Item 1. Report to Shareholders
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
November 30, 2003
Certified Semiannual Report
This report is certified under the Sarbanes-Oxley Act of 2002, which
requires that public companies, including mutual funds, affirm that the
information provided in their annual and semiannual shareholder reports
fully and fairly represents their financial position.
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
Certified Semiannual Report (Unaudited)
FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
- --------------------------------------------------------------------------------
6 Months Year
Ended Ended
11/30/03 5/31/03 5/31/02 5/31/01 5/31/00 5/31/99
- --------------------------------------------------------------------------------
NET ASSET VALUE
Beginning of period $ 9.89 $ 9.61 $ 9.40 $ 8.92 $ 9.33 $ 9.57
Investment activities
Net investment
income (loss) 0.15 0.37 0.52 0.59 0.60 0.61
Net realized and
unrealized gain
(loss) (0.15) 0.30 0.21 0.48 (0.41) (0.24)
Total from
investment
activities - 0.67 0.73 1.07 0.19 0.37
Distributions
Net investment
income (0.20) (0.39) (0.52) (0.59) (0.60) (0.61)
NET ASSET VALUE
End of period $ 9.69 $ 9.89 $ 9.61 $ 9.40 $ 8.92 $ 9.33
-----------------------------------------------------------
Ratios/Supplemental
Data
Total return^ (0.02)% 7.07% 7.95% 12.31% 2.13% 3.88%
Ratio of total
expenses to
average net assets 0.70%! 0.70% 0.69% 0.70% 0.71% 0.71%
Ratio of net
investment income
(loss) to average
net assets 3.03%! 3.68% 5.33% 6.39% 6.61% 6.36%
Portfolio turnover
rate 303.4%! 385.8% 145.2% 71.2% 63.8% 86.7%
Net assets,
end of period
(in millions) $ 1,355 $ 1,466 $ 1,223 $ 1,043 $ 1,052 $ 1,111
^ 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.
! Annualized
The accompanying notes are an integral part of these financial statements.
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
Certified Semiannual Report (Unaudited) November 30, 2003
PORTFOLIO OF INVESTMENTS Par/Shares Value
- --------------------------------------------------------------------------------
In thousands
U.S. GOVERNMENT & AGENCY MORTGAGE-
BACKED SECURITIES 99.3%
U.S. Government Obligations 99.3%
Government National Mortgage Assn.
5.00%, 3/15/18 - 10/20/33 $ 221,529 $ 219,332
5.50%, 7/15/14 - 3/15/33 136,949 141,135
6.00%, 11/15/08 - 3/20/33 135,156 141,905
6.50%, 12/15/14 - 3/15/33 97,796 103,412
6.73%, 5/15/40 19,479 21,502
6.75%, 2/15/41 9,865 10,204
7.00%, 3/15/13 - 7/15/32 98,646 105,051
7.37%, 8/15/33 9,326 9,902
7.50%, 3/15/07 - 9/15/32 49,001 52,659
8.00%, 3/15/14 - 3/15/30 28,080 30,303
8.50%, 12/15/04 - 6/20/29 5,440 5,979
9.00%, 5/15/09 - 9/15/24 2,530 2,817
9.25%, 2/20/16 - 12/15/19 405 453
9.50%, 6/15/09 - 12/15/24 1,570 1,734
9.75%, 8/15/16 - 2/15/21 439 493
10.00%, 2/15/16 - 3/15/26 5,600 6,278
10.25%, 9/20/16 22 25
10.50%, 2/15/13 - 10/15/21 476 537
10.75%, 2/15/16 - 1/15/18 221 250
11.00%, 2/15/10 - 9/20/20 426 478
11.50%, 4/15/10 - 7/15/20 834 942
12.00%, 10/15/10 - 7/15/15 948 1,077
12.25%, 1/20/14 - 7/20/15 71 81
12.50%, 4/15/10 - 1/20/16 438 497
12.75%, 10/20/13 - 12/20/14 73 83
13.00%, 1/15/11 - 9/20/15 311 356
13.50%, 5/15/10 - 1/15/15 223 252
CMO
2.212%, 10/16/17 $ 3,923 $ 3,746
5.00%, 8/16/28 12,550 12,674
5.064%, 9/16/26 13,200 13,519
5.50%, 2/20 - 10/20/30 32,075 32,844
6.00%, 2/20/28 - 5/20/29 ++ 48,969 50,489
6.50%, 10/20/27 - 3/20/32 30,082 30,982
CMO, IO
6/16/23 - 8/20/30 8,519 317
CMO, Principal Only, 3/16/28 1,670 1,404
U.S. Department of Veteran Affairs
CMO
7.25%, 10/15/08 10,545 10,690
9.606%, 3/15/25 966 1,100
TBA
5.50%, 1/1/32 - 1/1/33 125,625 126,702
6.00%, 1/1/33 196,580 203,323
Total U.S. Government & Agency Mortgage-
Backed Securities (Cost $1,328,760) 1,345,527
U.S. GOVERNMENT & AGENCY OBLIGATIONS
(EXCLUDING MORTGAGE-BACKED) 0.5%
U.S. Treasury Obligations 0.5%
U.S. Treasury Inflation-Indexed Notes,
1.875%, 7/15/13 6,806 6,729
Total U.S. Government & Agency Obligations
(Excluding Mortgage-Backed) (Cost $6,785) 6,729
Money Market Funds 24.2%
T. Rowe Price Government Reserve
Investment Fund, 1.01% # ! 327,276 327,276
Total Money Market Funds (Cost $327,276) 327,276
Value
- --------------------------------------------------------------------------------
In thousands
Total Investments in Securities
124.0% of Net Assets (Cost $1,662,821) $ 1,679,532
Futures Contracts
Contract Unrealized
Expiration Value Gain (Loss)
---------- ------------ -----------
In thousands
Short, 436 U.S.
Treasury 5 year
contracts, $500,000
of Government
National Mortgage
Assn. 6.00%, Bonds
pledged as initial
margin 12/03 $ (48,682) $ 43
Net payments
(receipts)
of variation
margin to date 161
Variation margin
receivable (payable)
on open futures
contracts 204
Other Assets
Less Liabilities (324,813)
NET ASSETS $ 1,354,923
---------------
# Seven-day yield
++ All or a portion of this security is pledged to cover margin
requirements on futures contracts at November 30, 2003
! Affiliated company - See Note 2
CMO Collateralized Mortgage Obligation
IO Interest Only security for which the fund receives interest on notional
principal (par)
TBA To Be Announced security was purchased on a forward commitment basis
The accompanying notes are an integral part of these financial statements.
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
Certified Semiannual Report (Unaudited) November 30, 2003
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
In thousands
Assets
Investments in securities, at value
Affiliated companies (cost $327,276) $ 327,276
Other companies (cost $ 1,335,545) 1,352,256
Total investments in securities 1,679,532
Other assets 36,135
Total assets 1,715,667
Liabilities
Payable for investment securities purchased 358,690
Other liabilities 2,054
Total liabilities 360,744
NET ASSETS $ 1,354,923
------------
Net Assets Consist of:
Undistributed net investment income (loss) $ (11,598)
Undistributed net realized gain (loss) 11,954
Net unrealized gain (loss) 16,754
Paid-in-capital applicable to 139,767,023 shares of
no par value shares of beneficial interest outstanding;
unlimited number of shares authorized 1,337,813
NET ASSETS $ 1,354,923
------------
NET ASSET VALUE PER SHARE $ 9.69
------------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
Certified Semiannual Report (Unaudited)
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
In thousands
6 Months
Ended
11/30/03
Investment Income (Loss)
Income
Interest $ 24,697
Dividend 1,248
Total income 25,945
Expenses
Investment management 3,261
Shareholder servicing 1,247
Custody and accounting 235
Registration 57
Prospectus and shareholder reports 42
Legal and audit 10
Trustees 5
Miscellaneous 6
Total expenses 4,863
Net investment income (loss) 21,082
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities (5,130)
Futures 85
Net realized gain (loss) (5,045)
Change in net unrealized gain (loss)
Securities (16,130)
Futures 43
Change in net unrealized gain (loss) (16,087)
Net realized and unrealized gain (loss) (21,132)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ (50)
---------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
Certified Semiannual Report (Unaudited) November 30, 2003
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
In thousands
6 Months Year
Ended Ended
11/30/03 5/31/03
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ 21,082 $ 50,899
Net realized gain (loss) (5,045) 39,455
Change in net unrealized gain (loss) (16,087) 924
Increase (decrease) in net assets from operations (50) 91,278
Distributions to shareholders
Net investment income (28,236) (55,051)
Capital share transactions *
Shares sold 99,207 492,751
Distributions reinvested 24,914 48,335
Shares redeemed (207,246) (333,836)
Increase (decrease) in net assets from capital
share transactions (83,125) 207,250
Net Assets
Increase (decrease) during period (111,411) 243,477
Beginning of period 1,466,334 1,222,857
End of period $ 1,354,923 $1,466,334
----------------------------
*Share information
Shares sold 10,173 50,166
Distributions reinvested 2,564 4,909
Shares redeemed (21,294) (33,935)
Increase (decrease) in shares outstanding (8,557) 21,140
The accompanying notes are an integral part of these financial statements.
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
Certified Semiannual Report (Unaudited) November 30, 2003
Notes To Financial Statements
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price GNMA Fund (the fund) is registered under the Investment
Company Act of 1940 (the 1940 Act) as a diversified, open-end management
investment company and commenced operations on November 26, 1985. The fund
seeks high current income consistent with maximum credit protection and
moderate price fluctuation by investing exclusively in securities backed by
the full faith and credit of the U.S. government and instruments linked to
these securities.
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 Trustees.
Expenses Paid Indirectly
Credits earned on temporarily uninvested cash balances at the custodian are
used to reduce the fund's custody charges.
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. Premiums and discounts on debt
securities are amortized for financial reporting purposes. Distributions to
shareholders are recorded by the fund on the ex-dividend date.
Dividends from mutual fund investments are reflected as dividend income;
capital gain distributions from mutual fund investments are reflected as
realized gain/loss. Payments ("variation margin") made or received by the
fund to settle the daily fluctuations in the value of futures contracts are
recorded as unrealized gains or losses until the contracts are closed.
Unrealized gains and losses on futures contracts are included in Other
assets and other liabilities respectively, and in Change in net unrealized
gain or loss in the accompanying financial statements. 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.
Futures Contracts
During the six months ended November 30, 2003, 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.
Repurchase Agreements
All repurchase agreements are fully collateralized by U.S. government
securities. Collateral is in the possession of the fund's custodian or, for
tri-party agreements, the custodian designated by the agreement. Collateral
is evaluated daily to ensure that its market value exceeds the delivery
value of the repurchase agreements at maturity. Although risk is mitigated
by the collateral, the fund could experience a delay in recovering its
value and a possible loss of income or value if the counter-party fails to
perform in accordance with the terms of the agreement.
Affiliated Companies
The fund may invest in certain securities that are considered affiliated
companies. As defined by the 1940 Act, an affiliated company is one in
which the fund owns 5% or more of the outstanding voting securities. At
November 30, 2003, the fund's investment in the T. Rowe Price Government
Reserve Investment Fund was its only affiliated holding and represented
19.5% of the value of the fund's investments in securities.
Other
Purchases and sales of U.S. government securities aggregated $2,116,692,000
and $2,236,430,000, respectively, for the six months ended November 30,
2003.
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, 2003.
For tax purposes, the fund has elected to treat net capital losses realized
between November 1 and May 31 of each year as occurring on the first day of
the following tax year; consequently, $651,000 of realized losses
recognized for financial reporting purposes in the year ended May 31, 2003
were recognized for tax purposes on June 1, 2003.
At November 30, 2003, the cost of investments for federal income tax
purposes was $1,662,821,000. Net unrealized gain aggregated $16,754,000 at
period-end, of which $25,651,000 related to appreciated investments and
$8,897,000 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 0.15% 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, 2003, the effective annual group fee rate was 0.32%, and investment
management fee payable totaled $519,000.
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. Expenses incurred
pursuant to these service agreements totaled $573,000 for the six months
ended November 30, 2003, of which $100,000 was payable at period-end.
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) may invest. The Spectrum Funds do not invest in the
underlying Price funds for the purpose of exercising management or control.
Pursuant to a special servicing agreement, expenses associated with the
operation of the Spectrum 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 Funds. Expenses allocated
under this agreement are reflected as shareholder servicing expense in the
accompanying financial statements. For the six months ended November 30,
2003, the fund was allocated $478,000 of Spectrum Funds' expenses, of which
$447,000 related to services provided by Price and $75,000 was payable at
period-end. At November 30, 2003, approximately 31% of the outstanding
shares of the fund were held by the Spectrum 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. The Reserve Funds are offered as cash management options only
to mutual funds, trusts, and other accounts managed by Price Associates
and/or its affiliates, and are not available to the public. The Reserve
Funds pay no investment management fees. During the six months ended
November 30, 2003, dividend income from the Reserve Funds totaled
$1,248,000.
T. Rowe Price GNMA Fund
- --------------------------------------------------------------------------------
Certified Semiannual Report (Unaudited)
INFORMATION ON PROXY VOTING
- --------------------------------------------------------------------------------
A description of the policies and procedures that the T. Rowe Price GNMA
Fund uses to determine how to vote proxies relating to portfolio securities
is available, without charge, upon request by calling 1-800-225-5132. It
also appears in the fund's Statement of Additional Information (Form 485B),
which can be found on the SEC's Web site, www.sec.gov.
Item 2. Code of Ethics.
The registrant has adopted 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. A copy of this code of ethics will be filed as a required 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.
Not effective until registrant's next annual Form N-CSR.
Item 4. Principal Accountant Fees and Services.
Not effective until registrant's next annual Form N-CSR.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. [Reserved]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable.
Item 8. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
Not applicable.
Item 9. 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 changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 10. Exhibits.
(a)(1) The registrant's code of ethics pursuant to Item 2 of Form N-CSR will be
filed with the registrant's annual Form N-CSR.
(a)(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.
(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 GNMA Fund
By /s/ James S. Riepe
James S. Riepe
Principal Executive Officer
Date January 16, 2004
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 16, 2004
By /s/ Joseph A. Carrier
Joseph A. Carrier
Principal Financial Officer
Date January 16, 2004