SUMMARY
Investment
Objective
The
fund seeks to provide high income.
Fees and Expenses
This table describes the fees
and expenses that you may pay if you buy and hold shares of the fund.
Fees and Expenses of the Fund
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Annual fund operating expenses
(expenses
that you pay each year as a
percentage of the value of your investment)
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Management
fees
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0.45%
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Other expenses
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0.00%
a
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Total annual
fund operating expenses
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0.45%
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a
Other
expenses are estimated for the current fiscal year.
Example
This example is intended to help you compare the cost of investing
in the fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000
in the fund for the time periods indicated and then redeem all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and that the fund’s operating
expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
Portfolio Turnover
The fund
pays transaction costs, such as commissions, when it buys and sells securities (or “turns over”
its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result
in higher taxes when fund shares are held in a taxable account. These costs, which are not reflected
in annual fund operating expenses or in the example, affect the fund’s performance.
Investments,
Risks, and Performance
Principal Investment
Strategies
The fund will normally invest in a diversified portfolio of longer duration debt securities
issued by corporations as well as certain non-corporate issuers. While the fund will focus on corporate
bonds, the non-corporate debt securities in which the fund may invest include securities issued by supranational
organizations and U.S. and foreign governments and government agencies. There is no limit on the fund’s
investments in U.S. dollar-denominated foreign securities, but non-U.S. dollar-denominated holdings are
limited to 10% of the fund’s total assets. Holdings will mainly consist of investment-grade debt
securities, although the fund has the flexibility to purchase some noninvestment-grade bonds (also called
high yield or “junk” bonds).
Interest rates and bond prices tend to move in opposite directions.
Duration, which is expressed in years, is a calculation that attempts to measure the price sensitivity
of a bond or bond fund to changes in interest rates. The longer a bond fund’s duration, the more
sensitive that fund should be to changes in interest rates. For example, if interest rates rise by 1%
and a fixed-rate bond has a duration of 10 years, it is estimated that the principal value of the bond
will decrease by approximately 10%. While the fund may invest in debt securities of any maturity or
duration, the fund expects to normally maintain an effective duration within +/-20% of the duration of
the Barclays U.S. Long Credit Index. As of December 31, 2012, the duration of the Barclays U.S. Long
Credit Index was 13.70 years. However, the duration of the fund and this index will change over time
and could be significantly higher or lower during certain interest rate environments.
Under normal conditions, at least 85% of the fund’s net assets
will be rated investment-grade (AAA, AA, A, or BBB, or an equivalent rating) at the time of purchase
by at least one of the major credit rating agency or, if not rated by any credit rating agency, deemed
to be of investment-grade quality by T. Rowe Price. Such investment-grade investments could include “split-rated”
securities, which are securities that are rated as investment grade by at least one credit rating agency
but rated below investment grade by another agency. Up to 15% of the fund’s net assets can be invested
in noninvestment-grade securities. Any investments in noninvestment-grade securities will be
focused
primarily on the higher-quality range (BB or an equivalent rating) of the high yield market and the fund
will not purchase any individual bond that is rated B or below (or equivalent) by any major credit rating
agency.
While
most of the fund’s assets will typically be invested directly in debt securities, the fund may use
derivatives such as Treasury futures contracts, interest rate futures, interest rate swaps, and interest
rate swap futures primarily in an effort to manage the portfolio’s duration or interest rate risk.
The
fund may sell holdings for a variety of reasons, such as to adjust the portfolio’s average maturity,
duration, or credit quality or to shift assets into and out of higher-yielding or lower-yielding securities
or different sectors.
Principal Risks
As with any mutual fund, there is no guarantee that the fund will achieve its objective. The fund’s
share price fluctuates, which means you could lose money by investing in the fund. The principal risks
of investing in this fund are summarized as follows:
Active management risk
The fund is subject to the risk that the investment adviser’s judgments
about the attractiveness, value, or potential appreciation of the fund’s investments may prove to
be incorrect. If the securities selected and strategies employed by the fund fail to produce the intended
results, the fund could underperform other funds with similar objectives and investment strategies.
Market risk
This is the risk that
the value of securities owned by the fund may go up or down, sometimes rapidly or unexpectedly, due to
factors affecting securities markets generally or particular industries.
Interest rate risk
This is the risk that a rise in interest
rates will cause the price of a fixed rate debt security to fall. Generally, securities with longer maturities
and funds with longer weighted average maturities carry greater interest rate risk. The fund’s longer
duration should result in relatively higher interest rate risk when compared to bond funds with lower
durations.
Prepayment risk and extension risk
Prepayment risk is the risk that the principal on any debt security with an embedded call option may
be prepaid at any time, which could reduce yield and market value. The rate of prepayments tends to increase
as interest rates fall, which could cause the average maturity of the portfolio to shorten. Extension
risk may result from a rise in interest rates, which tends to make callable debt securities more volatile.
Credit risk
This is the risk that
an issuer of a debt security could suffer an adverse change in financial condition that results in a
payment default, security downgrade, or inability to meet a financial obligation. Junk bonds carry a
higher risk of default and should be considered speculative. The fund’s exposure to credit risk
is increased to the extent it invests in securities that are rated noninvestment-grade.
Liquidity risk
This is the risk that the fund may not be
able to sell a holding in a timely manner at a desired price.
Foreign investing risk
This is the risk that the fund’s investments in
foreign securities may be adversely affected by political and economic conditions overseas, reduced liquidity,
or decreases in foreign currency values relative to the U.S. dollar.
Derivatives risk
To the extent the fund uses Treasury futures contracts, interest rate futures,
interest rate swaps, or interest rate swap futures, it is exposed to additional volatility in comparison
to investing directly in bonds and other debt securities. These instruments can experience reduced liquidity
and become difficult to value, and any of these instruments not traded on an exchange are subject to
the risk that a counterparty to the transaction will fail to meet its obligations under the derivatives
contract. The fund’s principal use of derivatives involves the risks that adjustments to the fund’s
duration through derivatives will result in additional portfolio volatility and that anticipated interest
rate movements will not be accurately predicted, which could lead to losses and significantly harm the
fund’s performance.
Performance
Because the fund commenced operations in 2013, there is no historical performance information shown
here. Performance history will be presented after the fund has been in operation for one full calendar
year.
Current
performance information may be obtained through troweprice.com or by calling 1-800-638-8790.
Management
Investment Adviser
T. Rowe Price Associates, Inc. (T. Rowe Price)
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Portfolio Manager
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Title
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Managed Fund Since
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Joined Investment
Adviser
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David A.
Tiberii
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Chairman of Investment
Advisory Committee
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2013
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2003
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Purchase
and Sale of Fund Shares
The fund generally requires a $1,000,000 minimum initial investment. There is no minimum
for subsequent purchases. If you hold shares through a financial intermediary, the intermediary may impose
different investment minimums.
You may purchase, redeem, or exchange shares of the fund on any day the New York Stock
Exchange is open for business by calling 1-800-638-8790 or by written request. If you hold shares through
a financial intermediary, you must purchase, redeem, and exchange shares through your intermediary.
Tax
Information
The fund declares dividends daily and pays them on the first business day of each month.
Any capital gains are declared and paid annually, usually in December. Distributions by the fund, whether
or not you reinvest these amounts in additional fund shares, may be taxed as ordinary income or capital
gains unless you invest through a tax-deferred account. A redemption or exchange of fund shares may be
taxable.
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Information About Accounts in T. Rowe Price Funds
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As a T. Rowe Price shareholder,
you will want to know about the following policies and procedures that apply to all Institutional Funds
(other than F Class shares of Institutional Funds) in the T. Rowe Price family of funds.
PRICING SHARES AND RECEIVING SALE PROCEEDS
How and
When Shares Are Priced
The share price, also called the “net asset value,” for the funds is calculated
at the close of the New York Stock Exchange (normally 4 p.m. ET) each day that the exchange is open for
business. To calculate the net asset value, the fund’s assets are valued and totaled; liabilities
are subtracted; and the balance, called net assets, is divided by the number of shares outstanding. Market
values are used to price portfolio holdings for which market quotations are readily available. Market
values represent the prices at which securities actually trade or evaluations based on the judgment of
the fund’s pricing services. If a market value for a security is not available or normal valuation
procedures are deemed to be inappropriate, the fund will make a good faith effort to assign a fair value
to the security by taking into account various factors that have been approved by the fund’s Board
of Directors. This value may differ from the value the fund receives upon sale of the securities. Amortized
cost is used to price securities held by money funds and certain other debt securities held by a fund.
Investments in other mutual funds are valued at the closing net asset value per share of the mutual fund
on the day of valuation.
Non-U.S. equity securities are valued on the basis of their most
recent closing market prices at 4 p.m. ET except under the circumstances described below. Most foreign
markets close before 4 p.m. ET. For example, the most recent closing prices for securities traded in
certain Asian markets, may be as much as 15 hours old at 4 p.m. ET. If a fund determines that
developments between the close of a foreign market and the close of the New York Stock Exchange will,
in its judgment, materially affect the value of some or all of the fund’s securities, the fund will
adjust the previous closing prices to reflect what it believes to be the fair value of the securities
as of 4 p.m. ET. In deciding whether to make these 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 may also fair value certain securities or a group of securities in other situations—for
example, when a particular foreign market is closed but the fund is open. The fund uses outside pricing
services to provide it with closing market prices and information used for adjusting those prices and
to value most fixed income securities. 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. The fund also evaluates a variety of factors when assigning fair values
to private placements and other restricted securities. Other mutual funds may adjust the prices of their
securities by different amounts or assign different fair values to the same security.
The various ways you can buy,
sell, and exchange shares are explained at the end of this prospectus and on the New Account form.
How
Your Purchase, Sale, or Exchange Price Is Determined
If your request is received by T. Rowe Price
in correct form by the close of the New York Stock Exchange (normally 4 p.m. ET), your transaction will
be priced at that business day’s net asset value. If your request is received by T. Rowe Price after
the close of the New York Stock Exchange, your transaction will be priced at the next business day’s
net asset value.
The funds generally do not accept orders that request a particular day or price for
a transaction or any other special conditions.
Fund shares may be purchased through various third-party intermediaries
including banks, brokers, and investment advisers. Where authorized by a fund, orders will be priced
at the net asset value next computed after receipt by the intermediary. Contact your intermediary for
trade deadlines and the applicable policies for purchasing, selling, or exchanging your shares, as well
as initial and subsequent investment minimums. The intermediary may charge a fee for its services.
When
authorized by the fund, certain financial institutions or retirement plans purchasing fund shares on
behalf of customers or plan participants through T. Rowe Price Financial Institution Services or T. Rowe
Price Retirement Plan Services may place a purchase order unaccompanied by payment. Payment for these
shares must be received by the time designated by the fund (not to exceed the period established for
settlement under applicable regulations). If payment is not received by this time, the order may be canceled.
The financial institution or retirement plan is responsible for any costs or losses incurred by the fund
or T. Rowe Price if payment is delayed or not received.
Note:
The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the New York Stock Exchange closes
at a time other than 4 p.m. ET. In the event of an emergency closing, a fund’s shareholders will
receive the next share price calculated by the fund. There may be times when you are unable to contact
us by telephone or access your account online due to extreme market activity, the unavailability of the
T. Rowe Price website, or other circumstances. Should this occur, your order must still be placed and
accepted by T. Rowe Price prior to the time the New York Stock Exchange closes to be priced at that
business day’s net asset value.
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How You Can Receive the Proceeds
From a Sale
When filling out the New Account form, you may wish to give your organization the widest
range of options for receiving proceeds from a sale.
If your request is received in correct form by
T. Rowe Price on a business day prior to the close of the New York Stock Exchange, proceeds are
usually sent on the next business day. Proceeds can be mailed to you by check or sent electronically
to your bank account by Automated Clearing House transfer or bank wire. Automated Clearing House is an
automated method of initiating payments from, and receiving payments in, your financial institution account.
Proceeds sent by Automated Clearing House transfer are usually credited to your account the second business
day after the sale. Proceeds sent by bank wire are usually credited to your account the next business
day after the sale.
Exception:
Under certain circumstances, and when deemed to be in a fund’s best interests, your proceeds may
not be sent for up to seven calendar days after we receive your redemption request in good order.
If
for some reason we cannot accept your request to sell shares, we will attempt to contact you.
Contingent
Redemption Fee
Short-term trading can disrupt a fund’s investment program and create additional
costs for long-term shareholders. For these reasons, certain T. Rowe Price funds, listed in the following
table, assess a fee on redemptions (including exchanges out of a fund), which reduces the proceeds from
such redemptions by the amounts indicated:
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T. Rowe
Price Institutional Funds With Redemption Fees
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Fund
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Redemption
fee
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Holding
period
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Institutional Africa & Middle East
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2%
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90 days or less
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Institutional
Concentrated International Equity
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2%
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90 days or less
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Institutional Emerging Markets Bond
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2%
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90 days or less
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Institutional Emerging Markets Equity
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2%
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90 days or less
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Institutional Floating Rate
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2%
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90 days or less
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Institutional
Global Equity
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2%
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90 days or less
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Institutional Global Large-Cap Equity
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2%
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90 days or less
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Institutional Global Value Equity
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2%
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90 days or less
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Institutional High Yield
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2%
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90 days or less
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Institutional International Bond
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2%
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90 days or less
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Institutional International Core Equity
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2%
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90 days or less
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Institutional International Growth Equity
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2%
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90 days or less
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Redemption fees are paid to a fund to deter short-term trading,
offset costs, and protect the fund’s long-term shareholders. Subject to the exceptions described
on the following pages, all persons holding shares of a T. Rowe Price fund that imposes a redemption
fee are subject to the fee, whether the person is holding shares directly with a T. Rowe Price fund;
through a retirement plan for which T. Rowe Price serves as recordkeeper; or indirectly through an intermediary
(such as a broker, bank, or investment adviser), recordkeeper for retirement plan participants, or other
third party.
Computation of Holding Period
When an investor sells shares of a fund that
assesses a redemption fee, T. Rowe Price will use the “first-in, first-out” method to determine
the holding period for the shares sold. Under this method, the date of redemption or exchange will be
compared with the earliest purchase date of shares held in the account. A redemption fee will be charged
on shares sold on or before the end of the required holding period. The day after the date of your purchase
is considered Day 1 for purposes of computing the holding period. For example, if you redeem your shares
on or before the 90th day from the date of purchase, you will be assessed the redemption fee. If you
purchase shares through an intermediary, consult your intermediary to determine how the holding period
will be applied.
Transactions Not Subject to Redemption Fees
The T. Rowe Price funds will
not assess a redemption fee with respect to certain transactions. As of the date of this prospectus,
the following shares of T. Rowe Price funds will not be subject to redemption fees:
·
Shares redeemed
through an automated, systematic withdrawal plan;
·
Shares redeemed through or used to establish certain
rebalancing, asset allocation, wrap, and advisory programs, as well as non-T. Rowe Price fund-of-funds
products, if approved in writing by T. Rowe Price;
·
Shares purchased
through the reinvestment of dividends or capital gain distributions;
*
·
Shares converted
from one share class to another share class of the same fund;
*
·
Shares redeemed automatically by a fund to pay fund
fees or shareholder account fees (e.g., for failure to meet account minimums);
·
Shares purchased
by rollover or changes of account registration within the same fund;
*
·
Shares redeemed
to return an excess contribution from a retirement account;
·
Shares of
T. Rowe Price funds purchased by another T. Rowe Price fund and shares purchased by discretionary accounts
managed by T. Rowe Price or one of its affiliates (please note that other shareholders of the investing
T. Rowe Price fund are still subject to the policy);
·
Shares that
are redeemed in-kind;
·
Shares transferred to T. Rowe Price or a third-party
intermediary acting as a service provider when the age of the shares cannot be determined systematically;
*
and
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·
Shares redeemed
in retirement plans or other products that restrict trading to no more frequently than once per quarter,
if approved in writing by T. Rowe Price.
* Subsequent exchanges
of these shares into funds that assess redemption fees will subject such shares to the fee.
Redemption
Fees on Shares Held in Retirement Plans
If shares are held in a retirement plan, redemption fees generally
will be assessed on shares redeemed by exchange only if they were originally purchased by exchange. However,
redemption fees may apply to transactions other than exchanges depending on how shares of the plan are
held at T. Rowe Price or how the fees are applied by your plan’s recordkeeper. To determine which
of your transactions are subject to redemption fees, you should contact T. Rowe Price or your plan recordkeeper.
Omnibus
Accounts
If
your shares are held through an intermediary in an omnibus account, T. Rowe Price relies on the intermediary
to assess the redemption fee on underlying shareholder accounts. T. Rowe Price seeks to identify intermediaries
establishing omnibus accounts and to enter into agreements requiring the intermediary to assess the redemption
fees. There are no assurances that T. Rowe Price will be successful in identifying all intermediaries
or that the intermediaries will properly assess the fees.
Certain intermediaries may not apply the exemptions
previously listed to the redemption fee policy; all redemptions by persons trading through such intermediaries
may be subject to the fee. Certain intermediaries may exempt transactions not listed from redemption
fees, if approved by T. Rowe Price. Persons redeeming shares through an intermediary should check with
their respective intermediary to determine which transactions are subject to the fees.
USEFUL INFORMATION
ON DISTRIBUTIONS AND TAXES
Each fund intends to qualify to be treated each year as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. In order to qualify,
a fund must satisfy certain income, diversification, and distribution requirements. A regulated investment
company is not subject to U.S. federal income tax at the portfolio level on income and gains from investments
that are distributed to shareholders. However, if a fund were to fail to qualify as a regulated investment
company, and was ineligible to or otherwise did not cure such failure, the result would be fund-level
taxation and, consequently, a reduction in income available for distribution to the fund’s shareholders.
To
the extent possible, all net investment income and realized capital gains are distributed to shareholders.
Dividends and Other Distributions
Dividend and capital gain distributions
are reinvested in additional fund shares in your account unless you select another option on your New
Account form. Reinvesting distributions results in compounding, which allows you to receive dividends
and capital gain distributions on an increasing number of shares.
Distributions not reinvested are paid by check
or transmitted to your bank account via Automated Clearing House. If the U.S. Postal Service cannot deliver
your check, or if your check remains uncashed for six months, the fund reserves the right to reinvest
your distribution check in your account at the net asset value on the day of the reinvestment and to
reinvest all subsequent distributions in shares of the fund. Interest will not accrue on amounts represented
by uncashed distributions or redemption checks.
The following table provides details on dividend payments:
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Dividend
Payment Schedule
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Fund
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Dividends
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Bond funds
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·
Shares normally begin to earn dividends on the business
day after payment is received by T. Rowe Price.
·
Declared daily
and paid on the first business day of each month.
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Stock funds
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·
Must be a
shareholder on the dividend record date.
·
Declared and paid annually, if any, generally in December.
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Bond
fund shares will earn dividends through the date of redemption. Shares redeemed on a Friday or prior
to a holiday will continue to earn dividends until the next business day. Generally, if you redeem all
of your bond fund shares at any time during the month, you will also receive all dividends earned through
the date of redemption in the same check. When you redeem only a portion of your bond fund shares, all
dividends accrued on those shares will be reinvested, or paid in cash, on the next dividend payment date.
The funds do not pay dividends in fractional cents. Any dividend amount earned for a particular day on
all shares held that is one-half of one cent or greater (for example, $0.016) will be rounded up to the
next whole cent ($0.02), and any amount that is less than one-half of one cent (for example, $0.014)
will be rounded down to the nearest whole cent ($0.01). Please note that, if the dividend payable on
all shares held is less than one-half of one cent for a particular day, no dividend will be earned for
that day.
If
you purchase and sell your shares through an intermediary, consult your intermediary to determine when
your shares begin and stop accruing dividends; the information previously described may vary.
Capital
Gain Payments
A capital gain or loss is the difference between the purchase and sale price of a security.
If a fund has net capital gains for the year (after subtracting any capital
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losses), they are usually declared and paid in
December to shareholders of record on a specified date that month. If a second distribution is necessary,
it is paid the following year.
Tax Information
In most cases, you will be provided information
for your tax filing needs no later than mid-February.
If you invest in the fund through a tax-deferred
account, such as an individual retirement account, you will not be subject to tax on dividends and distributions
from the fund or the sale of fund shares if those amounts remain in the tax-deferred account. You may
receive a Form 1099-R or other Internal Revenue Service forms, as applicable, if any portion of the account
is distributed to you.
If you invest in the fund through a taxable account, you generally will be subject to
tax when:
·
You
sell fund shares, including an exchange from one fund to another.
·
The fund
makes dividend or capital gain distributions.
For individual shareholders, a portion of ordinary dividends representing
“qualified dividend income” received by the fund may be subject to tax at the lower rates applicable
to long-term capital gains rather than ordinary income. You may report it as “qualified dividend
income” in computing your taxes, provided you have held the fund shares on which the dividend was
paid for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date.
Ordinary dividends that do not qualify for this lower rate are generally taxable at the investor’s
marginal income tax rate. This includes the portion of ordinary dividends derived from interest, short-term
capital gains, distributions from nonqualified foreign corporations, and dividends received by the fund
from stocks that were on loan. Little, if any, of the ordinary dividends paid by the bond funds is expected
to qualify for this lower rate.
For corporate shareholders, a portion of ordinary dividends may
be eligible for the 70% deduction for dividends received by corporations to the extent the fund’s
income consists of dividends paid by U.S. corporations. Little, if any, of the ordinary dividends paid
by the international stock or bond funds is expected to qualify for this deduction.
Taxes
on Fund Redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange from one
fund to another in a taxable account is also a sale for tax purposes.
We will make available to you
Form 1099-B, if applicable, no later than mid-February, indicating the date and amount of each sale you
made in the fund during the prior year. This information will also be reported to the Internal Revenue
Service. For most new accounts or those opened by exchange in 1984 or later, we will
provide you with the gain or loss on the shares you sold during
the year based on the average cost single category method. This information is not reported to the Internal
Revenue Service. You may calculate the cost basis using other methods acceptable to the Internal Revenue
Service, such as specific identification.
For mutual fund shares acquired after 2011, new tax regulations
require us to report the cost basis information to most taxable shareholders and the Internal Revenue
Service on Form 1099-B using a cost basis method selected by the shareholder or, in the absence of such
selected method, our default method if you acquire your shares directly from us. Our default method is
average cost. If you acquire your fund shares through an intermediary after 2011, you should check with
your intermediary regarding the applicable cost basis method. You should, however, note that any cost
basis information reported to you may not always be the same as what you should report on your tax return
because the rules applicable to the determination of cost basis on Form 1099-B may be different from
the rules applicable to the determination of cost basis for reporting on your tax return. Therefore,
you should save your transaction records to make sure the information reported on your tax return is
accurate.
To
help you maintain accurate records, we will make available to you a confirmation promptly following each
transaction you make (except for systematic purchases and systematic redemptions) and a year-end statement
detailing all of your transactions in each fund account during the year.
Taxes
on Fund Distributions
We will make available to you, as applicable, no later than mid-February, a Form 1099-DIV,
or other Internal Revenue Service forms, as required, indicating the tax status of any income dividends,
dividends exempt from federal income taxes, and capital gain distributions made to you. This information
will be reported to the Internal Revenue Service. Taxable distributions are generally taxable to you
in the year in which they are paid. Your bond fund dividends for each calendar year will include dividends
accrued up to the first business day of the next calendar year. You will be sent any additional information
you need to determine your taxes on fund distributions, such as the portion of your dividends, if any,
that may be exempt from state and local income taxes.
The tax treatment of a capital gain distribution
is determined by how long the fund held the portfolio securities, not how long you held the shares in
the fund. Short-term (one year or less) capital gain distributions are taxable at the same rate as ordinary
income, and gains on securities held more than one year are taxed at the lower rates applicable to long-term
capital gains. If you realized a loss on the sale or exchange of fund shares that you held six months
or less, your short-term capital loss must be reclassified as a long-term capital loss to the extent
of any long-term capital gain distributions received during the period you held the shares. For funds
investing in foreign securities, distributions resulting from the sale of certain foreign currencies,
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currency contracts, and the foreign currency
portion of gains on debt securities are taxed as ordinary income. Net foreign currency losses may cause
monthly or quarterly dividends to be reclassified as returns of capital.
If the fund qualifies and elects
to pass through nonrefundable foreign income taxes paid to foreign governments during the year, your
portion of such taxes will be reported to you as taxable income. However, you may be able to claim an
offsetting credit or deduction on your tax return for those amounts. There can be no assurance that a
fund will meet the requirements to pass through foreign income taxes paid.
Taxable distributions are subject
to tax whether reinvested in additional shares or received in cash.
If a fund holds Build America Bonds or other
qualified tax credit bonds and elects to pass through the corresponding interest income and any available
tax credits, you will need to report both the interest income and any such tax credits as taxable income.
You may be able to claim the tax credits on your federal tax return as an offset to your income tax (including
alternative minimum tax) liability, but the tax credits generally are not refundable. There is no assurance,
however, that a fund will elect to pass through the income and credits.
Tax Consequences of Hedging
Entering
into certain transactions involving options, futures, swaps, and forward currency exchange contracts
may result in the application of the mark-to-market and straddle provisions of the Internal Revenue Code.
These provisions could result in a fund being required to distribute gains on such transactions even
though it did not close the contracts during the year or receive cash to pay such distributions. The
fund may not be able to reduce its distributions for losses on such transactions to the extent of unrealized
gains in offsetting positions.
Tax Consequences of Shareholder Turnover
If the fund’s portfolio
transactions result in a net capital loss (i.e., an excess of capital losses over capital gains) for
any year, the loss may be carried forward and used to offset future realized capital gains. However,
its ability to carry forward such losses will be limited if the fund experiences an “ownership change”
within the meaning of the Internal Revenue Code. An ownership change generally results when shareholders
owning 5% or more of the fund increase their aggregate holdings by more than 50 percentage points over
a three-year period.
Because institutional funds may have only a few large shareholders, an ownership change
can occur in the normal course of shareholder purchases and redemptions. The fund undertakes no obligation
to avoid or prevent an ownership change. Moreover, because of circumstances beyond the fund’s control,
there can be no assurance that the fund will not experience, or has not already experienced, an ownership
change. An ownership change can reduce the fund’s ability to offset
capital gains with losses, and as a result, increase the amount
of taxable gains that could be distributed to shareholders.
Tax Effect of Buying Shares Before
an Income Dividend or Capital Gain Distribution
If you buy shares shortly before or on the record date—the
date that establishes you as the person to receive the upcoming distribution—you may receive a portion
of the money you just invested in the form of a taxable distribution. Therefore, you may wish to find
out a fund’s record date before investing. In addition, a fund’s share price may, at any time,
reflect undistributed capital gains or income and unrealized appreciation, which may result in future
taxable distributions. Such distributions can occur even in a year when the fund has a negative return.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
Following these procedures helps
assure timely and accurate transactions.
Purchase Conditions
Nonpayment
Purchases of a fund may be canceled if payment
is not received in a timely manner, and the shareholder may be responsible for any losses or expenses
incurred by the fund or its transfer agent. The funds and their agents have the right to reject or cancel
any purchase, exchange, or redemption due to nonpayment.
U.S. Dollars
All purchases must be paid for in U.S. dollars; checks must be
drawn on U.S. banks.
Large Sale (Redemption)
Conditions
Large redemptions can adversely affect a portfolio manager’s ability to implement
a fund’s investment strategy by causing the premature sale of securities. Therefore, the fund reserves
the right (without prior notice) to pay all or part of redemption proceeds with securities from the fund’s
portfolio rather than in cash (“redemption in-kind”). If this occurs, the securities will
be selected by the fund in its absolute discretion, and the redeeming shareholder or account will be
responsible for disposing of the securities and bearing any associated costs.
We also request that you give
us three business days’ notice for any redemption of $2 million or more.
Excessive
and Short-Term Trading Policy
Excessive transactions and short-term trading can be harmful to fund shareholders in
various ways, such as disrupting a fund’s portfolio management strategies, increasing a fund’s
trading costs, and negatively affecting its performance. Short-term traders in funds that invest in foreign
securities may seek to take advantage of developments overseas that could lead to an anticipated difference
between the price of the funds’ shares and price movements in foreign markets. While there is no
assurance that
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T. Rowe Price can prevent all excessive
and short-term trading, the Boards of Directors/Trustees of the T. Rowe Price funds have adopted
the following trading limits that are designed to deter such activity and protect the funds’ shareholders.
The funds may revise their trading limits and procedures at any time as the Boards of Directors/Trustees
deem necessary or appropriate to better detect short-term trading that may adversely affect the funds,
to comply with applicable regulatory requirements, or to impose additional or alternative restrictions.
Subject
to certain exceptions, each T. Rowe Price fund restricts a shareholder’s purchases (including through
exchanges) into a fund account for a period of 30 calendar days after the shareholder has redeemed
or exchanged out of that same fund account (the “30-Day Purchase Block”). The calendar day
after the date of redemption is considered Day 1 for purposes of computing the period before another
purchase may be made.
General Exceptions
As of the date of this prospectus, the following types of transactions generally are not subject to
the 30-Day Purchase Block:
·
Shares purchased or redeemed in money funds;
·
Shares purchased
or redeemed through a systematic purchase or withdrawal plan;
·
Checkwriting
redemptions from bond and money funds;
·
Shares purchased through the reinvestment of dividends
or capital gain distributions;
·
Shares redeemed automatically by a fund to pay fund
fees or shareholder account fees;
·
Transfers and changes of account registration within
the same fund;
·
Shares purchased by asset transfer or direct rollover;
·
Shares
purchased or redeemed through IRA conversions and recharacterizations;
·
Shares redeemed
to return an excess contribution from a retirement account;
·
Transactions
in Section 529 college savings plans;
·
Shares converted from one share class to another share
class in the same fund; and
·
Shares of T. Rowe Price funds that are purchased
by another T. Rowe Price fund, including shares purchased by T. Rowe Price fund-of-funds products,
and shares purchased by discretionary accounts managed by T. Rowe Price or one of its affiliates
(please note that shareholders of the investing T. Rowe Price fund are still subject to the policy).
Transactions
in certain rebalancing, asset allocation, wrap programs, and other advisory programs, as well as non-T. Rowe
Price fund-of-funds products, may also be exempt from the 30-Day Purchase Block, subject to prior written
approval by T. Rowe Price.
In addition to restricting transactions in accordance with the 30-Day
Purchase Block, T. Rowe Price may, in its discretion, reject (or instruct an intermediary to reject)
any purchase or exchange into a fund from a person (which includes individuals and entities) whose trading
activity could disrupt the management of the fund or dilute
the value of the fund’s shares, including trading by persons
acting collectively (e.g., following the advice of a newsletter). Such persons may be barred, without
prior notice, from further purchases of T. Rowe Price funds for a period longer than 30 calendar
days or permanently.
Intermediary
Accounts
If you invest in T. Rowe Price funds through an intermediary, you should review the
intermediary’s materials carefully or consult with the intermediary directly to determine the trading
policy that will apply to your trades in the funds as well as any other rules or conditions on transactions
that may apply. If T. Rowe Price is unable to identify a transaction placed through an intermediary as
exempt from the excessive trading policy, the 30-Day Purchase Block may apply.
Intermediaries may maintain
their underlying accounts directly with the fund, although they often establish an omnibus account (one
account with the fund that represents multiple underlying shareholder accounts) on behalf of their customers.
When intermediaries establish omnibus accounts in the T. Rowe Price funds, T. Rowe Price is
not able to monitor the trading activity of the underlying shareholders. However, T. Rowe Price monitors
aggregate trading activity at the intermediary (omnibus account) level in an attempt to identify activity
that indicates potential excessive or short-term trading. If it detects suspicious trading activity,
T. Rowe Price contacts the intermediary and may request personal identifying information and transaction
histories for some or all underlying shareholders (including plan participants, if applicable). If T. Rowe
Price believes that excessive or short-term trading has occurred, it will instruct the intermediary to
impose restrictions to discourage such practices and take appropriate action with respect to the underlying
shareholder, including restricting purchases for 30 calendar days or longer. There is no assurance
that T. Rowe Price will be able to properly enforce its excessive trading policies for omnibus accounts.
Because T. Rowe Price generally relies on intermediaries to provide information and impose restrictions
for omnibus accounts, its ability to monitor and deter excessive trading will be dependent upon the intermediaries’
timely performance of their responsibilities.
T. Rowe Price may allow an intermediary or other third party to
maintain restrictions on trading in the T. Rowe Price funds that differ from the 30-Day Purchase
Block. An alternative excessive trading policy would be acceptable to T. Rowe Price if it believes
that the policy would provide sufficient protection to the T. Rowe Price funds and their shareholders
that is consistent with the excessive trading policy adopted by the funds’ Boards of Directors/Trustees.
Retirement Plan Accounts
If
shares are held in a retirement plan, generally the
30-Day Purchase Block applies only to shares redeemed
by a participant-directed exchange to another fund. However, the 30-Day Purchase Block may apply to transactions
other than exchanges depending on how shares of the plan are held at T. Rowe Price or the excessive
trading policy applied by your plan’s recordkeeper. An alternative excessive trading policy may
apply to the T. Rowe Price funds where a retirement plan has its own policy deemed acceptable to
T. Rowe Price. You should
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contact T. Rowe Price or your plan recordkeeper
to determine which of your transactions are subject to the funds’ 30-Day Purchase Block or an alternative
policy.
There
is no guarantee that T. Rowe Price will be able to identify or prevent all excessive or short-term trades
or trading practices.
Keeping Your Account Open
To keep operating expenses lower, we ask you
to maintain an account balance of at least $1 million. If your investment is below $1 million, we have
the right to redeem your account at the then-current net asset value after giving you 60 days to increase
your balance. This could result in a taxable gain.
Signature Guarantees
A Medallion signature guarantee
is designed to protect you and the T. Rowe Price funds from fraud by verifying your signature.
An
intermediary may need to obtain a signature guarantee in certain situations,
such as:
·
Written requests
to redeem over $5 million and wire the redemption proceeds to a bank account not on file;
·
Remitting
redemption proceeds to any person, address, or bank account not on record; or
·
Changing
the account registration or broker-dealer of record for an account.
Intermediaries should consult their T. Rowe Price
Financial Institution Services representative for specific requirements.
The signature guarantee must
be obtained from a financial institution that is a participant in a Medallion signature guarantee program.
You can obtain a Medallion signature guarantee from most banks, savings institutions, broker-dealers,
and other guarantors acceptable to T. Rowe Price. When obtaining a Medallion signature guarantee, please
discuss with the guarantor the dollar amount of your proposed transaction. It is important that the level
of coverage provided by the guarantor’s stamp covers the dollar amount of the transaction or it
may be rejected. We cannot accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
ORGANIZATION AND MANAGEMENT
How is the fund organized?
T.
Rowe Price Institutional Income Funds, Inc. (the “corporation”) was incorporated in Maryland
in 2000. Currently, the corporation consists of four series, each representing a separate pool of assets
with different investment objectives. The fund is an “open-end management investment company,”
or mutual fund. Mutual funds pool money received from shareholders and invest it to try to achieve specified
objectives.
What is meant by “shares”?
As with all mutual funds, investors
purchase shares when they put money in a fund. These shares are part of a fund’s authorized capital
stock, but share certificates are not issued.
Each share and fractional share entitles the shareholder to:
·
Receive
a proportional interest in income and capital gain distributions.
·
Cast one
vote per share on certain fund matters, including the election of fund directors/trustees, changes in
fundamental policies, or approval of changes in the fund’s management contract.
Do T.
Rowe Price funds have annual shareholder meetings?
The funds are not required to hold annual meetings
and, to avoid unnecessary costs to fund shareholders, do not do so except when certain matters, such
as a change in fundamental policies, must be decided. In addition, shareholders representing at least
10% of all eligible votes may call a special meeting for the purpose of voting on the removal of any
fund director or trustee. If a meeting is held and you cannot attend, you can vote by proxy. Before the
meeting, the fund will send or make available to you proxy materials that explain the issues to be decided
and include instructions on voting by mail or telephone or on the Internet.
Who runs
the fund?
General Oversight
The fund is governed by a Board of Directors that meets regularly
to review fund investments, performance, expenses, and other business affairs. The Board elects the fund’s
officers. At least 75% of Board members are independent of T. Rowe Price and its affiliates (the
“Firm”).
All decisions regarding the purchase and sale of fund investments are made by T. Rowe
Price–specifically by the fund’s portfolio manager.
Investment Adviser
T. Rowe Price is the fund’s
investment adviser and oversees the selection of the fund’s investments and management of the fund’s
portfolio. T. Rowe Price is a SEC-registered investment adviser that provides investment management
services to individual and institutional investors, and sponsors and serves as adviser and sub-adviser
to registered investment companies, institutional separate accounts, and common trust funds. The address
for T. Rowe Price is 100 East Pratt Street, Baltimore, Maryland 21202. As of December 31,
2012, the Firm managed approximately $577 billion for more than 10 million individual and institutional
investor accounts.
Portfolio Management
T. Rowe Price has established an Investment Advisory
Committee with respect to the fund. The committee chairman has day-to-day responsibility for managing
the fund’s portfolio and works with the committee in developing and executing the fund’s investment
program. The members of the committee are as follows: David A. Tiberii, Chairman, Steve Boothe,
Steven G. Brooks, Michael J. Grogan, Paul A. Karpers, Michael Lambe, Robert Larkins, Samy B.
Muaddi, Alexander S. Obaza, Miso Park, Vernon A. Reid, Jr., Theodore E. Robson, Brian M.
Ropp, Kimberly A. Stokes, Robert D. Thomas, Lauren T. Wagandt, Howard Woodward, and Zhen
Xia. The following information provides the year that the chairman first joined the Firm and the chairman’s
specific business experience during the past five years (although the chairman may have had portfolio
management responsibilities for a longer period). Mr. Tiberii has been chairman of the committee
since the fund’s inception. He joined the Firm in 2003 and his investment experience dates from
1996. He has served as a portfolio manager with the Firm throughout the past five years. The Statement
of Additional Information provides additional information about the portfolio manager’s compensation,
other accounts managed by the portfolio manager, and the portfolio manager’s ownership of fund shares.
The
Management Fee
The fund pays the investment adviser an annual all-inclusive management fee of 0.45%
based on the fund’s average daily net assets. The management fee is calculated and accrued daily
and it includes investment management services and ordinary, recurring operating expenses, but does not
cover interest, taxes, brokerage, or nonrecurring extraordinary expenses.
A discussion about the factors
considered by the Board and its conclusions in approving the fund’s investment management contract
with T. Rowe Price will appear in the fund’s annual report to shareholders for the period ended
May 31.
Fund Operations and Shareholder Services
T. Rowe Price provides accounting
services to the T. Rowe Price funds. T. Rowe Price Services, Inc. acts as the transfer and dividend disbursing
agent and provides
shareholder and administrative services to the fund. These companies
receive compensation from the fund for their services.
MORE INFORMATION ABOUT THE FUND AND ITS INVESTMENT RISKS
Consider your investment goals,
your time horizon for achieving them, and your tolerance for risk. If you can accept the possibility
of share price declines in an effort to achieve high income, the fund could be an appropriate part of
your overall investment strategy. The fund’s emphasis on investment-grade debt securities should
offer higher income than is available from funds that invest primarily in U.S. Treasury securities. The
addition of high yield bonds, non-corporate debt securities and foreign securities provides the opportunity
for higher income. The fund’s share price should fluctuate less than that of a high yield bond fund.
The
fund’s yield will vary. A fund’s yield is the annualized dividends earned for a given period
(typically 30 days for bond funds), divided by the share price at the end of the period. A fund’s
total return includes distributions from income and capital gains and the change in share price for a
given period.
Credit quality refers to a bond issuer’s expected ability to make all required
interest and principal payments on time. Because highly-rated issuers represent less risk, they can borrow
at lower interest rates than less-creditworthy issuers. Therefore, a fund investing in high-quality securities
should have a lower yield than an otherwise comparable fund investing in lower-quality securities.
Every
bond has a stated maturity date when the issuer must repay the bond’s entire principal value to
the investor. However, many bonds are “callable,” meaning their principal can be repaid before
the stated maturity date. Bonds are most likely to be called when interest rates are falling because
the issuer can refinance at a lower rate, just as a homeowner refinances a mortgage when interest rates
fall. In that environment, a bond’s “effective maturity” is usually its nearest call date.
For example, the rate at which homeowners pay down their mortgage principal determines the effective
maturity of mortgage-backed bonds.
A bond fund has no real maturity, but it does have a weighted average
maturity and a weighted average effective maturity. Each of these numbers is an average of the stated
or effective maturities of the underlying bonds, with each bond’s maturity “weighted”
by the percentage of fund assets it represents. (A fund’s average effective maturity is calculated
by reference to the nearest mortgage prepayment dates, call dates, or coupon reset dates of the underlying
holdings.) Some funds utilize effective maturities rather than stated maturities when managing a fund
to a certain average maturity, which provides additional flexibility in portfolio management.
Duration is a calculation that seeks to measure the price sensitivity
of a bond or a bond fund to changes in interest rates. It is expressed in years, like maturity, but it
is a better indicator of price sensitivity than maturity because it takes into account the time value
of cash flows generated over the bond’s life. Future interest and principal payments are discounted
to reflect their present value and then multiplied by the number of years they will be received to produce
a value expressed in years–the duration. “Effective” duration takes into account call
features and sinking fund payments that may shorten a bond’s life.
Since duration can be computed
for bond funds, you can estimate the effect of interest rate fluctuations on share prices by multiplying
fund duration by an expected change in interest rates. For example, the price of a bond fund with a duration
of five years would be expected to fall approximately 5% if rates rose by one percentage point. (A bond
fund’s duration is shown in its shareholder report.)
The fund seeks to provide strong long-term risk-adjusted
performance by using bottom-up research to identify securities and industries with opportunities for
income and/or price appreciation. We seek to evaluate long-term industry and sector trends while using
independent credit research analysis and ratings to help eliminate investments with potentially deteriorating
credit profiles. The fund focuses on longer duration investment-grade corporate and non-corporate credit
securities with a particular focus on corporate bonds in the intermediate portion of the yield curve.
Non-corporate credit securities will consist mainly of investment-grade, U.S. dollar-denominated bonds
issued by U.S. governments and agencies, foreign agencies and local governments, and supranational organizations.
While the fund generally seeks holdings with longer durations, the fund’s average duration could
fluctuate significantly based on interest rate changes. The fund targets an average effective duration
within +/-20% of the duration of the Barclays U.S. Long Credit Index. However, the duration of this index
will change over time and could be significantly higher or lower during certain interest rate environments,
such as periods of high or rising interest rates. The fund may use Treasury futures, interest rate futures,
interest rate swaps, and interest rate swap futures primarily in an effort to maintain the fund’s
desired duration at the time, although such instruments may also be used as a tool to help manage cash
flows into and out of the fund.
A Treasury futures contract involves an obligation to purchase or
sell Treasury securities at a future date (which may be many months from the date of the contract) at
a price set at the time of the contract. These contracts are standardized, are traded through a national
(or foreign) exchange, and are cleared through an affiliate of the exchange that acts as the buyer to
every seller and the seller to every buyer. A sale of a Treasury futures contract creates an obligation
by the fund, as seller, to deliver the amount of certain types of Treasury securities called for in the
contract at a specified future time for a specified price. A purchase of a Treasury futures contract
creates an obligation by the fund, as purchaser, to take delivery of an amount of securities at a specified
future time at a specific price. Interest rate futures can be sold as an offset
against the effect of expected interest rate increases and purchased
as an offset against the effect of expected interest rate declines. Interest rate swaps, which are an
agreement between two parties where one stream of future interest rate payments is exchanged for another
based on a specified principal amount, may be used by the fund to manage interest rate sensitivity. Interest
rate swaps often exchange a fixed payment for a floating payment that is linked to a particular interest
rate (such as LIBOR). Interest rate swap futures are instruments that provide a way to gain swap exposure
and the benefits of futures in one contract. Swap futures are futures contracts on interest rate swaps
that enable purchasers to cash settle at a future date at the price determined by the benchmark rate
at the end of a fixed period (typically between 2 and 30 years). The notional face value of the swap
futures contract represents the fixed rate side of an interest rate swap that exchanges semiannual fixed
rate payments for floating rate payments based on 3-month LIBOR. The fund’s investments in swap
futures are intended to provide a liquid means of managing interest rate exposure, offering the opportunity
to trade actual interest rate swaps on a forward basis with the financial protections attendant to a
standard futures contract.
As with any mutual fund, there is no guarantee the fund will achieve its objective.
The fund’s share price fluctuates, which means you could lose money when you sell your shares of
the fund. The income level of the fund will change with market conditions and interest rate levels.
Some
particular risks affecting the fund include the following:
Market risk
The market price of securities owned by the fund may go up or down,
sometimes rapidly or unpredictably. Securities may decline in value due to factors affecting securities
markets generally or particular industries represented in the securities markets. The value of a security
may decline due to general market conditions which are not specifically related to a particular company,
such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings,
changes in interest or currency rates or adverse investor sentiment generally. The value of a security
may also decline due to factors which affect a particular industry or industries, such as labor shortages
or increased production costs and competitive conditions within an industry.
Interest rate risk
This is the risk that interest rates will
increase, causing a decline in bond prices. (Bond prices and interest rates usually move in opposite
directions.) Prices fall because the bonds and notes in the fund’s portfolio become less attractive
to other investors when securities with higher yields become available. Because the fund’s duration
typically exceeds 10 years, the fund carries significantly more interest rate risk than many other bond
funds, particularly those with much shorter durations.
Prepayment risk
This is the risk that a fund investing in mortgage-backed securities,
certain asset-backed securities, and other debt securities that have embedded call
options can be hurt when interest rates fall because borrowers tend
to refinance and prepay principal. Receiving increasing prepayments in a falling interest rate environment
causes the average maturity of the portfolio to shorten, reducing its potential for price gains. It also
requires the fund to reinvest proceeds at lower interest rates, which reduces the fund’s total return
and yield, and could result in a loss if bond prices fall below the level that the fund paid for them.
Extension risk
This is the
risk that a rise in interest rates or lack of refinancing opportunities can cause a fund’s average
maturity to lengthen unexpectedly due to a drop in expected prepayments of mortgage-backed securities,
asset-backed securities, and callable debt securities. This would increase a fund’s sensitivity
to rising rates and its potential for price declines.
Credit risk
This is the risk that an issuer of a debt security or counterparties
to over-the-counter derivatives held by the fund will default (fail to make scheduled payments), potentially
reducing the fund’s income and share price. This risk is increased when a portfolio security is
downgraded or the perceived creditworthiness of an issuer or counterparty deteriorates.
Investment-grade (AAA through
BBB) securities should have a relatively lower risk of encountering financial problems and a relatively
higher probability of future payments. However, securities rated BBB are more susceptible to adverse
economic conditions and may have speculative characteristics. Securities rated below investment grade
(“junk” or high yield bonds) should be regarded as speculative because their issuers are more
susceptible to financial setbacks and recession than more creditworthy companies. High yield bond issuers
include small companies lacking the history or capital to merit investment-grade status, former blue-chip
companies downgraded because of financial problems, and firms with heavy debt loads. If the fund invests
in securities whose issuers develop unexpected credit problems, the fund’s share price could decline.
The
fund’s exposure to credit risk is greater than that of a Treasury fund or one with all high-quality
bonds, but less than that of a fund focusing only on high yield “junk” bonds. Higher-quality
bond prices are affected primarily by changes in interest rate levels, but high yield bond prices are
affected by other factors as well: changes in a company’s financial situation, economic forecasts,
stock market conditions, technical market analysis, and overall market psychology that can lead to the
kind of volatility associated with stocks. High yield bonds are generally less liquid than high-quality
bonds, meaning that large transactions can cause substantial price changes.
Liquidity risk
This is the risk that a fund may not be able
to sell a holding in a timely manner at a desired price. Sectors of the bond market can experience sudden
downturns in trading activity. During periods of reduced market liquidity, the spread between the price
at which a security can be bought and the price at which it can be sold can widen, and the fund may not
be able to sell a holding readily at a price that
reflects what the fund believes it should be worth. Less liquid
securities can also become more difficult to value.
Foreign investing risk
To the extent a fund holds foreign securities, it will
be subject to special risks, whether the securities are denominated in U.S. dollars or foreign currencies.
These risks include potentially adverse political and economic conditions overseas, greater volatility,
lower liquidity, and the possibility that foreign currencies will decline against the dollar, lowering
the value of securities denominated in those currencies and possibly a fund’s share price.
Derivatives risk
While transactions
in Treasury futures contracts may reduce certain risks, unanticipated changes in interest rates or securities
prices may result in a poorer overall performance for the fund than if it had not entered into any Treasury
futures transactions. To the extent the fund uses Treasury futures contracts, it is exposed to additional
volatility and potential losses resulting from leverage. Losses (or gains) involving Treasury futures
contracts can sometimes be substantial—in part because a relatively small price movement in a Treasury
futures contract may result in an immediate and substantial loss (or gain) for the fund. Because Treasury
futures contracts, interest rate swaps, and the relatively new deliverable interest rate swap futures
are traded on an exchange, there should be no counterparty or default risk, although the fund could experience
delays and/or losses associated with the bankruptcy of a broker through which the fund engages in futures
transactions. Futures, swaps, and swap futures may not prove to be successful hedges and the potential
loss from the use of futures can exceed a fund’s initial investment in such contracts, which could
significantly lower a fund’s total return.
Efforts
to reduce risk
Consistent with the fund’s objective, the portfolio manager uses various
tools to try to reduce risk and increase total return, including:
·
Attempting
to reduce the impact of a single holding or sector on the fund’s net asset value.
·
Thorough
credit research by our own analysts.
·
Adjusting fund duration to try to reduce the drop in
the fund’s price when interest rates rise or to benefit from the rise in price when rates fall.
In
addition to the fund’s normal investments, the fund may employ other strategies that are not considered
part of its principal investment strategies. The fund may use futures and swaps in a variety of ways
beyond adjusting the fund’s duration, such as using credit default swaps to protect the value of
certain portfolio holdings or to manage the fund’s overall exposure to changes in credit quality.
In addition, the fund may invest in other types of securities (such as preferred stocks and convertible
securities) and use certain other types of derivatives on a limited basis that are consistent with its
investment program.
A derivative involves risks different from, and possibly greater than, the risks associated
with investing directly in the assets on which the derivative is based. Derivatives can be highly volatile,
illiquid, and difficult to value, and changes in the
value of a derivative may not properly correlate with changes in
the value of the underlying asset, reference rate, or index. A fund could be exposed to significant losses
if it is unable to close a derivatives position due to the lack of a liquid secondary trading market.
Derivatives involve the risk that a counterparty to the derivatives agreement will fail to make required
payments or comply with the terms of the agreement. There is also the possibility that limitations or
trading restrictions may be imposed by an exchange or government regulation, which could adversely impact
the value and liquidity of a derivatives contract subject to such regulation.
Recent legislation calls for
a new regulatory framework for the derivatives markets. The full extent and impact of new regulations
are not certain at this time. New regulations have made the use of derivatives by funds more costly,
may limit the availability of certain types of derivatives, and may otherwise adversely affect the value
or performance of derivatives used by funds.
The Statement of Additional Information contains more detailed information
about the fund and its investments, operations, and expenses.
INVESTMENT POLICIES AND PRACTICES
This section takes a detailed look at some of
the types of fund securities and the various kinds of investment practices that may be used in day-to-day
portfolio management. Fund investments are subject to further restrictions and risks described in the
Statement of Additional Information.
Shareholder approval is required to substantively change fund objectives.
Shareholder approval is also required to change certain investment restrictions noted in the following
section as “fundamental policies.” Portfolio managers also follow certain “operating policies”
that can be changed without shareholder approval.
Fund holdings of certain kinds of investments
cannot exceed maximum percentages of total assets, which are set forth in this prospectus. For instance,
fund investments in certain derivatives are limited to 10% of total assets. While these restrictions
provide a useful level of detail about fund investments, investors should not view them as an accurate
gauge of the potential risk of such investments. For example, in a given period, a 5% investment in derivatives
could have significantly more of an impact on a fund’s share price than its weighting in the portfolio.
The net effect of a particular investment depends on its volatility and the size of its overall return
in relation to the performance of all other fund investments.
Certain investment restrictions, such as a required
minimum or maximum investment in a particular type of security, are measured at the time a fund purchases
a security. The status, market value, maturity, credit quality, or other characteristics of a fund’s
securities may change after they are purchased, and this may cause the
amount of a fund’s assets invested in such securities to exceed
the stated maximum restriction or fall below the stated minimum restriction. If any of these changes
occur, it would not be considered a violation of the investment restriction and will not require the
sale of an investment if it was proper at the time it was made (this exception does not apply to a fund’s
borrowing policy). However, purchases by a fund during the time it is above or below the stated percentage
restriction would be made in compliance with applicable restrictions.
Changes in fund holdings, fund
performance, and the contribution of various investments to fund performance are discussed in the shareholder
reports.
Portfolio
managers have considerable discretion in choosing investment strategies and selecting securities they
believe will help achieve fund objectives.
Types of Portfolio Securities
In seeking to meet its investment
objective, fund investments may be made in any type of security or instrument (including certain potentially
high-risk derivatives described in this section) whose investment characteristics are consistent with
its investment program. The following pages describe various types of fund holdings and investment management
practices.
Diversification
As a fundamental
policy, the fund will not purchase a security if, as a result, with respect to 75% of its total assets,
more than 5% of the fund’s total assets would be invested in securities of a single issuer or more
than 10% of the outstanding voting securities of the issuer would be held by the fund. These limitations
do not apply to fund purchases of securities issued or guaranteed by the U.S. government, its agencies,
or instrumentalities.
Bonds
A bond is an interest-bearing security. The issuer has a contractual
obligation to pay interest at a stated rate on specific dates and to repay principal (the bond’s
face value) on a specified date. An issuer may have the right to redeem or “call” a bond before
maturity, and the investor may have to reinvest the proceeds at lower market rates. Bonds can be issued
by U.S. and foreign governments, states, and municipalities, as well as a wide variety of companies.
A
bond’s annual interest income, set by its coupon rate, is usually fixed for the life of the bond.
Its yield (income as a percent of current price) will fluctuate to reflect changes in interest rate levels.
A bond’s price usually rises when interest rates fall and vice versa, so its yield stays consistent
with current market conditions.
Conventional fixed rate bonds offer a coupon rate for a fixed maturity
with no adjustment for inflation. Real rate of return bonds also offer a fixed coupon but include ongoing
inflation adjustments for the life of the bond.
Bonds may be unsecured (backed by the issuer’s general creditworthiness
only) or secured (also backed by specified collateral). Bonds include asset- and mortgage-backed securities.
Certain
bonds have interest rates that are adjusted periodically. These interest rate adjustments tend to minimize
fluctuations in the bonds’ principal values. The maturity of those securities may be shortened under
certain specified conditions.
Bond investments may include Build America Bonds issued by state and local governments
to finance capital expenditures for which they otherwise could issue tax-exempt governmental bonds. Unlike
most other municipal obligations, interest received on Build America Bonds is taxable to the bondholder.
These include bonds on which the
issuer
may receive an interest payment subsidy directly from the U.S. Treasury, known as direct pay Build America
Bonds, and bonds on which the
investor
may receive a tax credit, known as tax credit Build America Bonds.
Common and Preferred Stocks
Stocks
represent shares of ownership in a company. Generally, preferred stock has a specified dividend and ranks
after bonds and before common stocks in its claim on income for dividend payments and on assets should
the company be liquidated. After other claims are satisfied, common stockholders participate in company
profits on a pro-rata basis; profits may be paid out in dividends or reinvested in the company to help
it grow. Increases and decreases in earnings are usually reflected in a company’s stock price, so
common stocks generally have the greatest appreciation and depreciation potential of all corporate securities.
Unlike common stock, preferred stock does not ordinarily carry voting rights. While most preferred stocks
pay a dividend, a fund may decide to purchase preferred stock where the issuer has omitted, or is in
danger of omitting, payment of its dividend.
Convertible Securities and Warrants
Investments may be made in
debt or preferred equity securities that are convertible into, or exchangeable for, equity securities
at specified times in the future and according to a certain exchange ratio. Convertible bonds are typically
callable by the issuer, which could in effect force conversion before the holder would otherwise choose.
Traditionally, convertible securities have paid dividends or interest at rates higher than common stocks
but lower than nonconvertible securities. They generally participate in the appreciation or depreciation
of the underlying stock into which they are convertible, but to a lesser degree than common stock. Some
convertible securities combine higher or lower current income with options and other features. Warrants
are options to buy, directly from the issuer, a stated number of shares of common stock at a specified
price anytime during the life of the warrants (generally, two or more years). Warrants can be highly
volatile, have no voting rights, and pay no dividends.
Operating policy
The fund may invest up to 10% of total assets in preferred
stocks and securities that are convertible into, or which carry warrants for, common stocks
or other equity securities. Under normal conditions, the fund does
not expect to directly purchase common stocks. Any shares of common stock that are received through a
reorganization, restructuring, exercise, exchange, conversion, or similar action will be sold within
a reasonable timeframe taking into consideration market conditions and any legal restrictions.
Foreign
Securities
Investments may be made in foreign securities. These include nondollar-denominated securities
traded outside of the U.S. and dollar-denominated securities of foreign issuers traded in the U.S. (such
as Yankee bonds). Investing in foreign securities involves special risks that can increase the potential
for losses. These include: exposure to potentially adverse local, political, social, and economic developments
such as war, political instability, hyperinflation, currency devaluations, and overdependence on particular
industries; government interference in markets such as nationalization and exchange controls, expropriation
of assets, or imposition of punitive taxes; potentially lower liquidity and higher volatility; possible
problems arising from accounting, disclosure, settlement, and regulatory practices and legal rights that
differ from U.S. standards; and the chance that fluctuations in foreign exchange rates will decrease
the investment’s value (favorable changes can increase its value). These risks are heightened for
a fund’s investments in emerging markets.
Operating
policy
There is no limit on fund investments in U.S. dollar-denominated debt securities issued
by foreign issuers, foreign branches of U.S. banks, and U.S. branches of foreign banks. The fund may
also invest up to 10% of total assets (excluding reserves) in non-U.S. dollar-denominated foreign debt
securities. Subject to the overall limit on fund investments in foreign debt securities, there is no
limit on the amount of foreign investments that may be made in emerging markets.
Mortgage-Backed
Securities
A
fund may invest in a variety of mortgage-backed securities. Mortgage lenders pool individual home mortgages
with similar characteristics to back a certificate or bond, which is sold to investors such as the fund.
Interest and principal payments generated by the underlying mortgages are passed through to the investors.
The “big three” issuers are the Government National Mortgage Association, the Federal National
Mortgage Association, and the Federal Home Loan Mortgage Corporation. Government National Mortgage Association
certificates are backed by the full faith and credit of the U.S. government, while others, such as the
Federal National Mortgage Association and Federal Home Loan Mortgage Corporation certificates, are only
supported by the ability to borrow from the U.S. Treasury or by the credit of the agency. (Since September
2008, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation have operated
under conservatorship of the Federal Housing Finance Agency, an independent federal agency.) Private
mortgage bankers and other institutions also issue mortgage-backed securities.
Mortgage-backed securities are subject to scheduled and unscheduled
principal payments as homeowners pay down or prepay their mortgages. As these payments are received,
they must be reinvested when interest rates may be higher or lower than on the original mortgage security.
Therefore, these securities are not an effective means of locking in long-term interest rates. In addition,
when interest rates fall, the rate of mortgage prepayments tends to increase. These refinanced mortgages
are paid off at face value or “par,” causing a loss for any investor who may have purchased
the security at a price above par. In such an environment, this risk limits the potential price appreciation
of these securities and can negatively affect a fund’s net asset value. When interest rates rise,
the prices of mortgage-backed securities can be expected to decline. In addition, when interest rates
rise and prepayments slow, the effective duration of mortgage-backed securities extends, resulting in
increased price volatility.
Other types of mortgage-backed securities in which the fund may invest include:
Collateralized Mortgage Obligations
Collateralized mortgage obligations are debt securities that are fully collateralized by a portfolio
of mortgages or mortgage-backed securities including Government National Mortgage Association, Federal
National Mortgage Association, Federal Home Loan Mortgage Corporation, and non-agency-backed mortgages.
All interest and principal payments from the underlying mortgages are passed through to the collateralized
mortgage obligations in such a way as to create different classes with varying risk characteristics,
payment structures, and maturity dates. Collateralized mortgage obligation classes may pay fixed or variable
rates of interest, and certain classes have priority over others with respect to the receipt of prepayments
and allocation of defaults.
Stripped Mortgage
Securities
Stripped mortgage securities are created by separating the interest and principal
payments generated by a pool of mortgage-backed securities or a collateralized mortgage obligation to
create additional classes of securities. Generally, one class receives interest-only payments and another
receives principal-only payments. Unlike other mortgage-backed securities and principal-only strips,
the value of interest-only strips tends to move in the same direction as interest rates. A fund can use
interest-only strips as a hedge against falling prepayment rates (when interest rates are rising) and/or
in an unfavorable market environment. Principal-only strips can be used as a hedge against rising prepayment
rates (when interest rates are falling) and/or in a favorable market environment. Interest-only strips
and principal-only strips are acutely sensitive to interest rate changes and to the rate of principal
prepayments.
A rapid or unexpected increase in prepayments can severely depress the price of interest-only
strips, while a rapid or unexpected decrease in prepayments could have the same effect on principal-only
strips. Of course, under the opposite conditions these securities may appreciate in value. These securities
can be very volatile in price and may have less liquidity than most other mortgage-backed securities.
Certain non-stripped collateralized mortgage obligation classes may also exhibit these qualities, especially
those that pay variable rates of interest that adjust inversely with, and more
rapidly than, short-term interest rates. In addition, if interest
rates rise rapidly and prepayment rates slow more than expected, certain collateralized mortgage obligation
classes, in addition to losing value, can exhibit characteristics of long-term securities and become
more volatile. There is no guarantee that a fund’s investments in collateralized mortgage obligations,
interest-only strips, or principal-only strips will be successful, and a fund’s total return could
be adversely affected as a result.
Commercial
Mortgage-Backed Securities
Commercial mortgage-backed securities are securities created from
a pool of commercial mortgage loans, such as loans for hotels, shopping centers, office buildings, and
apartment buildings. Interest and principal payments from the loans are passed on to the investor according
to a schedule of payments. Credit quality depends primarily on the quality of the loans themselves and
on the structure of the particular deal. Generally, deals are structured with senior and subordinate
classes. The degree of subordination is determined by the rating agencies who rate the individual classes
of the structure. Commercial mortgages are generally structured with prepayment penalties, which greatly
reduce prepayment risk to the investor. However, the value of these securities may change because of
actual or perceived changes in the creditworthiness of the individual borrowers, their tenants, the servicing
agents, or the general state of commercial real estate.
Asset-Backed Securities
An
underlying pool of assets, such as credit card or automobile trade receivables or corporate loans or
bonds, backs these bonds and provides the interest and principal payments to investors. On occasion,
the pool of assets may also include a swap obligation, which is used to change the cash flows on the
underlying assets. As an example, a swap may be used to allow floating rate assets to back a fixed rate
obligation. Credit quality depends primarily on the quality of the underlying assets, the level of any
credit support provided by the structure or by a third-party insurance wrap, and the credit quality of
the swap counterparty. The underlying assets (i.e., loans) are sometimes subject to prepayments, which
can shorten the security’s effective maturity and may lower its return. The value of these securities
also may change because of actual or perceived changes in the creditworthiness of the individual borrowers,
the originator, the servicing agent, the financial institution providing the credit support, or the swap
counterparty.
Operating policy
Fund investments in mortgage- and asset-backed securities are limited to 5% of total assets.
Inflation-Linked
Securities
Inflation-linked securities are income-generating instruments whose interest and principal
payments are adjusted for inflation—a sustained increase in prices of goods and services that erodes
the purchasing power of money. Treasury inflation-protected securities are inflation-linked securities
issued by the U.S. government. Inflation-linked bonds are also issued by corporations, U.S. government
agencies, and foreign
countries. The inflation adjustment, which is typically applied
monthly to the principal of the bond, follows a designated inflation index, such as the consumer price
index. A fixed coupon rate is applied to the inflation-adjusted principal so that as inflation rises,
both the principal value and the interest payments increase. This can provide investors with a hedge
against inflation, as it helps preserve the purchasing power of your investment. Because of this inflation-adjustment
feature, inflation-protected bonds typically have lower yields than conventional fixed rate bonds.
Inflation-protected
bonds normally will decline in price when real interest rates rise. (A real interest rate is calculated
by subtracting the inflation rate from a nominal interest rate. For example, if a 10-year Treasury note
is yielding 5% and inflation expectations for the next 10 years are 2%, the real interest rate is 3%.)
If inflation is negative, the principal and income of an inflation-protected bond could decline and result
in losses for the fund.
High Yield, High-Risk Bonds
The price and yield of lower-quality (high yield,
high-risk) bonds, commonly referred to as “junk” bonds, and below investment-grade emerging
market bonds, can be expected to fluctuate more than the price and yield of higher-quality bonds. Because
these bonds are rated below BBB or are in default, they are regarded as predominantly speculative with
respect to the issuer’s continuing ability to meet principal and interest payments. Successful investment
in lower-medium- and low-quality bonds involves greater investment risk and is highly dependent on T. Rowe
Price’s credit analysis. A real or perceived economic downturn or higher interest rates could cause
a decline in high yield bond prices by lessening the ability of issuers to make principal and interest
payments. These bonds are often thinly traded and can be more difficult to sell and value accurately
than high-quality bonds. Because objective pricing data may be less available, judgment may play a greater
role in the valuation process. In addition, the entire high yield bond market can experience sudden and
sharp price swings due to a variety of factors, including changes in economic forecasts, stock market
activity, large or sustained sales by major investors, a high-profile default, or just a change in the
market’s psychology. This type of volatility is usually associated more with stocks than bonds,
but “junk” bond investors should be prepared for it.
Operating policy
The fund may invest up to 15% of its net assets in below
investment-grade securities or “junk” bonds.
Derivatives and Leverage
A
derivative is a financial instrument whose value is derived from an underlying security such as a stock
or bond or from a market benchmark, such as an interest rate index. Many types of investments representing
a wide range of risks and potential rewards may be considered derivatives, including conventional instruments
such as futures and options, as well as other potentially more complex investments such as
swaps and structured notes. The use of derivatives can involve leverage.
Leverage has the effect of magnifying returns, positively or negatively. The effect on returns will depend
on the extent to which an investment is leveraged. For example, an investment of $1, leveraged at 2 to
1, would have the effect of an investment of $2. Leverage ratios can be higher or lower with a corresponding
effect on returns. The fund may use derivatives in certain situations to help accomplish any or all of
the following: to hedge against a decline in principal value, to increase yield, to manage exposure to
changes in interest or currency exchange rates, to invest in eligible asset classes with greater efficiency
and at a lower cost than is possible through direct investment, or to adjust portfolio duration or credit
risk exposure.
While individual fund investments may involve leverage, the fund will not invest in
any high-risk, highly leveraged derivative instrument that, at the time of entering into the derivative
transaction, is expected to cause the overall price volatility of the portfolio to be meaningfully greater
than that of a long-term (over 10-year maturity) investment-grade bond.
Derivatives that may be used
include the following as well as others that combine the risk characteristics and features of futures,
options, and swaps:
Futures and
Options
Futures, a type of potentially high-risk derivative, are often used to manage or hedge
risk because they enable the investor to buy or sell an asset in the future at an agreed-upon price.
Options, another type of potentially high-risk derivative, give the investor the right (when the investor
purchases the option), or the obligation (when the investor “writes” or sells the option),
to buy or sell an asset at a predetermined price in the future. Futures and options contracts may be
bought or sold for any number of reasons, including to manage exposure to changes in interest rates,
bond prices, foreign currencies, and credit quality; as an efficient means of increasing or decreasing
a fund’s exposure to a specific part or broad segment of the U.S. market or a foreign market; in
an effort to enhance income; to protect the value of portfolio securities; to serve as a cash management
tool; and to adjust portfolio duration or credit risk exposure. Call or put options may be purchased
or sold on securities, futures, and financial indexes. A fund may choose to continue a futures contract
by “rolling over” an expiring futures contract into an identical contract with a later maturity
date. This could increase the fund’s transaction costs and portfolio turnover rate.
Futures contracts and options
may not always be successful hedges; their prices can be highly volatile; using them could lower a fund’s
total return; and the potential loss from the use of futures can exceed a fund’s initial investment
in such contracts.
Operating policies
Initial margin deposits on futures and premiums on options used for non-hedging purposes will not exceed
5% of a fund’s net asset value. The total market value of securities covering call or put options
may not exceed 25% of total assets. No more than 5% of total assets will be committed to premiums when
purchasing call or put options.
Swaps
Fund investments may be made in interest rate, index, total return, credit default, and other
types of swap agreements, as well as options on swaps, commonly referred to as “swaptions,”
and interest rate swap futures, which are instruments that provide a way to gain swap exposure and the
benefits of futures in one contract. All of these agreements are considered derivatives and, in certain
cases, high-risk derivatives. Interest rate, index, and total return swaps are two-party contracts under
which a fund and a counterparty, such as a broker or dealer, agree to exchange the returns (or differentials
in rates of return) earned or realized on particular predetermined investments or indexes. Credit default
swaps are agreements where one party (the protection buyer) will make periodic payments to another party
(the protection seller) in exchange for protection against specified credit events, such as defaults
and bankruptcies related to an issuer or underlying credit instrument. Swap futures are futures contracts
on interest rate swaps that enable purchasers to cash settle at a future date at the price determined
by a specific benchmark rate at the end of a fixed period. Swaps, swaptions, and swap futures can be
used for a variety of purposes, including to manage a fund’s overall exposure to changes in interest
or foreign currency exchange rates and credit quality; as an efficient means of adjusting a fund’s
exposure to certain markets; in an effort to enhance income or total return or protect the value of portfolio
securities; to serve as a cash management tool; and to adjust portfolio duration or credit risk exposure.
There
are risks in the use of swaps and related instruments. Swaps could result in losses if interest or foreign
currency exchange rates or credit quality changes are not correctly anticipated by a fund. Total return
swaps could result in losses if the reference index, security, or investments do not perform as anticipated.
Credit default swaps can increase a fund’s exposure to credit risk and could result in losses if
evaluation of the creditworthiness of the counterparty, or of the company or government on which the
credit default swap is based, is incorrect. The use of swaps, swaptions, and swap futures may not always
be successful. Using them could lower a fund’s total return, their prices can be highly volatile,
and the potential loss from the use of swaps can exceed a fund’s initial investment in such instruments.
Also, the other party to a swap agreement could default on its obligations or refuse to cash out a fund’s
investment at a reasonable price, which could turn an expected gain into a loss. Although there should
not be any counterparty risk associated with investments in interest rate swap futures, a fund could
experience delays and/or losses associated with the bankruptcy of a broker through which the fund engaged
in the transaction.
Operating policies
A swap agreement with any single counterparty will not be entered into if the net amount owed or to
be received under existing contracts with that party would exceed 5% of total assets or if the net amount
owed or to be received by the fund under all outstanding swap agreements will exceed 10% of total assets.
For swaptions, the total market value of securities covering call or put options may not exceed 25% of
total assets. No more than 5% of total assets will be committed to premiums when purchasing call or put
swaptions.
Hybrid
Instruments
These instruments (a type of potentially high-risk derivative) can combine the characteristics
of securities, futures, and options. For example, the principal amount or interest rate of a hybrid could
be tied (positively or negatively) to the price of some commodity, currency, security, or securities
index or another interest rate (each a “benchmark”). Hybrids can be used as an efficient means
of pursuing a variety of investment goals, including currency hedging, duration management, and increased
total return. Hybrids may or may not bear interest or pay dividends. The value of a hybrid or its interest
rate may be a multiple of a benchmark and, as a result, may be leveraged and move (up or down) more steeply
and rapidly than the benchmark. These benchmarks may be sensitive to economic and political events, such
as commodity shortages and currency devaluations, which cannot be readily foreseen by the purchaser of
a hybrid. Under certain conditions, the redemption value of a hybrid could be zero. Thus, an investment
in a hybrid may entail significant market risks that are not associated with a similar investment in
a traditional, U.S. dollar-denominated bond that has a fixed principal amount and pays a fixed rate or
floating rate of interest. The purchase of hybrids also exposes the fund to the credit risk of the issuer
of the hybrid. These risks may cause significant fluctuations in the net asset value of the fund.
Hybrids
can have volatile prices and limited liquidity, and their use may not be successful.
Operating policy
Fund investments in hybrid instruments
are limited to 10% of total assets.
Currency
Derivatives
Funds that invest in foreign securities may attempt to hedge their exposure to potentially
unfavorable currency changes. The primary means of doing this is through the use of forward currency
exchange contracts, which are contracts between two counterparties to exchange one currency for another
on a future date at a specified exchange rate. However, futures, swaps, and options on foreign currencies
may also be used. In certain circumstances, a fund may use currency derivatives to substitute a different
currency for the currency in which the investment is denominated, a strategy known as proxy hedging.
A fund may also use these instruments to create a synthetic bond–issued in one currency but with
the currency component transformed into another currency. Foreign currency forwards, options and futures
may be used to protect a fund’s foreign securities from adverse currency movements relative to the
U.S. dollar, as well as to gain exposure to currencies and markets expected to increase or decrease in
value relative to other securities. Such transactions involve, among other risks, the risk that anticipated
currency movements will not occur, which could reduce a fund’s total return. There are certain markets,
including many emerging markets, where it is not possible to engage in effective foreign currency hedging.
Operating policy
The fund will
not commit more than 10% of total assets to any combination of currency derivatives.
Investments in Other Investment Companies
A
fund may invest in other investment companies, including open-end funds, closed-end funds, and exchange-traded
funds.
A
fund may purchase the securities of another investment company to temporarily gain exposure to a portion
of the market while awaiting purchase of securities or as an efficient means of gaining exposure to a
particular asset class. The fund might also purchase shares of another investment company to gain exposure
to the securities in the investment company’s portfolio at times when the fund may not be able to
buy those securities directly. Any investment in another investment company would be consistent with
the fund’s objective and investment program.
The risks of owning another investment company are generally similar
to the risks of investing directly in the securities in which that investment company invests. However,
an investment company may not achieve its investment objective or execute its investment strategy effectively,
which may adversely affect the fund’s performance. In addition, because closed-end funds and exchange-traded
funds trade on a secondary market, their shares may trade at a premium or discount to the actual net
asset value of their portfolio securities and their shares may have greater volatility because of the
potential lack of liquidity.
As a shareholder of an investment company not sponsored by T. Rowe Price, the fund
must pay its pro-rata share of that investment company’s fees and expenses. The fund’s investments
in non-T. Rowe Price investment companies are subject to the limits that apply to investments in
other funds under the Investment Company Act of 1940 or under any applicable exemptive order.
A fund may also invest in certain
other T. Rowe Price funds as a means of gaining efficient and cost-effective exposure to certain
asset classes, provided the investment is consistent with the fund’s investment program and policies.
Such an investment could allow the fund to obtain the benefits of a more diversified portfolio than might
otherwise be available through direct investments in the asset class, and will subject the fund to the
risks associated with the particular asset class. Examples of asset classes in which other T. Rowe
Price mutual funds concentrate their investments include high yield bonds, floating rate loans, international
bonds, emerging market bonds, and emerging market stocks. If the fund invests in another T. Rowe
Price fund, the management fee paid by the fund will be reduced to ensure that the fund does not incur
duplicate management fees as a result of its investment.
Illiquid Securities
Some fund holdings may be considered
illiquid because they are subject to legal or contractual restrictions on resale or because they cannot
be sold in the ordinary course of business within seven days at approximately the prices at which they
are valued. The determination of liquidity involves a variety of factors. Illiquid securities may include
private placements that are sold directly to a small number of investors, usually institutions. Unlike
public offerings, such securities are not registered with
the SEC. Although certain of these securities may be readily sold,
for example under Rule 144A of the Securities Act of 1933, others may have resale restrictions and can
be illiquid. The sale of illiquid securities may involve substantial delays and additional costs, and
a fund may only be able to sell such securities at prices substantially less than what it believes they
are worth.
Operating policy
Fund investments
in illiquid securities are limited to 15% of net assets.
Types of Investment Management
Practices
Reserve Position
A certain portion of fund assets will be held in reserves. Fund
reserve positions can consist of: 1) shares of a T. Rowe Price internal money fund or short-term
bond fund (which does not charge any management fees); 2) short-term, high-quality U.S. and foreign
dollar-denominated money market securities, including repurchase agreements; and 3) U.S. dollar or non-U.S.
dollar currencies. For temporary, defensive purposes, there is no limit on a fund’s holdings in
reserves. If a fund has significant holdings in reserves, it could compromise the fund’s ability
to achieve its objectives. The reserve position provides flexibility in meeting redemptions, paying expenses
and managing cash flows into a fund, and can serve as a short-term defense during periods of unusual
market volatility. Non-U.S. dollar reserves are subject to currency risk.
When-Issued
Securities and Forwards
A fund may purchase securities on a when-issued or delayed delivery basis or may purchase
or sell securities on a forward commitment basis. There is no limit on fund investments in these securities.
The price of these securities is fixed at the time of the commitment to buy, but delivery and payment
take place after the customary settlement period for that type of security (often a month or more later).
During the interim period, the price and yield of the securities can fluctuate, and typically no interest
accrues to the purchaser. At the time of delivery, the market value of the securities may be more or
less than the purchase or sale price. To the extent the fund remains fully or almost fully invested (in
securities with a remaining maturity of more than one year) at the same time it purchases these securities,
there will be greater fluctuations in the fund’s net asset value than if the fund did not purchase
them.
Borrowing Money and Transferring Assets
A fund may borrow from banks, other persons,
and other T. Rowe Price funds for temporary emergency purposes to facilitate redemption requests,
or for other purposes consistent with fund policies as set forth in this prospectus. Such borrowings
may be collateralized with fund assets, subject to restrictions.
Fundamental policy
Borrowings may not exceed
33
1
/
3
% of total assets
.
Operating policy
A fund will
not transfer portfolio securities as collateral except as necessary in connection with permissible borrowings
or investments, and then such
transfers may not exceed
33
1
/
3
%
of total assets. A fund will not purchase additional securities when borrowings exceed 5% of total assets.
Lending
of Portfolio Securities
A fund may lend its securities to broker-dealers, other institutions, or other persons
to earn additional income. Risks include the potential insolvency of the broker-dealer or other borrower
that could result in delays in recovering securities and capital losses. Additionally, losses could result
from the reinvestment of collateral received on loaned securities in investments that default or do not
perform as well as expected.
Fundamental policy
The value of loaned securities may not exceed
33
1
/
3
%
of total assets.
Credit Quality Considerations
The credit quality of many fund holdings is evaluated
by rating agencies such as Moody’s Investment Service, Inc. (Moody’s), Standard & Poor’s
Corporation (S&P), and Fitch Ratings (Fitch). Credit quality refers to the issuer’s ability
to meet all required interest and principal payments. The highest ratings are assigned to companies perceived
to have the lowest credit risks. T. Rowe Price research analysts also evaluate fund holdings, including
those rated by outside agencies. Other things being equal, lower-rated bonds and other debt obligations
have higher yields due to greater credit risk. High-yield bonds, also called “junk” bonds,
are those rated below BBB.
Credit quality ratings are not guarantees. They are estimates of a company’s financial
strength and ability to make interest and principal payments as they come due. Ratings can change at
any time due to real or perceived changes in a company’s credit or financial fundamentals.
The
following table shows the rating scale used by the major rating agencies.
Ratings
of Corporate Debt Securities
|
|
|
|
|
|
|
|
|
Moody’s .
|
S&P
|
Fitch
|
Definition
|
|
Long Term
|
Aaa
|
AAA
|
AAA
|
|
Highest
quality
|
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Aa
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AA
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AA
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High quality
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A
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A
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A
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Upper-medium
grade
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Baa
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BBB
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BBB
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Medium grade
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Ba
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BB
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BB
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Speculative
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B
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B
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B
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Highly
speculative
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Caa
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CCC
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CCC
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Vulnerable to default
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Ca
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CC
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CC
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Default
is imminent
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C
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C
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C
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Probably
in default
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Portfolio Turnover
Turnover is an indication of
frequency of trading. A fund will not generally trade in securities for short-term profits, but when
circumstances warrant, securities may be purchased and sold without regard to the length of time held.
Each time a fund purchases or sells a security, it incurs a cost. This cost is reflected in its net asset
value but not in its operating expenses. The higher the turnover rate, the higher the transaction costs
and the greater the impact on a fund’s total return. Higher turnover can also increase the possibility
of taxable capital gain distributions.
Funds investing in bonds may have higher turnover than funds investing
in stocks. Unlike stocks, fixed-maturity bonds require reinvestment. For funds investing in mortgages
and callable debt, frequent reinvestment of principal is often required. Common trading strategies, such
as mortgage dollar rolls, can increase turnover. Active investment strategies, such as sector rotation
and duration management, also necessitate more frequent trading. The fund’s portfolio turnover rate
for the initial period of operations may exceed 100%.
DISCLOSURE OF FUND PORTFOLIO INFORMATION
Each T. Rowe Price fund’s
portfolio holdings are disclosed on a regular basis in its semiannual and annual shareholder reports,
and on Form N-Q, which is filed with the SEC within 60 days of the fund’s first and third fiscal
quarter-end. The money funds also file detailed month-end portfolio holdings information with the SEC
each month. Such information will be made available to the public 60 days after the end of the month
to which the information pertains. In addition, the funds disclose their calendar quarter-end portfolio
holdings on troweprice.com 15 calendar days after each quarter. Under certain conditions, up to 5% of
a fund’s holdings may be included in this portfolio list without being individually identified.
Generally, securities would not be individually identified if they are being actively bought or sold
and it is determined that the quarter-end disclosure of the holding could be harmful to the fund. A security
will not be excluded for these purposes from a fund’s quarter-end holdings disclosure for more than
one year. Money funds also disclose their month-end portfolio holdings on troweprice.com five business
days after each month. The quarter-end portfolio holdings will remain on the website for one year and
the month-end money fund portfolio holdings will remain on the website for six months. Each fund also
discloses its 10 largest holdings on troweprice.com on the seventh business day after each month-end.
These holdings are listed in alphabetical order along with the aggregate percentage of the fund’s
total assets that these 10 holdings represent. Each monthly top 10 list will remain on the website for
six months. A description of T. Rowe Price’s policies and procedures with respect to the disclosure
of portfolio information is available in the Statement of Additional Information and through troweprice.com.
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Investing With T. Rowe Price
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4
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ACCOUNT
REQUIREMENTS AND TRANSACTION INFORMATION
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If you are purchasing fund shares
through a third-party intermediary, contact the intermediary for information regarding its policies on
purchasing, exchanging, and redeeming fund shares, as well as initial and subsequent investment minimums.
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Tax Identification
Number
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We must have your correct tax identification number on a signed New Account form or
W-9 Form. Otherwise, federal law requires the funds to withhold a percentage of your dividends, capital
gain distributions, and redemptions and may subject you to an Internal Revenue Service fine. If this
information is not received within 60 days after your account is established, your account may be redeemed
at the fund’s then-current net asset value.
Always verify your transactions by carefully reviewing the confirmation
we send you. Please report any discrepancies to Financial Institution Services promptly by calling 1-800-638-8797.
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$1,000,000 minimum initial investment
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Important
Information
About Opening an Account
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Pursuant
to federal law, all financial institutions must obtain, verify, and record information that identifies
each person or entity that opens an account.
When you open an account for an entity, you will be required to
provide the entity’s name, street address, and tax identification number as well as your name, residential
street address, date of birth, and Social Security number as the person opening the account on behalf
of the entity. Corporate and other institutional accounts require documents showing the existence of
the entity (such as articles of incorporation or partnership agreements) to open an account. Certain
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other fiduciary accounts (such as trusts or power of attorney arrangements) require
documentation, which may include an original or certified copy of the trust agreement or power of attorney
to open an account. For more information, call Financial Institution Services.
We will use this information
to verify the identity of the entity and person opening the account. We will not be able to open the
account for the entity until we receive all of this information. If we are unable to verify the identity
of the entity, we are authorized to take any action permitted by law. (See Rights Reserved by the Funds.)
Note:
Shares may generally only
be purchased and held by institutional investors with a U.S. address. Institutional investors typically
include banks, pension plans, and trust and investment companies. T. Rowe Price will not generally
authorize the transfer of ownership from an institutional to a noninstitutional account. Shares held
by noninstitutional accounts are subject to involuntary redemption at any time.
All initial and subsequent
investments must be made by bank wire. The wire must be received by T. Rowe Price by the close of
the New York Stock Exchange (normally 4 p.m. ET) to receive that day’s share price. There is no
assurance that the share price for the purchase will be the same day the wire was initiated.
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By Wire
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Call Financial Institution Services at 1-800-638-8797 for an account number, assignment
to a dedicated service representative, and wire transfer instructions.
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In
order to obtain an account number, you must supply the name, Social Security or employer identification
number, and business street address for the account.
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Complete a New Account form
and mail it, with proper documentation identifying your firm, to one of the appropriate T. Rowe
Price addresses listed under By Mail.
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Investing
With T. Rowe Price
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41
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Note:
Although the purchase will be made, services may not be established and Internal Revenue Service penalty
withholding may occur until we receive a signed New Account form.
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PURCHASING
ADDITIONAL SHARES
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No minimum for additional purchases
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By
Wire
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Access
troweprice.com
or call Shareholder Services
for wire transfer instructions.
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EXCHANGING AND REDEEMING SHARES
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Exchange
Service
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You
can move money from one account to an existing, identically registered account or open a new identically
registered account. An exchange from one fund to another is considered a sale and purchase for tax purposes.
For exchange policies, please see Transaction Procedures and Special
Requirements—
Excessive and Short-Term Trading Policy.
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Redemptions
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Redemption proceeds can be mailed to your account address, sent by Automated Clearing
House transfer to your bank, or wired to your bank (provided your bank information is already on file).
For charges, see Electronic Transfers—By Wire under Information About Your Services. Please note
that large purchase and redemption requests initiated through automated services, including the National
Securities Clearing Corporation, may be rejected and, in such instances, the transaction must be placed
by contacting a service representative.
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If you request to redeem a
specific dollar amount, and the market value of your account is less than the amount of your request,
we will redeem all shares from your account.
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Some of the T. Rowe Price
funds may impose a redemption fee. Check the fund’s prospectus under Contingent Redemption Fee in
Pricing Shares and Receiving Sale Proceeds. The fee is paid to the fund.
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For redemptions by electronic transfer, please see Information About Your Services.
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By Mail
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For each account involved, provide the account name and number, fund name, and exchange
or redemption amount. For exchanges, be sure to specify any fund you are exchanging out of and the fund
or funds you are exchanging into. T. Rowe Price may require a signature guarantee of all registered
owners (see Transaction Procedures and Special Requirements—Signature Guarantees). Please use the
appropriate address below to avoid a delay in processing your transaction:
via U.S. Postal Service
T. Rowe
Price Financial Institution Services
P.O. Box 17300
Baltimore, MD 21297-1603
via private carriers/overnight services
T.
Rowe Price Financial Institution Services
Mail Code: OM-4232
4515 Painters Mill Road
Owings
Mills, MD 21117
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RIGHTS RESERVED BY THE FUNDS
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T. Rowe Price funds and their agents, in their
sole discretion, reserve the following rights: (1) to waive or lower investment minimums; (2) to
accept initial purchases by telephone; (3) to refuse any purchase or exchange order; (4) to
cancel or rescind any purchase or exchange order placed through an intermediary, no later than the business
day after the order is received by the intermediary (including, but not limited to, orders deemed to
result in excessive trading, market timing, or 5% ownership); (5) to cease offering fund shares
at any time to all or certain groups of investors; (6) to freeze any account and suspend account
services when notice has been received of a dispute regarding the ownership of the account, or a legal
claim against an account, upon initial notification to T. Rowe Price of a shareholder’s death
until T. Rowe Price receives required documentation in good order,
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Investing
With T. Rowe Price
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43
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or if there is reason to believe a fraudulent transaction may occur; (7) to otherwise
modify the conditions of purchase and modify or terminate any services at any time; (8) to waive
any wire, small account, maintenance, or fiduciary fees charged to a group of shareholders; (9) to
act on instructions reasonably believed to be genuine; (10) to involuntarily redeem an account at
the net asset value calculated the day the account is redeemed, in cases of threatening conduct, suspected
fraudulent or illegal activity, or if the fund or its agent is unable, through its procedures, to verify
the identity of the person(s) or entity opening an account; and (11) for money funds, to suspend
redemptions and postpone the payment of proceeds to facilitate an orderly liquidation of the fund.
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INFORMATION ABOUT YOUR SERVICES
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Financial Institution Services
1-800-638-8797
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Many services are available to you as a shareholder—
some you receive automatically, and others you must authorize or request on the New Account form. By
signing up for services on the New Account form, you avoid having to complete a separate form at a later
time and obtain a signature guarantee. This section discusses some of the services currently offered.
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Retirement Plans
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We offer a wide range of plans for institutions and large and small businesses, including:
SEP-IRAs, SIMPLE IRAs, 401(k)s, and 403(b)(7)s. For information on these retirement plans, please call
our Trust Company at 1-800-492-7670.
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Telephone
Services
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Buy,
sell, or exchange shares by calling one of our service representatives.
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Electronic
Transfers
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Electronic
transfers can be conducted via bank wire. There may be a $5 fee for wire redemptions under $5,000, and
your bank may charge for incoming or outgoing wire transfers regardless of size.
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For information
Financial
Institution Services
1-800-638-8797 toll free
410-581-7290 in Baltimore
A Statement of Additional Information
for the T. Rowe Price family of funds, which includes additional information about the funds, has been
filed with the SEC and is incorporated by reference into this prospectus. Further information about fund
investments, including a review of market conditions and the manager’s recent investment strategies
and their impact on performance during the past fiscal year is available in the annual and semiannual
shareholder reports. To obtain free copies of any of these documents, or for shareholder inquiries, call
1-800-638-8797. These documents are available through troweprice.com.
Fund information and Statements
of Additional Information are also available from the Public Reference Room of the SEC. Information on
the operation of the Public Reference Room may be obtained by calling the SEC at 1-202-551-8090. Fund
reports and other fund information are available on the EDGAR Database on the SEC’s Internet site
at http://www.sec.gov. Copies of this information may be obtained, after paying a duplicating fee, by
electronic request at publicinfo@sec.gov, or by writing the Public Reference Room, Washington, D.C. 20549-1520.
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T. Rowe Price Associates, Inc.
100
East Pratt Street
Baltimore, MD 21202
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1940 Act File No.
811-21055
|
E151-040 6/3/13
|
Goldfield (AMEX:GV)
Graphique Historique de l'Action
De Juil 2024 à Août 2024
Goldfield (AMEX:GV)
Graphique Historique de l'Action
De Août 2023 à Août 2024
