Item 1. Report to Shareholders
November 30, 2004
T. Rowe Price Short-Term Bond Fund
Semiannual Report
T. Rowe Price
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The views and opinions in this report were current as of November 30, 2004. They
are not guarantees of performance or investment results and should not be taken
as investment advice. Investment decisions reflect a variety of factors, and the
managers reserve the right to change their views about individual stocks,
sectors, an d the markets at any time. As a result, the views expressed should
not be relied upon as a forecast of the fund's future investment intent. The
report is certified under the Sarbanes-Oxley Act of 2002, which requires mutual
funds and other public companies to affirm that, to the best of their knowledge,
the information in their financial reports is fairly and accurately stated in
all material respects.
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REPORTS ON THE WEB
Sign up for our E-mail Program, and you can begin to receive updated fund
reports and prospectuses online rather than through the mail. Log in to your
account at troweprice.com for more information.
T. Rowe Price Short-Term Bond Fund
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Fellow Shareholders
During the past six months, the Federal Reserve embarked on a policy of
tightening its monetary stance. As a result, interest rates for the shortest
maturities have risen sharply along with an increase in the fed funds rate
target from 1.0% to 2.0% from June through the end of November. Simultaneously,
intermediate- and longer-term yields have actually declined, resulting in a
positive total return for your fund.
MARKET ENVIRONMENT
Short- and longer-term interest rates moved counter to each other during the
past six months, with short yields rising and longer yields declining as the
Federal Reserve boosted the fed funds rate in four stages. The Federal Reserve's
four rate increases from June through November doubled the official federal
funds rate, to 2% but left rates at levels that were still quite low by
historical standards; indeed, as recently as four years ago, the federal funds
rate had been above 6%. Factoring in inflation, real short-term rates stood
below 0.5%. The Fed made clear that it would continue to move away from this
highly "accommodative" stance with further rate increases, although it would do
so at a measured pace.
[GRAPHIC OMITTED]
INTEREST RATE LEVELS
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FRB 5-Year Treasury Note
FRB 2-Year Treasury Note
Fed Funds Target
FRB 5-Year FRB 2-Year Fed Funds
Treasury Note Treasury Note Target
11/30/03 3.35% 2.04% 1.00%
12/03 3.25 1.82 1.00
1/04 3.14 1.82 1.00
2/04 2.94 1.64 1.00
3/04 2.78 1.57 1.00
4/04 3.62 2.32 1.00
5/04 3.79 2.53 1.00
6/04 3.77 2.68 1.25
7/04 3.69 2.68 1.25
8/04 3.31 2.39 1.50
9/04 3.37 2.61 1.75
10/04 3.28 2.55 1.75
11/30/2004 3.69 3.00 2.00
During the period, the U.S. dollar sank to an all-time low against the euro, and
gold rose to levels not seen since the late 1980s. While the administration has
proclaimed its preference for a "strong dollar," it has quietly allowed the
dollar to weaken against major foreign currencies without taking significant
steps to reverse the situation.
Recent economic reports reflected solid fundamentals. Low interest rates, ease
of financing, rising incomes, and an improving labor market all acted to bolster
housing demand in recent months. Similarly, strong cash flow,
healthy balance sheets, and rising utilization rates offer ongoing support for
business equipment purchases, with additional stimulus coming from favorable
depreciation allowances set to expire at year-end. Finally, the downward trend
in jobless claims supports the view that slack in the labor market will continue
to diminish. An improving economy normally results in higher interest rates,
which puts downward pressure on bond prices.
The economy grew at a 3.9% annual rate in the third quarter, slightly faster
than the 3.7% initially reported. Higher exports, business investments, and
consumer spending were behind the increase. Chicago purchasing managers reported
that their monthly measure of business activity fell to 65.2% in November from
68.5% the month before as automakers cut back production, but readings above 50%
still reflect an expanding economy.
PERFORMANCE COMPARISON
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Periods Ended 11/30/04 6 Months 12 Months
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Short-Term Bond Fund 1.15% 1.48%
Lehman Brothers 1-3 Year U.S. Government/Credit Index 1.04 1.70
Lipper Short Investment Grade Debt Funds Average 1.13 1.57
Please see the fund's quarter-end returns following this letter.
PORTFOLIO CHARACTERISTICS
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Periods Ended 5/31/04 11/30/04
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Price Per Share $4.76 $4.75
Dividends Per Share
For 6 Months 0.07 0.06
For 12 Months 0.14 0.13
30-Day Dividend Yield * 2.66% 2.87%
30-Day Standardized Yield to Maturity 2.50 2.86
Weighted Average Maturity (years) 2.3 2.4
Weighted Average Effective Duration (years) 1.6 1.7
* Dividends earned for the last 30 days of each period indicated are
annualized and divided by the fund's net asset value per share at the end
of the period.
Note: Yield will vary and is not guaranteed
PERFORMANCE
Your fund generated modest gains during the 6- and 12-month periods ended
November 30, 2004, surpassing the Lehman Brothers 1-3 Year U.S.
Government/Credit Index and performing roughly in line with the Lipper peer
group over the last six months but trailing both benchmarks during the 12-month
cycle. The fund's net asset value declined a penny from the end of May to $4.75
at the end of November in a challenging environment, but dividends contributed
$0.06
per share, resulting in a positive total return for the six-month period. For
the 12-month cycle, net asset value fell $0.06 but dividends amounting to $0.13
per share put the annual return in positive territory.
QUALITY DIVERSIFICATION
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U.S. Government Agency Securities* 20%
AAA 28
AA 7
A 20
BBB 25
Based on net assets as of 11/30/04.
* U.S. government agencies include GNMA and conventional pass-throughs and
CMOs.
Source: Standard & Poor's; if Standard & Poor's does not rate a security, then
Moody's Investors Service is used as a secondary source.
The fund's higher yield, generated primarily by our corporate and asset-backed
securities, managed to keep performance slightly ahead of its major benchmarks
during the past six months. The shortfall over the 12-month period was a result
of the portfolio's short duration throughout most of 2004. (Duration is a
measure of a bond fund's sensitivity to interest rates; see Glossary for a more
detailed explanation.) Duration had not been a significant factor earlier when
virtually all short-term bond funds had maintained similar postures, but a
longer duration when intermediate-term rates were falling in recent months would
have benefited results. Fund duration stood at 1.7 years at the end of November,
and it was only a notch lower at 1.6 years a year ago.
SECURITY DIVERSIFICATION
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Mortgage-Backed Securities 22%
Corporate Bonds 50
U.S. Treasuries 6
U.S. Agency Obligations 4
Asset-Backed Securities 15
Other and Reserves 3
Based on net assets as of 11/30/04.
Our investment strategy continued to focus on maintaining a slightly
higher-than-average yield compared with competing funds. This was accomplished
by reducing our allocation of U.S. Treasury securities during the past six
months and simultaneously lifting our exposure to agency, mortgage-backed,
industrial, asset-backed, and utilities holdings.
At the end of November, 28% of the portfolio was allocated to AAA securities,
20% to agencies (including GNMAs and collateralized mortgage obligations), 7% to
AA, 20% to A, and 25% to BBB. Corporate bonds amounted to 50% of portfolio net
assets, mortgage-backed securities 22%, asset-backed securities 15%, and the
remaining 10% was divided between U.S. Treasuries and agency obligations.
OUTLOOK
Inflation remains well contained, reflecting expectations for moderate growth in
labor costs, gains in worker productivity, and a declining trend in the price of
crude oil. We expect the Federal Reserve to continue its policy of raising
short-term interest rates during the coming year, and longer-term yields are
likely to track higher as well. However, we believe shorter rates will rise more
rapidly, resulting in a gradually flattening yield curve through 2005.
In this type of environment, with the economy growing moderately, longer-term
yields increasing more slowly than short-term rates, and inflation under
control, shorter-term bonds should perform reasonably well. We reiterate our
position that, while market conditions may become less friendly to bond
investors as rates move higher, investors should keep a portion of their assets
in this segment of the fixed-income market. Short-term fixed-income securities
offer portfolio diversification, are less volatile than equities and long-term
bonds, generate income that can help offset principal losses, and provide a
relatively safe haven in periods of geopolitical instability.
As long as the Fed implements its tightening strategy with incremental rate
hikes, the short-term market should be able to absorb them with relative ease.
In addition, the diversified mix of bonds in our portfolio provides investors
with a yield advantage over Treasuries, which can help offset any weakness in
principal. As always, we will continue to
monitor conditions closely and look for opportunities as they become available
in a changing economic environment.
Thank you for investing with T. Rowe Price.
Respectfully submitted,
Edward A. Wiese
President and chairman of the fund's Investment Advisory Committee
December 22, 2004
The committee chairman has day-to-day responsibility for managing the portfolio
and works with committee members in developing and executing the fund's
investment program.
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RISKS OF FIXED-INCOME INVESTING
Bonds are subject to interest rate risk (the decline in bond prices that usually
accompanies a rise in interest rates) and credit risk (the chance that any fund
holding could have its credit rating downgraded or that a bond issuer will
default by failing to make timely payments of interest or principal),
potentially reducing the fund's income level and share price. Mortgage-backed
securities are subject to prepayment risk, particularly if falling rates lead to
heavy refinancing activity, and extension risk, which is an increase in interest
rates that causes a fund's average maturity to lengthen unexpectedly due to a
drop in mortgage prepayments. This could increase the fund's sensitivity to
rising interest rates and its potential for price declines.
GLOSSARY
Lipper Averages: The averages of available mutual fund performance returns for
specified time periods in defined categories as tracked by Lipper Inc.
Lehman Brothers 1-3 Year U.S. Government/Credit Index: A total return index that
incorporates all bonds in both the Treasury Bond Index and the Agency Bond
Index, as well as U.S. corporate and some foreign debentures and secured notes,
with maturities of one to three years.
Duration: A measure of a bond fund's sensitivity to changes in interest rates.
For example, a fund with a duration of two years would fall about 2% in price in
response to a one-percentage-point rise in interest rates, and vice versa.
T. Rowe Price Short-Term Bond Fund
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GROWTH OF $10,000
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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 benchmarks, which may include a
broad-based market index and a peer group average or index. Market indexes do
not include expenses, which are deducted from fund returns as well as mutual
fund averages and indexes.
[GRAPHIC OMITTED]
SHORT-TERM BOND FUND
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As of 11/30/04
Short-Term Bond Fund $16,968
Lehman Brothers 1-3 Yr. U.S. Government/Credit Index $17,860
Lehman Brothers
Short-Term 1-3 Yr. U.S.
Bond Fund Government/Credit Index
11/94 $10,000 $10,000
11/95 10,814 11,033
11/96 11,336 11,687
11/97 11,946 12,385
11/98 12,739 13,286
11/99 13,029 13,744
11/00 13,983 14,692
11/01 15,411 16,166
11/02 16,007 17,006
11/03 16,722 17,562
11/04 16,968 17,860
AVERAGE ANNUAL COMPOUND TOTAL RETURN
This table shows how the fund and its benchmarks would have performed if their
actual (or cumulative) returns for the periods shown had been earned at a
constant rate.
Periods Ended 11/30/04 1 Year 5 Years 10 Years
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Short-Term Bond Fund 1.48% 5.43% 5.43%
Lehman Brothers 1-3 Year U.S.
Government/Credit Index 1.70 5.38 5.97
Lipper Short Investment Grade
Debt Funds Average 1.57 4.62 5.30
Returns do not reflect taxes that the shareholder may pay on fund distributions
or the redemption of fund shares. Past performance cannot guarantee future
results.
T. Rowe Price Short-Term Bond Fund
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FUND EXPENSE EXAMPLE
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As a mutual fund shareholder, you may incur two types of costs: (1) transaction
costs such as redemption fees or sales loads and (2) ongoing costs, including
management fees, distribution and service (12b-1) fees, and other fund expenses.
The following example is intended to help you understand your ongoing costs (in
dollars) of investing in the fund and to compare these costs with the ongoing
costs of investing in other mutual funds. The example is based on an investment
of $1,000 invested at the beginning of the most recent six-month period and held
for the entire period.
Actual Expenses
The first line of the following table ("Actual") provides information about
actual account values and actual expenses. You may use the information in this
line, together with your account balance, to estimate the expenses that you paid
over the period. Simply divide your account value by $1,000 (for example, an
$8,600 account value divided by $1,000 = 8.6), then multiply the result by the
number in the first line under the heading "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The information on the second line of the table ("Hypothetical") is based on
hypothetical account values and expenses derived from the fund's actual expense
ratio and an assumed 5% per year rate of return before expenses (not the fund's
actual return). You may compare the ongoing costs of investing in the fund with
other funds by contrasting this 5% hypothetical example and the 5% hypothetical
examples that appear in the shareholder reports of the other funds. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period.
Note: T. Rowe Price charges an annual small-account maintenance fee of $10,
generally for accounts with less than $2,000 ($500 for UGMA/UTMA). The fee is
waived for any investor whose T. Rowe Price mutual fund accounts total $25,000
or more, accounts employing automatic investing, and IRAs and other retirement
plan accounts that utilize a prototype plan sponsored by T. Rowe Price (although
a separate custodial or administrative fee may apply to such accounts). This fee
is not included in the accompanying table. If you are subject to the fee, keep
it in mind when you are estimating the ongoing expenses of investing in the fund
and when comparing the expenses of this fund with other funds.
You should also be aware that the expenses shown in the table highlight only
your ongoing costs and do not reflect any transaction costs, such as redemption
fees or sales loads. Therefore, the second line of the table is useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. To the extent a fund charges transaction costs,
however, the total cost of owning that fund is higher.
T. Rowe Price Short-Term Bond Fund
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Beginning Ending Expenses Paid
Account Value Account Value During Period*
6/1/04 11/30/04 6/1/04 to 11/30/04
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Actual $1,000 $1,011.50 $2.77
Hypothetical (assumes 5%
return before expenses) 1,000 1,022.31 2.79
* Expenses are equal to the fund's annualized expense ratio for the six-month
period (0.55%), multiplied by the average account value over the period,
multiplied by the number of days in the most recent fiscal half year (183)
divided by the days in the year (365) to reflect the half-year period.
T. Rowe Price Short-Term Bond Fund
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QUARTER-END RETURNS
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Periods Ended 12/31/04 1 Year 5 Years 10 Years
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Short-Term Bond Fund 1.49% 5.46% 5.56%
Lehman Brothers 1-3 Year U.S.
Government/Credit Index 1.30 5.41 5.98
Lipper Short Investment Grade
Debt Funds Average 1.35 4.57 5.34
Current performance may be lower or higher than the quoted past performance,
which cannot guarantee future results. Share price, principal value, and return
will vary, and you may have a gain or loss when you sell your shares. For the
most recent month-end performance information, please visit our Web site
(troweprice.com) or contact a T. Rowe Price representative at 1-800-225-5132.
This table provides returns through the most recent calendar quarter-end rather
than through the end of the fund's fiscal period. It 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. Average annual total return figures
include changes in principal value, reinvested dividends, and capital gain
distributions. Returns do not reflect taxes that the shareholder may pay on fund
distributions or the redemption of fund shares. When assessing performance,
investors should consider both short- and long-term returns.
T. Rowe Price Short-Term Bond Fund
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Unaudited
FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
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6 Months Year
Ended Ended
11/30/04 5/31/04 5/31/03 5/31/02 5/31/01 5/31/00
NET ASSET VALUE
Beginning of period $ 4.76 $ 4.87 $ 4.75 $ 4.71 $ 4.52 $ 4.63
Investment activities
Net investment income
(loss) 0.06* 0.14* 0.19* 0.25* 0.28* 0.26
Net realized and
unrealized gain (loss) (0.01) (0.11) 0.12 0.04 0.19 (0.11)
Total from
investment activities 0.05 0.03 0.31 0.29 0.47 0.15
Distributions
Net investment income (0.06) (0.14) (0.19) (0.25) (0.28) (0.26)
NET ASSET VALUE
End of period $ 4.75 $ 4.76 $ 4.87 $ 4.75 $ 4.71 $ 4.52
-----------------------------------------------------
Ratios/Supplemental Data
Total return^ 1.15%* 0.54%* 6.74%* 6.24%* 10.61%* 3.39%
Ratio of total expenses to
average net assets 0.55%*! 0.55%* 0.55%* 0.55%* 0.59%* 0.72%
Ratio of net investment
income (loss) to average
net assets 2.62%*! 2.67%* 3.85%* 5.11%* 5.99%* 5.74%
Portfolio turnover rate 44.7%! 69.5% 110.1% 49.9% 77.6%v 50.7%
Net assets, end of period
(in millions) $ 1,507 $ 1,596 $ 1,052 $ 696 $ 469 $ 287
* Excludes expenses in excess of a 0.55% contractual expense limitation in
effect through 9/30/06.
^ Total return reflects the rate that an investor would have earned on an
investment in the fund during each period, assuming reinvestment of all
distributions.
v Excludes the effect of the acquisition of Summit Limited-Term Bond Fund's
and Short-Term U.S. Government's Fund's assets.
! Annualized
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term Bond Fund
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Unaudited November 30, 2004
PORTFOLIO OF INVESTMENTS (1) $ Par/Shares Value
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(Amounts in 000s)
CORPORATE BONDS AND NOTES 49.8%
Banking and Finance 16.8%
ABN AMRO Bank (Chicago), 7.25%, 5/31/05 3,620 3,686
AIG Sunamerica Global Financing XII, 144A,
5.30%, 5/30/07 3,450 3,587
Allstate Financial Global Funding, 144A,
5.25%, 2/1/07 4,500 4,669
AT&T Capital Corporation, 6.60%, 5/15/05 1,110 1,129
Bank of America, 5.25%, 2/1/07 9,000 9,335
Bank of New York, 2.20%, 5/12/06 6,000 5,920
Bank One Corp., 6.50%, 2/1/06 3,000 3,119
CIT Group
4.125%, 2/21/06 5,162 5,221
5.50%, 11/30/07 3,000 3,134
Citigroup
4.125%, 6/30/05 3,000 3,024
5.75%, 5/10/06 6,000 6,216
Countrywide Home Loans, 4.125%, 9/15/09 7,000 6,918
Developers Diversified Realty, 3.875%, 1/30/09 5,000 4,864
EOP Operating Limited Partnership, 8.375%, 3/15/06 6,000 6,377
Fifth Third Bank, 2.70%, 1/30/07 10,000 9,856
First Union, 7.55%, 8/18/05 4,750 4,905
Goldman Sachs Group, VR, 2.145%, 7/2/07 9,000 9,009
Greenpoint Financial, 3.20%, 6/6/08 5,000 4,863
HBOS Treasury Services, 144A, 3.125%, 1/12/07 8,000 7,950
Household Finance, 5.75%, 1/30/07 4,330 4,525
ING Security Life Institutional Fund, 144A,
2.70%, 2/15/07 9,000 8,854
International Lease Finance, 3.75%, 8/1/07 7,500 7,488
JP Morgan Chase, 3.125%, 12/11/06 5,800 5,768
Keycorp, 6.75%, 3/15/06 1,850 1,935
Landwirtschaftliche Rentenbank, 3.75%, 6/15/09 10,000 9,939
Lehman Brothers, 6.25%, 5/15/06 5,500 5,739
Marsh & McLennan, 3.625%, 2/15/08 3,500 3,354
Marshall & Ilsley Bank
2.625%, 2/9/07 3,000 2,960
4.125%, 9/4/07 2,160 2,185
Massmutual Global Funding, 144A, 3.25%, 6/15/07 6,430 6,363
Merrill Lynch
7.00%, 3/15/06 225 235
VR, 3.81%, 3/2/09 7,000 6,992
Midland Bank, 7.625%, 6/15/06 4,300 4,572
Morgan Stanley Dean Witter, 6.10%, 4/15/06 6,700 6,963
National City Bank, 2.375%, 8/15/06 5,000 4,920
National Rural Utilities, 3.875%, 2/15/08 9,255 9,251
Regions Bank, 2.90%, 12/15/06 5,635 5,575
SLM Corporation, VR, 3.66%, 4/1/09 10,000 10,044
St. Paul Companies, 5.75%, 3/15/07 2,475 2,583
Swedish Export Credit, 2.875%, 1/26/07 6,015 5,967
Travelers Property Casualty, 3.75%, 3/15/08 1,770 1,751
U.S. Bank, 2.87%, 2/1/07 12,000 11,828
Wachovia
7.45%, 7/15/05 2,000 2,057
VR, 2.23%, 7/20/07 3,000 3,001
Wells Fargo, 4.20%, 1/15/10 9,500 9,483
Zions Bancorporation, 2.70%, 5/1/06 4,800 4,764
252,878
Consumer Products and Services 8.7%
Abbott Laboratories, 5.625%, 7/1/06 4,225 4,383
AOL Time Warner, 6.125%, 4/15/06 6,650 6,896
Brown-Forman, 2.125%, 3/15/06 9,000 8,898
Bunge Limited Finance, 4.375%, 12/15/08 5,950 5,967
Cargill Inc., 144A, 6.25%, 5/1/06 6,500 6,773
Chancellor Media, 8.00%, 11/1/08 7,100 7,952
Clorox, 144A, VR, 2.544%, 12/14/07 3,750 3,750
Comcast Cable, 8.375%, 5/1/07 6,000 6,642
CVS, 144A, 4.00%, 9/15/09 5,000 4,944
Dayton Hudson Corporation, 7.50%, 7/15/06 2,500 2,670
Disney, 6.75%, 3/30/06 6,000 6,266
Gillette, 3.50%, 10/15/07 6,250 6,185
Harrah's Operating, 7.125%, 6/1/07 7,100 7,637
Home Depot, 144A, 3.75%, 9/15/09 5,290 5,213
IBM, 2.375%, 11/1/06 5,500 5,415
Kraft Foods, 4.625%, 11/1/06 4,850 4,953
Kroger, 7.80%, 8/15/07 5,000 5,478
McCormick
3.35%, 4/15/09 5,000 4,852
6.40%, 2/1/06 3,400 3,530
Merck, 2.50%, 3/30/07 4,700 4,579
Motorola, 5.80%, 10/15/08 5,750 6,069
Newell Rubbermaid, 2.00%, 5/1/05 1,515 1,508
Pfizer, 2.50%, 3/15/07 6,000 5,851
Viacom, 5.625%, 5/1/07 4,440 4,669
131,080
Energy 2.6%
BP Canada Finance, 3.375%, 10/31/07 5,700 5,661
ConocoPhillips, 3.625%, 10/15/07 6,350 6,345
Devon Energy, 2.75%, 8/1/06 4,600 4,558
Encana, 4.60%, 8/15/09 5,600 5,692
Halliburton, 144A, VR, 2.85%, 1/26/07 4,000 3,998
Pemex Project Funding Master Trust, 144A
VR, 3.18%, 6/15/10 7,000 7,167
Smith International Inc., 7.00%, 9/15/07 5,000 5,390
38,811
Industrial 6.4%
Alcoa, 4.25%, 8/15/07 2,475 2,515
American Honda Finance, 144A, 2.875%, 4/3/06 4,400 4,384
Caterpillar Financial Services
2.35%, 9/15/06 6,500 6,392
2.625%, 1/30/07 3,500 3,440
Daimlerchrysler, 4.75%, 1/15/08 5,000 5,093
Dow Chemical, 7.00%, 8/15/05 6,000 6,171
Ford Motor Credit, 6.50%, 1/25/07 3,750 3,896
General Electric, VR, 2.15%, 10/24/05 2,665 2,665
General Electric Capital, 5.00%, 6/15/07 6,000 6,202
General Motors Acceptance Corp., 6.75%, 1/15/06 7,000 7,198
Hertz, VR, 3.40%, 8/5/08 2,250 2,249
Hutchison Whampoa Finance, 144A, 6.95%, 8/1/07 4,500 4,852
John Deere Capital, 3.90%, 1/15/08 4,000 4,018
Lennar, VR, 2.66%, 3/19/09 5,000 4,998
Meadwestvaco, 2.75%, 12/1/05 3,700 3,680
Praxair, 4.75%, 7/15/07 4,000 4,126
Pulte Homes, 4.875%, 7/15/09 4,655 4,683
Sealed Air, 144A, 5.375%, 4/15/08 6,000 6,179
Tyco International, 5.80%, 8/1/06 6,200 6,433
Weyerhaeuser
5.50%, 3/15/05 1,500 1,511
6.00%, 8/1/06 5,000 5,209
95,894
Media and Communications 5.5%
Alltel, 6.75%, 9/15/05 3,750 3,869
America Movil, 2.735%, 4/27/07 5,000 4,997
BellSouth, VR, 2.415%, 11/15/07 5,200 5,198
Belo, 8.00%, 11/1/08 6,000 6,743
British Telecommunications, STEP, 7.875%, 12/15/05 8,000 8,381
Cox Enterprises, 144A, 4.375%, 5/1/08 6,150 6,124
Deutsche Telekom International Finance, 3.875%, 7/22/08 6,000 5,965
France Telecom, STEP, 7.95%, 3/1/06 8,600 9,071
Sprint Capital, 6.00%, 1/15/07 5,600 5,865
Telefonica Europe, 7.35%, 9/15/05 3,000 3,101
Telefonos De Mexico, 4.50%, 11/19/08 5,545 5,567
Telus, 7.50%, 6/1/07 5,000 5,440
Verizon Global Funding, 6.125%, 6/15/07 5,000 5,295
Verizon Wireless, 5.375%, 12/15/06 7,600 7,892
83,508
Transportation Services 0.6%
ERAC USA Finance, 144A, 6.625%, 2/15/05++ 5,665 5,705
Union Pacific, 5.75%, 10/15/07 4,000 4,202
9,907
Utilities 9.2%
Alabama Power, 3.50%, 11/15/07 9,000 8,944
Appalachian Power, 2.30%, 6/29/07 3,350 3,349
Arizona Public Service, 7.625%, 8/1/05 5,000 5,133
CE Electric UK Funding, 144A, 6.995%, 12/30/07 2,370 2,515
Centerpoint Energy, 5.875%, 6/1/08 5,000 5,227
Consumers Energy, 6.25%, 9/15/06 4,057 4,246
Dominion Resources, 7.625%, 7/15/05 3,000 3,088
Duke Capital, 4.302%, 5/18/06 6,500 6,568
Energy East, 5.75%, 11/15/06 5,750 5,969
Entergy Gulf States, 5.20%, 12/3/07 5,310 5,310
FirstEnergy, 5.50%, 11/15/06 3,175 3,272
Niagara Mohawk, 7.75%, 10/1/08 2,200 2,464
Nisource Finance, VR, 2.94%, 5/4/05 6,000 6,000
Panhandle Eastern Pipeline, 2.75%, 3/15/07 6,000 5,845
Pepco Holdings, 5.50%, 8/15/07 5,000 5,180
PG&E, VR, 2.72%, 4/3/06 3,994 3,998
Pinnacle West Capital, 6.40%, 4/1/06 3,300 3,417
PPL Capital Funding, 4.33%, 3/1/09 5,000 4,981
Progress Energy, 5.85%, 10/30/08 7,100 7,469
PSEG Power, 6.875%, 4/15/06 5,345 5,585
Sempra Energy, VR, 2.809%, 5/21/08 8,950 8,940
Southern California Edison, 8.00%, 2/15/07 7,000 7,642
Texas-New Mexico Power, 6.125%, 6/1/08 3,650 3,777
TXU Energy
6.125%, 3/15/08 2,900 3,037
VR, 2.838%, 1/17/06 2,335 2,334
Westar Energy, 7.875%, 5/1/07 5,055 5,489
Western Power Distribution Holdings, 144A
6.875%, 12/15/07 2,700 2,789
Wisconsin Electric Power, 3.50%, 12/1/07 5,625 5,594
138,162
Total Corporate Bonds and Notes (Cost $751,601) 750,240
ASSET-BACKED SECURITIES 14.9%
Aesop Funding II, Series 2003-5A, Class A1
144A, 2.78%, 12/20/07 6,350 6,291
American Express Credit Account Master Trust
Series 2004-1, Class C, 144A, 2.65%, 9/15/11 4,500 4,500
Bank One Auto Securitization, Series 2003-1, Class A3
1.82%, 9/20/07 9,850 9,746
BMW Vehicle Owner Trust, Series 2003-A, Class A3
1.94%, 2/25/07 6,705 6,686
Capital Auto Receivables Asset Trust
Series 2002-2, Class A4, 4.50%, 10/15/07 2,781 2,801
Series 2002-2, Class CERT, 4.18%, 10/15/07 713 717
Series 2004-1, Class A4, , 2.64%, 11/17/08 9,000 8,825
Series 2004-1, Class CTFS, 2.84%, 9/15/10 7,000 6,861
Capital One Master Trust, Series 1998-1, Class A
6.31%, 6/15/11 9,000 9,745
Chase Manhattan Auto Owner Trust, Series 2001-B,
Class CTFS 3.75%, 5/15/08 453 454
CIT RV Trust
Series 1997-A, Class A6, 6.35%, 4/15/11 72 72
Series 1998-A, Class A4, 6.09%, 2/15/12 433 434
Citibank Credit Card Issuance Trust
Series 2000-A3, Class A3, 6.875%, 11/15/09 3,700 4,034
Series 2001-A6, Class A6, 5.65%, 6/16/08 7,000 7,255
Series 2004-C1, Class C1, VR, 2.75%, 7/15/13 11,000 11,019
Comed Transitional Funding Trust, Series 1998-1, Class A5
5.44%, 3/25/07 1,320 1,328
CPL Transition Funding, Series 2002-1, Class A1
3.54%, 1/15/07 1,310 1,312
GS Auto Loan Trust
Series 2004-1, Class A3, 2.13%, 11/15/07 3,000 2,970
Series 2004-1, Class C, VR, 2.68%, 5/16/11 6,000 5,955
Harley-Davidson Motorcycle Trust
Series 2001-1B, Class CTFS, 5.29%, 1/15/09 693 702
Series 2003-3, Class A2, 2.76%, 5/15/11 4,700 4,657
Series 2004-1, Class B, VR, 2.00%, 11/15/11 4,000 3,903
Hertz Vehicle Financing, Series 2004-1, Class A2
144A, 2.38%, 5/25/08 12,500 12,181
Honda Auto Receivables, Series 2003-5, Class A4
2.96%, 4/20/09 9,125 9,020
Household Affinity Credit Card, Series 2003-1, Class A
VR, 1.99%, 2/15/10 5,000 5,012
Hyundai Auto Receivables Trust
Series 2003-A, Class B, 2.99%, 10/15/10 3,275 3,242
Series 2003-A, Class C, 3.19%, 10/15/10 1,225 1,216
John Deere Owner Trust
Series 2001-A, Class A4, 3.78%, 9/15/08 3,803 3,805
Series 2003-A, Class A3, 1.79%, 4/15/07 2,000 1,984
MBNA Credit Card Master Note Trust
Series 2001-C1, Class C1, VR, 3.15%, 10/15/08 6,000 6,052
Series 2003-C2, Class C2, VR, 3.70%, 6/15/10 5,000 5,149
MBNA Master Credit Card Trust, Series 2000-D, Class A
VR, 2.30%, 9/15/09 10,600 10,641
Morgan Stanley Auto Loan Trust, Series 2004-HB1, Class C
VR, 2.88%, 10/15/11 4,591 4,572
Navistar Financial Corp. Owner Trust
Series 2003-B, Class A3, VR, 2.30%, 4/15/08 10,000 10,025
Nissan Auto Receivables Owner Trust
Series 2004-A, Class A4, 2.76%, 7/15/09 9,000 8,705
Nissan Auto Receivables Owner Trust, Series 2002-A,
Class A4 4.28%, 10/16/06 749 756
Regions Auto Receivables Trust, Series 2002-1, Class A3
2.63%, 1/16/07 2,403 2,404
Reliant Energy Transition Bond Trust, Series 2001-1,
Class A1 3.84%, 9/15/07 2,190 2,202
SSB Auto Loan Trust, Series 2002-1, Class C
4.13%, 2/15/09 669 671
USAA Auto Owner Trust, Series 2003-1, Class A3
1.58%, 6/15/07 10,000 9,947
WFS Financial Owner Trust, Series 2004-2, Class C
3.20%, 11/21/11 12,500 12,481
World Financial Network
Series 2003-A, Class A2, VR, 2.47%, 5/15/12 10,000 10,043
Series 2004-B, Class C, VR, 2.75%, 7/15/10 4,600 4,603
Total Asset-Backed Securities (Cost $226,206) 224,978
U.S. GOVERNMENT & AGENCY MORTGAGE-BACKED SECURITIES 16.7%
U.S. Government Agency Obligations (+/-) 15.7%
Federal Home Loan Mortgage
4.50%, 10/1/07 6,618 6,796
5.00%, 10/1 - 11/1/18 24,537 24,897
6.00%, 5/1 - 7/1/17 6,203 6,518
10.00%, 6/1 - 10/1/05 2 2
10.75%, 12/1/09 23 25
CMO
2.37%, 12/15/09 12,000 11,917
3.32%, 12/15/11 3,000 2,930
4.00%, 1/15/22 9,000 9,040
4.105%, 10/27/31 2,853 2,857
4.50%, 2/15/13 9,722 9,822
5.00%, 1/15/19 - 6/15/23 34,000 34,959
6.50%, 8/15/23 1,390 1,427
CMO, IO
4.50%, 5/15/16 - 4/15/18 5,689 797
TBA, 6.00%, 1/1/18 8,646 9,052
Federal National Mortgage Assn.
4.50%, 5/1/18 8,586 8,547
5.00%, 1/1/09 - 11/1/18 10,155 10,317
5.50%, 5/1/16 - 6/1/34 50,201 51,825
6.00%, 7/1 - 11/1/13 235 247
9.00%, 5/1/05 10 10
ARM
2.805%, 11/1/21 106 107
3.00%, 11/1/17 25 25
3.008%, 12/1/16 5 5
3.02%, 3/1/19 3 3
3.066%, 10/1/17 22 22
3.108%, 3/1/20 17 17
3.111%, 7/1/27 157 159
3.125%, 12/1/17 - 11/1/20 81 82
3.162%, 3/1/18 7 7
3.184%, 5/1/17 52 52
3.816%, 10/1/33 13,231 13,331
4.396%, 12/1/32 7,773 7,817
4.75%, 6/1 - 7/1/18 22 22
4.94%, 5/1/24 28 29
5.516%, 1/1/19 142 145
CMO
3.50%, 4/25/13 10,000 10,006
4.50%, 6/25/13 12,000 12,039
6.00%, 6/25/16 275 280
9.00%, 1/25/08 872 911
237,044
U.S. Government Obligations 1.0%
Government National Mortgage Assn.
6.00%, 7/15/17 2,770 2,923
7.00%, 9/15/12 - 12/15/13 3,066 3,270
8.00%, 5/15/07 60 62
8.50%, 1/15 - 3/15/06 20 20
9.00%, 12/15/05 - 2/15/06 18 18
9.50%, 4/15/05 - 10/15/09 3 3
10.00%, 11/15/09 - 10/15/21 88 99
10.50%, 11/15/15 26 29
11.00%, 4/20/14 2 2
11.25%, 7/15 - 8/15/13 35 40
11.50%, 3/15/10 - 12/15/15 326 374
11.75%, 8/15 - 9/15/13 107 123
CMO, 3.59%, 10/16/07 8,000 7,974
14,937
Total U.S. Government & Agency Mortgage-Backed
Securities (Cost $252,152) 251,981
NON-U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES 5.6%
Banc of America Commercial Mortgage, Series 2003-1,
Class A1 CMO, 3.878%, 9/11/36 4,560 4,493
Bank of America Mortgage Securities
Series 2003-L, Class 2A2, CMO, VR, 4.32%, 1/25/34 9,242 9,162
Series 2004-A, Class 2A2, CMO, VR, 4.152%, 2/25/34 5,303 5,233
Series 2004-H, Class 2A2, CMO, VR, 4.817%, 9/25/34 12,707 12,854
BankBoston Home Equity Loan Trust, Series 1998-2, Class A6
6.64%, 12/25/28 5,000 5,197
Chase Funding Mortgage Loan, Series 2002-4, Class 2A1
VR, 2.551%, 10/25/32 3,853 3,861
Countrywide Home Loans, Series 2003-60, Class 3A-1
CMO, VR 5.19%, 2/25/34 8,387 8,438
DLJ Commercial Mortgage, Series 1999-CG2, Class A1B
CMO 7.30%, 6/10/32 4,200 4,688
GMAC Commercial Mortgage Securities, Series 1998-C2,
Class A1 CMO, 6.15%, 5/15/35 718 724
Greenwich Capital Commercial Funding, Series 2004-GG1A
Class A2, CMO, 3.835%, 6/10/36 7,500 7,494
Morgan Stanley Dean Witter, Series 2002-TOP7, Class A1
CMO, 5.38%, 1/15/39 4,461 4,621
Prudential Securities Secured Financing, Series 1999-NRF1
Class A1, CMO, 6.074%, 11/1/31 191 195
Residential Asset Mortgage Products
Series 2003-RZ2, Class A1, CMO, VR, 3.60%, 4/25/33 5,583 5,552
Series 2004-RZ3, Class AI2, VR, 3.42%, 10/25/27 4,000 3,969
Ryland Mercury Savings Trust, Series 1998-MS2, Class A
VR, 3.31%, 10/25/18 18 18
Sovereign Bank Home Equity Loan Trust, Series 2000-1,
Class A6 7.25%, 2/25/15 536 566
Washington Mutual, Series 2004-AR1, Class A, CMO, VR
4.229%, 3/25/34 6,838 6,736
Total Non-U.S. Government Mortgage-Backed
Securities (Cost $84,688) 83,801
U.S. GOVERNMENT & AGENCY OBLIGATIONS (EXCLUDING MORTGAGE-BACKED) 9.8%
U.S. Government Agency Obligations (+/-) 4.0%
Federal Home Loan Mortgage
2.75%, 3/15/08 4,500 4,383
2.875%, 9/15/05 20,000 20,025
Federal National Mortgage Assn.
2.50%, 6/15/06 10,000 9,915
3.25%, 8/15/08 14,183 13,973
VR, 3.794%, 2/17/09 12,100 12,230
60,526
U.S. Treasury Obligations 5.8%
U.S. Treasury Notes
1.50%, 7/31/05 11,800 11,728
1.625%, 1/31 - 4/30/05 ++ 75,000 74,904
86,632
Total U.S. Government & Agency Obligations (excluding
Mortgage-Backed) (Cost $147,359) 147,158
SHORT-TERM INVESTMENTS 3.8%
Money Market Funds 3.8%
T. Rowe Price Reserve Investment Fund, 2.00% #! 57,903 57,903
Total Short-Term Investments (Cost $57,903) 57,903
FUTURES CONTRACTS 0.0%
Variation margin receivable (payable) on open
futures contracts (2) (21)
Total Futures Contracts (21)
Total Investments in Securities
100.6% of Net Assets (Cost $1,519,909) $1,516,040
----------
(1) Denominated in U.S. dollars unless otherwise noted
# Seven-day yield
(+/-) The issuer is a publicly-traded company that operates under a
congressional charter; its securities are neither issued nor guaranteed by
the U.S. government.
++ All or a portion of this security is pledged to cover margin requirements
on futures contracts at November 30, 2004.
! Affiliated company - See Note 4
144A Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be resold in transactions exempt from registration only to
qualified institutional buyers - total value of such securities at period-
end amounts to $118,788 and represents 7.9% of net assets
ARM Adjustable Rate Mortgage
CMO Collateralized Mortgage Obligation
IO Interest Only security for which the fund receives interest on notional
principal (par)
STEP Stepped coupon bond for which the coupon rate of interest will adjust on
specified future date(s)
TBA To Be Announced security was purchased on a forward commitment basis
VR Variable Rate
T. Rowe Price Short-Term Bond Fund
- --------------------------------------------------------------------------------
(2) Open Futures Contracts at November 30, 2004 were as follows:
(Amounts in 000s)
Contract Unrealized
Expiration Value Gain (Loss)
---------- ---------- -----------
Short, 250 U.S. Treasury five year
contracts $1,000 par of 1.625% U.S.
Treasury Notes pledged as initial
margin 3/05 $ (27,207) $ 26
Net payments (receipts) of variation
margin to date (47)
Variation margin receivable (payable)
on open futures contracts $ (21)
- --------------------------------------------------------------------------------
T. Rowe Price Short-Term Bond Fund
- --------------------------------------------------------------------------------
++Restricted Securities
(Amounts in 000s)
The fund may invest in securities that cannot be offered for public resale
without first being registered under the Securities Act of 1933 and related
rules. The total restricted securities (excluding 144A issues) at period-end
amounts to $5,705 and represents 0.4% of net assets.
Acquisition Acquisition
Description Date Cost
- ------------------------------------------------ ------------ ------------
9/20 -
ERAC USA Finance, 144A, 6.625%, 2/15/05 9/24/02 $ 5,974
Totals $ 5,974
--------
The fund has registration rights for certain restricted securities held as of
November 30, 2004. Any costs related to such registration are borne by the
issuer.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term Bond Fund
- --------------------------------------------------------------------------------
Unaudited November 30, 2004
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
(In thousands except shares and per share amounts)
Assets
Investments in securities, at value
Affiliated companies (cost $57,903) $ 57,903
Non-affiliated companies (cost $1,462,006) 1,458,137
Total investments in securities 1,516,040
Other assets 24,310
Total assets 1,540,350
Liabilities
Total liabilities 33,116
NET ASSETS $ 1,507,234
---------------
Net Assets Consist of:
Undistributed net investment income (loss) $ (3,920)
Undistributed net realized gain (loss) (11,394)
Net unrealized gain (loss) (3,822)
Paid-in-capital applicable to 317,233,827 shares of
$0.01 par value capital stock outstanding;
1,000,000,000 shares authorized 1,526,370
NET ASSETS $ 1,507,234
---------------
NET ASSET VALUE PER SHARE $ 4.75
---------------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term Bond Fund
- --------------------------------------------------------------------------------
Unaudited
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
($ 000s)
6 Months
Ended
11/30/04
Investment Income (Loss)
Income
Interest $ 23,193
Dividend 1,190
Securities lending 1
Total income 24,384
Expenses
Investment management 3,193
Shareholder servicing 1,247
Custody and accounting 96
Prospectus and shareholder reports 51
Registration 36
Legal and audit 8
Directors 4
Miscellaneous 6
Reductions/repayments of fees and expenses
Investment management fees (waived) repaid (403)
Total expenses 4,238
Expenses paid indirectly (1)
Net expenses 4,237
Net investment income (loss) 20,147
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities (95)
Futures (3,383)
Foreign currency transactions 1
Net realized gain (loss) (3,477)
Change in net unrealized gain (loss)
Securities (764)
Futures 463
Change in net unrealized gain (loss) (301)
Net realized and unrealized gain (loss) (3,778)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 16,369
----------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term Bond Fund
- --------------------------------------------------------------------------------
Unaudited
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
($ 000s)
6 Months Year
Ended Ended
11/30/04 5/31/04
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ 20,147 $ 34,846
Net realized gain (loss) (3,477) 2,797
Change in net unrealized gain (loss) (301) (31,143)
Increase (decrease) in net assets from operations 16,369 6,500
Distributions to shareholders
Net investment income (20,819) (36,742)
Capital share transactions *
Shares sold 253,701 1,001,801
Distributions reinvested 19,014 33,156
Shares redeemed (357,279) (460,734)
Increase (decrease) in net assets from capital
share transactions (84,564) 574,223
Net Assets
Increase (decrease) during period (89,014) 543,981
Beginning of period 1,596,248 1,052,267
End of period $1,507,234 $ 1,596,248
---------- -----------
(Including undistributed net investment income (loss)
of ($3,920) at 11/30/04 and ($3,248) at 5/31/04)
*Share information
Shares sold 53,231 207,635
Distributions reinvested 3,989 6,883
Shares redeemed (74,992) (95,552)
Increase (decrease) in shares outstanding (17,772) 118,966
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term Bond Fund
- --------------------------------------------------------------------------------
Unaudited November 30, 2004
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Short-Term Bond Fund, Inc. (the fund) is registered under the
Investment Company Act of 1940 (the 1940 Act) as a diversified, open-end
management investment company. The fund commenced operations on March 2, 1984.
The fund seeks a high level of income consistent with minimal fluctuation in
principal value and liquidity.
The accompanying financial statements were prepared in accordance with
accounting principles generally accepted in the United States of America, which
require the use of estimates made by fund management.
Valuation
The fund values its investments and computes its net asset value per share at
the close of the New York Stock Exchange (NYSE), normally 4 p.m. ET, each day
that the NYSE is open for business. Debt securities are generally traded in the
over-the-counter market. Securities with original maturities of one year or more
are valued at prices 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 bid-side money
market yields.
Investments in mutual funds are valued at the mutual fund's closing net asset
value per share on the day of valuation. Financial futures contracts are valued
at closing settlement prices.
Other investments and those 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 the T. Rowe Price Valuation Committee,
established by the fund's Board of Directors. In the course of making a good
faith determination of a security's fair value, the fund reviews a variety of
factors, including market and trading trends and the value of comparable
securities, such as unrestricted securities of the same issuer.
Most foreign markets close before the close of trading on the NYSE. If the fund
determines that developments between the close of a foreign market and the close
of the NYSE will, in its judgment, materially affect the value of some or all of
its portfolio securities, which in turn will affect the fund's share price, the
fund will adjust the previous closing prices to reflect the fair value of the
securities as of the close of the NYSE, as determined in good faith by the T.
Rowe Price
Valuation Committee, established by the fund's Board of Directors. A fund may
also fair value securities in other situations, such as when a particular
foreign market is closed but the fund is open. In deciding whether to make fair
value adjustments, the fund reviews a variety of factors, including developments
in foreign markets, the performance of U.S. securities markets, and the
performance of instruments trading in U.S. markets that represent foreign
securities and baskets of foreign securities. The fund uses outside pricing
services to provide it with closing market prices and information used for
adjusting those prices. The fund cannot predict how often it will use closing
prices and how often it will adjust those prices. As a means of evaluating its
fair value process, the fund routinely compares closing market prices, the next
day's opening prices in the same markets, and adjusted prices.
Currency Translation
Assets, including investments, and liabilities denominated in foreign currencies
are translated into U.S. dollar values each day at the prevailing exchange rate,
using the mean of the bid and asked prices of such currencies against U.S.
dollars as quoted by a major bank. Purchases and sales of securities, income,
and expenses are translated into U.S. dollars at the prevailing exchange rate on
the date of the transaction. The effect of changes in foreign currency exchange
rates on realized and unrealized security gains and losses is reflected as a
component of security gains and losses.
Credits
The fund earns credits on temporarily uninvested cash balances at the custodian
that reduce the fund's custody charges. Custody expense in the accompanying
financial statements is presented before reduction for credits, which are
reflected as expenses paid indirectly.
Investment Transactions, Investment Income, and Distributions
Income and expenses are recorded on the accrual basis. Premiums and discounts on
debt securities are amortized for financial reporting purposes. Dividends
received from mutual fund investments are reflected as dividend income; capital
gain distributions are reflected as realized gain/loss. Dividend income and
capital gain distributions are recorded on the ex-dividend date. Investment
transactions are accounted for on the trade date. Realized gains and losses are
reported on the identified cost basis. Payments ("variation margin") made or
received to settle the daily fluctuations in the value of futures contracts are
recorded as unrealized gains or losses until the contracts are closed. Unsettled
variation margin on futures contracts is included in investments in securities,
and unrealized gains and losses on futures contracts are included in the change
in net unrealized gain or loss in the accompanying financial statements.
Distributions to shareholders
are recorded on the ex-dividend date. Income distributions are declared on a
daily basis and paid monthly. Capital gain distributions, if any, are declared
and paid by the fund, typically on an annual basis.
Other
In the normal course of business, the fund enters into contracts that provide
general indemnifications. The fund's maximum exposure under these arrangements
is dependent on claims that may be made against the fund in the future and,
therefore, cannot be estimated; however, based on experience, the risk of
material loss from such claims is considered remote.
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.
Restricted Securities
The fund may invest in securities that are subject to legal or contractual
restrictions on resale. Although certain of these securities may be readily
sold, for example, under Rule 144A, others may be illiquid, and their sale may
involve substantial delays and additional costs, and prompt sale at an
acceptable price may be difficult.
Forward Currency Exchange Contracts
During the six months ended November 30, 2004, the fund was a party to forward
currency exchange contracts under which it is obligated to exchange currencies
at specified future dates and exchange rates. Risks arise from the possible
inability of counterparties to meet the terms of their agreements and from
movements in currency values.
Futures Contracts
During the six months ended November 30, 2004, the fund was a party to futures
contracts, which provide for the future sale by one party and purchase by
another of a specified amount of a specific financial instrument at an agreed
upon price, date, time, and place. Risks arise from possible illiquidity of the
futures market and from movements in security values and/or interest rates.
Securities Lending
The fund lends its securities to approved brokers to earn additional income. It
receives as collateral cash and U.S. government securities valued at 102% to
105% of the value of the securities on loan. Cash collateral is invested in a
money market pooled account managed by the fund's lending agent in accordance
with investment guidelines approved by fund management.
Collateral is maintained over the life of the loan in an amount not less than
the value of loaned securities, as determined at the close of fund business each
day; any additional collateral required due to changes in security values is
delivered to the fund the next business day. Although 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 the securities.
Securities lending revenue recognized by the fund consists of earnings on
invested collateral and borrowing fees, net of any rebates to the borrower and
compensation to the lending agent. At November 30, 2004, there were no
securities on loan.
Other
Purchases and sales of portfolio securities, other than short-term and U.S.
government securities, aggregated $282,896,000 and $228,379,000, respectively,
for the six months ended November 30, 2004. Purchases and sales of U.S.
government securities aggregated $112,017,000 and $80,882,000, respectively, for
the six months ended November 30, 2004.
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 under Subchapter M of the
Internal Revenue Code and distribute to shareholders all of its taxable income
and gains. Federal income tax regulations differ from generally accepted
accounting principles; therefore, distributions determined in accordance with
tax regulations may differ in amount or character from net investment income and
realized gains for financial reporting purposes. Financial reporting records are
adjusted for permanent book/tax differences to reflect tax character. Financial
records are not adjusted for temporary differences. The amount and character of
tax-basis distributions and composition of net assets are finalized at fiscal
year-end; accordingly, tax-basis balances have not been determined as of
November 30, 2004.
The fund intends to retain realized gains to the extent of available capital
loss carryforwards. As of May 31, 2004, the fund had $8,766,000 of unused
capital loss carryforwards, of which $2,405,000 expire in fiscal 2005,
$1,276,000 expire in fiscal 2007, and $5,085,000 expire thereafter through
fiscal 2009.
At November 30, 2004, the cost of investments for federal income tax purposes
was $1,519,909,000. Net unrealized loss aggregated $3,822,000 at period-end, of
which $6,632,000 related to appreciated investments and $10,454,000 related to
depreciated investments.
NOTE 4 - RELATED PARTY TRANSACTIONS
The fund is managed by T. Rowe Price Associates, Inc. (the manager or Price
Associates), a wholly owned subsidiary of T. Rowe Price Group, Inc. The
investment management agreement between the fund and the manager provides for an
annual investment management fee, which is computed daily and paid monthly. The
fee consists of an individual fund fee, equal to 0.10% of the fund's average
daily net assets, and the fund's pro-rata share of a group fee. The group fee is
calculated based on the combined net assets of certain mutual funds sponsored by
Price Associates (the group) applied to a graduated fee schedule, with rates
ranging from 0.48% for the first $1 billion of assets to 0.295% for assets in
excess of $120 billion. The fund's portion of the group fee is determined by the
ratio of its average daily net assets to those of the group. At November 30,
2004, the effective annual group fee rate was 0.31%, and investment management
fee payable totaled $465,000.
The fund is also subject to a contractual expense limitation through September
30, 2006. During the limitation period, the manager is required to waive its
management fee and reimburse the fund for any expenses, excluding interest,
taxes, brokerage commissions, and extraordinary expenses, that would otherwise
cause the fund's ratio of total expenses to average net assets (expense ratio)
to exceed its expense limitation of 0.55%. Through September 30, 2008, the fund
is required to repay the manager for expenses previously reimbursed and
management fees waived to the extent its net assets have grown or expenses have
declined sufficiently to allow repayment without causing the fund's expense
ratio to exceed its expense limitation. Pursuant to this agreement, management
fees remain subject to repayment by the fund in the following amounts:
$2,017,000 through September 30, 2006 and $90,000 through September 30, 2008.
In addition, the fund has entered into service agreements with Price Associates
and two wholly owned subsidiaries of Price Associates (collectively, Price).
Price Associates computes the daily share price and maintains the financial
records of the fund. T. Rowe Price Services, Inc., provides shareholder and
administrative services in its capacity as the fund's transfer and dividend
disbursing agent. T. Rowe Price Retirement Plan Services, Inc., provides
subaccounting and recordkeeping services for certain retirement accounts
invested in the fund. For the six months ended November 30, 2004, expenses
incurred pursuant to these service agreements were $42,000 for Price Associates,
$384,000 for T. Rowe Price Services, Inc., and $138,000 for T. Rowe Price
Retirement Plan Services, Inc. At period-end, a total of $113,000 of these
expenses was payable.
Additionally, the fund is one of several mutual funds in which certain college
savings plans managed by Price Associates may invest. As approved by the fund's
Board of Directors, shareholder servicing costs associated with each college
savings plan are borne by the fund in proportion to the average daily value of
its shares owned by the college savings plan. For the six months ended November
30, 2004, the fund was charged $101,000 for shareholder servicing costs related
to the college savings plans, of which $78,000 was for services provided by
Price and $13,000 was payable at period-end. At November 30, 2004, approximately
2.8% of the outstanding shares of the fund were held by college savings plans.
The fund is also one of several mutual funds sponsored by Price Associates
(underlying Price funds) in which the T. Rowe Price Spectrum Funds (Spectrum
Funds) and T. Rowe Price Retirement Funds (Retirement Funds) may invest. Neither
the Spectrum Funds nor the Retirement Funds invest in the underlying Price funds
for the purpose of exercising management or control. Pursuant to separate,
special servicing agreements, expenses associated with the operation of the
Spectrum and Retirement Funds are borne by each underlying Price fund to the
extent of estimated savings to it and in proportion to the average daily value
of its shares owned by the Spectrum and Retirement Funds, respectively. Expenses
allocated under these agreements are reflected as shareholder servicing expenses
in the accompanying financial statements. For the six months ended November 30,
2004, the fund was allocated $332,000 of Spectrum Funds' expenses and $76,000 of
Retirement Funds' expenses. Of these amounts, $258,000 related to services
provided by Price and $92,000 was payable at period-end. At November 30, 2004,
approximately 25.8% of the outstanding shares of the fund were held by the
Spectrum Funds and 1.6% were held by the Retirement Funds.
The fund may invest in the T. Rowe Price Reserve Investment Fund and the T. Rowe
Price Government Reserve Investment Fund (collectively, the Reserve Funds),
open-end management investment companies managed by Price Associates and
affiliates of the fund. The Reserve Funds are offered as cash management options
to mutual funds, trusts, and other accounts managed by Price Associates and/or
its affiliates, and are not available for direct purchase by members of the
public. The Reserve Funds pay no investment management fees. During the six
months ended November 30, 2004, dividend income from the Reserve Funds totaled
$1,190,000, and the value of shares of the Reserve Funds held at November 30,
2004 and May 31, 2004 was $57,903,000 and $205,066,000, respectively.
As of November 30, 2004, T. Rowe Price Group, Inc. and/or its wholly owned
subsidiaries owned 490,573 shares of the fund, representing less than 1% of the
fund's net assets.
T. Rowe Price Short-Term Bond Fund
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INFORMATION ON PROXY VOTING POLICIES, PROCEDURES, AND RECORDS
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A description of the policies and procedures used by T. Rowe Price funds and
portfolios to determine how to vote proxies relating to portfolio securities is
available in each fund's Statement of Additional Information, which you may
request by calling 1-800-225-5132 or by accessing the SEC's Web site,
www.sec.gov. The description of our proxy voting policies and procedures is also
available on our Web site, www.troweprice.com. To access it, click on the words
"Company Info" at the top of our homepage for individual investors. Then, in the
window that appears, click on the "Proxy Voting Policy" navigation button in the
top left corner.
Each fund's most recent annual proxy voting record is available on our Web site
and through the SEC's Web site. To access it through our Web site, follow the
directions above, then click on the words "Proxy Voting Record" at the bottom of
the Proxy Voting Policy page.
HOW TO OBTAIN QUARTERLY PORTFOLIO HOLDINGS
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The fund files a complete schedule of portfolio holdings with the Securities and
Exchange Commission for the first and third quarters of each fiscal year on Form
N-Q. The fund's Form N-Q is available electronically on the SEC's Web site
(www.sec.gov); hard copies may be reviewed and copied at the SEC's Public
Reference Room, 450 Fifth St. N.W., Washington, DC 20549. For more information
on the Public Reference Room, call 1-800-SEC-0330.
Item 2. Code of Ethics.
A code of ethics, as defined in Item 2 of Form N-CSR, applicable to its
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions is filed as an
exhibit to the registrant's annual Form N-CSR. No substantive amendments were
approved or waivers were granted to this code of ethics during the registrant's
most recent fiscal half-year.
Item 3. Audit Committee Financial Expert.
Disclosure required in registrant's annual Form N-CSR.
Item 4. Principal Accountant Fees and Services.
Disclosure required in registrant's annual Form N-CSR.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Schedule of Investments.
Not applicable. The complete schedule of investments is included in Item 1 of
this Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 11. Controls and Procedures.
(a) The registrant's principal executive officer and principal financial officer
have evaluated the registrant's disclosure controls and procedures within 90
days of this filing and have concluded that the registrant's disclosure controls
and procedures were effective, as of that date, in ensuring that information
required to be disclosed by the registrant in this Form N-CSR was recorded,
processed, summarized, and reported timely.
(b) The registrant's principal executive officer and principal financial officer
are aware of no change in the registrant's internal control over financial
reporting that occurred during the registrant's second fiscal quarter covered by
this report that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting.
Item 12. Exhibits.
(a)(1) The registrant's code of ethics pursuant to Item 2 of Form N-CSR is filed
with the registrant's annual Form N-CSR.
(2) Separate certifications by the registrant's principal executive officer
and principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 and required by Rule 30a-2(a) under the Investment Company Act of
1940, are attached.
(3) Written solicitation to repurchase securities issued by closed-end
companies: not applicable.
(b) A certification by the registrant's principal executive officer and
principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and required by Rule 30a-2(b) under the Investment Company Act of 1940,
is attached.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
T. Rowe Price Short-Term Bond Fund, Inc.
By /s/ James S. Riepe
-----------------------------------
James S. Riepe
Principal Executive Officer
Date January 14, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/ James S. Riepe
-----------------------------------
James S. Riepe
Principal Executive Officer
Date January 14, 2005
By /s/ Joseph A. Carrier
-----------------------------------
Joseph A. Carrier
Principal Financial Officer
Date January 14, 2005