1,739 85,750
-----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Intermediate Fund
Calvin W. Burnett, Ph.D.,
Director $1,557 $83,750
Anthony W. Deering, Director 1,822 92,500
F. Pierce Linaweaver, Director 1,600 85,750
John G. Schreiber, Director 1,600 85,750
-----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Long-Term Fund
Calvin W. Burnett, Ph.D.,
Director $1,629 $83,750
Anthony W. Deering, Director 1,907 92,500
F. Pierce Linaweaver, Director 1,674 85,750
John G. Schreiber, Director 1,674 85,750
-----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Money Fund
Calvin W. Burnett, Ph.D.,
Director $2,250 $83,750
Anthony W. Deering, Director 2,634 92,500
F. Pierce Linaweaver, Director 2,312 85,750
John G. Schreiber, Director 2,312 85,750
-----------------------------------------------------------------------------------------------------------------------------------
(a) Amounts in this column are based on accrued compensation for fiscal year
2001.
(b) Amounts in this column are based on compensation received for the
calendar year 2001. The T. Rowe Price complex included 95 funds as of
December 31, 2000.
Note: GRF and RIF will not incur director's fees.
All funds
The fund's Executive Committee, consisting of the fund's interested
directors/trustees, has been authorized by its respective Board of
Directors/Trustees to exercise all powers of the Board to manage the fund in
the intervals between meetings of the Board, except the powers prohibited by
statute from being delegated.
PRINCIPAL HOLDERS OF SECURITIES
-------------------------------------------------------------------------------
As of August 31, 2001, the officers and directors/trustees of the fund, as a
group, owned less than 1% of the outstanding shares of the fund.
As of August 31, 2001, the following shareholders of record owned more than
5% of the outstanding shares of any share class of the fund:
Corporate Income Fund: T. Rowe Price RPS Inc., OMNIPLAN Account, Corporate
Income Fund, Fund #02/112, P.O. Box 17215, Baltimore, Maryland 21297-1215;
GNMA: Yachtcrew & Co., T. Rowe Price Associates, Inc., Attn.: Fund Accounting
Department, 100 East Pratt Street, Baltimore, Maryland 21202-1009; T. Rowe
Price Trust Company, Inc., Attn.: RPS Control Department, 10090 Red Run
Boulevard, Owings Mills, Maryland 21117-4842;
High Yield Fund: Yachtcrew & Co., T. Rowe Price Associates, Inc., Attn.: Fund
Accounting Department, 100 East Pratt Street, Baltimore, Maryland 21202-1009;
New Income Fund: Yachtcrew & Co., T. Rowe Price Associates, Inc., Attn.: Fund
Accounting Department, 100 East Pratt Street, Baltimore, Maryland 21202-1009;
T. Rowe Price Trust Company, Inc., Attn.: TRPS Inst. Control Department, P.O.
Box 17215, Baltimore, Maryland 21297-1215;
Personal Strategy Balanced Fund: T. Rowe Price Trust Company Tr. Balanced,
Attn.: Asset Reconciliation, P.O. Box 17215, Baltimore, Maryland 21297-1215;
Personal Strategy Growth Fund: T. Rowe Price Trust Company Tr., Attn.: Growth
Asset, P.O. Box 17215, Baltimore, Maryland 21297-1215;
Personal Strategy Income Fund: T. Rowe Price Trust Company Tr. Income, Attn.:
Asset Reconciliation, P.O. Box 17215, Baltimore, Maryland 21297-1215;
Prime Reserve Fund: T. Rowe Price Trust Company, Inc., Attn.: TRPS Inst.
Control Department, P.O. Box 17215, Baltimore, Maryland 21297-1215;
Prime Reserve Fund-PLUS Class: Pershing Div. of DLJ Secs. Corp. for Exclusive
Benefit of TRP Money Fund Customer Accounts, 1 Pershing Plaza, Jersey City,
New Jersey, 07399-0002;
Short-Term Bond Fund: T. Rowe Price Trust Company, Inc., Attn.: TRPS Inst.
Control Department, P.O. Box 17215, Baltimore, Maryland 21297-1215;
U.S. Treasury Intermediate Bond Fund: T. Rowe Price Trust Company, Inc.,
Attn.: TRPS Inst. Control Department, P.O. Box 17215, Baltimore, Maryland
21297-1215;
U.S. Treasury Long-Term Bond Fund: Yachtcrew & Co., T. Rowe Price Associates,
Inc., Attn.: Fund Accounting Department, 100 East Pratt Street, Baltimore,
Maryland 21202-1009; T. Rowe Price Trust Company, Inc., Attn.: TRPS Inst.
Control Department, P.O. Box 17215, Baltimore, Maryland 21297-1215;
U.S. Treasury Money Fund: T. Rowe Price Trust Company, Inc., Attn.: TRPS
Inst. Control Department, P.O. Box 17215, Baltimore, Maryland 21297-1215; T.
Rowe Price Retirement Plan Service, Inc., Attn.: RPS Cash, 10090 Red Run
Boulevard, Owings Mills, Maryland 21117-4842.
INVESTMENT MANAGEMENT SERVICES
-------------------------------------------------------------------------------
Services
Under the Management Agreement, T. Rowe Price provides the fund with
discretionary investment services. Specifically, T. Rowe Price is responsible
for supervising and directing the investments of the fund in accordance with
the fund's investment objectives, program, and restrictions as provided in
its prospectus and this Statement of Additional Information. T. Rowe Price is
also responsible for effecting all security transactions on behalf of the
fund, including the negotiation of commissions and the allocation of
principal business and portfolio brokerage. In addition to these services, T.
Rowe Price provides the fund with certain corporate administrative services,
including: maintaining the fund's corporate existence and corporate records;
registering and qualifying fund shares under federal laws; monitoring the
financial, accounting, and administrative functions of the fund; maintaining
liaison with the agents employed by the fund such as the fund's custodian and
transfer agent; assisting the fund in the coordination of such agents'
activities; and permitting T. Rowe Price's employees to serve as officers,
directors/trustees, and committee members of the fund without cost to the
fund.
The Management Agreement also provides that T. Rowe Price, its
directors/trustees, officers, employees, and certain other persons performing
specific functions for the fund will only be liable to the fund for losses
resulting from willful misfeasance, bad faith, gross negligence, or reckless
disregard of duty.
All funds except Government Reserve Investment and Reserve Investment Funds
Management Fee
The fund pays T. Rowe Price a fee ("Fee") which consists of two components: a
Group Management Fee ("Group Fee") and an Individual Fund Fee ("Fund Fee").
The Fee is paid monthly to T. Rowe Price on the first business day of the
next succeeding calendar month and is calculated as described next.
The monthly Group Fee ("Monthly Group Fee") is the sum of the daily Group Fee
accruals ("Daily Group Fee Accruals") for each month. The Daily Group Fee
Accrual for any particular day is computed by multiplying the Price Funds'
group fee accrual as determined below ("Daily Price Funds' Group Fee
Accrual") by the ratio of the Price Fund's net assets for that day to the sum
of the aggregate net assets of the Price Funds for that day. The Daily Price
Funds' Group Fee Accrual for any particular day is calculated by multiplying
the fraction of one (1) over the number of calendar days in the year by the
annualized Daily Price Funds' Group Fee Accrual for that day as determined in
accordance with the following schedule:
0.480% First $1 billion 0.360% Next $2 billion 0.310% Next $16 billion
------------------------------------------------------------------------------
0.450% Next $1 billion 0.350% Next $2 billion 0.305% Next $30 billion
------------------------------------------------------------------------------
0.420% Next $1 billion 0.340% Next $5 billion 0.300% Next $40 billion
------------------------------------------------------------------------------
0.390% Next $1 billion 0.330% Next $10 billion 0. Thereafter
295
%
------------------------------------------------------------------------------
0.370% Next $1 billion 0.320% Next $10 billion
For the purpose of calculating the Group Fee, the Price Funds include all the
mutual funds distributed by Investment Services, (excluding the T. Rowe Price
Spectrum Funds, and any institutional, index, or private label mutual funds).
For the purpose of calculating the Daily Price Funds' Group Fee Accrual for
any particular day, the net assets of each Price Fund are determined in
accordance with the fund's prospectus as of the close of business on the
previous business day on which the fund was open for business.
The monthly Fund Fee ("Monthly Fund Fee") is the sum of the daily Fund Fee
accruals ("Daily Fund Fee Accruals") for each month. The Daily Fund Fee
Accrual for any particular day is computed by multiplying the fraction of one
(1) over the number of calendar days in the year by the individual Fund Fee
Rate and multiplying this product by the net assets of the fund for that day,
as determined in accordance with the fund's prospectus as of the close of
business on the previous business day on which the fund was open for
business. The individual fund fees are listed in the following chart:
Corporate Income Fund 0.15%
GNMA Fund 0.15
High Yield Fund 0.30
New Income Fund 0.15
Personal Strategy Balanced Fund 0.25
Personal Strategy Growth Fund 0.30
Personal Strategy Income Fund 0.15
Prime Reserve Fund 0.05
Prime Reserve Fund-PLUS Class 0.05
Short-Term Bond Fund 0.10
U.S. Treasury Intermediate Fund 0.05
U.S. Treasury Long-Term Fund 0.05
U.S. Treasury Money Fund 0.00
The following chart sets forth the total management fees, if any, paid to T.
Rowe Price by each fund, during the last three years:
Fund 2001 2000 1999
---- ---- ---- ----
Corporate Income $ 124,000 $ 112,000 $ 71,000
GNMA 5,005,000 5,086,000 5,388,000
High Yield* 9,413,000 10,209,000 10,598,000
New Income 7,887,000 8,438,000 9,740,000
Personal Strategy Balanced 3,604,000 3,341,000 2,479,000
Personal Strategy Growth 1,696,000 1,493,000 1,010,000
Personal Strategy Income 914,000 1,044,000 897,000
Prime Reserve* 21,004,000 19,755,000 18,779,000
Short-Term Bond 1,219,000 1,276,000 1,423,000
U.S. Treasury Intermediate 869,000 901,000 931,000
U.S. Treasury Long-Term 1,128,000 1,200,000 1,150,000
U.S. Treasury Money 2,945,000 2,922,000 2,890,000
----------------------------
* The fund has two classes of shares. The management fee is allocated to
each class based on relative net assets.
Limitation on Fund Expenses
The Management Agreement between the fund and T. Rowe Price provides that the
fund will bear all expenses of its operations not specifically assumed by T.
Rowe Price.
The following chart sets forth expense ratio limitations and the periods for
which they are effective. For each, T. Rowe Price has agreed to bear any fund
expenses (other than interest, taxes, brokerage, and other expenditures that
are capitalized in accordance with generally accepted accounting principles
and extraordinary expenses) which would cause the fund's ratio of expenses to
average net assets to exceed the indicated percentage limitations. (The
expense limitation for the High Yield Fund-Advisor Class relates to operating
expenses other than management fees). The expenses borne by T. Rowe Price are
subject to reimbursement by the fund through the indicated reimbursement
date, provided no reimbursement will be made if it would result in the fund's
expense ratio exceeding its applicable limitation.
Expense Reimbursement
Fund Limitation Period ------- -------------
---- ----------------- Ratio Date
----- ----
Limitation
----------
June 1, 1999-May 31, May 31, 200
Corporate Income 2001 0.80% 3
High Yield March 31,
Fund-Advisor Class 2000-December 31, 2001 1.05% December 31, 2003
Personal Strategy June 1, 2000-May 31,
Income (a) 2002 0.90% May 31, 2004
Personal Strategy June 1, 2000-May 31,
Growth (b) 2002 1.10% May 31, 2004
Prime Reserve May 1, 2000-April 30, April 30, 200
Fund-PLUS Class (c) 2002 1.00% 4
May
November 1, 2000-May 3
Short-Term Bond 31, 2002 0.55% 1
, 2004
-------------------------------------------------------------------------------
(a) The Personal Strategy Income Fund previously operated under a 0.90%
limitation that expired May 31, 2000. The reimbursement period for this
limitation extends through May 31, 2002.
(b) The Personal Strategy Growth Fund previously operated under a 1.10%
limitation that expired May 31, 2000. The reimbursement period for this
limitation extends through May 31, 2002.
(c) The Prime Reserve Fund-PLUS Class previously operated under a 1.00%
limitation that expired April 30, 2000. The reimbursement period for this
limitation extends through April 30, 2002.
Each of the above-referenced fund's Management Agreement also provides that
one or more additional expense limitations periods (of the same or different
time periods) may be implemented after the expiration of the current expense
limitation, and that with respect to any such additional limitation period,
the fund may reimburse T. Rowe Price, provided the reimbursement does not
result in the fund's aggregate expenses exceeding the additional expense
limitation.
Corporate Income Fund
Pursuant to the current expense limitation, $118,000 of management fees were
not accrued by the fund for the year ended May 31, 2001, unaccrued fees in
the amount of $239,000 remain subject to reimbursement by the fund through
May 31, 2003.
Personal Strategy Growth Fund
Pursuant to the current expense limitation, $58,000 of management fees were
not accrued by the fund for the year ended May 31, 2001. At May 31, 2001,
unaccrued fees in the amount of $87,000 remain subject to reimbursement by
the fund through May 31, 2002, and $58,000 through May 31, 2004.
Personal Strategy Income Fund
Pursuant to the current expense limitation, $129,000 of management fees were
not accrued by the fund for the year ended May 31, 2001. At May 31, 2001,
unaccrued fees in the amount of $10,000 remain subject to reimbursement by
the fund through May 31, 2002, and $129,000 through May 31, 2004.
Short-Term Bond Fund
Pursuant to the current expense limitation, $425,000 of management fees were
not accrued by the fund for the year ended May 31, 2001. At May 31, 2001,
unaccrued fees in the amount of $425,000 remain subject to reimbursement by
the fund through May 31, 2004.
GNMA, High Yield, New Income, Short-Term Bond, and U.S. Treasury Long-Term
Funds
T. Rowe Price Spectrum Fund, Inc.
The funds listed above are a party to a Special Servicing Agreement
("Agreement") between and among T. Rowe Price Spectrum Fund, Inc. ("Spectrum
Fund"), T. Rowe Price, and various other T. Rowe Price funds which, along
with such fund, are funds in which Spectrum Fund invests (collectively all
such funds "Underlying Price Funds").
The Agreement provides that, if the Board of Directors/Trustees of any
underlying Price fund determines that such underlying fund's share of the
aggregate expenses of Spectrum Fund is less than the estimated savings to the
underlying Price fund from the operation of Spectrum Fund, the underlying
Price fund will bear those expenses in proportion to the average daily value
of its shares owned by Spectrum Fund, provided further that no underlying
Price fund will bear such expenses in excess of the estimated savings to it.
Such savings are expected to result primarily from the elimination of
numerous separate shareholder accounts which are or would have been invested
directly in the underlying Price funds and the resulting reduction in
shareholder servicing costs. Although such cost savings are not certain, the
estimated savings to the underlying Price funds generated by the operation of
Spectrum Fund are expected to be sufficient to offset most, if not all, of
the expenses incurred by Spectrum Fund.
Management Fee
Government Reserve Investment and Reserve Investment Funds
Neither fund pays T. Rowe Price an investment management fee.
Management Related Services
As noted above, the Management Agreement spells out the expenses to be paid
by the fund. In addition to the Management Fee, the fund pays for the
following: shareholder service expenses; custodial, accounting, legal, and
audit fees; costs of preparing and printing prospectuses and reports sent to
shareholders; registration fees and expenses; proxy and annual meeting
expenses (if any); and director/trustee fees and expenses.
T. Rowe Price Services, Inc., a wholly owned subsidiary of T. Rowe Price,
acts as the fund's transfer and dividend disbursing agent and provides
shareholder and administrative services. Services for certain types of
retirement plans are provided by T. Rowe Price Retirement Plan Services,
Inc., also a wholly owned subsidiary. The address for each is 100 East Pratt
Street, Baltimore, MD 21202. Additionally, T. Rowe Price, under a separate
agreement with the funds, provides accounting services to the funds.
The funds paid the expenses shown in the following table for the fiscal year
ended May 31, 2001, to T. Rowe Price and its affiliates.
Transfer Agent and Retirement
Fund ------------------ ---------- Accounting Services
---- Shareholder Services Subaccounting -------------------
-------------------- -------------
Services
--------
Corporate Income $ 63,000 $ 23,000 $ 84,000
GNMA 1,652,000 257,000 104,000
Government Reserve
Investment 5,000 -- 64,000
High Yield 2,387,000 206,000 142,000
High Yield
Fund-Advisor Class 1,000 -- 0(a)
New Income 2,257,000 1,440,000 106,000
Personal Strategy
Balanced 200,000 2,090,000 85,000
Personal Strategy
Growth 201,000 791,000 84,000
Personal Strategy
Income 79,000 670,000 84,000
Prime Reserve 5,269,000 4,053,000 98,000
Prime Reserve
Fund-PLUS Class 93,000 -- 1,000
Reserve Investment 0(a) -- 64,000
Short-Term Bond 434,000 316,000 84,000
U.S. Treasury
Intermediate 219,000 193,000 64,000
U.S. Treasury
Long-Term 565,000 57,000 64,000
U.S. Treasury Money 698,000 445,000 64,000
------------------------
(a) Less than $1,000.
SERVICES BY OUTSIDE PARTIES
-------------------------------------------------------------------------------
The shares of some fund shareholders are held in omnibus accounts maintained
by various third parties, including retirement plan sponsors, insurance
companies, banks, and broker-dealers. The fund has adopted an administrative
fee payment ("AFP") program that authorizes the fund to make payments to
these third parties. The payments are made for transfer agent, recordkeeping,
and other administrative services provided by, or on behalf of, the third
parties with respect to such shareholders and the omnibus accounts. Under the
AFP program, the funds paid the amounts set forth below to various third
parties in calendar year 2000.
GNMA Fund $ 2,287
High Yield Fund 30,180
New Income Fund 35,085
Personal Strategy Balanced Fund 14,149
Personal Strategy Growth Fund 13,740
Personal Strategy Income Fund 5,548
Prime Reserve Fund 14,804
Short-Term Bond Fund 253
U.S. Treasury Intermediate Fund 25,607
U.S. Treasury Money Fund 10,185
The Advisor Class has adopted an Advisor Class administrative fee payment
program ("Advisor Class AFP") under which various intermediaries, including
intermediaries receiving 12b-1 payments, may receive payments from the
Advisor Class in addition to 12b-1 fees for providing various recordkeeping
and transfer agent type services to the Advisor classes and/or shareholders
thereof. These services include, but are not limited to: transmission of net
purchase and redemption orders; maintenance of separate records for
shareholders reflecting purchases, redemptions, and share balances; mailing
of shareholder confirmations and periodic statements; and telephone services
in connection with the above. Under the Advisor Class AFP program, the funds
paid the amounts set forth below to various third parties in calendar year
2000
High Yield Fund-Advisor Class $1,043
Control of Investment Advisor
T. Rowe Price Group, Inc., ("Group") owns 100% of the stock of T. Rowe Price
Associates, Inc. Group was formed in 2000 as a holding company for the T.
Rowe Price affiliated companies.
All funds except Government Reserve Investment and Reserve Investment Funds
DISTRIBUTOR FOR THE FUND
-------------------------------------------------------------------------------
Investment Services, a Maryland corporation formed in 1980 as a wholly owned
subsidiary of T. Rowe Price, serves as the fund's distributor. Investment
Services is registered as a broker-dealer under the Securities Exchange Act
of 1934 and is a member of the National Association of Securities Dealers,
Inc. The offering of the fund's shares is continuous.
Investment Services is located at the same address as the fund and T. Rowe
Price-100 East Pratt Street, Baltimore, Maryland 21202.
Investment Services serves as distributor to the fund pursuant to an
Underwriting Agreement ("Underwriting Agreement"), which provides that the
fund will pay all fees and expenses in connection with: necessary state
filings; preparing, setting in type, printing, and mailing its prospectuses
and reports to shareholders; and issuing its shares, including expenses of
confirming purchase orders.
The Underwriting Agreement provides that Investment Services will pay all
fees and expenses in connection with: printing and distributing prospectuses
and reports for use in offering and selling fund shares; preparing, setting
in type, printing, and mailing all sales literature and advertising;
Investment Services' federal and state registrations as a broker-dealer; and
offering and selling fundshares, except for those fees and expenses
specifically assumed by the fund. Investment Services' expenses are paid by
T. Rowe Price.
Investment Services acts as the agent of the fund in connection with the sale
of its shares in the various states in which Investment Services is qualified
as a broker-dealer. Under the Underwriting Agreement, Investment Services
accepts orders for fund shares at net asset value. No sales charges are paid
by investors or the fund.
High Yield Fund-Advisor Class
Distribution and Shareholder Services Plan
The fund Directors/Trustees adopted a Plan pursuant to Rule 12b-1 on February
9, 2000 with respect to each Advisor Class. Each Plan provides that the
Advisor Class may compensate Investment Services or such other persons as the
fund or Investment Services designates, to finance any or all of the
distribution, shareholder servicing, maintenance of shareholder accounts,
and/or other administrative services with respect to Advisor Class shares. It
is expected that most, if not all, payments under the Plan will be made
(either directly, or indirectly through Investment Services) to brokers,
dealers, banks, insurance companies, and intermediaries other than Investment
Services. Under the Plan, each Advisor Class pays a fee at the annual rate of
up to 0.25% of that class's average daily net assets. Normally, the full
amount of the fee is paid to the intermediary on shares sold through that
intermediary. However, a lesser amount may be paid based on the level of
services provided. Intermediaries may use the payments for, among other
purposes, compensating employees engaged in sales and/or shareholder
servicing of the Advisor Class, as well as for a wide variety of other
purposes associated with supporting, distributing, and servicing the Advisor
Class shares. The amount of fees paid by an Advisor Class during any year may
be more or less than the cost of distribution and other services provided to
the Advisor Class and its investors. NASD rules limit the amount of annual
distribution and service fees that may be paid by a mutual fund and impose a
ceiling on the cumulative distribution fees paid. The Plan complies with
these rules.
The Plan requires that Investment Services provide, or cause to be provided,
to the fund Directors/Trustees for their review a quarterly written report
identifying the amounts expended by each Advisor Class and the purposes for
which such expenditures were made.
Prior to approving the Plan, the fund considered various factors relating to
the implementation of the Plan and determined that there is a reasonable
likelihood that the Plan will benefit each fund, its Advisor Class and the
Advisor Class's shareholders. The fund Directors/Trustees noted that to the
extent the Plan allows a fund to sell Advisor Class shares in markets to
which it would not otherwise have access, the Plan may result in additional
sales of fund shares. This may enable a fund to achieve economies of scale
that could reduce
expenses. In addition, certain ongoing shareholder services may be provided
more effectively by intermediaries with which shareholders have an existing
relationship.
The Plan continues until March 31, 2002. The Plan is renewable thereafter
from year to year with respect to each fund, so long as its continuance is
approved at least annually (1) by the vote of a majority of the fund
Directors/Trustees and (2) by a vote of the majority of the Rule 12b-1
Directors/Trustees, cast in person at a meeting called for the purpose of
voting on such approval. The Plan may not be amended to increase materially
the amount of fees paid by any Advisor Class thereunder unless such amendment
is approved by a majority vote of the outstanding shares of such Advisor
Class and by the fund Directors/Trustees in the manner prescribed by Rule
12b-1 under the 1940 Act. The Plan is terminable with respect to an Advisor
Class at any time by a vote of a majority of the Rule 12b-1
Directors/Trustees or by a majority vote of the outstanding shares in the
Advisor Class.
The following payments for the period ended May 31, 2001 were made to third
party intermediaries, including broker-dealers and insurance companies, for
the distribution, shareholder servicing, maintenance of shareholder accounts
and/or other administration services under the 12b-1 Plan.
High Yield Fund-Advisor Class $2,000
CUSTODIAN
-------------------------------------------------------------------------------
State Street Bank and Trust Company is the custodian for the fund's U.S.
securities and cash, but it does not participate in the fund's investment
decisions. Portfolio securities purchased in the U.S. are maintained in the
custody of the Bank and may be entered into the Federal Reserve Book Entry
System, or the security depository system of the Depository Trust
Corporation. State Street Bank's main office is at 225 Franklin Street,
Boston, Massachusetts 02110.
The fund (other than GNMA, Prime Reserve, U.S. Treasury Intermediate,
Long-Term, Money, Government Reserve Investment, and Reserve Investment
Funds) has entered into a Custodian Agreement with The Chase Manhattan Bank,
London, pursuant to which portfolio securities which are purchased outside
the United States are maintained in the custody of various foreign branches
of The Chase Manhattan Bank and such other custodians, including foreign
banks and foreign securities depositories as are approved in accordance with
regulations under the 1940 Act. The address for The Chase Manhattan Bank,
London is Woolgate House, Coleman Street, London, EC2P 2HD, England.
CODE OF ETHICS
-------------------------------------------------------------------------------
The fund, its investment adviser (T. Rowe Price), and its principal
underwriter (T. Rowe Price Investment Services), have a written Code of
Ethics which requires persons with access to investment information ("Access
Persons") to obtain prior clearance before engaging in personal securities
transactions. In addition, all Access Persons must report their personal
securities transactions within 10 days of their execution. Access Persons
will not be permitted to effect transactions in a security: if there are
pending client orders in the security; the security has been purchased or
sold by a client within seven calendar days; the security is being considered
for purchase for a client; or the security is subject to internal trading
restrictions. In addition, Access Persons are prohibited from profiting from
short-term trading (e.g., purchases and sales involving the same security
within 60 days). Any person becoming an Access Person must file a statement
of personal securities holdings within 10 days of this date. All Access
Persons are required to file an annual statement with respect to their
personal securities holdings. Any material violation of the Code of Ethics is
reported to the Board of the fund. The Board also reviews the administration
of the Code of Ethics on an annual basis.
PORTFOLIO TRANSACTIONS
-------------------------------------------------------------------------------
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio securities on
behalf of the fund are made by T. Rowe Price. T. Rowe Price is also
responsible for implementing these decisions, including the negotiation of
commissions and the allocation of portfolio brokerage and principal business
and the use of affiliates to assist in routing orders for execution. The
fund's purchases and sales of fixed-income portfolio securities are normally
done on a principal basis and do not involve the payment of a commission
although they may involve the designation of selling concessions. That part
of the discussion below relating solely to brokerage commissions would not
normally apply to the fund (except to the extent it purchases equity
securities (High Yield, New Income, and Personal Strategy Funds only)).
However, it is included because T. Rowe Price does manage a significant
number of common stock portfolios which do engage in agency transactions and
pay commissions and because some research and services resulting from the
payment of such commissions may benefit the fund.
How Brokers and Dealers Are Selected
Equity Securities
In purchasing and selling equity securities, it is T. Rowe Price's policy to
obtain quality execution at the most favorable prices through responsible
brokers and dealers and at competitive commission rates where such rates are
negotiable. However, under certain conditions, the fund may pay higher
brokerage commissions in return for brokerage and research services. As a
general practice, over-the-counter orders are executed with market-makers. In
selecting among market-makers, T. Rowe Price generally seeks to select those
it believes to be actively and effectively trading the security being
purchased or sold. In selecting broker-dealers to execute the fund's
portfolio transactions, consideration is given to such factors as the price
of the security, the rate of the commission, the size and difficulty of the
order, the reliability, integrity, financial condition, general execution and
operational capabilities of competing brokers and dealers, their expertise in
particular markets and brokerage and research services provided by them. It
is not the policy of T. Rowe Price to seek the lowest available commission
rate where it is believed that a broker or dealer charging a higher
commission rate would offer greater reliability or provide better price or
execution.
Fixed-Income Securities
Fixed-income securities are generally purchased from the issuer or a primary
market-maker acting as principal for the securities on a net basis, with no
brokerage commission being paid by the client although the price usually
includes an undisclosed compensation. Transactions placed through dealers
serving as primary market-makers reflect the spread between the bid and asked
prices. Securities may also be purchased from underwriters at prices which
include underwriting fees.
With respect to equity and fixed-income securities, T. Rowe Price may effect
principal transactions on behalf of the fund with a broker or dealer who
furnishes brokerage and/or research services, designate any such broker or
dealer to receive selling concessions, discounts, or other allowances, or
otherwise deal with any such broker or dealer in connection with the
acquisition of securities in underwritings. T. Rowe Price may receive
research services in connection with brokerage transactions, including
designations in fixed price offerings.
How Evaluations Are Made of the Overall Reasonableness of Brokerage Commissions
Paid
On a continuing basis, T. Rowe Price seeks to determine what levels of
commission rates are reasonable in the marketplace for transactions executed
on behalf of the fund. In evaluating the reasonableness of commission rates,
T. Rowe Price considers: (a) historical commission rates; (b) rates which
other institutional investors are paying, based on available public
information; (c) rates quoted by brokers and dealers; (d) the size of a
particular transaction, in terms of the number of shares, dollar amount, and
number of clients involved; (e) the complexity of a particular transaction in
terms of both execution and settlement; (f) the level and type of business
done with a particular firm over a period of time; and (g) the extent to
which the broker or dealer has capital at risk in the transaction.
Descriptions of Research Services Received From Brokers and Dealers
T. Rowe Price receives a wide range of research services from brokers and
dealers. These services include information on the economy, industries,
groups of securities, individual companies, statistical information,
accounting and tax law interpretations, political developments, legal
developments affecting portfolio securities, technical market action, pricing
and appraisal services, credit analysis, risk measurement analysis,
performance analysis, and analysis of corporate responsibility issues. These
services provide both domestic and international perspective. Research
services are received primarily in the form of written reports,
computer-generated services, telephone contacts, and personal meetings with
security analysts. In addition, such services may be provided in the form of
meetings arranged with corporate and industry spokespersons, economists,
academicians, and government representatives. In some cases, research
services are generated by third parties but are provided to T. Rowe Price by
or through broker-dealers.
Research services received from brokers and dealers are supplemental to T.
Rowe Price's own research effort and, when utilized, are subject to internal
analysis before being incorporated by T. Rowe Price into its investment
process. As a practical matter, it would not be possible for T. Rowe Price's
Equity Research Division to generate all of the information presently
provided by brokers and dealers. T. Rowe Price pays cash for certain research
services received from external sources. T. Rowe Price also allocates
brokerage for research services which are available for cash. While receipt
of research services from brokerage firms has not reduced T. Rowe Price's
normal research activities, the expenses of T. Rowe Price could be materially
increased if it attempted to generate such additional information through its
own staff. To the extent that research services of value are provided by
brokers or dealers, T. Rowe Price may be relieved of expenses which it might
otherwise bear.
T. Rowe Price has a policy of not allocating brokerage business in return for
products or services other than brokerage or research services. In accordance
with the provisions of Section 28(e) of the Securities Exchange Act of 1934,
T. Rowe Price may from time to time receive services and products which serve
both research and non-research functions. In such event, T. Rowe Price makes
a good faith determination of the anticipated research and non-research use
of the product or service and allocates brokerage only with respect to the
research component.
Commissions to Brokers Who Furnish Research Services
Certain brokers and dealers who provide quality brokerage and execution
services also furnish research services to T. Rowe Price. With regard to the
payment of brokerage commissions, T. Rowe Price has adopted a brokerage
allocation policy embodying the concepts of Section 28(e) of the Securities
Exchange Act of 1934, which permits an investment adviser to cause an account
to pay commission rates in excess of those another broker or dealer would
have charged for effecting the same transaction, if the adviser determines in
good faith that the commission paid is reasonable in relation to the value of
the brokerage and research services provided. The determination may be viewed
in terms of either the particular transaction involved or the overall
responsibilities of the adviser with respect to the accounts over which it
exercises investment discretion. Accordingly, while T. Rowe Price cannot
readily determine the extent to which commission rates or net prices charged
by broker-dealers reflect the value of their research services, T. Rowe Price
would expect to assess the reasonableness of commissions in light of the
total brokerage and research services provided by each particular broker. T.
Rowe Price may receive research, as defined in Section 28(e), in connection
with selling concessions and designations in fixed price offerings in which
the funds participate.
Internal Allocation Procedures
T. Rowe Price has a policy of not precommitting a specific amount of business
to any broker or dealer over any specific time period. Historically, the
majority of brokerage placement has been determined by the needs of a
specific transaction such as market-making, availability of a buyer or seller
of a particular security, or specialized execution skills. However, T. Rowe
Price does have an internal brokerage allocation procedure for that portion
of its discretionary client brokerage business where special needs do not
exist, or where the business may be allocated among several brokers or
dealers which are able to meet the needs of the transaction.
Each year, T. Rowe Price assesses the contribution of the brokerage and
research services provided by brokers or dealers, and attempts to allocate a
portion of its brokerage business in response to these assessments. Research
analysts, counselors, various investment committees, and the Trading
Department each seek to evaluate the brokerage and research services they
receive from brokers or dealers and make judgments as to the level of
business which would recognize such services. In addition, brokers or dealers
sometimes suggest a level of business they would like to receive in return
for the various brokerage and research services they provide. Actual
brokerage received by any firm may be less than the suggested allocations but
can, and often does, exceed the suggestions, because the total business is
allocated on the basis of all the considerations described above. In no case
is a broker or dealer excluded from receiving business from T. Rowe Price
because it has not been identified as providing research services.
Miscellaneous
T. Rowe Price's brokerage allocation policy is consistently applied to all
its fully discretionary accounts, which represent a substantial majority of
all assets under management. Research services furnished by brokers or
dealers through which T. Rowe Price effects securities transactions may be
used in servicing all accounts (including non-fund accounts) managed by T.
Rowe Price. Conversely, research services received from brokers or dealers
which execute transactions for the fund are not necessarily used by T. Rowe
Price exclusively in connection with the management of the fund.
From time to time, orders for clients may be placed through a computerized
transaction network.
The fund does not allocate business to any broker-dealer on the basis of its
sales of the fund's shares. However, this does not mean that broker-dealers
who purchase fund shares for their clients will not receive business from the
fund.
Some of T. Rowe Price's other clients have investment objectives and programs
similar to those of the fund. T. Rowe Price may occasionally make
recommendations to other clients which result in their purchasing or selling
securities simultaneously with the fund. As a result, the demand for
securities being purchased or the supply of securities being sold may
increase, and this could have an adverse effect on the price of those
securities. It is T. Rowe Price's policy not to favor one client over another
in making recommendations or in placing orders. T. Rowe Price frequently
follows the practice of grouping orders of various clients for execution
which generally results in lower commission rates being attained. In certain
cases, where the aggregate order is executed in a series of transactions at
various prices on a given day, each participating client's proportionate
share of such order reflects the average price paid or received with respect
to the total order. T. Rowe Price has established a general investment policy
that it will ordinarily not make additional purchases of a common stock of a
company for its clients (including the T. Rowe Price funds) if, as a result
of such purchases, 10% or more of the outstanding common stock of such
company would be held by its clients in the aggregate.
At the present time, T. Rowe Price does not recapture commissions or
underwriting discounts or selling group concessions in connection with
taxable securities acquired in underwritten offerings. T. Rowe Price does,
however, attempt to negotiate elimination of all or a portion of the selling
group concession or underwriting discount when purchasing tax-exempt
municipal securities on behalf of its clients in underwritten offerings.
Other
For the fiscal years ended May 31, 2001, 2000, and 1999, the fund's engaged
in portfolio transactions involving broker-dealers in the following amounts:
Fund 2001 2000 1999
---- ---- ---- ----
Corporate Income $ 113,035,000 $ 87,158,000 $ 148,017,000
GNMA 1,478,634,000 1,340,767,000 1,928,467,000
Government Reserve
Investment 168,448,618,000 208,368,283,000 125,867,962,000
High Yield 2,151,430,000 2,228,594,000 3,133,849,000
New Income 3,606,669,000 2,787,051,000 3,883,982,000
Personal Strategy
Balanced 784,704,000 572,235,000 443,414,000
Personal Strategy
Growth 330,295,000 232,667,000 177,166,000
Personal Strategy
Income 339,026,000 169,938,000 263,137,000
Prime Reserve 38,321,006,000 44,694,574,000 32,055,326,000
Reserve Investment 79,731,548,000 85,643,368,000 82,675,097,000
Short-Term Bond 547,984,000 267,997,000 268,240,000
U.S. Treasury
Intermediate 508,503,000 253,839,000 343,197,000
U.S. Treasury Long-Term 191,764,000 155,975,000 509,554,000
U.S. Treasury Money 4,879,524,000 5,655,456,000 4,583,442,000
-------------------------
With respect to the GNMA, Government Reserve, Prime Reserve, Reserve
Investment, U.S. Treasury Intermediate, U.S. Treasury Long-Term, and U.S.
Treasury Money Funds, the entire amount for each of these years represented
principal transactions as to which the funds have no knowledge of the profits
or losses realized by the respective broker-dealers for the fiscal years
ended May 31, 2001, 2000, and 1999.
With respect to the Corporate Income, High Yield, New Income, Short-Term
Bond, Personal Strategy Balanced, Personal Strategy Growth, and Personal
Strategy Income Funds, the following amounts consisted of principal
transactions as to which the funds have no knowledge of the profits or losses
realized by the respective broker-dealers for the fiscal years ended May 31,
2001, 2000, and 1999.
Fund 2001 2000 1999
---- ---- ---- ----
Corporate Income $ 96,190,000 $ 81,635,000 $ 132,909,000
High Yield 1,841,819,000 1,950,820,000 2,667,387,000
New Income 3,186,861,000 2,589,971,000 3,624,940,000
Personal Strategy Balanced 478,739,000 241,804,000 245,489,000
Personal Strategy Growth 157,439,000 69,314,000 78,262,000
Personal Strategy Income 254,071,000 89,593,000 148,720,000
Short-Term Bond 454,590,000 216,139,000 237,228,000
----------------------------
The following amounts involved trades with brokers acting as agents or
underwriters for the fiscal years ended May 31, 2001, 2000, and 1999.
Fund 2001 2000 1999
---- ---- ---- ----
Corporate Income $ 16,845,000 $ 5,523,000 $ 15,108,000
High Yield 309,611,000 277,774,000 466,462,000
New Income 419,808,000 197,080,000 259,042,000
Personal Strategy Balanced 305,965,000 330,431,000 197,925,000
Personal Strategy Growth 172,856,000 163,353,000 98,904,000
Personal Strategy Income 84,955,000 80,344,000 114,417,000
Short-Term Bond 93,393,000 51,858,000 31,012,000
----------------------------
The amounts shown below involved trades with brokers acting as agents or
underwriters, in which such brokers received total commissions, including
discounts received in connection with underwritings for the fiscal years
ended May 31, 2001, 2000, and 1999.
Fund 2001 2000 1999
---- ---- ---- ----
Corporate Income $ 103,000 $ 35,000 $ 53,000
High Yield 7,746,000 7,250,000 11,755,000
New Income 1,387,000 700,000 1,041,000
Personal Strategy Balanced 564,000 448,000 281,000
Personal Strategy Growth 218,000 208,000 82,000
Personal Strategy Income 215,000 112,000 134,000
Short-Term Bond 217,000 105,000 105,000
----------------------------
The percentage of total portfolio transactions, placed with firms which
provided research, statistical, or other services to T. Rowe Price in
connection with the management of the funds, or in some cases, to the funds
for the fiscal years ended May 31, 2001, 2000, and 1999, are shown below:
Fund 2001 2000 1999
---- ---- ---- ----
Corporate Income 98% 93% 96%
GNMA 71 94 86
Government Reserve Investment -- 98 78
High Yield 87 86 95
New Income 112 92 94
Personal Strategy Balanced 11 25 20
Personal Strategy Growth 17 30 29
Personal Strategy Income 7 25 16
Prime Reserve -- 94 78
Reserve Investment -- 93 65
Short-Term Bond 78 90 93
U.S. Treasury Intermediate 108 95 100
U.S. Treasury Long-Term 31 71 99
U.S. Treasury Money -- 98 61
-------------------------------
The portfolio turnover rates for the following funds for the fiscal years
ended May 31, 2001, 2000, and 1999, are as follows:
Fund 2001 2000 1999
---- ---- ---- ----
Corporate Income 98.1% 90.9% 140.8%
GNMA 71.2 63.8 86.7
High Yield 80.1 75.9 95.6
New Income 112.1 83.6 94.3
Personal Strategy Balanced 61.5 48.2 34.3
Personal Strategy Growth 54.8 42.6 36.1
Personal Strategy Income 79.8 45.4 48.9
Short-Term Bond 77.6 50.7 51.6
U.S. Treasury Intermediate 108.0 48.5 61.2
U.S. Treasury Long-Term 31.3 21.7 74.1
----------------------------
Government Reserve Investment, Prime Reserve, Reserve Investment, and U.S.
Treasury Money Funds
The fund, in pursuing its objectives, may engage in short-term trading to
take advantage of market variations. The fund will seek to protect principal,
improve liquidity of its securities, or enhance yield by purchasing and
selling securities based upon existing or anticipated market discrepancies.
PRICING OF SECURITIES
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Corporate Income, GNMA, High Yield, New Income, Personal Strategy, Short-Term
Bond, U.S. Treasury Intermediate, and U.S. Treasury Long-Term Funds
Debt securities are generally traded in the over-the-counter market.
Investments in domestic securities with original maturities of one year or
more and foreign securities are stated at fair value using a bid-side
valuation as furnished by dealers who make markets in such securities or by
an independent pricing service, which considers yield or price of bonds of
comparable quality, coupon, maturity, and type, as well as prices quoted by
dealers who make markets in such securities. Domestic securities with
original maturities less than one year are stated at fair value which is
determined by using a matrix system that establishes a value for each
security based on bid-side money market yields. The Personal Strategy Funds
value short-term debt securities at their cost in local currency which, when
combined with accrued interest, approximates fair value.
There are a number of pricing services available, and the Board of
Directors/Trustees, on the basis of an ongoing evaluation of these services,
may use or may discontinue the use of any pricing service in whole or part.
Corporate Income, High Yield, New Income, and Personal Strategy Funds
Equity securities listed or regularly traded on a securities exchange are
valued at the last quoted sales price at the time the valuations are made. A
security that 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/Trustees, or by persons delegated by the Board, best to reflect
fair value.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation.
Government Reserve Investment, Prime Reserve, Reserve Investment, and U.S.
Treasury Money Funds
Securities are valued at amortized cost.
Corporate Income, High Yield, New Income, Personal Strategy, and Short-Term
Bond Funds
For the purposes of determining the fund's net asset value per share, the
U.S. dollar value of all assets and liabilities initially expressed in
foreign currencies is determined by using the mean of the bid and offer
prices of such currencies against U.S. dollars quoted by a major bank.
All funds
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/Trustees.
Government Reserve Investment, Prime Reserve, Reserve Investment, and U.S.
Treasury Money Funds
Maintenance of Money Fund's Net Asset Value Per Share at $1.00
It is the policy of the fund to attempt to maintain a net asset value of
$1.00 per share by using the amortized cost method of valuation permitted by
Rule 2a-7 under the 1940 Act. Under this method, securities are valued by
reference to the fund's acquisition cost as adjusted for amortization of
premium or accumulation of discount rather than by reference to their market
value. Under Rule 2a-7:
(a) The Board of Directors must establish written procedures reasonably
designed, taking into account current market conditions and the fund's
investment objectives, to stabilize the fund's net asset value per share,
as computed for the purpose of distribution, redemption, and repurchase,
at a single value;
(b) The fund must (i) maintain a dollar-weighted average portfolio maturity
appropriate to its objective of maintaining a stable price per share,
(ii) not purchase any instrument with a remaining maturity greater than
397 days, and (iii) maintain a dollar-weighted average portfolio maturity
of 90 days or less;
(c) The fund must limit its purchase of portfolio instruments, including
repurchase agreements, to those U.S. dollar-denominated instruments which
the fund's Board of Directors determines present minimal credit risks,
and which are eligible securities as defined by Rule 2a-7; and
(d) The Board of Directors must determine that (i) it is in the best interest
of the fund and its shareholders to maintain a stable net asset value per
share under the amortized cost method; and (ii) the fund will continue to
use the amortized cost method only so long as the Board of Directors
believes that it fairly reflects the market based net asset value per
share.
Although the fund believes that it will be able to maintain its net asset
value at $1.00 per share under most conditions, there can be no absolute
assurance that it will be able to do so on a continuous basis. If the fund's
net asset value per share declined, or was expected to decline, below $1.00
(rounded to the nearest one cent), the Board of Directors of the fund might
temporarily reduce or suspend dividend payments in an effort to maintain the
net asset value at $1.00 per share. As a result of such reduction or
suspension of dividends, an investor would receive less income during a given
period than if such a reduction or suspension had not taken place. Such
action could result in an investor receiving no dividend for the period
during which he holds his shares and in his receiving, upon redemption, a
price per share lower than that which he paid. On the other hand, if the
fund's net asset value per share were to increase, or were anticipated to
increase above $1.00 (rounded to the nearest one cent), the Board of
Directors of the fund might supplement dividends in an effort to maintain the
net asset value at $1.00 per share.
Prime Reserve and Reserve Investment Funds
Prime Money Market Securities Defined
Prime money market securities are those which are described as First Tier
Securities under Rule 2a-7 of the 1940 Act. These include any security with a
remaining maturity of 397 days or less that is rated (or that has been issued
by an issuer that is rated with respect to a class of short-term debt
obligations, or any security within that class that is comparable in priority
and security with the security) by any two nationally recognized statistical
rating organizations (NRSROs) (or if only one NRSRO has issued a rating, that
NRSRO) in the highest rating category for short-term debt obligations (within
which there may be sub-categories). First Tier Securities also include
unrated securities comparable in quality to rated securities, as determined
by T. Rowe Price under the supervision of the fund's Board of Directors.
All funds
NET ASSET VALUE PER SHARE
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The purchase and redemption price of the fund's shares is equal to the fund's
net asset value per share or share price. The fund determines its net asset
value per share by subtracting its liabilities (including accrued expenses
and dividends payable) from its total assets (the market value of the
securities the fund holds plus cash and other assets, including income
accrued but not yet received) and dividing the result by the total number of
shares outstanding. The net asset value per share of the fund is normally
calculated as of the close of trading on the New York Stock Exchange ("NYSE")
every day the NYSE is open for trading. The NYSE is closed on the following
days: New Year's Day, Dr. Martin Luther King, Jr. Holiday, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
Determination of net asset value (and the offering, sale, redemption, and
repurchase of shares) for the fund may be suspended at times (a) during which
the NYSE is closed, other than customary weekend and holiday closings, (b)
during which trading on the NYSE is restricted, (c) during which an emergency
exists as a result of which disposal by the fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the fund
fairly to determine the value of its net assets, or (d) during which a
governmental body having jurisdiction over the fund may by order permit such
a suspension for the protection of the fund's shareholders; provided that
applicable rules and regulations of the SEC (or any succeeding governmental
authority) shall govern as to whether the conditions prescribed in (b), (c),
or (d) exist.
DIVIDENDS AND DISTRIBUTIONS
-------------------------------------------------------------------------------
Unless you elect otherwise, the fund's annual capital gain distribution, if
any, will be reinvested on the reinvestment date using the NAV per share of
that date. The reinvestment date normally precedes the payment date by one
day, although the exact timing is subject to change and can be as great as 10
days.
TAX STATUS
-------------------------------------------------------------------------------
The fund intends to qualify as a "regulated investment company" under
Subchapter M of the Code.
A portion of the dividends paid by the fund may be eligible for the
dividends-received deduction applicable to corporate shareholders. Long-term
capital gain distributions paid from the fund is never eligible for the
dividend received deduction. For tax purposes, it does not make any
difference whether dividends and capital gain distributions are paid in cash
or in additional shares. Each fund must declare dividends by December 31 of
each year equal to at least 98% of ordinary income (as of December 31) and
capital gains (as of October 31) in order to avoid a federal excise tax and
distribute within 12 months 100% of ordinary income and capital gains as of
to avoid a federal income tax.
At the time of your purchase, the fund's net asset value may reflect
undistributed income, capital gains or net unrealized appreciation of
securities held by the fund. A subsequent distribution to you of such
amounts, although constituting a return of your investment, would be taxable
either as dividend or capital gain distributions. For federal income tax
purposes, the fund is permitted to carry forward its net realized capital
losses, if any, for eight years and realize net capital gains up to the
amount of such losses without being required to pay taxes on, or distribute,
such gains.
If, in any taxable year, the fund should not qualify as a regulated
investment company under the Code: (1) the fund would be taxed at normal
corporate rates on the entire amount of its taxable income, if any, without
deduction for dividends or other distributions to shareholders; and (2) the
fund's distributions to the extent made out of the fund's current or
accumulated earnings and profits would be taxable to shareholders as
ordinary dividends (regardless of whether they would otherwise have been
considered capital gain dividends) and the fund may qualify for the 70%
deduction for dividends received by corporations.
Taxation of Foreign Shareholders
The Code provides that dividends from net income will be subject to U.S. tax.
For shareholders who are not engaged in a business in the U.S., this tax
would be imposed at the rate of 30% upon the gross amount of the dividends in
the absence of a Tax Treaty providing for a reduced rate or exemption from
U.S. taxation. Distributions of net long-term capital gains realized by the
fund are not subject to tax unless the foreign shareholder is engaged in a
business in the U.S. and the gains are connected with that business or
shareholder is a nonresident alien individual who was physically present in
the U.S. during the tax year for more than 182 days.
To the extent the fund invests in foreign securities, the following would
apply:
Passive Foreign Investment Companies
The fund may purchase the securities of certain foreign investment funds or
trusts called passive foreign investment companies for U.S. tax purposes.
Such foreign investment funds or trusts have been the only or primary way to
invest in certain countries. In addition to bearing their proportionate share
of the fund's expenses (management fees and operating expenses), shareholders
will also indirectly bear similar expenses of such foreign investment funds
or trusts. Capital gains on the sale of such holdings are considered ordinary
income regardless of how long the fund held its investment. In addition, the
fund may be subject to corporate income tax and an interest charge on certain
dividends and capital gains earned from these investments, regardless of
whether such income and gains are distributed to shareholders.
To avoid such tax and interest, the fund intends to treat these securities as
sold on the last day of its fiscal year and recognize any gains for tax
purposes at that time; deductions for losses are allowable only to the extent
of any gains resulting from these deemed sales for prior taxable years. Such
gains and losses will be treated as ordinary income. The fund will be
required to distribute any resulting income even though it has not sold the
security and received cash to pay such distributions.
Foreign Currency Gains and Losses
Foreign currency gains and losses, including the portion of gain or loss on
the sale of debt securities attributable to foreign exchange rate
fluctuations, are taxable as ordinary income. If the net effect of these
transactions is a gain, the ordinary income dividend paid by the fund will be
increased. If the result is a loss, the income dividend paid by the fund will
be decreased, or to the extent such dividend has already been paid, it may be
classified as a return of capital. Adjustments to reflect these gains and
losses will be made at the end of the fund's taxable year.
YIELD INFORMATION
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GNMA Fund
In conformity with regulations of the SEC, an income factor is calculated for
each security in the portfolio based upon the security's coupon rate. The
income factors are then adjusted for any gains or losses which have resulted
from prepayments of principal during the period. The income factors are then
totaled for all securities in the portfolio. Next, expenses of the fund for
the period, net of expected reimbursements, are deducted from the income to
arrive at net income, which is then converted to a per-share amount by
dividing net income by the average number of shares outstanding during the
period. The net income per share is divided by the net asset value on the
last day of the period to produce a monthly yield which is then annualized.
Quoted yield factors are for comparison purposes only, and are not intended
to indicate future performance or forecast the dividend per share of the
fund.
The yield of the GNMA Fund calculated under the above-described method for
the month ended May 31, 2001, was 6.17%.
Corporate Income, High Yield, New Income, Short-Term Bond, U.S. Treasury
Intermediate, and U.S. Treasury Long-Term Funds
An income factor is calculated for each security in the portfolio based upon
the security's market value at the beginning of the period and yield as
determined in conformity with regulations of the SEC. The income factors are
then totaled for all securities in the portfolio. Next, expenses of the fund
for the period, net of expected reimbursements, are deducted from the income
to arrive at net income, which is then converted to a per share amount by
dividing net income by the average number of shares outstanding during the
period. The net income per share is divided by the net asset value on the
last day of the period to produce a monthly yield which is then annualized.
If applicable, a taxable-equivalent yield is calculated by dividing this
yield by one minus the effective federal, state, and/or city or local income
tax rates. Quoted yield factors are for comparison purposes only, and are not
intended to indicate future performance or forecast the dividend per share of
the fund.
The yields of the Corporate Income, High Yield, High Yield Fund-Advisor
Class, New Income, Short-Term Bond, U.S. Treasury Intermediate, and U.S.
Treasury Long-Term Funds calculated under the above-described method for the
month ended May 31, 2001, were 7.14%, 10.98%, 10.81%, 5.90%, 5.49%, 4.73%,
and 5.38%, respectively.
Government Reserve Investment, Prime Reserve, Reserve Investment, and U.S.
Treasury Money Funds
The fund's current and historical yield for a period is calculated by
dividing the net change in value of an account (including all dividends
accrued and dividends reinvested in additional shares) by the account value
at the beginning of the period to obtain the base period return. This base
period return is divided by the number of days in the period, then multiplied
by 365 to arrive at the annualized yield for that period. The fund's
annualized compound yield for such period is compounded by dividing the base
period return by the number of days in the period, and compounding that
figure over 365 days.
The seven-day yields ending May 31, 2001, for the Prime Reserve, Prime
Reserve Fund-PLUS Class, and U.S. Treasury Money Funds were 4.12%, 3.81%, and
3.90%, respectively, and the funds' compound yield for the same period were
4.21%, 3.89%, and 3.97%, respectively.
All funds
INVESTMENT PERFORMANCE
-------------------------------------------------------------------------------
Total Return Performance
The fund's calculation of total return performance includes the reinvestment
of all capital gain distributions and income dividends for the period or
periods indicated, without regard to tax consequences to a shareholder in the
fund. Total return is calculated as the percentage change between the
beginning value of a static account in the fund and the ending value of that
account measured by the then current net asset value, including all shares
acquired through reinvestment of income and capital gain dividends. The
results shown are historical and should not be considered indicative of the
future performance of the fund. Each average annual compound rate of return
is derived from the cumulative performance of the fund over the time period
specified. The annual compound rate of return for the fund over any other
period of time will vary from the average.
Cumulative Performance Percentage Change
1 Yr. 5 Yrs. 10 Yrs. % Since Inception
Fund Ended Ended Ended Inception Date
---- 5/31/01 5/31/01 5/31/01 5/31/01 ----
------- ------- ------- -------
Corporate Income 13.86% 40.57% -- 40.70% 10/31/95
GNMA 12.31 42.13 99.70% 215.27 11/26/85
High Yield 3.96 37.93 137.32 316.44 12/31/84
High Yield Fund-Advisor Class 3.86 -- -- 2.92 03/31/00
New Income 12.54 37.25 95.88 844.29 08/31/73
Personal Strategy Balanced 4.60 67.30 -- 125.69 07/29/94
Personal Strategy Growth 2.46 77.25 -- 151.77 07/29/94
Personal Strategy Income 6.54 58.32 -- 103.46 07/29/94
Prime Reserve 5.82 28.76 56.99 491.77 01/26/76
Prime Reserve Fund-PLUS Class 5.66 -- -- 13.76 11/01/98
Short-Term Bond 10.61 35.39 74.18 220.71 03/02/84
U.S. Treasury Intermediate 11.85 38.78 94.79 127.06 09/29/89
U.S. Treasury Long-Term 10.74 49.65 121.92 153.38 09/29/89
U.S. Treasury Money 5.44 26.77 53.40 188.91 06/28/82
------------------------------- -----------
Average Annual Compound Rates of Return
1 Yr. 5 Yrs. 10 Yrs. % Since Inception
Fund Ended Ended Ended Inception Date
---- 5/31/01 5/31/01 5/31/01 5/31/01 ----
------- ------- ------- -------
Corporate Income 13.86% 7.05% -- 6.31% 10/31/95
GNMA 12.31 7.28 7.16% 7.69 11/26/85
High Yield 3.96 6.64 9.03 9.08 12/31/84
High Yield Fund-Advisor Class 3.86 -- -- 2.49 03/31/00
New Income 12.54 6.54 6.95 8.43 08/31/73
Personal Strategy Balanced 4.60 10.84 -- 12.64 07/29/94
Personal Strategy Growth 2.46 12.13 -- 14.46 07/29/94
Personal Strategy Income 6.54 9.62 -- 10.95 07/29/94
Prime Reserve 5.82 5.19 4.61 7.27 01/26/76
Prime Reserve Fund-PLUS Class 5.66 -- -- 5.12 11/01/98
Short-Term Bond 10.61 6.25 5.71 6.99 03/02/84
U.S. Treasury Intermediate 11.85 6.77 6.89 7.28 09/29/89
U.S. Treasury Long-Term 10.74 8.40 8.30 8.29 09/29/89
U.S. Treasury Money 5.44 4.86 4.37 5.77 06/28/82
------------------------------- -----------
Outside Sources of Information
From time to time, in reports and promotional literature: (1) the fund's
total return performance, ranking, or any other measure of the fund's
performance may be compared to any one or combination of the following: (a) a
broad-based index, (b) other groups of mutual funds, including T. Rowe Price
funds, tracked by independent research firm's ranking entities, or financial
publications; (c) indices of securities comparable to those in which the fund
invests; (2) the Consumer Price Index (or any other measure for inflation),
government statistics, such as GNP may be used to illustrate investment
attributes of the fund or the general economic, business, investment, or
financial environment in which the fund operates; (3) various financial,
economic, and market statistics developed by brokers, dealers, and other
persons may be used to illustrate aspects of the fund's performance; (4) the
effect of tax-deferred compounding on the fund's investment returns, or on
returns in general in both qualified and nonqualified retirement plans or any
other tax advantage product, may be illustrated by graphs, charts, etc.; and
(5) the sectors or industries in which the fund invests may be compared to
relevant indices or surveys in order to evaluate the fund's historical
performance or current or potential value with respect to the particular
industry or sector.
Other Publications
From time to time, in newsletters and other publications issued by Investment
Services, T. Rowe Price mutual fund portfolio managers may discuss economic,
financial, and political developments in the U.S. and abroad and how these
conditions have affected or may affect securities prices or the fund;
individual securities within the fund's portfolio; and their philosophy
regarding the selection of individual stocks, including why specific stocks
have been added, removed, or excluded from the fund's portfolio.
Other Features and Benefits
The fund is a member of the T. Rowe Price family of funds and may help
investors achieve various long-term investment goals, which include, but are
not limited to, investing money for retirement, saving for a down payment on
a home, or paying college costs. To explain how the fund could be used to
assist investors in planning for these goals and to illustrate basic
principles of investing, various worksheets and guides prepared by T. Rowe
Price and/or Investment Services may be made available.
No-Load Versus Load and 12b-1 Funds
Many mutual funds charge sales fees to investors or use fund assets to
finance distribution activities. These fees are in addition to the normal
advisory fees and expenses charged by all mutual funds. There are several
types of fees charged which vary in magnitude and which may often be used in
combination. A sales charge (or "load") can be charged at the time the fund
is purchased (front-end load) or at the time of redemption (back-end load).
Front-end loads are charged on the total amount invested. Back-end loads are
charged either on the amount originally invested or on the amount redeemed.
12b-1 plans allow for the payment of marketing and sales expenses from fund
assets. These expenses are usually computed daily as a fixed percentage of
assets.
The T. Rowe Price funds, including the Advisor Classes, are considered to be
"no-load" funds. They impose no front-end or back-end sales loads. However,
the Advisor Classes do charge 12b-1 fees. Under applicable National
Association of Securities Dealers Regulation, Inc. ("NASDR") regulations,
mutual funds that have no front-end or deferred sales charges and whose total
asset-based charges for sales-related expenses and/or service fees (as
defined by NASDR) do not exceed 0.25% of average net assets per year may be
referred to as no-load funds.
Redemptions in Kind
The fund has filed a notice of election under Rule 18f-1 of the 1940 Act.
This permits the fund to effect redemptions in kind and in cash as set forth
in its prospectus.
In the unlikely event a shareholder were to receive an in kind redemption of
portfolio securities of the fund, it would be the responsibility of the
shareholder to dispose of the securities. The shareholder would be at risk
that the value of the securities would decline prior to their sale, that it
would be difficult to sell the securities and that brokerage fees could be
incurred.
Issuance of Fund Shares for Securities
Transactions involving issuance of fund shares for securities or assets other
than cash will be limited to (1) bona fide reorganizations; (2) statutory
mergers; or (3) other acquisitions of portfolio securities that: (a) meet the
investment objective and policies of the fund; (b) are acquired for
investment and not for resale except in accordance with applicable law; (c)
have a value that is readily ascertainable via listing on or trading in a
recognized United States or international exchange or market; and (d) are not
illiquid.
All funds except GNMA Fund
CAPITAL STOCK
-------------------------------------------------------------------------------
The fund's Charter authorizes the Board of Directors to classify and
reclassify any and all shares which are then unissued, including unissued
shares of capital stock into any number of classes or series, each class or
series consisting of such number of shares and having such designations, such
powers, preferences, rights, qualifications, limitations, and restrictions,
as shall be determined by the Board subject to the 1940 Act and other
applicable law. The shares of any such additional classes or series might
therefore differ from the shares of the present class and series of capital
stock and from each other as to preferences, conversions or other rights,
voting powers, restrictions, limitations as to dividends, qualifications or
terms or conditions of redemption, subject to applicable law, and might thus
be superior or inferior to the capital stock or to other classes or series in
various characteristics. The Board of Directors may increase or decrease the
aggregate number of shares of stock or the number of shares of stock of any
class or series that the fund has authorized to issue without shareholder
approval.
Except to the extent that the fund's Board of Directors might provide by
resolution that holders of shares of a particular class are entitled to vote
as a class on specified matters presented for a vote of the holders of all
shares entitled to vote on such matters, there would be no right of class
vote unless and to the extent that such a right might be construed to exist
under Maryland law. The Charter contains no provision entitling the holders
of the present class of capital stock to a vote as a class on any matter.
Accordingly, the preferences, rights, and other characteristics attaching to
any class of shares, including the present class of capital stock, might be
altered or eliminated, or the class might be combined with another class or
classes, by action approved by the vote of the holders of a majority of all
the shares of all classes entitled to be voted on the proposal, without any
additional right to vote as a class by the holders of the capital stock or of
another affected class or classes.
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares held) and will vote in the election of
or removal of directors (to the extent hereinafter provided) and on other
matters submitted to the vote of shareholders. There will normally be no
meetings of shareholders for the purpose of electing directors unless and
until such time as less than a majority of the directors holding office have
been elected by shareholders, at which time the directors then in office will
call a shareholders' meeting for the election of directors. Except as set
forth above, the directors shall continue to hold office and may appoint
successor directors. Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in the election of directors can, if they
choose to do so, elect all the directors of the fund, in which event the
holders of the remaining shares will be unable to elect any person as a
director. As set forth in the By-Laws of the fund, a special meeting of
shareholders of the fund shall be called by the Secretary of the fund on the
written request of shareholders entitled to cast at least 10% of all the
votes of the fund entitled to be cast at such meeting. Shareholders
requesting such a meeting must pay to the fund the reasonably estimated costs
of preparing and mailing the notice of the meeting. The fund, however, will
otherwise assist the shareholders seeking to hold the special meeting in
communicating to the other shareholders of the fund to the extent required by
Section 16(c) of the 1940 Act.
GNMA Fund
Description of the Fund
For tax and business reasons, the fund was organized in 1985 as a
Massachusetts Business Trust, and is registered with the SEC under the 1940
Act as a diversified, open-end investment company, commonly known as a mutual
fund.
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of full and fractional shares of a single class. The Declaration of
Trust also provides that the Board of Trustees may issue additional series or
classes of shares. Each share represents an equal proportionate beneficial
interest in the fund. In the event of the liquidation of the fund, each share
is entitled to a pro-rata share of the net assets of the fund.
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares held) and will vote in the election of
or removal of trustees (to the extent hereinafter provided) and on other
matters submitted to the vote of shareholders. There will normally be no
meetings of shareholders for the purpose of electing trustees unless and
until such time as less than a majority of the trustees holding office have
been elected by shareholders, at which time the trustees then in office will
call a shareholders' meeting for the election of trustees. Pursuant to
Section 16(c) of the 1940 Act, holders of record of not less than two-thirds
of the outstanding shares of the fund may remove a trustee by a vote cast in
person or by proxy at a meeting called for that purpose. Except as set forth
above, the trustees shall continue to hold office and may appoint successor
trustees. Voting rights are not cumulative, so that the holders of more than
50% of the shares voting in the election of trustees can, if they choose to
do so, elect all the trustees of the Trust, in which event the holders of the
remaining shares will be unable to elect any person as a trustee. No
amendments may be made to the Declaration of Trust without the affirmative
vote of a majority of the outstanding shares of the Trust.
Shares have no preemptive or conversion rights; the right of redemption and
the privilege of exchange are described in the prospectus. Shares are fully
paid and nonassessable, except as set forth below. The Trust may be
terminated (i) upon the sale of its assets to another diversified, open-end
management investment company, if approved by the vote of the holders of
two-thirds of the outstanding shares of the Trust, or (ii) upon liquidation
and distribution of the assets of the Trust, if approved by the vote of the
holders of a majority of the outstanding shares of the Trust. If not so
terminated, the Trust will continue indefinitely.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the fund. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations
of the fund and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the fund or
a Trustee. The Declaration of Trust provides for indemnification from fund
property for all losses and expenses of any shareholder held personally
liable for the obligations of the fund. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the fund itself would be unable to meet its
obligations, a possibility which T. Rowe Price believes is remote. Upon
payment of any liability incurred by the fund, the shareholders of the fund
paying such liability will be entitled to reimbursement from the general
assets of the fund. The Trustees intend to conduct the operations of the fund
in such a way so as to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of such fund.
FEDERAL REGISTRATION OF SHARES
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The fund's shares (except for Government Reserve and Reserve Investment
Funds)are registered for sale under the 1933 Act. Registration of the fund's
shares is not required under any state law, but the fund is required to make
certain filings with and pay fees to the states in order to sell its shares
in the states.
LEGAL COUNSEL
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Shearman & Sterling, whose address is 801 Pennsylvania Avenue, N.W.,
Washington, D.C. 20004-2604, is legal counsel to the fund.
INDEPENDENT ACCOUNTANTS
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PricewaterhouseCoopers LLP, 250 West Pratt Street, 21st Floor, Baltimore,
Maryland 21201, are the independent accountants to the funds.
The financial statements of the funds listed below for the period ended May
31, 2001, and the report of independent accountants are included in each
fund's Annual Report for the period ended May 31, 2001. A copy of each Annual
Report accompanies this Statement of Additional Information. The following
financial statements and the report of independent accountants appearing in
each Annual Report for the period ended May 31, 2001, are incorporated into
this Statement of Additional Information by reference:
ANNUAL REPORT REFERENCES:
CORPORATE PRIME PRIME RESERVE
INCOME GNMA RESERVE FUND-PLUS CLASS
------ ---- ------- -----
Financial Highlights 8 7 7 8
Statement of Net Assets, May
31, 2001 9-18 8-11 9-19 9-19
Statement of Operations, year
ended
May 31, 2001 19 12 20 20
Statement of Changes in Net
Assets, years
ended May 31, 2001 and May 31,
2000 20 13 21 21
Notes to Financial Statements,
May 31, 2001 21-24 14-17 22-23 22-23
Report of Independent
Accountants 25 18 24 24
PERSONAL PERSONAL PERSONAL NEW
STRATEGY STRATEGY STRATEGY ---
BALANCED GROWTH INCOME INCOME
-------- ------ ------ ------
Financial Highlights 2 2 2 9
Portfolio of Investments, May 31,
2001 3-35 3-34 3-34 10-19
Statement of Assets and
Liabilities, May 31, 2001 36 35 35 20
Statement of Operations, year ended
May 31, 2001 37 36 36 21
Statement of Changes in Net Assets,
years ended
May 31, 2001 and May 31, 2000 38 37 37 22
Notes to Financial Statements, May
31, 2001 39-43 38-42 38-42 23-27
Report of Independent Accountants 44 43 43 28
SHORT-TERM HIGH YIELD
HIGH YIELD BOND FUND-ADVISOR
---------- ----- CLASS
-----
Financial Highlights 10 8 10
Statement of Net Assets, May 31, 2001 11-23 9-16 11-23
Statement of Operations, year ended
May 31, 2001 24 17 24
Statement of Changes in Net Assets,
years ended
May 31, 2001 and May 31, 2000 25-26 18 25-26
Notes to Financial Statements, May 31,
2001 27-31 19-23 27-31
Report of Independent Accountants 32 24 32
U.S. TREASURY U.S. TREASURY U.S. TREASURY
INTERMEDIATE LONG-TERM MONEY
------------ --------- -----
Financial Highlights 12 13 11
Statement of Net Assets, May 31,
2001 16-18 19-21 14-15
Statement of Operations, year
ended
May 31, 2001 22 22 22
Statement of Changes in Net
Assets, years ended
May 31, 2001 and May 31, 2000 24 25 23
Notes to Financial Statements,
May 31, 2001 26-30 26-30 26-30
Report of Independent
Accountants 31 31 31
RESERVE GOVERNMENT
INVESTMENT RESERVE
---------- INVESTMENT
----------
Financial Highlights 4 5
Statement of Net Assets, May 31, 2001 6-8 9
Statement of Operations, year ended May 31, 2001 10 10
Statement of Changes in Net Assets, years ended
May 31, 2001 and May 31, 2000 11 12
Notes to Financial Statements, May 31, 2001 13-14 13-14
Report of Independent Accountants 15 15
RATINGS OF COMMERCIAL PAPER
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Moody's Investors Service, Inc. The rating of Prime-1 is the highest
commercial paper rating assigned by Moody's. Among the factors considered by
Moody's in assigning ratings are the following: valuation of the management
of the issuer; economic evaluation of the issuer's industry or industries and
an appraisal of speculative-type risks which may be inherent in certain
areas; evaluation of the issuer's products in relation to competition and
customer acceptance; liquidity; amount and quality of long-term debt; trend
of earnings over a period of 10 years; financial strength of the parent
company and the relationships which exist with the issuer; and recognition by
the management of obligations which may be present or may arise as a result
of public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is
rated P1, P2, or P3.
Standard & Poor's Corporation Commercial paper rated A (highest quality) by
S&P has the following characteristics: liquidity ratios are adequate to meet
cash requirements; long-term senior debt is rated "A" or better, although in
some cases "BBB" credits may be allowed. The issuer has access to at least
two additional channels of borrowing. Basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances. Typically, the
issuer's industry is well established and the issuer has a strong position
within the industry. The reliability and quality of management are
unquestioned. The relative strength or weakness of the above factors
determines whether the issuer's commercial paper is rated A1, A2, or A3.
Fitch IBCA, Inc. Fitch 1-Highest grade Commercial paper assigned this rating
is regarded as having the strongest degree of assurance for timely payment.
Fitch 2-Very good grade Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
Government Reserve Investment, Prime Reserve, and Reserve Investment Funds
RATINGS OF CORPORATE DEBT SECURITIES
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Moody's Investors Service, Inc.
Aaa-Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge."
Aa-Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally know as high-grade bonds.
A-Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium-grade obligations.
Baa-Bonds rated Baa are considered as medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
Ba-Bonds rated Ba are judged to have speculative elements: their futures
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B-Bonds rated B generally lack the characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa-Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to repayment of
principal or payment of interest.
Ca-Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C-Bonds rated C represent the lowest rated and have extremely poor prospects
of attaining investment standing.
Standard & Poor's Corporation
AAA-This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA-Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong.
A-Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
BB, B, CCC, CC, C-Bonds rated BB, B, CCC, CC, and C are regarded on balance
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal. BB indicates the lowest degree of speculation
and C the highest degree of speculation. While such bonds will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
D-In default.
Fitch IBCA, Inc.
AAA-High grade, broadly marketable, suitable for investment by trustees and
fiduciary institutions, and liable to slight market fluctuation other than
through changes in the money rate. The prime feature of a "AAA" bond is the
showing of earnings several times or many times interest requirements for
such stability of applicable interest that safety is beyond reasonable
question whenever changes occur in conditions. Other features may enter, such
as wide margin of protection through collateral, security or direct lien on
specific property. Sinking funds or voluntary reduction of debt by call or
purchase are often factors, while guarantee or assumption by parties other
than the original debtor may influence their rating.
AA-Of safety virtually beyond question and readily salable. Their merits are
not greatly unlike those of "AAA" class but a bond so rated may be junior
though of strong lien, or the margin of safety is less strikingly broad. The
issue may be the obligation of a small company, strongly secured, but
influenced as to rating by the lesser financial power of the enterprise and
more local type of market.
A-Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB-Bonds rated BBB are considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB, B, CCC, CC, and C-Bonds rated BB, B, CCC, CC, and C are regarded on
balance as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligation for bond issues not in default. BB indicates the lowest degree of
speculation and C the highest degree of speculation. The rating takes into
consideration special features of the issue, its relationship to other
obligations of the issuer, and the current and prospective financial
condition and operating performance of the issuer.