-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PBQmj0JLxFJRN5ZU1rvQz2TcDY+U20iDNz4ixQxhWuWy21c1KeDPTPfy3zPJdTib 5rcHD9HnljyBTV/zkvhYSA== 0000950109-97-004939.txt : 19970714 0000950109-97-004939.hdr.sgml : 19970714 ACCESSION NUMBER: 0000950109-97-004939 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970531 FILED AS OF DATE: 19970711 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRICE T ROWE NEW INCOME FUND INC CENTRAL INDEX KEY: 0000080249 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 520980581 FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-02396 FILM NUMBER: 97639370 BUSINESS ADDRESS: STREET 1: 100 EAST PRATT ST CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 4105472000 FORMER COMPANY: FORMER CONFORMED NAME: PRICE T ROWE NEW INCOME FUND INC ET AL DATE OF NAME CHANGE: 19920703 N-30D 1 NEW INCOME FUND ANNUAL REPORT Annual Report New Income Fund May 31, 1997 [LOGO OF T. ROWE PRICE APPEARS HERE] T. Rowe Price Report Highlights . The Federal Reserve tightened in March to slow the surging economy; the consequent interest rate rise led to lackluster returns on high-quality bonds for the six-month period ended May 31. . Mortgage-backed securities were the performance leaders among high-quality bonds, as rising interest rates assuaged prepayment risk. . The fund's 6- and 12-month returns of 0.26% and 7.70%, respectively, lagged its Lipper peer group slightly for the shorter period but exceeded it for the longer. . We pared our holdings of mortgage-backed securities but continued to overweight them in the portfolio at 38% of net assets. . While additional Fed tightening is possible this year, prospects are good for continued moderate inflation and growth--a favorable environment for bonds over time. Fellow Shareholders Interest rates rose and prices of high-quality bonds declined on balance for the six months ended May 31, 1997, the reverse of the credit market scenario in the first half of the fund's fiscal year. Bond fund returns for the six-month period were basically flat, as coupon income tended to offset price drops. For the 12- month period returns were solid, driven almost entirely by income. Over the past six months, the economy developed considerable momentum. Consumer sentiment reached unusually high levels, and household spending on durable goods surged. Jobs were created at a rapid rate, and the civilian unemployment rate dropped to 4.8% in May, its lowest level in over two decades. The GDP rose at a 5.8% annual rate in the first quarter, roughly double its trend rate since the current upturn began in 1991. Against this background, the Federal Reserve abandoned its patient wait for the economy to slow on its own and, on March 25, raised the target for the key federal funds rate from 5.25% to 5.50%--the first tightening since 1995. This sent shock waves through the stock and bond markets, but they gradually regained their equilibria in April as interest rates leveled off or declined slightly, as shown in the chart. Among high-grade bond market sectors, mortgage-backed securities outstripped both Treasuries and corporates for the six-month period, as the rise in interest rates dampened the rate at which homeowners prepaid their mortgages. The strong performance in recent months enabled mortgage securities to provide the highest overall returns for the 12-month period [LINE GRAPH APPEARS HERE] INTEREST RATE LEVELS
30-Year 5-Year 1-Year 5/31/96 6.93 6.55 5.70 7.02 6.63 5.79 6.94 6.52 5.80 8/31/96 7.03 6.60 5.81 6.95 6.48 5.72 6.71 6.15 5.48 11/30/96 6.41 5.90 5.41 6.58 6.12 5.50 6.89 6.36 5.62 2/28/97 6.75 6.31 5.60 7.00 6.66 5.94 6.98 6.62 5.93 5/31/97 6.99 6.60 5.86
1 as well. Treasury issues outperformed corporate bonds for the six-month period but not for the whole 12 months. Within the investment-grade corporate sector, the lowest credit tier (bonds rated BBB) generated the highest returns. This is typical during periods of strong economic growth as fears of credit downgrades and defaults diminish. Performance and Strategy Review For the six-month period ended May 31, the fund managed a small positive return that was a few basis points behind that of its Lipper peer group average and also lagged the broad index. (One hundred basis points equal one percentage point.) Although total return for the past six months was lackluster because of the $0.27 drop in share price, the fund's dividend income for this period ($0.29 per share) was unchanged from the preceding six-month period. The fund's 7.70% return for the fiscal year, consisting largely of income but also a modest rise in share price ($8.70 to $8.77), exceeded its peer group average but not the index. Performance Comparison
Periods Ended 5/31/97 6 Months 12 Months New Income Fund 0.26% 7.70% Lehman Aggregate Bond Index 0.94 8.32 Lipper Average of Corporate Bond Funds A-Rated 0.29 7.60
We shortened the fund's duration from 5.5 years to 4.9 years because the buoyant economy increased the potential for higher inflation and a tightening by the Fed--which, in fact, occurred. (Duration is a measure of interest rate sensitivity. For example, the share price of a fund with a duration of four years would fall about 4% for each one-percentage- point rise in rates and vice versa.) The principal change we made in portfolio composition was to reduce holdings of mortgage-backed securities from 44% to 38% of net assets on
SECURITY DIVERSIFICATION Reserves 12% Other 2% U.S. Treasury Securities 27% Mortgage-Backed Securities 38% Corporate Bonds 21%
Based on net assets as of 5/31/97. 2 May 31. Even so, mortgage-backed securities remained significantly overweighted in the portfolio because we like the additional yield they provide over Treasury securities with no loss of credit quality. These securities perform well when interest rates fluctuate in a fairly narrow range, which we anticipate over the coming months, but we reined in the position a bit in case our forecast is wrong. We trimmed holdings of corporate bonds from 23% of net assets to 21%, since tight yield spreads among credit quality levels offered little inducement to move down the quality chain in search of higher income. The fund maintained a high weighted average credit rating of AA+. Outlook With the economy strong and labor markets under stress, some additional tightening of monetary policy is possible this year as the Fed tries to restrain the economy's blistering pace. Credit markets may again be roiled by a higher federal funds rate. Nevertheless, if inflation remains under control, we do not believe longer-term interest rates will necessarily move much higher. Barring a serious miscalculation by the Fed, we think prospects are good for moderate growth and a favorable market for debt securities over the long term. Respectfully submitted, /s/ Charles P. Smith Charles P. Smith President and Chairman of the Investment Advisory Committee June 17, 1997 3 T. Rowe Price New Income Fund - -------------------------------------------------------------------------------- - -------------------- Portfolio Highlights - --------------------
Key statistics 11/30/96 5/31/97 Price Per Share $ 9.04 $8.77 Dividends Per Share For 6 months 0.29 0.29 For 12 months 0.59 0.58 Dividend Yield * For 6 months 6.79% 6.69% For 12 months 6.84 6.86 Weighted Average Maturity (years) 9.9 10.4 Weighted Average Effective Duration (years) 5.5 4.9 Weighted Average Quality ** AA+ AA+
* Dividends earned and reinvested for the periods indicated are annualized and divided by the average daily net asset values per share for the same period. ** Based on T. Rowe Price research. - -------------------- Portfolio Highlights - --------------------
SECTOR DIVERSIFICATION Percent of Percent of Net Assets Net Assets 11/30/96 5/31/97 Mortgage-Backed Securities 44% 38% U.S. Treasury Securities 30 27 Commercial Paper 5 10 Banking 11 8 Electric Utilities 4 6 All Other 12 10 Other Assets Less Liabilities - 6 1 Total 100% 100%
4 T. Rowe Price New Income Fund - -------------------------------------------------------------------------------- - ---------------------- PERFORMANCE COMPARISON - -------------------------------------------------------------------------------- This chart shows the value of a hypothetical $10,000 investment in the fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records). The result is compared with a broad-based average or index. The index return does not reflect expenses, which have been deducted from the fund's return. [LINE GRAPH APPEARS HERE] NEW INCOME FUND ----------------------------------------------------------------------------
Lehman Aggregate Bond Index New Income Fund 05/87 10,000 10,000 05/88 10,696 10,790 05/89 11,929 11,765 05/90 13,048 12,696 05/91 14,684 14,275 05/92 16,510 15,930 05/93 18,376 17,437 05/94 18,507 17,681 05/95 20,631 19,648 05/96 21,536 20,374 05/97 23,327 21,942
- ------------------------------------ AVERAGE ANNUAL COMPOUND TOTAL RETURN - -------------------------------------------------------------------------------- This table shows how the fund would have performed each year if its actual (or cumulative) returns for the periods shown had been earned at a constant rate.
Periods Ended 5/31/97 1 Year 3 Years 5 Years 10 Years ---------------------------------------------------------------------------- New Income Fund 7.70% 7.46% 6.61% 8.17% ............................................................................
Investment return and principal value represent past performance and will vary. Shares may be worth more or less at redemption than at original purchase. 5 T. Rowe Price New Income Fund - -------------------------------------------------------------------------------- - --------------------- FINANCIAL HIGHLIGHTS For a share outstanding throughout each period - --------------------------------------------------------------------------------
Year 3 Months++ Year Ended Ended Ended 5/31/97 5/31/96 5/31/95 5/31/94 2/28/94 2/28/93 NET ASSET VALUE Beginning of period $ 8.70 $ 8.97 $ 8.65 $ 9.12 $ 9.24 $ 8.94 .................................................................. Investment activities Net investment income 0.58 0.60 0.58 0.14 0.54 0.57 Net realized and unrealized gain (loss) 0.07 (0.27) 0.34 (0.40) (0.05) 0.30 .................................................................. Total from investment activities 0.65 0.33 0.92 (0.26) 0.49 0.87 .................................................................. Distributions Net investment income (0.58) (0.60) (0.58) (0.14) (0.54) (0.57) Net realized gain - - (0.02) (0.07) (0.07) - .................................................................. Total distributions (0.58) (0.60) (0.60) (0.21) (0.61) (0.57) .................................................................. NET ASSET VALUE End of period $ 8.77 $ 8.70 $ 8.97 $ 8.65 $ 9.12 $ 9.24 ------------------------------------------------------------------
Ratios/Supplemental Data
Total return 7.70% 3.70% 11.13% (2.84)% 5.36% 10.12% ....................................................................................................... Ratio of expenses to average net assets 0.74% 0.75% 0.78% 0.80%+ 0.82% 0.84% ....................................................................................................... Ratio of net investment income to average net assets 6.65% 6.66% 6.95% 6.43%+ 5.77% 6.36% ....................................................................................................... Portfolio turnover rate 87.1% 35.5% 54.1% 91.5%+ 58.3% 85.8% ....................................................................................................... Net assets, end of period (in millions) $ 1,711 $ 1,634 $ 1,566 $ 1,375 $ 1,458 $ 1,527 .......................................................................................................
+ Annualized. ++ The funds fiscal year-end was changed to May 31. The accompanying notes are an integral part of these financial statements. 6 T. Rowe Price New Income Fund - -------------------------------------------------------------------------------- May 31, 1997
- ----------------------- STATEMENT OF NET ASSETS Par/Shares Value - ------------------------------------------------------------------------------------------ In thousands CORPORATE BONDS AND NOTES 21.3% Banking 7.1% ABN AMRO NV, Sub. Deb., 7.30%, 12/1/26 $ 10,000 $ 9,241 ....................................................................................... Banco Latinoamericano, (144a), 6.69%, 12/23/99 10,000 9,956 ....................................................................................... Bank of Boston Capital Trust, Gtd. Notes, 8.25%, 12/15/26 10,000 9,971 ....................................................................................... First Chicago NBD, Gtd. Bonds, (144a), 7.95%, 12/1/26 10,000 9,589 ....................................................................................... First Empire Capital Trust I, Gtd. Bonds, 8.234%, 2/1/27 10,000 9,794 ....................................................................................... Hubco Capital Trust I, 8.98%, 2/1/27 7,000 7,006 ....................................................................................... M & I Capital Trust, 7.65%, 12/1/26 11,300 10,604 ....................................................................................... Mercantile Bankshares, Sr. Notes, (144a), 6.13%, 7/15/98+ 5,000 4,985 ....................................................................................... PNC Bank, Sub. Notes, 7.875%, 4/15/05 12,000 12,385 ....................................................................................... PNC Institutional Capital, (144a), 7.95%, 12/15/26 8,000 7,756 ....................................................................................... Scotland International, Sub. Notes, (144a), 8.80%, 1/27/04 10,000 10,833 ....................................................................................... Societe Generale, Step-Up Perpetual Sub. Notes, (144a) 7.85%, 4/29/49 8,000 8,065 .................................................................................... Toronto Dominion Bank, Sub. Notes, 6.50%, 1/15/07 12,000 11,784 ....................................................................................... 121,969 ............. Consumer Services 0.6% Service Corporation International, 7.70%, 4/15/09 10,000 10,161 ....................................................................................... 10,161 ............. Electric Utilities 6.4% Alabama Power, 1st Mtg. Bonds, 7.75%, 2/1/23 3,650 3,488 ....................................................................................... Big Rivers, Cooperative Utility Trust Cert., 10.70%, 9/15/17 2,500 2,660 ....................................................................................... Consolidated Edison, Deb., 6.375%, 4/1/03 5,860 5,675 ....................................................................................... Consumers Energy, 1st Mtg. Bonds, 6.375%, 9/15/03 5,000 4,741 ....................................................................................... Georgia Power 1st Mtg. Bonds 7.625%, 3/1/23 5,750 5,384 .................................................................................... 7.95%, 2/1/23 3,300 3,182 ....................................................................................... Houston Lighting & Power, 7.75%, 3/15/23 10,000 9,531 ....................................................................................... Jersey Central Power & Light 1st Mtg. Notes, 6.75%, 11/1/25 9,000 7,874 ...................................................................................... MTN, 6.85%, 11/27/06 10,000 9,620 ....................................................................................... Montana Power, 1st Mtg. Bonds, 8.25%, 2/1/07 5,000 5,225 ....................................................................................... Northern Indiana Public Service, MTN, 6.90%, 6/1/00 5,000 4,978 ....................................................................................... Pacificorp, MTN, 7.12%, 8/15/02 3,900 3,912 ....................................................................................... Pennsylvania Power & Light, 1st Mtg. Notes, 6.875%, 3/1/04 5,000 4,954 .......................................................................................
7 T. Rowe Price New Income Fund - --------------------------------------------------------------------------------
Par/Shares Value - -------------------------------------------------------------------------------- In thousands Philadelphia Electric, 1st Ref. Mtg., 8.00%, 4/1/02 $ 8,050 $ 8,330 ................................................................................ Public Service Electric & Gas, 1st Ref. Mtg., 6.125%, 8/1/02 3,450 3,329 ................................................................................ Texas Utilities Electric, 1st Mtg. Bonds, 7.875%, 3/1/23 8,450 8,221 ................................................................................ Virginia Electric & Power, 1st Ref. Mtg., 7.50%, 6/1/23 10,950 10,440 ................................................................................ West Texas Utilities, 1st Mtg. Bonds, 6.375%, 10/1/05 7,860 7,467 ................................................................................ 109,011 ........... Finance and Credit 2.3% Fairfax Financial Holdings, 8.25%, 10/1/15 8,000 8,101 ................................................................................ Jefferson Pilot Capital Trust, (144a), 8.14%, 1/15/46 5,000 4,881 ................................................................................ National City Capital Trust, Gtd. Notes, 6.75%, 6/1/29 17,000 17,045 ................................................................................ Zurich Capital Trust, (144a), 8.376%, 6/1/37 10,000 10,170 ................................................................................ 40,197 ........... Food Processing 0.1% Quaker Oats, 7.44%, 3/2/26 1,000 963 ................................................................................ 963 ........... Industrials 0.9% Bard (C.R.), 6.70%, 12/1/26 10,000 9,608 ................................................................................ Clorox, 8.80%, 7/15/01 5,000 5,344 ................................................................................ 14,952 ........... Investment Dealers 1.1% Lehman Brothers Sr. Sub. Notes 5.75%, 11/15/98 5,000 4,955 ............................................................................ 7.625%, 8/1/98 8,000 8,104 ................................................................................ Salomon, MTN, 6.31%, 10/29/98 5,000 4,991 ................................................................................ 18,050 ........... Railroads 0.6% CSX, Deb., 7.45%, 5/1/07 10,000 10,063 ................................................................................ 10,063 ........... Retail 0.9% Food Lion, 7.55%, 4/15/07 6,000 6,061 ................................................................................ Kroger, 7.65%, 4/15/07 9,000 9,104 ................................................................................ 15,165 ........... Savings and Loan 0.3% CENFED Financial, Sr. Deb., (144a), 11.17%, 12/15/01 5,000 5,331 ................................................................................ 5,331 ...........
8 T. Rowe Price New Income Fund - --------------------------------------------------------------------------------
Par/Shares Value - -------------------------------------------------------------------------------- In thousands Telephone 0.6% GTE, Deb., 9.375%, 12/1/00 $ 10,000 $ 10,789 ................................................................................ 10,789 ........... Transportation 0.4% Qantas Airways, Sr. Notes, (144a), 6.625%, 6/30/98 7,000 7,018 ................................................................................ 7,018 ........... Total Corporate Bonds and Notes (Cost $366,813) 363,669 U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES 38.0% U.S. Government Agency Asset-Backed 0.3% Federal National Mortgage Assn., REMIC, 8.10%, 4/25/25 4,500 4,632 ................................................................................ 4,632 ........... U.S. Government Agency Obligations 2.2% Federal Home Loan Mortgage 6.50%, 11/1/04 - 6/1/24 11,025 10,472 ........................................................................... 7.00%, 2/1/24 4,374 4,294 ........................................................................... 7.50%, 3/1 - 6/1/24 9,133 9,118 ........................................................................... 8.00%, 6/1/08 108 110 ........................................................................... 9.00%, 3/1/21 - 5/1/22 6,598 6,956 ........................................................................... 9.75%, 12/1/17 2,292 2,468 ........................................................................... 10.50%, 2/1/01 - 8/1/20 988 1,078 ........................................................................... 11.00%, 5/1/11 - 7/1/20 496 550 ........................................................................... 11.50%, 6/1/01 6 7 ................................................................................ Federal National Mortgage Assn. 8.75%, 3/1/10 13 13 ........................................................................... 10.50%, 7/1/09 - 4/1/22 2,274 2,481 ................................................................................ 37,547 ........... U.S. Government Guaranteed Obligations 35.5% Government National Mortgage Assn. I 6.00%, 12/15/23 - 4/15/24 3,434 3,187 ........................................................................... 6.50%, 9/15/23 - 4/15/26 39,790 37,894 ........................................................................... 7.00%, 4/15/22 - 2/15/27 131,743 128,728 ........................................................................... 7.50%, 8/15/16 - 12/15/25 72,578 72,869 ........................................................................... 8.00%, 7/15/16 - 4/15/27 119,470 122,383 ........................................................................... 8.50%, 9/15/16 - 4/15/27 102,149 106,300 ........................................................................... 9.00%, 1/15/09 - 11/15/25 30,773 32,675 ...........................................................................
9 T. Rowe Price New Income Fund - --------------------------------------------------------------------------------
Par/Shares Value - -------------------------------------------------------------------------------- In thousands Government National Mortgage Assn. I 9.50%, 6/15/09 - 3/15/25 $ 62,430 $ 67,463 ........................................................................... 11.00%, 12/15/09 - 1/15/21 18,520 20,832 ........................................................................... 11.50%, 3/15/10 - 10/15/15 2,352 2,674 ........................................................................... II 7.00%, 12/20/23 1,410 1,374 ........................................................................... 8.50%, 9/20/26 171 177 ........................................................................... 9.00%, 6/20/16 - 5/20/22 7,654 8,099 ........................................................................... GPM, I, 10.25%, 2/15/16 - 11/15/20 3,103 3,384 ................................................................................ 608,039 ........... Total U.S. Government Mortgage-Backed Securities (Cost $646,371) 650,218 ........... U.S. GOVERNMENT OBLIGATIONS 27.2% U.S. Treasury Obligations 27.2% U.S. Treasury Bonds 6.00%, 2/15/26 3,250 2,860 ........................................................................... 6.50%, 11/15/26 24,000 22,627 ........................................................................... 6.75%, 8/15/26 71,550 69,638 ........................................................................... 7.875%, 2/15/21 15,850 17,423 ........................................................................... 8.00%, 11/15/21 18,860 21,026 ........................................................................... 8.125%, 5/15/21 32,140 36,258 ................................................................................ U.S. Treasury Notes 6.125%, 9/30/00 3,000 2,975 ........................................................................... 6.25%, 5/31/00 - 2/15/03 22,500 22,316 ........................................................................... 6.50%, 5/15 - 8/15/05 104,900 103,910 ........................................................................... 6.625%, 6/30/01 - 5/15/07 21,800 21,831 ........................................................................... 7.00%, 7/15/06 9,000 9,194 ........................................................................... 7.25%, 5/15/04 69,250 71,728 ........................................................................... 7.50%, 11/15/01 3,650 3,789 ........................................................................... 7.75%, 11/30/99 58,250 60,161 ................................................................................ Total U.S. Government Obligations (Cost $459,243) 465,736 ........... ASSET-BACKED SECURITIES 0.9% Auto-Backed 0.4% Daimler-Benz Auto Grantor Trust, 3.90%, 10/15/98 366 363 ................................................................................ Ford Credit Grantor Trust, 4.30%, 7/15/98 348 347 ................................................................................ GMAC Grantor Trust, 4.15%, 3/16/98 113 113 ................................................................................
10 T. Rowe Price New Income Fund - --------------------------------------------------------------------------------
Par/Shares Value - -------------------------------------------------------------------------------- In thousands Premier Auto Trust, 4.22%, 3/2/99 $ 1,316 $ 1,304 ................................................................................ Western Financial Grantor Trust, 6.20%, 2/1/02 4,984 4,976 ................................................................................ 7,103 ........... Home Equity Loans-Backed 0.0% Home Equity Loan, REMIC, 5.65%, 11/15/14 517 508 ................................................................................ 508 ........... Receivables-Backed 0.5% Continental Airlines, PTC, 6.94%, 10/15/13 3,431 3,326 ................................................................................ Green Tree Financial, 6.25%, 1/15/28 5,000 4,994 ................................................................................ 8,320 ........... Total Asset-Backed Securities (Cost $16,078) 15,931 ........... EQUITY AND CONVERTIBLE SECURITIES 0.6% Banking 0.6% Chase Preferred Capital, Pfd. Stock, (Series A) 400 10,250 ................................................................................ Total Equity and Convertible Securities (Cost $9,960) 10,250 ........... COMMERCIAL PAPER 9.8% Caisse des Depots et Consignations, 4(2), 5.58%, 6/17/97 25,000 24,934 ................................................................................ Delaware Funding 4(2) 5.53%, 6/16/97 10,000 9,975 ........................................................................... 5.55%, 6/2/97 22,111 22,111 ........................................................................... Halifax Building Society, 5.50%, 6/6/97 20,000 19,981 ................................................................................ Internationale Nederland, 5.58%, 6/16/97 25,000 24,938 ................................................................................ National Australia Funding, 5.52%, 6/5/97 25,000 24,980 ................................................................................ Preferred Receivables Funding, 5.53%, 6/12/97 8,575 8,559 ................................................................................ Investments in Commercial Paper through a Joint Account 5.60 - 5.69%, 6/2/97 32,971 32,971 ................................................................................ Total Commercial Paper (Cost $168,460) 168,449 ........... CERTIFICATES OF DEPOSIT 1.5% Deutschebank Finance, 5.55%, 6/5/97 25,000 25,000 ................................................................................ Total Certificates of Deposit (Cost $25,000) 25,000 ...........
11 T. Rowe Price New Income Fund - -------------------------------------------------------------------------------- Value - -------------------------------------------------------------------------------- In thousands Total Investments in Securities 99.3% of Net Assets (Cost $1,691,925) $ 1,699,253 Other Assets Less Liabilities 11,477 ............ NET ASSETS $ 1,710,730 ------------ Net Assets Consist of: Accumulated net investment income - net of distributions $ 2,701 Accumulated net realized gain/loss - net of distributions (6,766) Net unrealized gain (loss) 7,328 Paid-in-capital applicable to 195,078,443 shares of $1.00 par value capital stock outstanding; 300,000,000 shares authorized 1,707,467 ............ NET ASSETS $ 1,710,730 ------------ NET ASSET VALUE PER SHARE $ 8.77 ------------
+ Private Placement GPM Graduated Payment Mortgage MTN Medium Term Note PTC Pass-through Certificate REMIC Real Estate Mortgage Investment Conduit 4(2) Commercial Paper sold within terms of a private placement memorandum, exempt from registration under section 4.2 of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors". 144a Security was purchased pursuant to Rule 144a under the Securities Act of 1933 and may not be resold subject to that rule except to qualified institutional buyers -- total of such securities at year-end amounts to 4.6% of net assets. The accompanying notes are an integral part of these financial statements. 12 T. Rowe Price New Income Fund - -------------------------------------------------------------------------------- - ------------------------- Statement of Operations - -------------------------------------------------------------------------------- In thousands
Year Ended 5/31/97 Investment Income Interest and dividend income $ 123,450 ........... Expenses Investment management 7, 984 Shareholder servicing 3,777 Custody and accounting 384 Prospectus and shareholder reports 113 Registration 75 Legal and audit 27 Directors 20 Miscellaneous 21 ........... Total expenses 12,401 ........... Net investment income 111,049 ........... Realized and Unrealized Gain (Loss) Net realized gain (loss) on securities 4,730 Change in net unrealized gain or loss on securities 6,965 ........... Net realized and unrealized gain (loss) 11,695 ........... INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 122,744 -----------
The accompanying notes are an integral part of these financial statements. 13 T. Rowe Price New Income Fund - -------------------------------------------------------------------------------- - ------------------------------------ Statement of Changes in Net Assets - -------------------------------------------------------------------------------- In thousands
Year Ended 5/31/97 5/31/96 Increase (Decrease) in Net Assets Operations Net investment income $ 111,049 $ 107,924 Net realized gain (loss) 4,730 1,379 Change in net unrealized gain or loss 6,965 (53,172) .......................... Increase (decrease) in net assets from operations 122,744 56,131 .......................... Distributions to shareholders Net investment income (111,027) (107,911) .......................... Capital share transactions* Shares sold 323,914 394,756 Distributions reinvested 71,848 78,213 Shares redeemed (331,111) (352,730) .......................... Increase (decrease) in net assets from capital share transactions 64,651 120,239 .......................... Net Assets Increase (decrease) during period 76,368 68,459 Beginning of period 1,634,362 1,565,903 .......................... End of period $ 1,710,730 $1,634,362 -------------------------- *Share information Shares sold 36,821 43,673 Distributions reinvested 8,164 8,680 Shares redeemed (37,672) (39,188) .......................... Increase (decrease) in shares outstanding 7,313 13,165
The accompanying notes are an integral part of these financial statements. 14 T. Rowe Price New Income Fund - -------------------------------------------------------------------------------- May 31, 1997 - ------------------------------- Notes to Financial Statements - -------------------------------------------------------------------------------- NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES T. Rowe Price New Income Fund, Inc. (the fund) is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company and commenced operations on October 12, 1973. Valuation Debt securities are generally traded in the over-the-counter market. Investments in securities originally issued with maturities of one year or more are stated at fair value as furnished by dealers who make markets in such securities or by an independent pricing service, which considers yield or price of bonds of comparable quality, coupon, maturity, and type, as well as prices quoted by dealers who make markets in such securities. Securities with original maturities of less than one year are stated at fair value, which is determined by using a matrix system that establishes a value for each security based on money market yields. Equity securities listed or regularly traded on a securities exchange are valued at the last quoted sales price on the day the valuations are made. A security which is listed or traded on more than one exchange is valued at the quotation on the exchange determined to be the primary market for such security. Listed securities not traded on a particular day and securities regularly traded in the over-the-counter market are valued at the mean of the latest bid and asked prices. Other equity securities are valued at a price within the limits of the latest bid and asked prices deemed by the Board of Directors, or by persons delegated by the Board, best to reflect fair value. Assets and liabilities for which the above valuation procedures are inappropriate or are deemed not to reflect fair value are stated at fair value as determined in good faith by or under the supervision of the officers of the fund, as authorized by the Board of Directors. Premiums and Discounts Premiums and discounts on debt securities, other than mortgage-backed securities, are amortized for both financial reporting and tax purposes. Premiums and discounts on mortgage-backed securities are recognized upon principal repayment as gain or loss for financial reporting purposes and as ordinary income for tax purposes. Other Income and expenses are recorded on the accrual basis. Investment transactions are accounted for on the trade date. Realized gains and losses are reported on the identified cost basis. Dividends and distributions to shareholders are recorded by the fund on the ex-dividend date. Income and capital gain 15 T. Rowe Price New Income Fund - -------------------------------------------------------------------------------- distributions are determined in accordance with federal income tax regulations and may differ from those determined in accordance with generally accepted accounting principles. NOTE 2 - INVESTMENT TRANSACTIONS Consistent with its investment objective, the fund engages in the following practices to manage exposure to certain risks or enhance performance. The investment objective, policies, program, and risk factors of the fund are described more fully in the fund's prospectus and Statement of Additional Information. Commercial Paper Joint Account The fund, and other affiliated funds, may transfer uninvested cash into a commercial paper joint account, the daily aggregate balance of which is invested in high-grade commercial paper. All securities purchased by the joint account satisfy the fund's criteria as to quality, yield, and liquidity. Securities Lending The fund lends its securities to approved brokers to earn additional income and takes cash and U.S. Treasury securities as collateral to secure the loans. Collateral is maintained at not less than 100% of the value of loaned securities. At May 31, 1997, the value of securities on loan was $366,242,000. Although the risk is mitigated by the collateral, the fund could experience a delay in recovering its securities and a possible loss of income or value if the borrower fails to return them. Other Purchases and sales of portfolio securities, other than short-term and U.S. government securities, aggregated $396,601,000 and $426,395,000, respectively, for the year ended May 31, 1997. Purchases and sales of U.S. government securities aggregated $997,253,000 and $1,037,964,000, respectively, for the year ended May 31, 1997. NOTE 3 - FEDERAL INCOME TAXES No provision for federal income taxes is required since the fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. At May 31, 1997, the fund had no unused realized capital loss carryforwards for federal income tax purposes. Capital loss carryforwards utilized in 1997 amounted to $2,377,000. 16 T. Rowe Price New Income Fund - -------------------------------------------------------------------------------- At May 31, 1997, the aggregate cost of investments for federal income tax and financial reporting purposes was $1,691,925,000, and net unrealized gain aggregated $7,328,000, of which $22,159,000 related to appreciated investments and $14,831,000 to depreciated investments. NOTE 4 - RELATED PARTY TRANSACTIONS The investment management agreement between the fund and T. Rowe Price Associates, Inc. (the manager) provides for an annual investment management fee, of which $689,000 was payable at May 31, 1997. The fee is computed daily and paid monthly, and consists of an individual fund fee equal to 0.15% of average daily net assets and a group fee. The group fee is based on the combined assets of certain mutual funds sponsored by the manager or Rowe Price-Fleming International, Inc. (the group). The group fee rate ranges from 0.48% for the first $1 billion of assets to 0.30% for assets in excess of $80 billion. At May 31, 1997, and for the year then ended, the effective annual group fee rate was 0.33%. The fund pays a pro-rata share of the group fee based on the ratio of its net assets to those of the group. In addition, the fund has entered into agreements with the manager and two wholly owned subsidiaries of the manager, pursuant to which the fund receives certain other services. The manager computes the daily share price and maintains the financial records of the fund. T. Rowe Price Services, Inc. (TRPS) is the fund's transfer and dividend disbursing agent and provides shareholder and administrative services to the fund. T. Rowe Price Retirement Plan Services, Inc., provides subaccounting and recordkeeping services for certain retirement accounts invested in the fund. Additionally, the fund is one of several T. Rowe Price mutual funds (the underlying funds) in which the T. Rowe Price Spectrum Income Fund (Spectrum) invests. In accordance with an agreement among Spectrum, the underlying funds, the manager, and TRPS, expenses from the operation of Spectrum are borne by the underlying funds based on each underlying fund's proportionate share of assets owned by Spectrum. The fund incurred expenses pursuant to these related party agreements totaling approximately $3,494,000 for the year ended May 31, 1997, of which $254,000 was payable at period-end. 17 T. Rowe Price New Income Fund - -------------------------------------------------------------------------------- - ----------------------------------- Report of Independent Accountants - -------------------------------------------------------------------------------- To the Board of Directors and Shareholders of T. Rowe Price New Income Fund, Inc. In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of T. Rowe Price New Income Fund, Inc. (the "Fund") at May 31, 1997, and the results of its operations, the changes in its net assets and the financial highlights for each of the fiscal periods presented, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at May 31, 1997 by correspondence with the custodian and, where appropriate, the application of alternative auditing procedures for unsettled security transactions, provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Baltimore, Maryland June 18, 1997 18 T. Rowe Price Shareholder Services - -------------------------------------------------------------------------------- Investment Services And Information KNOWLEDGEABLE SERVICE REPRESENTATIVES By Phone 1-800-225-5132 Available Monday through Friday from 8 a.m. to 10 p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET. In Person Available in T. Rowe Price Investor Centers. ACCOUNT SERVICES Checking Available on most fixed income funds ($500 minimum). Automatic Investing From your bank account or paycheck. Automatic Withdrawal Scheduled, automatic redemptions. Distribution Options Reinvest all, some, or none of your distributions. Automated 24-Hour Services Including Tele*Access(R) and T. Rowe Price OnLine. DISCOUNT BROKERAGE* Individual Investments Stocks, bonds, options, precious metals, and other securities at a savings over regular commission rates. INVESTMENT INFORMATION Combined Statement Overview of your T. Rowe Price accounts. Shareholder Reports Fund managers' reviews of their strategies and results. T. Rowe Price Report Quarterly investment newsletter discussing markets and financial strategies. Performance Update Quarterly review of all T. Rowe Price fund results. Insights Educational reports on investment strategies and financial markets. Investment Guides Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A Guide to International Investing, Personal Strategy Planner, Retirees Financial Guide, and Retirement Planning Kit. *A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC. 19 T. Rowe Price Mutual Funds - --------------------------------------------------------------------------------
STOCK FUNDS BOND FUNDS ...................... ............................ ........................ Domestic Domestic Taxable International/Global Balanced Corporate Income Global Government Bond Blue Chip Growth GNMA Emerging Markets Bond Capital Appreciation High Yield International Bond Capital Opportunity New Income Dividend Growth Short-Term Bond MONEY MARKET FUNDS Equity Income Short-Term U.S. Government ....................... Equity Index Spectrum Income Taxable Financial Services Summit GNMA Prime Reserve Growth & Income Summit Limited-Term Bond Summit Cash Reserves Growth Stock U.S. Treasury Intermediate U.S. Treasury Money Health Sciences U.S. Treasury Long-Term Mid-Cap Growth Tax-Free Mid-Cap Value Domestic Tax-Free California Tax-Free Money New America Growth California Tax-Free Bond New York Tax-Free Money New Era Florida Insured Summit Municipal New Horizons* Intermediate Tax-Free Money Market Science & Technology Georgia Tax-Free Bond Tax-Exempt Money Small-Cap Stock** Maryland Short-Term Small-Cap Value* Tax-Free Bond BLENDED ASSET FUNDS Spectrum Growth Maryland Tax-Free Bond ........................ Value New Jersey Tax-Free Bond Personal Strategy Income New York Tax-Free Bond Personal Strategy Balanced International/Global Summit Municipal Income Personal Strategy Growth Emerging Markets Stock Summit Municipal Intermediate European Stock Tax-Free High Yield T. ROWE PRICE NO-LOAD Global Stock Tax-Free Income VARIABLE ANNUITY International Discovery Tax-Free Insured .......................... International Stock Intermediate Bond Equity Income Portfolio Japan Tax-Free Short-Intermediate International Stock Portfolio Latin America Virginia Short-Term Limited-Term Bond Portfolio New Asia Tax-Free Bond Mid-Cap Growth Portfolio Spectrum International Virginia Tax-Free Bond New America Growth Portfolio Personal Strategy Balanced Portfolio Prime Reserve Portfolio
*Closed to new investors. **Formerly the OTC Fund. Please call for a prospectus. Read it carefully before you invest or send money. The T. Rowe Price No-Load Variable Annuity [#V6021] is issued by Security Benefit Life Insurance Company. In New York, it [#FSB201(11-96)] is issued by First Security Benefit Life Insurance Company of New York, White Plains, NY. T. Rowe Price refers to the underlying portfolios' investment managers and the distributors, T. Rowe Price Investment Services, Inc.; T. Rowe Price Insurance Agency, Inc.; and T. Rowe Price Insurance Agency of Texas, Inc. The Security Benefit Group of Companies and the T. Rowe Price companies are not affiliated. The variable annuity may not be available in all states. The contract has limitations. Call a representative for costs and complete details of the coverage. 20 T. Rowe Price Discount Brokerage - -------------------------------------------------------------------------------- Discount Brokerage A Division of T. Rowe Price Investment Services, Inc., Member NASD/SIPC This low-cost service gives you the opportunity to easily consolidate all your investments with one company. Through T. Rowe Price Discount Brokerage, you can buy and sell individual securities--stocks, bonds, options, and others--at considerable commission savings over full- service brokers.* We also provide a wide range of services, including: Automated Telephone and Computer Services You can enter trades, access quotes, and review account information 24 hours a day, seven days a week. Any trades executed through these programs save you an additional 10% on commissions.** Investor Information A variety of informative reports, such as our Brokerage Insights series, S&P Market Month newsletter, and select stock reports, can help you better evaluate economic trends and investment opportunities. Dividend Reinvestment Service Virtually all stocks held in customer accounts are eligible for this service, free of charge. *Based on a February 1997 telephone survey that compared our commission rates on stock transactions of various sizes with those of other full- service and discount brokerages. Commission rates will vary based on size and nature of trades. Services vary by firm. For additional information concerning our commission rates and services, call 1-800- 638-5660. **Discount applies to our current commission schedule; subject to our $35 minimum commission. 21 For yield, price, last transaction, Investor Centers: current balance, or to conduct 101 East Lombard St. transactions, 24 hours, 7 days Baltimore, MD 21202 a week, call Tele*Access(R): 1-800-638-2587 toll free T. Rowe Price Financial Center For assistance 10090 Red Run Blvd. with your existing Owings Mills, MD 21117 fund account, call: Shareholder Service Center Farragut Square 1-800-225-5132 toll free 900 17th Street, N.W. 410-625-6500 Baltimore area Washington, D.C. 20006 To open a Discount Brokerage account or obtain information, ARCO Tower call: 1-800-638-5660 toll free 31st Floor 515 South Flower St. Internet address: Los Angeles, CA 90071 www.troweprice.com 4200 West Cypress St. T. Rowe Price Associates 10th Floor 100 East Pratt Street Tampa, FL 33607 Baltimore, Maryland 21202 This report is authorized for distribution only to shareholders and to others who have received a copy of the prospectus of the T. Rowe Price New Income Fund(R). [LOGO OF T. ROWE PRICE APPEARS HERE] T. Rowe Price Investment Services, Inc., Distributor. F43-050 5/31/97 -----END PRIVACY-ENHANCED MESSAGE-----