PRWBX PASHX Short-Term Bond Fund Short-Term Bond Fund

ANNual REPORT May 31, 2017

T. Rowe Price

PRWBX

Short-Term Bond Fund

PASHX

Short-Term Bond Fund– Advisor Class

TBSIX

Short-Term Bond Fund– I Class The fund invests in high-quality short- and intermediate-term bonds for current income and minimal principal fluctuation.

T. R owe P rice S hort- T erm B ond F und

HIGHLIGHTS • Before moderating somewhat by the end of the reporting period, Treasury yields spiked dramatically higher in late 2016 as investors priced in an aggressive policy agenda following Donald Trump’s victory in the November 2016 U.S. presidential election. • The Short-Term Bond Fund outperformed the Bloomberg Barclays 1–3 Year U.S. Government/Credit Bond Index but underperformed its Lipper peer group average during the 12-month reporting period. • We increased our exposure to corporate bonds and asset-backed securities during the 12-month period and reduced exposure to mortgage-backed securities. • The failure of the Republican-led effort to repeal and replace the Affordable Care Act, along with tax reform and infrastructure spending legislation delays, has left us with a significant degree of uncertainty about the direction of the U.S. economy and various sectors of the market.

The views and opinions in this report were current as of May 31, 2017. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the fund’s future investment intent. The report is certified under the Sarbanes-Oxley Act, which requires mutual funds and other public companies to affirm that, to the best of their knowledge, the information in their financial reports is fairly and accurately stated in all material respects. REPORTS ON THE WEB Sign up for our Email Program, and you can begin to receive updated fund reports and prospectuses online rather than through the mail. Log in to your account at troweprice.com for more information.

T. Rowe Price Short-Term Bond Fund Manager’s Letter

Fellow Shareholders Before moderating somewhat by the end of the reporting period, Treasury yields spiked dramatically in late 2016 as investors priced in an aggressive policy agenda following Donald Trump’s victory in the November 2016 U.S. presidential election. Since the election, we have increased exposure to riskier market segments given the possibility that economic growth may get a boost from increased spending and deregulation. Our security selection helped your fund outperform its benchmark.

PERFORMANCE

Your fund returned 1.44% during the 12 months ended May 31, 2017, outperforming its benchmark, the Bloomberg Barclays 1–3 Year U.S. Government/ P erformance C omparison Credit Bond Index, which returned 0.99%. However, Total Return the fund underperPeriods Ended 5/31/17 6 Months 12 Months formed the Lipper Short Short-Term Bond Fund 0.85% 1.44% Investment Grade Debt Short-Term Bond Fund– Funds Average of 2.02% Advisor Class 0.91 1.12 for the same period. The fund’s net asset value Short-Term Bond Fund– I Class 1.11 1.75 ended the reporting period at $4.72, down Bloomberg Barclays from $4.73 at the end of 1–3 Year U.S. Government/ May 2016. Dividends conCredit Bond Index 0.82 0.99 tributed $0.08 per share Lipper Short Investment Grade during the 12-month Debt Funds Average 1.32 2.02 period. (Performance for the Advisor Class and I Class will vary, reflecting their different fee structures.) The fund’s investment objective is to provide greater income than a money market fund but with a higher degree of principal risk.

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W hat R ising R ates M ean for B onds With the Federal Reserve expected to continue its measured approach to interest rate hikes, yields on U.S. Treasuries and other fixed income securities have slowly increased from the low levels of the recent past. We expect the Fed to pause after each increase in the federal funds rate and to carefully analyze incoming U.S. economic data to be sure that economic activity is strong enough to withstand further incremental moves toward normalization of monetary policy. The Fed’s more gradual approach to interest rate increases than in previous cycles nonetheless brings the risk of rising rates to the forefront for bond investors. Higher interest rates weigh on the prices of most types of bonds. Importantly, investors also need to understand that not all bonds or bond funds respond uniformly in such an environment. In particular, the duration of a bond or bond fund, which is tied in part to its maturity, provides important information about how the asset will perform when rates change. Also, some bond sectors and bonds of varying quality are better insulated from rate changes and may even perform well as rates rise. A bond fund’s duration (shown in the Portfolio Characteristics exhibit) is the most precise indicator of how the fund will respond to rising rates. If a bond fund has a duration of 5.3 years, for example, the fund’s net asset value (NAV) would be expected to fall about 5.3% for every one-percentage-point rise in rates. Even this is only part of the picture, however—rising rates will also generally mean higher dividends per share as the fund invests in new, higher-yielding bonds. As a result, the fund’s total return (change in NAV plus dividend income) is unlikely to fall as steeply as the duration indicates. Generally, bond funds with a shorter weighted average maturity—in other words, those with holdings that come due sooner—have lower durations and should fare better than funds with longer average maturities when rates rise. This is because investors in the bonds will not be locked into lower yields, or coupon payments, for long. When the fund receives principal payments from maturing bonds, it can reinvest them at a higher yield. Indeed, for investors in a bond fund with a low duration and a low weighted average maturity, higher rates can mean an increase in income potential. Some fixed income sectors offer an added degree of protection from rising rates. Floating rate funds invest in bank loans where the interest rate on the loan is periodically reset, meaning that investors face very little interest rate risk. However, the bank loans usually have a credit profile that is below investment quality, which means these investments may have greater exposure to default risk than investment-grade bonds. Mortgage-backed securities typically fare better than other bonds of similar maturity when rates rise modestly, as fewer homeowners will refinance and pay off their loans early. In addition, lower-quality bonds with a price that is highly sensitive to the issuer’s credit rating (shown in the Quality Diversification exhibit) may perform better as rates increase. Rising rates often accompany a strengthening economy, which can lead to credit upgrades for lower-rated issuers. Also, the higher yields offered by lower-quality bonds provide an additional cushion to total return if bond prices fall as interest rates increase. However, lower-quality bonds are generally exposed to greater credit risk than other bonds because the securities carry a higher risk of default.

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ECONOMY AND INTEREST RATES

After growing 1.6% in 2016, U.S. gross domestic product growth slowed to a 1.2% annual pace in the first three months of 2017, according to the Commerce Department’s second estimate. While first-quarter growth was weak, the underlying trend of moderate U.S. economic expansion seems to remain in place. The pace of employment growth has moderated compared with the last few years as the unemployment rate has declined, but the labor market remains strong and wage growth has picked up. Inflation is higher than 12 months ago, but any further increases are likely to be gradual as energy prices have leveled off. Citing an improving labor market and rising inflation, the Fed raised interest rates by 25 basis points in December 2016 and March 2017. (A basis point is 0.01 percentage point.) After the pair of hikes, the range for the fed funds target rate was 0.75% to 1.00%. (The Fed also raised rates in June, shortly after the end of the reporting period.) Treasury yields rose over the 12-month reporting period as the market anticipated the Fed’s moves. While U.S. Treasury yields fell to near record lows in July, they climbed higher through the end of the year amid expectations of accelerating inflation and economic growth stemming from Donald Trump’s campaign proposals to cut taxes and increase infrastructure spending. The yield on the two-year Treasury note began the fiscal year at 0.87% and finished at 1.28%, whereas the yield on the five-year Treasury note began at 1.37% and ended at 1.75%. (Bond prices and yields move in opposite directions.) I nterest R ate L evels 4.0% 3.5

2-Year Treasury Note 5-Year Treasury Note

3.0 2.5 2.0 1.5 1.0 0.5 0.0 8/16

5/31/16

11/16

Source: Federal Reserve Board.

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2/17

5/31/17

Companies, looking to take advantage of historically low rates, issued investment-grade debt at a record pace. However, technical conditions remained healthy, with strong demand, especially from foreign buyers, absorbing the supply. Corporate bonds outpaced U.S. Treasuries of similar maturities as corporate spreads measured by

the Bloomberg Barclays 1–3 Year U.S. Government/Credit Bond Index compressed, ending the period at 0.18 percentage points from 0.26 percentage points at the beginning of the period. Asset-backed securities (ABS) and mortgage-backed securities (MBS) gained modestly amid the increase in Treasury yields. While ABS were supported by strong consumer fundamentals, uncertainty about the Fed’s plans for winding down its holdings of MBS weighed on that market. PORTFOLIO REVIEW P ortfolio C haracteristics Periods Ended

11/30/16

5/31/17

$4.72

$4.72

Dividends Per Share For 6 Months

0.04

0.04

For 12 Months

0.07

0.08

1.30%

1.55%

Short-Term Bond Fund Share Price

SEC Yield (30-day) Short-Term Bond Fund– Advisor Class Share Price

$4.71

$4.72


0.03

0.03

For 12 Months

0.06

0.06

1.03%

1.23%

SEC Yield (30-day) Short-Term Bond Fund– I Class Share Price

$4.72

$4.73


0.04

0.04

For 12 Months

–

0.08

SEC Yield (30-day)

1.39%

1.65%

Weighted Average Maturity (years)

2.1

1.9

Weighted Average Effective Duration (years)

1.9

1.8

12-month dividends may not equal the combined 6-month figures due to rounding.

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We saw continued high demand for corporate bonds from yield-hungry investors as well as an increased level of risk tolerance in the wake of the U.S. elections and the rapid increase in yields. Our strategic underweight to U.S. Treasuries and corresponding overweight to investmentgrade corporate debt benefited results in this environment. Typically, we underweight loweryielding Treasury securities and overweight investment-grade corporates for their incremental yield advantage. We have also added out-ofbenchmark exposure in the securitized sector, which benefited from the strength in the consumer and housing markets during the period.

C redit R atings in a N utshell Credit rating agencies assign letter ratings to bonds after analyzing the issuer’s financial situation, although some issuers choose not to be rated. The chart below shows the range of ratings used by Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings. Bonds within the four highest rating categories are considered to be investment grade; those with lower ratings are considered noninvestment grade and are often called high yield or junk bonds. There are also intermediate gradations called split ratings; these occur when two of the rating agencies do not agree on a rating. For example, one agency may rate a bond BB and another B, creating a BB/B split rating.

Moody’s and Standard & Poor’s/Fitch Rating Codes Investment-Grade Bonds Moody’s

S&P/Fitch

Meaning

Aaa

AAA

Highest-quality bonds. Issuers are considered extremely stable and dependable.

Aa

AA

High-quality bonds. The long-term investment risk is slightly higher than on AAA bonds.

A

A

Bonds with many favorable attributes.

Baa

BBB

Medium-grade bonds. Quality is adequate at present but less certain for the long term.

Noninvestment-Grade Bonds Ba

BB

B

B

Caa

CCC

Ca

CC

C

C

–

D

5

Bonds with a speculative element. Security of payments is not well safeguarded. Bonds are extremely speculative. The danger of a default is high. In default.

Our exposure to securities with a yield advantage over Treasuries is at an all-time high, with corporate debt composing 52% of the portfolio and securitized debt accounting for 38%. To take advantage of the growing risk tolerance over the period, we increased our exposure to short-duration BBB rated corporate debt. This combination of lower-quality but shorter-duration debt enabled us to earn a higher yield but gave us needed protection to withstand any new rounds of risk-related selling. We also found good opportunities in high-quality short-duration paper, including Yankee (U.S. dollar-denominated) bonds in China. We were able to leverage the insights of our Asiabased analysts and added to our holdings in Zheijang Provincial Energy, an electric power company; China Shenua Overseas Capital Company, the finance arm of Shenua Energy, the world’s largest coal miner; and China Vanke, the country’s largest S ecurity D iversification property developer. Commercial Government (Please refer to the MortgageRelated portfolio of investments Backed 2% Securities for a complete list 6% Corporate of holdings and the Bonds U.S. Treasury amount each represents in and Notes Bonds and 52% the portfolio.) Notes 8%

At the end of May, as noted above, corporate bonds and notes accounted for 52% of the portfolio’s assets, followed Based on net assets as of 5/31/17. by ABS and MBS at 22% and 10%, respectively. Commercial mortgage-backed securities, government-related securities, and U.S. Treasury bonds and notes composed the remaining 16%. The portfolio has 95% of net assets invested in securities rated BBB or higher, including those guaranteed by the U.S. Treasury and various U.S. government agencies. MortgageBacked Securities 10%

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Asset-Backed Securities 22%

Q uality D iversification Reserves 1% BB and Below 4% BBB 37% A 15%

U.S. Government Agency Securities* 7% U.S. Treasury Securities** 8% AAA 23% AA 5%

Based on net assets as of 5/31/17. *U.S. government agency securities are issued or guaranteed by a U.S. government agency and may include conventional pass-through securities and collateralized mortgage obligations; unlike Treasuries, government agency securities are not issued directly by the U.S. government and are generally unrated but may have credit support from the U.S. Treasury (e.g., FHLMC and FNMA issues) or a direct government guarantee (e.g., GNMA issues). Therefore, this category may include rated and unrated securities. **U.S. Treasury securities are issued by the U.S. Treasury and are backed by the full faith and credit of the U.S. government. The ratings of U.S. Treasury securities are derived from the ratings on the U.S. government.

Our yield curve positioning detracted from results. The portfolio ended the period with a duration of 1.8 years, shorter than the benchmark’s 1.95-year duration. We expect this defensive duration stance to benefit the portfolio in a rising rate environment. While we are primarily a cash bond manager, we occasionally employ the limited use of derivatives in our strategy for hedging purposes. Derivatives may include futures, options, and interestonly mortgages, as well as credit-default and interest-rates swaps. OUTLOOK

We believe that the Fed will continue to tighten monetary policy at a gradual pace to ensure that it does not derail the economic expansion and that it will clearly telegraph its moves to investors. While the backdrop for U.S. corporate credit remains constructive—buoyed by decent earnings and expectations of economic growth—the lack of clarity and proposed policy changes have left investors with a significant

Sources: Moody’s Investors Service; if Moody’s does not rate a security, then Standard & Poor’s (S&P) is used as a secondary source. When available, Fitch will be used for securities that are not rated by Moody’s or S&P. T. Rowe Price does not evaluate these ratings but simply assigns them to the appropriate credit quality category as determined by the rating agency. Securities that have not been rated by any rating agency totaled 0.22% of the portfolio at the end of the reporting period.

7

degree of uncertainty about the direction of the U.S. economy and various sectors of the market. We will watch for signs of economic growth and credit expansion as well as potential risk-off events. As always, we strive to find value and seek out securities offering reasonable yields without taking on an inordinate level of risk. We remain committed to a risk-conscious, fundamentally based investment approach and long-term perspective. Thank you for investing with T. Rowe Price. Respectfully submitted,

Michael Reinartz President and chairman of the fund’s Investment Advisory Committee June 19, 2017 The committee chairman has day-to-day responsibility for managing the portfolio and works with committee members in developing and executing the fund’s investment program.

8

T. Rowe Price Short-Term Bond Fund

R isks of F ixed I ncome I nvesting Bonds are subject to interest rate risk (the decline in bond prices that usually accompanies a rise in interest rates) and credit risk (the chance that any fund holding could have its credit rating downgraded or that a bond issuer will default by failing to make timely payments of interest or principal), potentially reducing the fund’s income level and share price. Mortgage-backed securities are subject to prepayment risk, particularly if falling rates lead to heavy refinancing activity, and extension risk, which is an increase in interest rates that causes a fund’s average maturity to lengthen unexpectedly due to a drop in mortgage prepayments. This could increase the fund’s sensitivity to rising interest rates and its potential for price declines. G lossary Bloomberg Barclays 1–3 Year U.S. Government/Credit Bond Index: An index that measures the performance of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities of between 1 and 3 years and are publicly issued. Credit spread: The difference between the yield on a corporate bond and a Treasury of a similar maturity. Duration: A measure of a bond fund’s sensitivity to changes in interest rates. For example, a fund with a duration of two years would fall about 2% in price in response to a one-percentage-point rise in interest rates, and vice versa. Fed funds rate: The interest rate charged on overnight loans of reserves by one financial institution to another in the United States. The Federal Reserve sets a target federal funds rate to affect the direction of interest rates. Lipper averages: The averages of available mutual fund performance returns for specified time periods in defined categories as tracked by Lipper Inc. SEC yield (30-day): A method of calculating a fund’s yield that assumes all portfolio securities are held until maturity. Yield will vary and is not guaranteed. Yield curve: A graphic depiction of the relationship between yields and maturity dates for a set of similar securities. A security with a longer maturity usually has a higher yield. If a short-term security offers a higher yield, then the curve is said to be “inverted.” If shortand long-term bonds are offering equivalent yields, then the curve is said to be “flat.” Note: Bloomberg Index Services Ltd. Copyright 2017, Bloomberg Index Services Ltd. Used with permission.

9

T. Rowe Price Short-Term Bond Fund Performance and Expenses G rowth of $10,000 This chart shows the value of a hypothetical $10,000 investment in the fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records). The result is compared with benchmarks, which may include a broad-based market index and a peer group average or index. Market indexes do not include expenses, which are deducted from fund returns as well as mutual fund averages and indexes.

S H O RT-T E R M B O N D F U N D As of 5/31/17 $20,000

Short-Term Bond Fund $12,826 Bloomberg Barclays 1–3 Year U.S. Government/Credit Bond Index $12,609

18,000 16,000

Lipper Short Investment Grade Debt Funds Average $12,567

14,000 12,000 10,000

5/07

5/08

5/09

5/10

5/11

5/12

5/13

5/14

5/15

5/16

5/17

Note: Performance for the Advisor and I Classes will vary due to their differing fee structures. See returns table below.

A verage A nnual C ompound T otal R eturn Periods Ended 5/31/17

1 Year

5 Years

Since Inception 10 Years Inception Date


1.44%

1.07%

2.52%

–

–


1.12

0.76

2.22

–

–

Short-Term Bond Fund– I Class

1.75

–

–

2.02% 12/17/15

This table shows how the fund would have performed each year if its actual (or cumulative) returns for the periods shown had been earned at a constant rate. Returns do not reflect taxes that the shareholder may pay on fund distributions or the redemption of fund shares. Past performance cannot guarantee future results.

10


F und E xpense E xample As a mutual fund shareholder, you may incur two types of costs: (1) transaction costs, such as redemption fees or sales loads, and (2) ongoing costs, including management fees, distribution and service (12b-1) fees, and other fund expenses. The following example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the most recent six-month period and held for the entire period. Please note that the fund has three share classes: The original share class (Investor Class) charges no distribution and service (12b-1) fee, the Advisor Class shares are offered only through unaffiliated brokers and other financial intermediaries and charge a 0.25% 12b-1 fee, and I Class shares are available to institutionally oriented clients and impose no 12b-1 or administrative fee payment. Each share class is presented separately in the table. Actual Expenses The first line of the following table (Actual) provides information about actual account values and expenses based on the fund’s actual returns. You may use the information on this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number on the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The information on the second line of the table (Hypothetical) is based on hypothetical account values and expenses derived from the fund’s actual expense ratio and an assumed 5% per year rate of return before expenses (not the fund’s actual return). You may compare the ongoing costs of investing in the fund with other funds by contrasting this 5% hypothetical example and the 5% hypothetical examples that appear in the shareholder reports of the other funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. Note: T. Rowe Price charges an annual account service fee of $20, generally for accounts with less than $10,000. The fee is waived for any investor whose T. Rowe Price mutual fund accounts total $50,000 or more; accounts electing to receive electronic delivery of account statements, transaction confirmations, prospectuses, and shareholder reports; or accounts of an investor who is a T. Rowe Price Personal Services or Enhanced Personal Services client (enrollment in these programs generally requires T. Rowe Price assets of at least $250,000). This fee is not included in the accompanying table. If you are subject to the fee, keep it in mind when you are estimating the ongoing expenses of investing in the fund and when comparing the expenses of this fund with other funds. You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs, such as redemption fees or sales loads. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. To the extent a fund charges transaction costs, however, the total cost of owning that fund is higher.

11


F und E xpense E xample ( continued ) S hort- T erm B ond F und

Beginning Account Value 12/1/16

Ending Account Value 5/31/17

Expenses Paid During Period* 12/1/16 to 5/31/17

$1,000.00

$1,008.50

$2.30

Hypothetical (assumes 5% return before expenses)

1,000.00

1,022.64

2.32

Advisor Class Actual

1,000.00

1,009.10

3.91


1,000.00

1,021.04

3.93

I Class Actual

1,000.00

1,011.10

1.86


1,000.00

1,023.09

1.87

Investor Class Actual

*Expenses are equal to the fund’s annualized expense ratio for the 6-month period, multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half year (182), and divided by the days in the year (365) to reflect the half-year period. The annualized expense ratio of the Investor Class was 0.46%, the Advisor Class was 0.78%, and the I Class was 0.37%.

12


Q uarter- E nd R eturns Periods Ended 3/31/17

1 Year

5 Years

10 Years

Since Inception

Inception Date


1.42%

1.08%

2.52%

–

–


1.11

0.74

2.20

–

–

Short-Term Bond Fund– I Class

1.73

–

–

1.89%

12/17/15

Current performance may be higher or lower than the quoted past performance, which cannot guarantee future results. Share price, principal value, and return will vary, and you may have a gain or loss when you sell your shares. For the most recent month-end performance, please visit our website (troweprice.com) or contact a T. Rowe Price representative at 1-800-225-5132 or, for Advisor Class and I Class shares, 1-800-638-8790. This table provides returns through the most recent calendar quarter-end rather than through the end of the fund’s fiscal period. It shows how the fund would have performed each year if its actual (or cumulative) returns for the period shown were earned at a constant rate. Average annual total return figures include changes in principal value, reinvested dividends, and capital gain distributions. Returns do not reflect taxes that the shareholder may pay on fund distributions or the redemption of fund shares. When assessing performance, investors should consider both short- and long-term returns.

E xpense R atio Short-Term Bond Fund

0.47%

Short-Term Bond Fund–Advisor Class

0.75

Short-Term Bond Fund–I Class

0.36

The expense ratios shown are as of 11/1/16. These numbers may vary from the expense ratios shown elsewhere in this report because they are based on a different time period and, if applicable, include acquired fund fees and expenses but do not include fee or expense waivers.

13


F inancial H ighlights

For a share outstanding throughout each period

Investor Class Year Ended 5/31/17

5/31/16

5/31/15

5/31/14

5/31/13

NET ASSET VALUE Beginning of period

$

4.73

$

4.77

$

4.80

$

4.82

$

4.84

Investment activities Net investment income

(1)

0.07

Net realized and unrealized gain / loss Total from investment activities

(2)

– 0.07

Distributions Net investment income

(0.08)

Tax return of capital Total distributions

– (0.08)

(2)

0.06

0.05

0.05

0.06

(0.03) 0.03

(0.01) 0.04

– 0.05

0.01 0.07

(0.06)

(0.07)

(0.07)

(0.09)

(0.01) (0.07)

– (0.07)

– (0.07)

– (0.09)

(2)

NET ASSET VALUE End of period

$

4.72

$

4.73

$

4.77

$

4.80

$

4.82

Ratios/Supplemental Data (3)

Total return Ratio of total expenses to average net assets Ratio of net investment income to average net assets Portfolio turnover rate Net assets, end of period (in millions) (1) (2) (3)

1.44%

0.68%

0.75%

1.08%

1.40%

0.48%

0.52%

0.52%

0.52%

0.51%

1.45%

1.20%

1.09%

1.12%

1.29%

48.9%

44.4%

53.2%

45.9%

66.5%

$ 4,277

$ 4,667

$ 5,983

$ 6,116

$ 6,405

Per share amounts calculated using average shares outstanding method. Amounts round to less than $0.01 per share. Total return reflects the rate that an investor would have earned on an investment in the fund during each period, assuming reinvestment of all distributions.

The accompanying notes are an integral part of these financial statements.

14




Advisor Class Year Ended 5/31/17

5/31/16

5/31/15

5/31/14

5/31/13


$

4.73

$

4.76

$

4.80

$

4.82

$

4.84

Investment activities Net investment income

(1)

0.05

Net realized and unrealized gain / loss Total from investment activities

(3)

– 0.05


(0.06)

Tax return of capital Total distributions

– (0.06)

(3)

0.04

0.04

0.04

0.07

(0.01) 0.03

(0.03) 0.01

(0.01) 0.03

(0.02) 0.05

(0.05)

(0.05)

(0.05)

(0.07)

(0.01) (0.06)

– (0.05)

– (0.05)

– (0.07)


$

4.72

$

4.73

$

4.76

$

4.80

$

4.82


Total return Ratio of total expenses to average net assets Ratio of net investment income to average net assets Portfolio turnover rate Net assets, end of period (in thousands) (1) (2) (3)

1.12%

0.60%

0.24%

0.73%

1.13%

0.80%

0.80%

0.81%

0.87%

0.83%

1.12% 48.9%

0.88% 44.4%

0.85% 53.2%

0.76% 45.9%

1.41% 66.5%

$ 64,550 $ 104,424 $ 118,567 $ 188,918 $ 193,857

Per share amounts calculated using average shares outstanding method. Total return reflects the rate that an investor would have earned on an investment in the fund during each period, assuming reinvestment of all distributions. Amounts round to less than $0.01 per share.


15




I Class Year Ended 5/31/17

(1)

12/17/15 Through 5/31/16


$

4.73

$

4.71

Investment activities Net investment income (loss)

(2)

0.07

(0.01)

Net realized and unrealized gain / loss

0.01

0.07

Total from investment activities

0.08

0.06

(0.08)

(0.03)


(5)

Tax return of capital

–

Total distributions

(0.08)

(0.01) (0.04)


$

4.73

$

4.73


Total return

1.75%

1.18%

Ratio of total expenses to average net assets

0.39%

0.41%

Ratio of net investment income (loss) to average net assets

1.54%

(0.86)%

Portfolio turnover rate Net assets, end of period (in thousands) (1) (2) (3)

(4) (5)

48.9%

(4) (4)

44.4%

$ 592,894 $642,194

Inception date Per share amounts calculated using average shares outstanding method. Total return reflects the rate that an investor would have earned on an investment in the fund during each period, assuming reinvestment of all distributions. Total return is not annualized for periods less than one year. Annualized Amount rounds to less than $0.01 per share.


16


May 31, 2017

P ortfolio of I nvestments

‡

Par/Shares

$ Value

ABN Amro Bank, 2.10%, 1/18/19 (1)

14,260

14,292

American Express, 2.20%, 3/3/20

12,825

12,904

Banco de Credito del Peru, 2.25%, 10/25/19 (1)

2,450

2,450

Banco Santander, VR, 2.718%, 4/11/22

7,400

7,575

Bank of America, 2.00%, 1/11/18

6,955

6,972

Bank of America, 2.503%, 10/21/22

5,545

5,471


7,010

7,039


3,565

3,905


5,045

5,217

Bank of America, VR, 2.316%, 1/20/23

12,500

12,539

Banque Federale Credit Mutuel, 2.50%, 10/29/18 (1)

15,785

15,885

Barclays, VR, 2.78%, 1/10/23

11,735

11,954

Barclays Bank, 6.05%, 12/4/17 (1)

15,560

15,886

BPCE, 2.50%, 12/10/18

21,020

21,179

4,865

4,878

Capital One National Association, 1.85%, 9/13/19

13,095

12,981


5,290

5,317


10,010

10,023

Citigroup, 1.55%, 8/14/17

18,060

18,065

Citigroup, 1.70%, 4/27/18

1,915

1,914

Citigroup, 1.80%, 2/5/18

(Amounts in 000s)

CORPORATE BONDS 50.5% FINANCIAL INSTITUTIONS 18.9% Banking 14.8%

BPCE, VR, 2.392%, 5/22/22 (1)

12,870

12,876

Citigroup, 1.85%, 11/24/17

5,585

5,594

Citigroup, 2.05%, 6/7/19

6,100

6,092

Citigroup, 2.90%, 12/8/21

13,095

13,249

Citigroup, VR, 1.945%, 1/10/20

13,000

13,073

Citizens Bank Rhode Island, 2.25%, 3/2/20

5,140

5,146


1,395

1,400

First Page Footer

17


Par/Shares

$ Value

(Amounts in 000s)


1,920

1,932


11,980

12,071


5,020

5,035

11,445

11,477

Danske Bank, 2.20%, 3/2/20 (1) Discover Bank, 2.00%, 2/21/18

1,623

1,625

Discover Bank, 7.00%, 4/15/20

16,180

18,019

Discover Financial Services, 6.45%, 6/12/17

12,793

12,808

6,985

7,007

34,165

35,374

9,220

9,262

16,120

16,180

Huntington National Bank, 2.20%, 11/6/18

9,125

9,159

ING Groep, VR, 2.302%, 3/29/22

6,030

6,105

915

987

JPMorgan Chase, VR, 1.656%, 3/9/21

12,365

12,324

JPMorgan Chase, VR, 2.383%, 10/24/23

11,785

11,919

Merrill Lynch, 6.40%, 8/28/17

19,420

19,643

Merrill Lynch, 6.875%, 4/25/18

15,485

16,170

7,060

7,101

11,555

11,543

2,345

2,360

Morgan Stanley, VR, 2.003%, 1/24/19

41,265

41,565

National Bank of Canada, 1.45%, 11/7/17

23,730

23,730

Nationwide Building Society, 2.35%, 1/21/20 (1)

9,050

9,072

Regions Bank, 2.25%, 9/14/18

5,855

5,870

Regions Bank, 7.50%, 5/15/18

3,455

3,632

Santander Bank, 8.75%, 5/30/18

3,505

3,734

Santander UK, 2.875%, 10/16/20

5,820

5,872

Skandinaviska Enskilda Banken, 1.50%, 9/13/19

13,675

13,542

Standard Chartered, 1.50%, 9/8/17 (1)

16,710

16,681

Goldman Sachs, 2.30%, 12/13/19 Goldman Sachs, 6.15%, 4/1/18 Goldman Sachs, VR, 2.277%, 4/26/22 HSBC Bank, VR, 1.822%, 5/15/18 (1)

JPMorgan Chase, 6.30%, 4/23/19

Mistubishi UFJ Financial Group, VR, 2.092%, 2/22/22 Mizuho Bank, 1.70%, 9/25/17 (1) Morgan Stanley, 2.45%, 2/1/19

18


Par/Shares

$ Value

Standard Chartered, 2.10%, 8/19/19 (1)

3,575

3,553

Sumitomo Mitsui Banking, 1.762%, 10/19/18

3,805

3,796

21,655

21,629

7,250

7,287

Swedbank, 1.75%, 3/12/18 (1)

32,085

32,121

UBS Group Funding, 3.00%, 4/15/21 (1)

14,810

15,041

9,665

9,763

Union Bank of California, 2.125%, 6/16/17

16,350

16,355

Wells Fargo, VR, 2.263%, 1/24/23

14,115

(Amounts in 000s)

Sumitomo Mitsui Trust Bank, 1.80%, 3/28/18 (1) SunTrust Banks, 2.35%, 11/1/18

UBS Group Funding, VR, 2.406%, 5/23/23 (1)

14,220 729,440

Brokerage Asset Managers Exchanges 0.1% Legg Mason, 2.70%, 7/15/19

2,270

2,287 2,287

Finance Companies 0.9% AerCap Ireland Capital Limited, 3.50%, 5/26/22

1,575

1,616

AerCap Ireland Capital Limited, 3.95%, 2/1/22

10,295

10,745

Air Lease, 2.125%, 1/15/18

2,645

2,651

Air Lease, 2.125%, 1/15/20

11,220

11,194

GATX, 2.375%, 7/30/18

10,250

10,302

GATX, 2.50%, 7/30/19

1,840

1,855

GATX, 2.60%, 3/30/20

7,815

7,927 46,290

Insurance 1.6% 4,084

4,089

Anthem, 2.30%, 7/15/18

10,045

10,095

AON, 2.80%, 3/15/21

13,495

13,594

CNA Financial, 6.95%, 1/15/18

2,535

2,610

CNA Financial, 7.35%, 11/15/19

4,140

4,636

Humana, 2.625%, 10/1/19

5,090

5,152

AIA Group, 2.25%, 3/11/19 (1)

19


Par/Shares

$ Value

Marsh & McLennan Companies, 2.55%, 10/15/18

6,465

6,529

Principal Life Global Funding II, 1.50%, 4/18/19 (1)

5,450

5,402

Principal Life Global Funding II, 2.20%, 4/8/20 (1)

11,630

11,643

Provident Companies, 7.00%, 7/15/18

2,115

2,228

Reinsurance Group of America, 6.45%, 11/15/19

2,430

2,670

Trinity Acquisition, 3.50%, 9/15/21

3,310

3,385

XLIT, 2.30%, 12/15/18

7,820

7,859

(Amounts in 000s)

79,892 Real Estate Investment Trusts 1.5% American Campus Communities, 3.35%, 10/1/20

8,765

9,039

Brixmor Operating Partnership, 3.875%, 8/15/22

1,410

1,456

DDR, 4.75%, 4/15/18

4,190

4,268

Kimco Realty, 6.875%, 10/1/19

3,555

3,937

Simon Property Group, 2.35%, 1/30/22

5,695

5,652

Ventas Realty, 2.00%, 2/15/18

5,030

5,030

Ventas Realty, 4.00%, 4/30/19

1,120

1,155

21,139

21,403

Vereit Operating Partner, 3.00%, 2/6/19 WEA Finance, 1.75%, 9/15/17 (1)

9,235

9,234

WEA Finance, 2.70%, 9/17/19 (1)

12,328

12,418

WEA Finance, 3.25%, 10/5/20 (1)

2,515

2,561 76,153 934,062

Total Financial Institutions

INDUSTRIAL 28.1% Basic Industry 1.5% 1,821

1,849

GoldCorp, 2.125%, 3/15/18

14,040

14,063

Invista Finance, 4.25%, 10/15/19 (1)

12,970

13,261

2,292

2,399

Eastman Chemical, 2.70%, 1/15/20

LyondellBasell, 5.00%, 4/15/19

20


Par/Shares

$ Value

(Amounts in 000s)

LyondellBasell, 6.00%, 11/15/21

5,369

6,100

Sherwin Williams, 2.25%, 5/15/20

24,560

24,654

Solvay Finance, 3.40%, 12/3/20 (1)

9,715

10,030 72,356

Capital Goods 1.7% Fortive, 1.80%, 6/15/19 (1)

1,355

1,348

14,553

14,590

Martin Marietta Material, VR, 1.822%, 5/22/20

2,645

2,654

Martin Marietta Material, VR, 2.252%, 6/30/17

9,645

9,651

Rockwell Collins, 1.95%, 7/15/19

3,665

3,673

Roper Industries, 1.85%, 11/15/17

2,860

2,865

Roper Industries, 2.05%, 10/1/18

15,310

15,354

3,915

3,968

Harris, 1.999%, 4/27/18

Roper Technologies, 2.80%, 12/15/21 Roper Technologies, 3.00%, 12/15/20 Stanley Black & Decker, 2.451%, 11/17/18

1,865

1,911

27,105

27,376 83,390

Communications 2.7% AT&T, 2.30%, 3/11/19

13,610

13,702

Charter Communications Operating, 3.579%, 7/23/20

17,105

17,770

Crown Castle International, 2.25%, 9/1/21

11,630

11,494

Crown Castle International, 3.40%, 2/15/21

8,425

8,696

Crown Castle Towers, 6.113%, 1/15/40 (1)

3,295

3,546

Interpublic Group of Companies, 2.25%, 11/15/17

21,964

22,015

S&P Global, 2.50%, 8/15/18

2,570

2,591

SBA Tower Trust, 2.24%, 4/15/43 (1)

9,700

9,697

SBA Tower Trust, 3.168%, 4/15/22 (1)

6,880

6,928

SBA Tower Trust, 3.598%, 4/15/18 (1)

7,530

7,523

Telefonica Emisiones, 3.192%, 4/27/18

5,755

5,820

Time Warner Cable, 6.75%, 7/1/18

4,665

4,903

21


Par/Shares

$ Value

(Amounts in 000s)

Time Warner Cable, 8.25%, 4/1/19

16,200

17,965 132,650

Consumer Cyclical 5.3% Alibaba Group Holding, 2.50%, 11/28/19 AutoZone, 1.625%, 4/21/19

19,100

19,225

1,315

1,306

Bestgain Real Estate, 2.625%, 3/13/18

19,980

20,003

Brinker International, 2.60%, 5/15/18

9,675

9,689

Daimler Finance North America, 1.75%, 10/30/19 (1)

16,030

15,887

Daimler Finance North America, VR, 2.03%, 8/1/18 (1)

12,065

12,129

Delphi Automotive, 3.15%, 11/19/20

9,540

9,774

eBay, 2.15%, 6/5/20

6,525

6,524

Experian Finance, 2.375%, 6/15/17 (1)

7,735

7,735

Ford Motor Credit, 1.684%, 9/8/17

22,715

22,702


5,570

5,542


3,610

3,624


11,120

11,181


5,635

5,637

General Motors Financial, 3.10%, 1/15/19

4,695

4,759

General Motors Financial, 4.75%, 8/15/17

13,434

13,518

GLP Capital, 4.375%, 11/1/18

14,000

14,350

Hyundai Capital America, 1.75%, 9/27/19 (1)

1,325

1,303


4,480

4,446


4,485

4,496

14,460

14,494

7,470

7,506

17,605

17,664

Hyundai Capital Services America, 2.50%, 3/18/19 (1) Hyundai Capital Services, 3.50%, 9/13/17 (1) JD.com, 3.125%, 4/29/21 Nissan Motor Acceptance, 1.55%, 9/13/19 (1)

6,680

6,595

Nissan Motor Acceptance, 1.95%, 9/12/17 (1)

16,940

16,959

22


Par/Shares

$ Value

(Amounts in 000s)

QVC, 3.125%, 4/1/19

7,532

7,625 264,673

Consumer Non-Cyclical 7.1% Abbott Laboratories, 2.35%, 11/22/19 Abbott Laboratories, 2.90%, 11/30/21

21,755

21,891

9,385

9,522

AbbVie, 1.80%, 5/14/18

25,975

26,009

AbbVie, 2.30%, 5/14/21

8,275

8,265

Agilent Technologies, 6.50%, 11/1/17

2,573

2,618

Allergan, 1,875%, 10/1/17

13,935

13,944

Allergan Funding, 2.35%, 3/12/18

13,905

13,958

Baxalta, 2.00%, 6/22/18

2,020

2,024

Baxalta, VR, 1.936%, 6/22/18

5,105

5,132

Becton Dickinson, 2.404%, 6/5/20

9,600

9,622

Becton Dickinson, 2.675%, 12/15/19

9,335

9,453

Biogen, 2.90%, 9/15/20

5,535

5,659

Bunge Limited Finance, 3.20%, 6/15/17

22,615

22,626


4,835

4,955


860

963

Catholic Health Initiatives, 1.60%, 11/1/17

1,740

1,739

Catholic Health Initiatives, 2.60%, 8/1/18

8,375

8,433

Celgene, 1.90%, 8/15/17

3,380

3,383

Celgene, 2.125%, 8/15/18

2,695

2,709

Celgene, 2.30%, 8/15/18

9,738

9,805

21,250

21,035

Express Scripts Holding, 2.25%, 6/15/19

1,500

1,506

Express Scripts Holding, 3.30%, 2/25/21

2,265

2,316

Danone, 1.691%, 10/30/19 (1)

HCA, 3.75%, 3/15/19

7,285

7,449

23,815

23,844

Mead Johnson Nutrition, 3.00%, 11/15/20

3,025

3,091

Medco Health Solutions, 4.125%, 9/15/20

6,607

6,942

Imperial Tobacco Finance, 2.05%, 2/11/18 (1)

23


Par/Shares

$ Value

Newell Rubbermaid, 2.05%, 12/1/17

11,110

11,137


9,555

9,611


3,054

3,092

Perrigo Finance, 3.50%, 3/15/21

2,760

2,856

Reynolds American, 2.30%, 6/12/18

8,970

9,018

Reynolds American, 8.125%, 6/23/19

3,407

3,821

Shire Acquisition Investments Ireland, 1.90%, 9/23/19

23,335

23,254

Teva Pharmaceutical Finance III, 1.40%, 7/20/18

13,530

13,462


11,940

11,835


10,060

9,860

5,630

5,633

(Amounts in 000s)

Whirlpool, 1.65%, 11/1/17

352,472 Energy 4.1% Canadian Natural Resources, 1.75%, 1/15/18

4,940

4,934

Columbia Pipeline Group, 2.45%, 6/1/18

5,355

5,378

ConocoPhillips, 5.20%, 5/15/18

1,450

1,499

DCP Midstream Operating, 2.50%, 12/1/17

17,970

17,970

Enbridge, VR, 1.514%, 6/2/17

14,175

14,175

EnCana, 6.50%, 5/15/19

1,315

1,415

Energy Transfer Partners, 6.70%, 7/1/18

5,265

5,518

Enterprise Products Operations, 2.55%, 10/15/19

5,340

5,402

Enterprise Products Operations, 6.30%, 9/15/17

12,700

12,877

ExxonMobil, VR, 1.47%, 3/6/22

24,120

24,311

Kinder Morgan Energy Partners, 5.95%, 2/15/18

4,650

4,776

Kinder Morgan Finance, 6.00%, 1/15/18 (1)

6,365

6,523

Marathon Oil, 6.00%, 10/1/17

13,248

13,443

Murphy Oil, STEP, 3.50%, 12/1/17

32,053

32,138

ONEOK Partners, 3.20%, 9/15/18

13,665

13,861

Panhandle Eastern Pipeline, 6.20%, 11/1/17

2,080

2,111

Phillips 66, VR, 1.784%, 4/15/19 (1)

4,225

4,231

24


Par/Shares

$ Value

(Amounts in 000s)

Sabine Pass Liquefaction, 5.625%, 2/1/21

16,455

17,998

Spectra Energy Partners, 2.95%, 9/25/18

9,905

10,041

Valero Energy, 9.375%, 3/15/19

2,036

2,293 200,894

Industrial Other 0.7% Hutchinson Whampoa Finance, 1.625%, 10/31/17 (1)

33,310

33,268 33,268

Technology 3.2% Anstock II, 2.125%, 7/24/17 Arrow Electronics, 6.875%, 6/1/18

17,230

17,230

7,980

8,359

Baidu, 2.75%, 6/9/19

12,940

13,098

Broadcom, 2.375%, 1/15/20 (1)

13,905

13,922

Broadcom, 3.00%, 1/15/22 (1)

13,070

13,152

Everett Spinco, 2.875%, 3/27/20 (1)

8,065

8,178

Fidelity National Information Services, 1.45%, 6/5/17

4,605

4,605

Fidelity National Information Services, 2.25%, 8/15/21

10,005

9,909

8,605

8,627

HP Enterprise, STEP, 2.45%, 10/5/17 HP Enterprise, STEP, 2.85%, 10/5/18

7,512

7,617

27,390

27,891

Qualcomm, 2.10%, 5/20/20

4,960

4,976

Qualcomm, 2.60%, 1/30/23

3,340

3,346

Seagate Technology, 3.75%, 11/15/18

5,390

5,525

Tencent Holdings, 2.875%, 2/11/20 (1)

4,615

4,691

Xerox, 5.625%, 12/15/19

4,930

5,291

Keysight Technologies, 3.30%, 10/30/19

156,417 Transportation 1.8% 12,110

12,261

ERAC USA Finance, 2.80%, 11/1/18 (1)

1,655

1,669

ERAC USA Finance, 6.375%, 10/15/17 (1)

5,950

6,046

Delta Air Lines, 2.875%, 3/13/20

25


Par/Shares

$ Value

HPHT Finance, 2.25%, 3/17/18 (1)

8,562

8,562

J.B. Hunt Transportation Services, 2.40%, 3/15/19

2,830

2,841

14,285

14,299

Penske Truck Leasing, 2.50%, 6/15/19 (1)

7,470

7,528


14,458

14,624


12,924

13,095

8,015

8,147

(Amounts in 000s)

Kansas City Southern, 2.35%, 5/15/20

Southwest Airlines, 2.75%, 11/6/19

89,072 1,385,192

Total Industrial

UTILITY 3.5% Electric 3.5% Dominion Resources, 1.50%, 9/30/18 (1)

4,795

4,761

Dominion Resources, 1.875%, 1/15/19

1,750

1,748

Dominion Resources, 2.125%, 2/15/18 (1)

14,485

14,575

Dominion Resources, STEP, 2.579%, 7/1/20

3,270

3,296

Dominion Resources, STEP, 2.962%, 7/1/19

3,155

3,202

Enel Finance International, 2.875%, 5/25/22 (1)

9,430

9,405

Exelon, 1.55%, 6/9/17

7,970

7,969

Exelon Generation, 2.95%, 1/15/20

8,485

8,623

FirstEnergy, 2.75%, 3/15/18

5,722

5,744

Great Plains Energy, 2.50%, 3/9/20

7,135

7,206

NextEra Energy Capital Holdings, 1.649%, 9/1/18

3,650

3,643


2,803

2,806


3,735

3,754

14,437

14,581

PPL Capital Funding, 1.90%, 6/1/18

5,819

5,824

San Diego Gas & Electric, 1.914%, 2/1/22

4,068

4,029

Southern Company, 1.55%, 7/1/18

3,515

3,507


12,725

12,693

Origin Energy Finance, 3.50%, 10/9/18 (1)

26


Par/Shares

$ Value

(Amounts in 000s)


2,695

2,674

Southern Power, 1.85%, 12/1/17

2,935

2,939

Teco Finance, VR, 1.755%, 4/10/18

15,210

15,210

Zhejiang Provincial Energy, 2.30%, 9/30/17

34,030

34,040 172,229

Total Utility

2,491,483

Total Corporate Bonds (Cost $2,481,345)

ASSET-BACKED SECURITIES 21.6% Car Loan 13.2% Ally Auto Receivables Trust Series 2014-1, Class C 2.04%, 12/15/19

1,295

1,300

Ally Auto Receivables Trust Series 2014-1, Class D 2.48%, 2/15/21

1,295

1,298

Ally Auto Receivables Trust Series 2015-2, Class C 2.41%, 1/15/21 (1)

9,435

9,504


3,200

3,229

Ally Auto Receivables Trust Series 2017-2, Class C 2.46%, 9/15/22

1,225

1,232


1,700

1,702

30,630

30,645

AmeriCredit Automobile Receivables Trust Series 2013-5, Class B 1.52%, 1/8/19

29

29

AmeriCredit Automobile Receivables Trust Series 2014-1, Class E 3.58%, 8/9/21

3,075

3,128

Ally Master Owner Trust Series 2015-3, Class A 1.63%, 5/15/20

27


Par/Shares

$ Value

AmeriCredit Automobile Receivables Trust Series 2014-2, Class B 1.60%, 7/8/19

8,235

8,237

AmeriCredit Automobile Receivables Trust Series 2014-2, Class E 3.37%, 11/8/21

6,420

6,520

AmeriCredit Automobile Receivables Trust Series 2014-3, Class C 2.58%, 9/8/20

3,030

3,057


4,525

4,561

AmeriCredit Automobile Receivables Trust Series 2014-4, Class D 3.07%, 11/9/20

1,675

1,697

AmeriCredit Automobile Receivables Trust Series 2015-1, Class A3 1.26%, 11/8/19

7,399

7,396


6,009

6,006


4,490

4,542


5,765

5,859


5,295

5,302


1,780

1,784


2,795

2,783


7,665

7,638

(Amounts in 000s)

28


Par/Shares

$ Value


4,115

4,149

ARI Fleet Lease Trust Series 2015-A, Class A2 1.11%, 11/15/18 (1)

3,488

3,485


13,590

13,595


7,860

7,875


2,350

2,351

Avis Budget Rental Car Funding Series 2012-3A, Class A 2.10%, 3/20/19 (1)

5,128

5,139


3,070

3,070

Avis Budget Rental Car Funding Series 2013-1A, Class B 2.62%, 9/20/19 (1)

6,305

6,328


6,659

6,745

Avis Budget Rental Car Funding Series 2013-2A, Class B 3.66%, 2/20/20 (1)

4,405

4,482


2,909

2,920


13,585

13,548

4,340

4,332

(Amounts in 000s)

BMW Vehicle Lease Trust Series 2016-2, Class A3 1.43%, 9/20/19

29


Par/Shares

$ Value

California Republic Auto Receivables Trust Series 2015-1, Class B 2.51%, 2/16/21

2,465

2,480

Capital Auto Receivables Asset Trust Series 2013-3, Class E 4.55%, 3/21/22 (1)

1,430

1,453

Capital Auto Receivables Asset Trust Series 2013-4, Class D 3.22%, 5/20/19

3,240

3,266


2,295

2,320


2,095

2,127


1,305

1,321

Capital Auto Receivables Asset Trust Series 2014-3, Class A3 1.48%, 11/20/18

1,735

1,735


865

865


5,215

5,223


14,075

14,081


5,530

5,539


3,580

3,572


2,455

2,454

(Amounts in 000s)

30


Par/Shares

$ Value

CarMax Auto Owner Trust Series 2014-1, Class B 1.69%, 8/15/19

1,170

1,171

CarMax Auto Owner Trust Series 2014-1, Class C 1.93%, 11/15/19

1,695

1,698

CarMax Auto Owner Trust Series 2014-4, Class A4 1.81%, 7/15/20

5,225

5,236


4,785

4,780


8,055

8,001

Chrysler Capital Auto Receivables Trust Series 2014-BA, Class D 3.44%, 8/16/21 (1)

3,013

3,044

Chrysler Capital Auto Receivables Trust Series 2016-BA, Class A2 1.36%, 1/15/20 (1)

2,625

2,623

Chrysler Capital Auto Receivables Trust Series 2016-BA, Class A3 1.64%, 7/15/21 (1)

2,480

2,477

Enterprise Fleet Financing Series 2014-2, Class A2 1.05%, 3/20/20 (1)

3,619

3,617


3,952

3,949


7,595

7,597


19,482

19,491


5,287

5,283

(Amounts in 000s)

31


Par/Shares

$ Value


3,355

3,366

Ford Credit Auto Lease Trust Series 2015-A, Class A4 1.31%, 8/15/18

5,235

5,235

Ford Credit Auto Lease Trust Series 2017-A, Class A4 2.02%, 6/15/20

8,595

8,626

Ford Credit Floorplan Master Owner Series 2013-2, Class A 2.09%, 3/15/22 (1)

2,505

2,520

Ford Credit Floorplan Master Owner Series 2014-4, Class A1 1.40%, 8/15/19

34,200

34,214


10,790

10,788


7,630

7,598

Ford Credit Floorplan Master Owner Series 2016-3, Class B 1.75%, 7/15/21

3,640

3,621

Ford Credit Floorplan Master Owner Series 2017-1, Class B 2.25%, 5/15/22

6,720

6,719

GM Financial Auto Lease Series 2015-1, Class D 3.01%, 3/20/20

2,460

2,474

GM Financial Auto Lease Series 2015-3, Class A3 1.69%, 3/20/19

8,430

8,440

GM Financial Auto Lease Series 2017-1, Class A4 2.26%, 8/20/20

1,405

1,414

GMF Floorplan Owner Revolving Trust Series 2015-1, Class A1 1.65%, 5/15/20 (1)

9,540

9,546

(Amounts in 000s)

32


Par/Shares

$ Value

GMF Floorplan Owner Revolving Trust Series 2015-1, Class C 2.22%, 5/15/20 (1)

5,000

5,005

GMF Floorplan Owner Revolving Trust Series 2016-1, Class B 2.41%, 5/17/21 (1)

3,035

3,056


1,165

1,168


8,247

8,309

Huntington Auto Trust Series 2016-1, Class A4 1.93%, 4/15/22

(Amounts in 000s)

5,110

5,141

Hyundai Auto Lease Securitization Trust Series 2015-A, Class A4 1.65%, 8/15/19 (1)

15,635

15,637

Hyundai Auto Lease Securitization Trust Series 2015-B, Class A3 1.40%, 11/15/18 (1)

6,366

6,366

Hyundai Auto Lease Securitization Trust Series 2016-A, Class A3 1.60%, 7/15/19 (1)

3,970

3,973

Hyundai Auto Lease Securitization Trust Series 2016-C, Class A4 1.65%, 7/15/20 (1)

5,965

5,957

Hyundai Auto Receivables Trust Series 2015-A, Class A3 1.05%, 4/15/19

3,307

3,304

Hyundai Auto Receivables Trust Series 2017-A, Class B 2.38%, 4/17/23

2,830

2,847

Mercedes-Benz Auto Lease Trust Series 2016-A, Class A3 1.52%, 3/15/19

9,175

9,180

Nissan Auto Lease Trust Series 2015-A, Class A3 1.40%, 6/15/18

3,761

3,761

33


Par/Shares

$ Value

7,395

7,386

Nissan Master Owner Trust Receivables Series 2015-A, Class A2 1.44%, 1/15/20

10,690

10,689

Nissan Master Owner Trust Receivables Series 2016-A, Class A2 1.54%, 6/15/21

7,005

6,973

Santander Drive Auto Receivables Trust Series 2013-5, Class E 3.73%, 3/15/21 (1)

7,543

7,672


2,785

2,824

Santander Drive Auto Receivables Trust Series 2014-3, Class D 2.65%, 8/17/20

1,815

1,832


2,135

2,160


8,977

9,157


4,397

4,483

Santander Drive Auto Receivables Trust Series 2015-5, Class C 2.74%, 12/15/21

13,320

13,397


6,990

7,163

Santander Drive Auto Receivables Trust Series 2016-1, Class B 2.47%, 12/15/20

3,080

3,100


10,205

10,228

(Amounts in 000s)

Nissan Auto Lease Trust Series 2016-B, Class A4 1.61%, 1/18/22

34


Par/Shares

$ Value

Santander Drive Auto Receivables Trust Series 2017-1, Class B 2.10%, 6/15/21

975

976


1,180

1,183

Smart Trust Australia Series 2015-3US, Class A3A 1.66%, 8/14/19

13,105

13,068

Smart Trust Australia Series 2016-2US, Class A2A 1.45%, 8/14/19

14,860

14,836

Volkswagen Auto Loan Enhanced Trust Series 2014-1, Class A3 0.91%, 10/22/18

174

174

Volkswagen Auto Loan Enhanced Trust Series 2014-2, Class A4 1.39%, 5/20/21

17,140

17,110

Volkswagen Credit Auto Master Trust Series 2014-1A, Class A2 1.40%, 7/22/19 (1)

(Amounts in 000s)

15,925

15,923

Wheels Series 2015-1A, Class A2 1.27%, 4/22/24 (1)

1,525

1,523

Wheels Series 2016-1A, Class A2 1.59%, 5/20/25 (1)

2,070

2,071

World Omni Auto Lease Securitization Trust Series 2016-A, Class A3 1.45%, 8/15/19

9,980

9,943 653,007

Credit Card 1.4% American Express Credit Account Master Trust Series 2014-2, Class A 1.26%, 1/15/20 GE Capital Credit Card Master Note Trust Series 2012-6, Class A 1.36%, 8/17/20

35

11,530

11,529

700

700


Par/Shares

$ Value

Synchrony Credit Card Master Note Trust Series 2013-1, Class B 1.69%, 3/15/21

12,976

12,962

Synchrony Credit Card Master Note Trust Series 2014-1, Class A 1.61%, 11/15/20

19,060

19,078


5,075

5,122

Synchrony Credit Card Master Note Trust Series 2015-2, Class A 1.60%, 4/15/21

15,485

15,502


3,660

(Amounts in 000s)

3,688 68,581

Other Asset-Backed Securities 6.3% ALM Loan Funding Series 2014-14A, Class A1R, CLO, VR 2.322%, 7/28/26 (1)

3,415

3,416

ALM Loan Funding Series 2014-14A, Class A2R, CLO, VR 2.722%, 7/28/26 (1)

3,870

3,870

Ascentium Equipment Receivables Series 2015-2A, Class A3 1.93%, 3/11/19 (1)

13,937

13,957


1,924

1,926


2,985

2,983


2,770

2,772


2,795

2,803

36


Par/Shares

$ Value

CCG Receivables Trust Series 2014-1, Class A2 1.06%, 11/15/21 (1)

867

867


3,277

3,276


3,581

3,579

CNH Equipment Trust Series 2014-A, Class A3 0.84%, 5/15/19

181

181

CNH Equipment Trust Series 2014-C, Class A3 1.05%, 11/15/19

4,719

4,713

CNH Equipment Trust Series 2015-B, Class A3 1.37%, 7/15/20

11,658

11,649


11,210

11,223

CNH Equipment Trust Series 2016-A, Class A3 1.48%, 4/15/21

8,055

8,032


5,255

5,225

20,112

20,240

Diamond Resorts Owner Trust Series 2013-2, Class A 2.27%, 5/20/26 (1)

1,279

1,272

Elara HGV Timeshare Issuer Series 2014-A, Class A 2.53%, 2/25/27 (1)

2,283

2,276

21,025

21,031

(Amounts in 000s)

DB Master Finance Series 2015-1A, Class A2I 3.262%, 2/20/45 (1)

GE Dealer Floorplan Master Note Trust Series 2014-1, Class A, VR 1.39%, 7/20/19

37


Par/Shares

$ Value

14,055

14,069

GreatAmerica Leasing Receivables Series 2016-1, Class A3 1.73%, 6/20/19 (1)

7,980

7,977


610

610


560

561

Hilton Grand Vacation Trust Series 2014-AA, Class A 1.77%, 11/25/26 (1)

3,407

3,358

Hilton Grand Vacation Trust Series 2017-AA, Class A 2.66%, 12/26/28 (1)

4,097

4,110

Hilton Grand Vacation Trust Series 2017-AA, Class B, VR 2.96%, 12/26/28 (1)

1,406

1,415

John Deere Owner Trust Series 2015-A, Class A3 1.32%, 6/17/19

3,093

3,093

John Deere Owner Trust Series 2016-A, Class A3 1.36%, 4/15/20

7,890

7,880

John Deere Owner Trust Series 2016-B, Class A3 1.25%, 6/15/20

4,495

4,476

Kubota Credit Owner Trust Series 2015-1A, Class A3 1.54%, 3/15/19 (1)

11,950

11,955

Kubota Credit Owner Trust Series 2016-1A, Class A3 1.50%, 7/15/20 (1)

3,155

3,138

Madison Park Funding Series 2014-14A, Class A2R, CLO, VR 2.276%, 7/20/26 (1)

8,565

8,576

(Amounts in 000s)

GE Dealer Floorplan Master Note Trust Series 2014-2, Class A, VR 1.46%, 10/20/19

38


Par/Shares

$ Value

Marriott Vacation Club Owner Trust Series 2013-1A, Class A 2.15%, 4/22/30 (1)

968

966

Marriott Vacation Club Owner Trust Series 2014-1A, Class A 2.25%, 9/22/31 (1)

3,458

3,441

MMAF Equipment Finance Series 2014-AA, Class A3 0.87%, 1/8/19 (1)

6,838

6,829


3,628

3,626


2,815

2,817

OZLM Series 2014-8A, Class A1AR, CLO, VR 2.00%, 10/17/26 (1)

9,720

9,720

Sierra Receivables Funding Series 2014-2A, Class A 2.05%, 6/20/31 (1)

1,644

1,638


2,416

2,418


3,271

3,281


4,184

4,183


4,714

4,731


4,316

4,369


2,876

2,878

(Amounts in 000s)

39


Par/Shares

$ Value


9,216

9,167


2,683

2,713

Springleaf Funding Trust Series 2016-AA, Class A 2.90%, 11/15/29 (1)

3,500

3,522

Verizon Owner Trust Series 2016-2A, Class A 1.68%, 5/20/21 (1)

9,785

9,787

Verizon Owner Trust Series 2016-2A, Class B 2.15%, 5/20/21 (1)

6,635

6,651

Verizon Owner Trust Series 2016-2A, Class C 2.36%, 5/20/21 (1)

5,280

5,293

Verizon Owner Trust Series 2017-1A, Class B 2.45%, 9/20/21 (1)

2,070

2,088

Verizon Owner Trust Series 2017-1A, Class C 2.65%, 9/20/21 (1)

2,670

2,696

Volvo Financial Equipment Series 2014-1A, Class C 1.94%, 11/15/21 (1)

1,000

1,001

Volvo Financial Equipment Series 2016-1A, Class A3 1.67%, 2/18/20 (1)

4,030

4,033

Wendy's Funding Series 2015-1A, Class A2I 3.371%, 6/15/45 (1)

15,868

16,018

(Amounts in 000s)

310,375 Student Loan 0.4% SLM Student Loan Trust Series 2008-4, Class A4, VR 2.806%, 7/25/22

40

500

509


Par/Shares

$ Value

SLM Student Loan Trust Series 2008-5, Class A4, VR 2.856%, 7/25/23

5,506

5,652

SLM Student Loan Trust Series 2008-9, Class A, VR 2.656%, 4/25/23

3,957

4,040

SLM Student Loan Trust Series 2010-1, Class A, VR 1.424%, 3/25/25

11,573

11,390

(Amounts in 000s)

21,591 Whole Business 0.3% Dominos Pizza Master Issuer Series 2012-1A, Class A2 5.216%, 1/25/42 (1)

13,332

13,445 13,445 1,066,999

Total Asset-Backed Securities (Cost $1,066,809)

NON-U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES 8.8% Collateralized Mortgage Obligations 3.2% Bank of America Mortgage Securities Series 2004-A, Class 2A2, CMO, ARM 3.591%, 2/25/34

184

182

Bank of America Mortgage Securities Series 2004-H, Class 2A2, CMO, ARM 3.198%, 9/25/34

683

675

Bayview Opportunity Master Fund Series 2017-SPL4, Class A, CMO, ARM 3.50%, 1/25/55 (1)

5,170

5,302

Colt Funding Series 2017-1, Class A1, CMO, ARM 2.614%, 5/27/47 (1)

6,175

6,207

Colt Funding Series 2017-1, Class A3, CMO, ARM 3.074%, 5/27/47 (1)

921

926

41


Par/Shares

$ Value

Connecticut Avenue Securities Series 2016-C01, Class 2M1, CMO, ARM 3.124%, 8/25/28

9,275

9,382


3,326

3,374


2,857

2,874


4,024

4,057


10,226

10,280


12,337

12,376


6,560

6,560

Goldman Sachs Mortgage-Backed Securities Trust Series 2014-EB1A, Class 2A1, CMO, ARM 2.477%, 7/25/44 (1)

1,925

1,908

Mill City Mortgage Trust Series 2016-1, Class A, CMO, ARM 2.50%, 4/25/57 (1)

2,416

2,420

1

1

Structured Agency Credit Risk Debt Notes Series 2014-HQ2, Class M1, CMO, ARM 2.474%, 9/25/24

1,642

1,647

Structured Agency Credit Risk Debt Notes Series 2015-DNA1, Class M1, CMO, ARM 1.924%, 10/25/27

3,014

3,018


4,431

4,593

(Amounts in 000s)

Ryland-Mercury Savings Trust Series 1998-MS2, Class A, CMO, ARM 2.125%, 10/15/18

42


Par/Shares

$ Value

Structured Agency Credit Risk Debt Notes Series 2015-HQ2, Class M1, CMO, ARM 2.124%, 5/25/25

935

938


6,074

6,098

Structured Agency Credit Risk Debt Notes Series 2016-HQA1, Class M1, CMO, ARM 2.774%, 9/25/28

1,256

1,263


3,573

3,603


12,379

12,499

Structured Agency Credit Risk Debt Notes Series 2017-HQA1, Class M1, CMO, ARM 2.224%, 8/25/29

9,452

9,513

Towd Point Mortgage Trust Series 2015-4, Class A1B, CMO, ARM 2.75%, 4/25/55 (1)

7,855

7,917


7,281

7,329


3,937

3,962


4,810

4,840

Towd Point Mortgage Trust Series 2016-2, Class A1A, CMO, ARM 2.75%, 8/25/55 (1)

3,047

3,063

Towd Point Mortgage Trust Series 2016-3, Class A1, CMO, ARM 2.25%, 4/25/56 (1)

2,531

2,521

Towd Point Mortgage Trust Series 2017-1, Class A1, CMO, ARM 2.75%, 10/25/56 (1)

9,898

9,963

(Amounts in 000s)

43


Par/Shares

$ Value

6,225

6,285

65

53

WaMu Mortgage PTC Series 2005-AR12, Class 2A1, CMO, ARM 3.062%, 9/25/35

350

351

Wells Fargo Mortgage Backed Securities Trust Series 2004-G, Class A3, CMO, ARM 3.186%, 6/25/34

341

342

(Amounts in 000s)

Towd Point Mortgage Trust Series 2017-2, Class A1, CMO, ARM 2.75%, 4/25/57 (1) WaMu Mortgage PTC Series 2005-4, Class CB1, CMO, ARM 1.474%, 6/25/35

156,322 Commercial Mortgage-Backed Securities 5.3% Banc of America Commercial Mortgage Series 2007-4, Class AM, ARM 5.972%, 2/10/51 Banc of America Merrill Large Loan Series 2014-IP, Class A, ARM 2.717%, 6/15/28 (1)

793

796

10,550

10,595

Citigroup Commercial Mortgage Trust Series 2013-GC15, Class A1 1.378%, 9/10/46

67

67


952

951


3,247

3,236


1,258

1,257


4,412

4,392


7,243

7,235

44


Par/Shares

$ Value

CLNS Trust Series 2017-IKPR, Class A, ARM 1.00%, 6/11/32 (1)

4,165

4,165

Commercial Mortgage PTC Series 2014-CR17, Class A1 1.275%, 5/10/47

2,339

2,333


3,260

3,257


3,741

3,730


3,417

3,405


1,518

1,514

Commercial Mortgage PTC Series 2014-LC17, Class A1 1.381%, 10/10/47

2,391

2,384

Commercial Mortgage PTC Series 2014-TSC, Class A, ARM 1.84%, 2/13/32 (1)

4,880

4,889

Commercial Mortgage PTC Series 2014-UBS4, Class A1 1.309%, 8/10/47

1,613

1,609


2,364

2,363


4,274

4,266


1,267

1,265


2,867

2,860

(Amounts in 000s)

45


Par/Shares

$ Value

Commercial Mortgage PTC Series 2015-LC23, Class A2 3.221%, 10/10/48

14,350

14,806

Commercial Mortgage PTC Series 2015-PC1, Class A1 1.667%, 7/10/50

5,269

5,273

CSAIL Commercial Mortgage Trust Series 2015-C1, Class A1 1.684%, 4/15/50

1,416

1,414

Goldman Sachs Mortgage Securities II Series 2013-GC13, Class A1 1.206%, 7/10/46

345

345

Goldman Sachs Mortgage Securities II Series 2014-GC22, Class A1 1.29%, 6/10/47

2,751

2,743

Goldman Sachs Mortgage Securities Trust Series 2014-GC24, Class A1 1.509%, 9/10/47

4,724

4,708


6,601

6,581


3,290

3,287

Goldman Sachs Mortgage Securities Trust Series 2016-GS3, Class A1 1.429%, 10/10/49

1,596

1,581

Hospitality Mortgage Trust Series 2017-HIT, Class A, ARM 1.85%, 5/8/30 (1)

4,135

4,161

JPMorgan Chase Barclays Bank Commercial Mortgage Securities Series 2014-C19, Class A1 1.266%, 4/15/47

1,353

1,352


2,121

2,116


1,640

1,637

(Amounts in 000s)

46


Par/Shares

$ Value


1,659

1,660


1,581

1,578


14,163

14,152


5,888

5,869


8,193

8,167


2,870

2,867

JPMorgan Chase Commercial Mortgage Securities Series 2006-LDP7, Class AM, ARM 5.943%, 4/17/45

201

201

JPMorgan Chase Commercial Mortgage Securities Series 2014-C20, Class A1 1.268%, 7/15/47

2,563

2,555

JPMorgan Chase Commercial Mortgage Securities Series 2016-JP3, Class A1 1.462%, 8/15/49

1,477

1,463

Morgan Stanley Bank of America Merrill Lynch Trust Series 2013-C12, Class A1 1.313%, 10/15/46

4,265

4,258


1,840

1,833


1,179

1,177


1,463

1,461

(Amounts in 000s)

47


Par/Shares

$ Value


4,587

4,582


1,995

1,996


8,988

8,970


5,698

5,686


2,584

2,555

Morgan Stanley Capital I Series 2015-MS1, Class A1 1.638%, 5/15/48

4,865

4,859

Wells Fargo Commercial Mortgage Trust Series 2014- LC18, Class A1 1.437%, 12/15/47

10,239

10,212

Wells Fargo Commercial Mortgage Trust Series 2015-C26, Class A1 1.454%, 2/15/48

3,887

3,876

Wells Fargo Commercial Mortgage Trust Series 2015- C28, Class A1 1.531%, 5/15/48

4,797

4,787

Wells Fargo Commercial Mortgage Trust Series 2015-LC20, Class A1 1.471%, 4/15/50

5,724

5,709

Wells Fargo Commercial Mortgage Trust Series 2015-NXS2, Class A2 3.02%, 7/15/58

13,410

13,728

Wells Fargo Commercial Mortgage Trust Series 2015- SG1, Class A1 1.568%, 9/15/48

4,011

4,007

Wells Fargo Commercial Mortgage Trust Series 2016-LC24, Class A1 1.441%, 10/15/49

2,828

2,811

(Amounts in 000s)

48


Par/Shares

$ Value

WF-RBS Commercial Mortgage Trust Series 2013-C16, Class A1 1.406%, 9/15/46

1,018

1,017


2,160

2,152


4,539

4,524


6,935

6,916


3,444

3,436


1,710

1,710


1,132

1,128

WF-RBS Commercial Mortgage Trust Series 2014-LC14, Class A1 1.193%, 3/15/47

2,501

2,494

(Amounts in 000s)

260,969 Home Equity 0.3% BankBoston Home Equity Loan Trust Series 1998-2, Class A6, ARM 6.64%, 12/25/28

397

396

Chase Funding Mortgage Loan Series 2002-4, Class 2A1, ARM 1.764%, 10/25/32

176

166

Nationstar Home Equity Loan Trust Series 2016-1A, Class A 2.981%, 2/25/26 (1)

1,277

1,277


2,242

2,260

49


Par/Shares

$ Value


1,114

1,122

Novastar Home Equity Loan Trust Series 2006-1, Class A1A, ARM 1.184%, 5/25/36

9,772

9,458

(Amounts in 000s)

14,679 431,970

Total Non-U.S. Government Mortgage-Backed Securities (Cost $431,363)

U.S. GOVERNMENT & AGENCY MORTGAGE-BACKED SECURITIES 6.5% U.S. Government Agency Obligations 6.1% (2) Federal Home Loan Mortgage 1.369%, 5/25/19

855

854

1.426%, 8/25/17

5,617

5,613

2.059%, 3/25/20

14,101

14,178

8,011

8,313

214

225

3.50%, 3/1/46 4.00%, 7/1/25 - 8/1/26 4.50%, 10/1/19

393

403

5.00%, 10/1/18 - 7/1/25

5,490

5,861

5.50%, 3/1/21 - 10/1/38

1,221

1,301

6.00%, 7/1/17 - 1/1/38

1,935

2,160

2

2

201

211

2.875%, 6/1/38

98

103

2.875%, 7/1/38

543

575

2.95%, 11/1/34

245

260

2.976%, 7/1/35

315

334

1,410

1,484

572

607

Federal Home Loan Mortgage, ARM 2.719%, 10/1/33 2.841%, 9/1/35

3.085%, 10/1/36 3.215%, 6/1/38

50


Par/Shares

$ Value

(Amounts in 000s)

3.348%, 1/1/36

31

32

3.358%, 2/1/37

184

193

3.369%, 1/1/37

113

121

3.375%, 4/1/37

26

28

3.382%, 5/1/38

352

377

3.40%, 11/1/35

81

86

3.409%, 2/1/37

261

276

3.464%, 5/1/37

246

260

3.486%, 11/1/36

63

66

3.536%, 12/1/36

108

112

3.613%, 2/1/34

26

28

3.711%, 2/1/33

5

6

3.783%, 2/1/37

426

452

3.807%, 2/1/38

856

910

4.00%, 11/15/36

2,535

2,676

6.50%, 11/15/20

8

8

62

70

7,320

7,556

3.50%, 12/1/25 - 10/1/46

37,708

39,087

4.00%, 4/1/24 - 9/1/45

36,653

38,871

4.50%, 5/1/19 - 12/1/45

55,178

58,805

5.00%, 11/1/18 - 4/1/38

17,462

18,953

5.50%, 7/1/17 - 7/1/41

32,908

36,245

6.00%, 5/1/21 - 5/1/42

16,208

18,068

6.50%, 7/1/32 - 12/1/32

1,022

1,183

1.833%, 12/1/17 - 11/1/20

3

4

1.856%, 3/1/20

2

2

Federal Home Loan Mortgage, CMO

Federal Home Loan Mortgage, CMO, ARM, 6.28%, 10/27/31 Federal National Mortgage Assn. 3.00%, 7/1/30 - 9/1/30

Federal National Mortgage Assn., ARM

51


Par/Shares

$ Value

2.154%, 7/1/27

6

6

2.625%, 7/1/33

4

4

2.725%, 1/1/35

25

26

2.736%, 10/1/33

744

770

2.815%, 7/1/35

226

239

2.965%, 12/1/35

30

31

3.033%, 9/1/37

271

285

3.101%, 9/1/32

28

29

3.103%, 8/1/38

195

206

3.111%, 12/1/35

153

161

3.119%, 8/1/38

129

137

3.215%, 10/1/32

35

37

3.23%, 8/1/38

22

23

3.25%, 7/1/34

16

17

3.257%, 2/1/33

11

11

3.318%, 12/1/32

88

93

3.381%, 1/1/34

48

51

3.395%, 12/1/35

94

99

3.461%, 12/1/35

55

58

3.50%, 9/1/36

1

1

3.52%, 5/1/38

2,360

2,487

3.538%, 5/1/38

616

651

3.58%, 4/1/38

316

337

3.61%, 5/1/38

979

1,037

4.798%, 5/1/24

1

1

5.689%, 1/1/19

3

3

323

324

1.524%, 11/25/46

10,347

10,321

1.524%, 11/25/46

5,843

5,832

(Amounts in 000s)

Federal National Mortgage Assn., CMO, ARM 1.424%, 8/25/39

52


Par/Shares

$ Value

10,826

10,793

9

9

(Amounts in 000s)

1.524%, 11/25/46 5.61%, 1/25/32

301,038 U.S. Government Obligations 0.4% Government National Mortgage Assn. 3.50%, 3/20/43

10,368

10,845

5.00%, 12/20/34 - 3/20/41

4,943

5,486

6.00%, 7/15/17 - 7/15/36

4,508

5,236

3

3

10.00%, 8/15/18 - 10/20/20

21,570 Total U.S. Government & Agency Mortgage-Backed Securities (Cost $318,320)

322,608

U.S. GOVERNMENT AGENCY OBLIGATIONS (EXCLUDING MORTGAGE-BACKED) 8.2% U.S. Treasury Obligations 8.2% U.S. Treasury Notes, 0.875%, 6/15/19

48,990

48,577

U.S. Treasury Notes, 1.00%, 11/15/19

167,340

165,954


97,590

97,529


52,970

52,779

U.S. Treasury Notes, 1.625%, 11/30/20 (3)

38,255

38,345 403,184

Total U.S. Government Agency Obligations (Excluding Mortgage-Backed) (Cost $402,735)

403,184

FOREIGN GOVERNMENT OBLIGATIONS & MUNICIPALITIES 1.5% Owned No Guarantee 1.5% Petroleos Mexicanos, 3.125%, 1/23/19

2,145

2,173

Petroleos Mexicanos, 3.50%, 7/18/18

7,070

7,167

Petroleos Mexicanos, 3.50%, 7/23/20

9,955

10,155

53


Par/Shares

$ Value

Shenhua Overseas Capital, 2.50%, 1/20/18

16,140

16,180

Shenhua Overseas Capital, 3.125%, 1/20/20

21,255

21,534

State Grid Overseas Investment, 2.25%, 5/4/20 (1)

18,240

18,207

(Amounts in 000s)

75,416 75,416

Total Foreign Government Obligations & Municipalities (Cost $74,598)

MUNICIPAL SECURITIES 0.3% California 0.1% Univ. of California Regents, Series Y-1, VR, 1.495%, 7/1/41

5,425

5,425 5,425

Florida 0.2% Florida State Board of Administration Fin. Corp., Series A, 2.163%, 7/1/19

10,855

10,940 10,940 16,365

Total Municipal Securities (Cost $16,280)

SHORT-TERM INVESTMENTS 2.3% CERTIFICATES OF DEPOSIT 0.3% (4) Yankee 0.3% Credit Suisse, VR, 1.92%, 9/12/17

12,840

12,840 12,840

COMMERCIAL PAPER 1.3% 4(2) 1.3% (5) Ford Motor Credit, 1.75%, 9/1/17

25,850

25,735

Manhattan Asset Funding, 1.52%, 9/6/17

25,635

25,530

VW Credit, 1.75%, 9/18/17

13,350

13,279 64,544

54


Par/Shares

$ Value

(Amounts in 000s)

Money Market Funds 0.7% T. Rowe Price Government Reserve Fund, 0.83% (6)(7)

35,293

35,293 35,293 112,677

Total Short-Term Investments (Cost $112,677) Total Investments in Securities 99.7% of Net Assets (Cost $4,904,127) ‡ (1)

(2) (3) (4) (5)

(6) (7)

ARM CLO CMO PTC STEP VR

$

4,920,702

Par/Shares are denominated in U.S. dollars unless otherwise noted. Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration only to qualified institutional buyers -- total value of such securities at period-end amounts to $1,186,358 and represents 24.0% of net assets. The issuer currently operates under a federal conservatorship; however, its securities are neither issued nor guaranteed by the U.S. government. At May 31, 2017, all or a portion of this security is pledged as collateral and/or margin deposit to cover future funding obligations. Yankee certificates of deposit are issued by U.S. branches of foreign banks. Commercial paper exempt from registration under Section 4(2) of the Securities Act of 1933 and may be resold in transactions exempt from registration only to dealers in that program or other "accredited investors" -- total value of such securities at period-end amounts to $64,544 and represents 1.3% of net assets. Seven-day yield Affiliated Company Adjustable Rate Mortgage Collateralized Loan Obligation Collateralized Mortgage Obligation Pass-Through Certificate Stepped coupon bond for which the coupon rate of interest adjusts on specified date(s). Variable Rate; rate shown is effective rate at period-end.

55


(Amounts in 000s, except market price)

SWAPS 0.0% Notional Amount

Market Upfront Premiums Value Paid/(Received)

Unrealized Gain (Loss)

BILATERAL SWAPS 0.0% Credit Default Swaps, Protection Sold 0.0% JPMorgan Chase, Protection Sold (Relevant Credit: Humana, 6.30%, 8/1/18, $104.87*) Receive 1.00%, Pay upon credit default, 12/20/18

12,540$

197$

Total Bilateral Credit Default Swaps, Protection Sold Total Bilateral Swaps *Market price at May 31, 2017

56

$

24$

173

24

173

24$

173


Futures Contracts ($000s)

Contract Value

Expiration Short, 843 U.S. Treasury Notes ten year contracts Long, 5,035 U.S. Treasury Notes two year contracts

9/17 9/17

$

(106,468)

Unrealized Gain (Loss) $

1,089,998

1,014

Net payments (receipts) of variation margin to date Variation margin receivable (payable) on open futures contracts

57

(337)

(717) $

(40)


Affiliated Companies ($000s)

The fund may invest in certain securities that are considered affiliated companies. As defined by the 1940 Act, an affiliated company is one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common ownership or control. The following securities were considered affiliated companies for all or some portion of the year ended May 31, 2017. Purchase and sales cost and investment income reflect all activity for the period then ended.

Purchase Cost

Affiliate T. Rowe Price Government Reserve Fund+

Sales Cost

¤

Totals

Investment Income

Value 5/31/17

Value 5/31/16

¤$

321 $

35,293 $

109,722

$

321 $

35,293 $

109,722

+ At May 31, 2016, the underlying fund’s name was T. Rowe Price Reserve Investment Fund. ¤ Purchase and sale information not shown for cash management funds.

Amounts reflected on the accompanying financial statements include the following amounts related to affiliated companies: Investment in securities, at cost

$

Dividend income Interest income

35,293 321 -

Investment income

$

321

Realized gain (loss) on securities

$

-

Capital gain distributions from mutual funds

$

-


58


May 31, 2017

S tatement of A ssets and L iabilities ($000s, except shares and per share amounts)

Assets Investments in securities, at value (cost $4,904,127)

$ 4,920,702

Receivable for investment securities sold

25,642

Interest receivable

19,985

Receivable for shares sold

8,714

Cash

286

Unrealized gain on bilateral swaps

173

Bilateral swap premiums paid

24

Other assets

81

Total assets

4,975,607

Liabilities Payable for investment securities purchased

32,116

Payable for shares redeemed

5,419

Investment management fees payable

1,422

Due to affiliates

230

Variation margin payable on futures contracts

40

Payable to directors

3

Other liabilities

1,580

Total liabilities

40,810

NET ASSETS

$ 4,934,797

Net Assets Consist of: Overdistributed net investment income Accumulated undistributed net realized loss Net unrealized gain Paid-in capital applicable to 1,044,530,684 shares of $0.01 par value capital stock outstanding; 3,000,000,000 shares authorized NET ASSETS

59

$

(7,190) (87,198) 17,425 5,011,760

$ 4,934,797


May 31, 2017

S tatement of A ssets and L iabilities NET ASSET VALUE PER SHARE Investor Class ($4,277,353,103 / 905,414,008 shares outstanding)

$

4.72

Advisor Class ($64,550,309 / 13,671,687 shares outstanding)

$

4.72

I Class ($592,893,695 / 125,444,989 shares outstanding)

$

4.73


60


S tatement of O perations ($000s)

Year Ended 5/31/17

Investment Income (Loss) Income Interest Dividend Other Total income Expenses Investment management Shareholder servicing Investor Class Advisor Class I Class Rule 12b-1 fees Advisor Class Prospectus and shareholder reports Investor Class Advisor Class I Class Custody and accounting Registration Legal and audit Directors Miscellaneous Total expenses Net investment income

61

$

99,577 321 117 100,015 18,780

$

4,639 144 10

4,793 206

152 2 109

263 261 183 35 20 25 24,566 75,449


S tatement of O perations ($000s)

Year Ended 5/31/17

Realized and Unrealized Gain / Loss Net realized gain (loss) Securities Futures Swaps Net realized loss

3,059 (3,383) 86 (238)

Change in net unrealized gain / loss Securities Futures Swaps Change in net unrealized gain / loss Net realized and unrealized gain / loss INCREASE IN NET ASSETS FROM OPERATIONS


62

390 522 (89) 823 585 $

76,034


S tatement of C hanges in N et A ssets ($000s)

Year Ended 5/31/17

5/31/16

Increase (Decrease) in Net Assets Operations Net investment income Net realized loss Change in net unrealized gain / loss Increase in net assets from operations

$

Distributions to shareholders Net investment income Investor Class Advisor Class I Class Tax return of capital Investor Class Advisor Class I Class Decrease in net assets from distributions Capital share transactions* Shares sold Investor Class Advisor Class I Class Distributions reinvested Investor Class Advisor Class I Class Shares redeemed Investor Class Advisor Class I Class Decrease in net assets from capital share transactions

75,449 (238) 823 76,034

$

66,864 (20,061) (3,190) 43,613

(70,650) (1,076) (12,242)

(73,929) (1,352) (1,560)

(1,156) (16) (203) (85,343)

(2,568) (3,605) (3,730) (86,744)

1,024,106 46,259 604,801

1,400,124 41,149 742,136

61,201 1,080 10,815

68,421 1,334 1,469

(1,468,834) (87,120) (661,858)

(2,742,222) (55,778) (101,905)

(469,550)

(645,272)

(478,859) 5,413,656 4,934,797

(688,403) 6,102,059 5,413,656

Net Assets Decrease during period Beginning of period End of period

63

$

$


S tatement of C hanges in N et A ssets ($000s)

Year Ended 5/31/17 Overdistributed net investment income

*Share information Shares sold Investor Class Advisor Class I Class Distributions reinvested Investor Class Advisor Class I Class Shares redeemed Investor Class Advisor Class I Class Decrease in shares outstanding


64

(7,190)

5/31/16 (6,904)

216,578 9,791 127,649

295,821 8,707 156,941

12,940 229 2,286

14,460 282 311

(310,355) (18,429) (140,209) (99,520)

(579,439) (11,798) (21,533) (136,248)


May 31, 2017

N otes to F inancial S tatements

T. Rowe Price Short-Term Bond Fund, Inc. (the corporation), is registered under the Investment Company Act of 1940 (the 1940 Act). The Short-Term Bond Fund (the fund) is a diversified, open-end management investment company established by the corporation. The fund seeks a high level of income consistent with minimal fluctuations in principal value and liquidity. The fund has three classes of shares: the Short-Term Bond Fund (Investor Class), the Short-Term Bond Fund–Advisor Class (Advisor Class), and the Short-Term Bond Fund–I Class (I Class). Advisor Class shares are sold only through unaffiliated brokers and other unaffiliated financial intermediaries. I Class shares generally are available only to investors meeting a $1,000,000 minimum investment or certain other criteria. The Advisor Class operates under a Board-approved Rule 12b-1 plan pursuant to which the class compensates financial intermediaries for distribution, shareholder servicing, and/or certain administrative services; the Investor and I Classes do not pay Rule 12b-1 fees. Each class has exclusive voting rights on matters related solely to that class; separate voting rights on matters that relate to all classes; and, in all other respects, the same rights and obligations as the other classes. Note 1 - Significant Accounting Policies Basis of Preparation The fund is an investment company and follows accounting

and reporting guidance in the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 (ASC 946). The accompanying financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), including, but not limited to, ASC 946. GAAP requires the use of estimates made by management. Management believes that estimates and valuations are appropriate; however, actual results may differ from those estimates, and the valuations reflected in the accompanying financial statements may differ from the value ultimately realized upon sale or maturity. Investment Transactions, Investment Income, and Distributions Income and expenses are recorded on the accrual basis. Premiums and discounts on debt securities are amortized for financial reporting purposes. Paydown gains and losses are recorded as an adjustment to interest income. Dividends received from mutual fund investments are reflected as dividend income; capital gain distributions are reflected as realized gain/loss. Dividend income and capital gain distributions are recorded on the ex-dividend date. Income tax-related 65


interest and penalties, if incurred, would be recorded as income tax expense. Investment transactions are accounted for on the trade date. Realized gains and losses are reported on the identified cost basis. Income distributions are declared by each class daily and paid monthly. Distributions to shareholders are recorded on the ex-dividend date. Capital gain distributions are generally declared and paid by the fund annually. Class Accounting Shareholder servicing, prospectus, and shareholder report

expenses incurred by each class are charged directly to the class to which they relate. Expenses common to all classes and investment income are allocated to the classes based upon the relative daily net assets of each class’s settled shares; realized and unrealized gains and losses are allocated based upon the relative daily net assets of each class’s outstanding shares. The Advisor Class pays Rule 12b-1 fees, in an amount not exceeding 0.25% of the class’s average daily net assets. New Accounting Guidance In October 2016, the Securities and Exchange

Commission (SEC) issued a new rule, Investment Company Reporting Modernization, which, among other provisions, amends Regulation S-X to require standardized, enhanced disclosures, particularly related to derivatives, in investment company financial statements. Compliance with the guidance is effective for financial statements related to periods ending on or after August 1, 2017; adoption will have no effect on the fund’s net assets or results of operations. Note 2 - VALUATION

The fund’s financial instruments are valued and each class’s net asset value (NAV) per share is computed at the close of the New York Stock Exchange (NYSE), normally 4 p.m. ET, each day the NYSE is open for business. However, the NAV per share may be calculated at a time other than the normal close of the NYSE if trading on the NYSE is restricted, if the NYSE closes earlier, or as may be permitted by the SEC. Fair Value The fund’s financial instruments are reported at fair value, which GAAP defines as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The T. Rowe Price Valuation Committee (the Valuation Committee) is an internal committee that has been delegated certain responsibilities by the fund’s Board of Directors (the Board) to ensure that financial

66


instruments are appropriately priced at fair value in accordance with GAAP and the 1940 Act. Subject to oversight by the Board, the Valuation Committee develops and oversees pricing-related policies and procedures and approves all fair value determinations. Specifically, the Valuation Committee establishes procedures to value securities; determines pricing techniques, sources, and persons eligible to effect fair value pricing actions; oversees the selection, services, and performance of pricing vendors; oversees valuation-related business continuity practices; and provides guidance on internal controls and valuation-related matters. The Valuation Committee reports to the Board and has representation from legal, portfolio management and trading, operations, risk management, and the fund’s treasurer. Various valuation techniques and inputs are used to determine the fair value of financial instruments. GAAP establishes the following fair value hierarchy that categorizes the inputs used to measure fair value: Level 1 – quoted prices (unadjusted) in active markets for identical financial instruments that the fund can access at the reporting date Level 2 – inputs other than Level 1 quoted prices that are observable, either directly or indirectly (including, but not limited to, quoted prices for similar financial instruments in active markets, quoted prices for identical or similar financial instruments in inactive markets, interest rates and yield curves, implied volatilities, and credit spreads) Level 3 – unobservable inputs Observable inputs are developed using market data, such as publicly available information about actual events or transactions, and reflect the assumptions that market participants would use to price the financial instrument. Unobservable inputs are those for which market data are not available and are developed using the best information available about the assumptions that market participants would use to price the financial instrument. GAAP requires valuation techniques to maximize the use of relevant observable inputs and minimize the use of unobservable inputs. When multiple inputs are used to derive fair value, the financial instrument is assigned to the level within the fair value hierarchy based on the lowest-level input that is significant to the fair value of the financial instrument. Input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level but rather the degree of judgment used in determining those values.

67


Valuation Techniques Debt securities generally are traded in the over-the-counter (OTC) market. Securities with remaining maturities of one year or more at the time of acquisition are valued at prices furnished by dealers who make markets in such securities or by an independent pricing service, which considers the yield or price of bonds of comparable quality, coupon, maturity, and type, as well as prices quoted by dealers who make markets in such securities. Securities with remaining maturities of less than one year at the time of acquisition generally use amortized cost in local currency to approximate fair value. However, if amortized cost is deemed not to reflect fair value or the fund holds a significant amount of such securities with remaining maturities of more than 60 days, the securities are valued at prices furnished by dealers who make markets in such securities or by an independent pricing service. Generally, debt securities are categorized in Level 2 of the fair value hierarchy; however, to the extent the valuations include significant unobservable inputs, the securities would be categorized in Level 3.

Investments in mutual funds are valued at the mutual fund’s closing NAV per share on the day of valuation and are categorized in Level 1 of the fair value hierarchy. Financial futures contracts are valued at closing settlement prices and are categorized in Level 1 of the fair value hierarchy. Swaps are valued at prices furnished by an independent pricing service or independent swap dealers and generally are categorized in Level 2 of the fair value hierarchy; however, if unobservable inputs are significant to the valuation, the swap would be categorized in Level 3. Assets and liabilities other than financial instruments, including short-term receivables and payables, are carried at cost, or estimated realizable value, if less, which approximates fair value. Thinly traded financial instruments and those for which the above valuation procedures are inappropriate or are deemed not to reflect fair value are stated at fair value as determined in good faith by the Valuation Committee. The objective of any fair value pricing determination is to arrive at a price that could reasonably be expected from a current sale. Financial instruments fair valued by the Valuation Committee are primarily private placements, restricted securities, warrants, rights, and other securities that are not publicly traded. Subject to oversight by the Board, the Valuation Committee regularly makes good faith judgments to establish and adjust the fair valuations of certain securities as events occur and circumstances warrant. For instance, in determining the fair value of troubled or thinly traded debt instruments, the Valuation Committee considers a variety of factors, which may include, but are not limited to, the issuer’s business prospects, its financial standing and performance, recent investment transactions in the issuer, strategic events 68


affecting the company, market liquidity for the issuer, and general economic conditions and events. In consultation with the investment and pricing teams, the Valuation Committee will determine an appropriate valuation technique based on available information, which may include both observable and unobservable inputs. The Valuation Committee typically will afford greatest weight to actual prices in arm’s length transactions, to the extent they represent orderly transactions between market participants, transaction information can be reliably obtained, and prices are deemed representative of fair value. However, the Valuation Committee may also consider other valuation methods such as a discount or premium from market value of a similar, freely traded security of the same issuer; discounted cash flows; yield to maturity; or some combination. Fair value determinations are reviewed on a regular basis and updated as information becomes available, including actual purchase and sale transactions of the issue. Because any fair value determination involves a significant amount of judgment, there is a degree of subjectivity inherent in such pricing decisions, and fair value prices determined by the Valuation Committee could differ from those of other market participants. Depending on the relative significance of unobservable inputs, including the valuation technique(s) used, fair valued securities may be categorized in Level 2 or 3 of the fair value hierarchy. Valuation Inputs The following table summarizes the fund’s financial instruments, based on the inputs used to determine their fair values on May 31, 2017: Level 1

($000s)

Quoted Prices

Level 2

Level 3

Total Value

Significant Significant Observable Unobservable Inputs Inputs

Assets Investments in Securities, except:

$

— $

4,808,025 $

Short-Term Investments

35,293

77,384

Total Securities

35,293 —

Swaps Total

— $

4,808,025

—

112,677

4,885,409

—

4,920,702

197

—

197

$

35,293 $

4,885,606 $

— $

4,920,899

$

40 $

— $

— $

40

Liabilities Futures contracts 69


There were no material transfers between Levels 1 and 2 during the year ended May 31, 2017. Note 3 - derivative instruments

During the year ended May 31, 2017, the fund invested in derivative instruments. As defined by GAAP, a derivative is a financial instrument whose value is derived from an underlying security price, foreign exchange rate, interest rate, index of prices or rates, or other variable; it requires little or no initial investment and permits or requires net settlement. The fund invests in derivatives only if the expected risks and rewards are consistent with its investment objectives, policies, and overall risk profile, as described in its prospectus and Statement of Additional Information. The fund may use derivatives for a variety of purposes, such as seeking to hedge against declines in principal value, increase yield, invest in an asset with greater efficiency and at a lower cost than is possible through direct investment, or to adjust portfolio duration and credit exposure. The risks associated with the use of derivatives are different from, and potentially much greater than, the risks associated with investing directly in the instruments on which the derivatives are based. The fund at all times maintains sufficient cash reserves, liquid assets, or other SEC-permitted asset types to cover its settlement obligations under open derivative contracts. The fund values its derivatives at fair value and recognizes changes in fair value currently in its results of operations. Accordingly, the fund does not follow hedge accounting, even for derivatives employed as economic hedges. Generally, the fund accounts for its derivatives on a gross basis. It does not offset the fair value of derivative liabilities against the fair value of derivative assets on its financial statements, nor does it offset the fair value of derivative instruments against the right to reclaim or obligation to return collateral. The following table summarizes the fair value of the fund’s derivative instruments

70


held as of May 31, 2017, and the related location on the accompanying Statement of Assets and Liabilities, presented by primary underlying risk exposure: Location on Statement of Assets and Liabilities

($000s)

Fair Value

Assets Interest rate derivatives Credit derivatives

Futures*

$

Bilateral Swaps, and Premiums

1,014 197

Total

$

1,211

$

337

Liabilities Interest rate derivatives

Futures*

*The fair value presented includes cumulative gain (loss) on open futures contracts; however, the value reflected on the accompanying Statement of Assets and Liabilities is only the unsettled variation margin receivable (payable) at that date.

Additionally, the amount of gains and losses on derivative instruments recognized in fund earnings during the year ended May 31, 2017, and the related location on the accompanying Statement of Operations is summarized in the following table by primary underlying risk exposure: Location of Gain (Loss) on Statement of Operations

($000s)

Futures

Swaps

Total

Realized Gain (Loss) Interest rate derivatives

$

Credit derivatives Total

(3,383) $

—

—

86

$

(3,383) $

$

522 $

$

(3,383) 86

86 $

(3,297)

Change in Unrealized Gain / Loss Interest rate derivatives Credit derivatives Total

— $

71

522 $

—

$

522

(89)

(89)

(89) $

433


Counterparty Risk and Collateral The fund invests in derivatives in various

markets, which expose it to differing levels of counterparty risk. Counterparty risk on exchange-traded and centrally cleared derivative contracts, such as futures, exchange-traded options, and centrally cleared swaps, is minimal because the clearinghouse provides protection against counterparty defaults. For futures and centrally cleared swaps, the fund is required to deposit collateral in an amount specified by the clearinghouse and the clearing firm (margin requirement), and the margin requirement must be maintained over the life of the contract. Each clearinghouse and clearing firm, in its sole discretion, may adjust the margin requirements applicable to the fund. Derivatives, such as bilateral swaps, forward currency exchange contracts, and OTC options, that are transacted and settle directly with a counterparty (bilateral derivatives) expose the fund to greater counterparty risk. To mitigate this risk, the fund has entered into master netting arrangements (MNAs) with certain counterparties that permit net settlement under specified conditions and, for certain counterparties, also require the exchange of collateral to cover mark-to-market exposure. MNAs may be in the form of International Swaps and Derivatives Association master agreements (ISDAs) or foreign exchange letter agreements (FX letters). MNAs provide the ability to offset amounts the fund owes a counterparty against amounts the counterparty owes the fund (net settlement). Both ISDAs and FX letters generally allow termination of transactions and net settlement upon the occurrence of contractually specified events, such as failure to pay or bankruptcy. In addition, ISDAs specify other events, the occurrence of which would allow one of the parties to terminate. For example, a downgrade in credit rating of a counterparty would allow the fund to terminate while a decline in the fund’s net assets of more than a specified percentage would allow the counterparty to terminate. Upon termination, all transactions with that counterparty would be liquidated and a net termination amount settled. ISDAs include collateral agreements whereas FX letters do not. Collateral requirements are determined daily based on the net aggregate unrealized gain or loss on all bilateral derivatives with a counterparty, subject to minimum transfer amounts that typically range from $100,000 to $250,000. Any additional collateral required due to changes in security values is typically transferred the same business day.

72


Collateral may be in the form of cash or debt securities issued by the U.S. government or related agencies. Cash posted by the fund is reflected as cash deposits in the accompanying financial statements and generally is restricted from withdrawal by the fund; securities posted by the fund are so noted in the accompanying Portfolio of Investments; both remain in the fund’s assets. Collateral pledged by counterparties is not included in the fund’s assets because the fund does not obtain effective control over those assets. For bilateral derivatives, collateral posted or received by the fund is held in a segregated account at the fund’s custodian. As of May 31, 2017, no collateral had been posted by the fund to counterparties for bilateral derivatives. As of May 31, 2017, collateral pledged by counterparties to the fund for bilateral derivatives consisted of $340,000 cash. As of May 31, 2017, securities valued at $2,570,000 had been posted by the fund for exchange-traded and/or centrally cleared derivatives. Futures Contracts The fund is subject to interest rate risk in the normal

course of pursuing its investment objectives and uses futures contracts to help manage such risk. The fund may enter into futures contracts to manage exposure to interest rate and yield curve movements, security prices, foreign currencies, credit quality, and mortgage prepayments; as an efficient means of adjusting exposure to all or part of a target market; to enhance income; as a cash management tool; or to adjust portfolio duration and credit exposure. A futures contract provides for the future sale by one party and purchase by another of a specified amount of a specific underlying financial instrument at an agreed-upon price, date, time, and place. The fund currently invests only in exchange-traded futures, which generally are standardized as to maturity date, underlying financial instrument, and other contract terms. Payments are made or received by the fund each day to settle daily fluctuations in the value of the contract (variation margin), which reflect changes in the value of the underlying financial instrument. Variation margin is recorded as unrealized gain or loss until the contract is closed. The value of a futures contract included in net assets is the amount of unsettled variation margin; net variation margin receivable is reflected as an asset, and net variation margin payable is reflected as a liability on the accompanying Statement of Assets and Liabilities. Risks related to the use of futures contracts include possible illiquidity of the futures markets, contract prices that can be highly volatile and imperfectly correlated to movements in hedged security values and/or interest rates, and potential losses in excess of the fund’s initial investment. During the year ended May 31, 2017, the volume of the fund’s activity in futures, based on underlying notional amounts, was generally between 9% and 23% of net assets. 73


Swaps The fund is subject to credit risk in the normal course of pursuing its

investment objectives and uses swap contracts to help manage such risk. The fund may use swaps in an effort to manage exposure to changes in interest rates, inflation rates, and credit quality; to adjust overall exposure to certain markets; to enhance total return or protect the value of portfolio securities; to serve as a cash management tool; or to adjust portfolio duration and credit exposure. Swap agreements can be settled either directly with the counterparty (bilateral swap) or through a central clearinghouse (centrally cleared swap). Fluctuations in the fair value of a contract are reflected in unrealized gain or loss and are reclassified to realized gain or loss upon contract termination or cash settlement. Net periodic receipts or payments required by a contract increase or decrease, respectively, the value of the contract until the contractual payment date, at which time such amounts are reclassified from unrealized to realized gain or loss. For bilateral swaps, cash payments are made or received by the fund on a periodic basis in accordance with contract terms; unrealized gain on contracts and premiums paid are reflected as assets and unrealized loss on contracts and premiums received are reflected as liabilities on the accompanying Statement of Assets and Liabilities. For bilateral swaps, premiums paid or received are amortized over the life of the swap and are recognized as realized gain or loss in the Statement of Operations. For centrally cleared swaps, payments are made or received by the fund each day to settle the daily fluctuation in the value of the contract (variation margin). Accordingly, the value of a centrally cleared swap included in net assets is the unsettled variation margin; net variation margin receivable is reflected as an asset and net variation margin payable is reflected as a liability on the accompanying Statement of Assets and Liabilities. Credit default swaps are agreements where one party (the protection buyer) agrees to make periodic payments to another party (the protection seller) in exchange for protection against specified credit events, such as certain defaults and bankruptcies related to an underlying credit instrument, or issuer or index of such instruments. Upon occurrence of a specified credit event, the protection seller is required to pay the buyer the difference between the notional amount of the swap and the value of the underlying credit, either in the form of a net cash settlement or by paying the gross notional amount and accepting delivery of the relevant underlying credit. For credit default swaps where the underlying credit is an index, a specified credit event may affect all or individual underlying securities included in the index and will be settled based upon the relative weighting of the affected underlying security(ies) within

74


the index. Generally, the payment risk for the seller of protection is inversely related to the current market price or credit rating of the underlying credit or the market value of the contract relative to the notional amount, which are indicators of the markets’ valuation of credit quality. As of May 31, 2017, the notional amount of protection sold by the fund totaled $12,540,000 (0.3% of net assets), which reflects the maximum potential amount the fund could be required to pay under such contracts. Risks related to the use of credit default swaps include the possible inability of the fund to accurately assess the current and future creditworthiness of underlying issuers, the possible failure of a counterparty to perform in accordance with the terms of the swap agreements, potential government regulation that could adversely affect the fund’s swap investments, and potential losses in excess of the fund’s initial investment. During the year ended May 31, 2017, the volume of the fund’s activity in swaps, based on underlying notional amounts, was generally less than 1% of net assets. Note 4 - OTHER Investment Transactions

Consistent with its investment objective, the fund engages in the following practices to manage exposure to certain risks and/or to enhance performance. The investment objective, policies, program, and risk factors of the fund are described more fully in the fund’s prospectus and Statement of Additional Information. Restricted Securities The fund may invest in securities that are subject to legal or contractual restrictions on resale. Prompt sale of such securities at an acceptable price may be difficult and may involve substantial delays and additional costs. Collateralized Loan Obligations The fund may invest in collateralized loan obligations (CLOs) which are entities backed by a diversified pool of syndicated bank loans. The cash flows of the CLO can be split into multiple segments, called “tranches” or “classes”, which will vary in risk profile and yield. The riskiest segments, which are the subordinate or “equity” tranches, bear the greatest risk of loss from defaults in the underlying assets of the CLO and serve to protect the other, more senior, tranches. Senior tranches will typically have higher credit ratings and lower yields than the securities underlying the CLO. Despite the protection from the more junior tranches, senior tranches can experience substantial losses.

75


Mortgage-Backed Securities The fund may invest in mortgage-backed securities (MBS or pass-through certificates) that represent an interest in a pool of specific underlying mortgage loans and entitle the fund to the periodic payments of principal and interest from those mortgages. MBS may be issued by government agencies or corporations, or private issuers. Most MBS issued by government agencies are guaranteed; however, the degree of protection differs based on the issuer. MBS are sensitive to changes in economic conditions that affect the rate of prepayments and defaults on the underlying mortgages; accordingly, the value, income, and related cash flows from MBS may be more volatile than other debt instruments. Other Purchases and sales of portfolio securities other than short-term and

U.S. government securities aggregated $1,717,841,000 and $2,094,404,000, respectively, for the year ended May 31, 2017. Purchases and sales of U.S. government securities aggregated $666,346,000 and $897,237,000, respectively, for the year ended May 31, 2017. Note 5 - Federal Income Taxes

No provision for federal income taxes is required since the fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute to shareholders all of its taxable income and gains. Distributions determined in accordance with federal income tax regulations may differ in amount or character from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book/tax differences to reflect tax character but are not adjusted for temporary differences. The fund files U.S. federal, state, and local tax returns as required. The fund’s tax returns are subject to examination by the relevant tax authorities until expiration of the applicable statute of limitations, which is generally three years after the filing of the tax return but which can be extended to six years in certain circumstances. Tax returns for open years have incorporated no uncertain tax positions that require a provision for income taxes.

76


Reclassifications to paid-in capital relate primarily to expiring capital loss carryforwards. Reclassifications between income and gain relate primarily to the character of paydown gains and losses on asset-backed securities. For the year ended May 31, 2017, the following reclassifications were recorded to reflect tax character (there was no impact on results of operations or net assets): ($000s)

Undistributed net investment income

$

Undistributed net realized gain

8,233 (342)

Paid-in capital

(7,891)

Distributions during the years ended May 31, 2017 and May 31, 2016, were characterized for tax purposes as follows: ($000s)

May 31 2017

2016

Ordinary income

$

83,968

$

76,841

Return of capital

1,375

9,903

Total distributions

$

85,343

$

86,744

At May 31, 2017, the tax-basis cost of investments and components of net assets were as follows: ($000s)

Cost of investments

$

4,904,299

Unrealized appreciation

$

23,776

Unrealized depreciation

(7,373)

Net unrealized appreciation (depreciation)

16,403

Undistributed ordinary income

(7,190)

Capital loss carryforwards

(86,124)

Late-year ordinary loss deferrals

Paid-in capital

5,011,760

Net assets

$

4,934,797

77

(52)


The fund intends to retain realized gains to the extent of available capital loss carryforwards. Because the fund is required to use capital loss carryforwards that do not expire before those with expiration dates, all or a portion of its capital loss carryforwards subject to expiration could ultimately go unused. The fund’s available capital loss carryforwards as of May 31, 2017, expire as follows: $4,701,000 in fiscal 2018; $81,423,000 have no expiration. In accordance with federal tax laws applicable to investment companies, all or a portion of net losses resulting from (a) specified gains and losses realized between November 1 and the fund’s fiscal year-end plus (b) ordinary income or loss realized between January 1 and the fund’s fiscal year-end are not recognized for tax purposes until the subsequent year (late-year ordinary loss deferrals); however, such losses are recognized for financial reporting purposes in the year realized. Note 6 - related Party Transactions

The fund is managed by T. Rowe Price Associates, Inc. (Price Associates), a wholly owned subsidiary of T. Rowe Price Group, Inc. (Price Group). The investment management agreement between the fund and Price Associates provides for an annual investment management fee, which is computed daily and paid monthly. The fee consists of an individual fund fee and a group fee rate. The individual fund fee is equal to 0.05% of the fund’s average daily net assets; prior to November 1, 2016, the individual fund fee had been 0.10%. The group fee rate is calculated based on the combined net assets of certain mutual funds sponsored by Price Associates (the group) applied to a graduated fee schedule, with rates ranging from 0.48% for the first $1 billion of assets to 0.265% for assets in excess of $650 billion. The fund’s group fee is determined by applying the group fee rate to the fund’s average daily net assets. At May 31, 2017, the effective annual group fee rate was 0.29%. The I Class is subject to an operating expense limitation (I Class limit) pursuant to which Price Associates is contractually required to pay all operating expenses of the I Class, excluding management fees, interest, expenses related to borrowings, taxes, brokerage, and other non-recurring expenses permitted by the investment management agreement, to the extent such operating expenses, on an annualized basis, exceed 0.05% of average net assets. This agreement will continue until September 30, 2018, and may be renewed, revised, or revoked only with approval of the fund’s Board. The I Class is required to repay Price Associates for expenses previously paid to 78


the extent the class’s net assets grow or expenses decline sufficiently to allow repayment without causing the class’s operating expenses to exceed the I Class limit in effect at the time of the waiver. However, no repayment will be made more than three years after the date of a payment or waiver. For the year ended May 31, 2017, the I Class operated below its expense limitation. In addition, the fund has entered into service agreements with Price Associates and two wholly owned subsidiaries of Price Associates (collectively, Price). Price Associates provides certain accounting and administrative services to the fund. T. Rowe Price Services, Inc. provides shareholder and administrative services in its capacity as the fund’s transfer and dividend-disbursing agent. T. Rowe Price Retirement Plan Services, Inc. provides subaccounting and recordkeeping services for certain retirement accounts invested in the Investor Class and I Class. For the year ended May 31, 2017, expenses incurred pursuant to these service agreements were $81,000 for Price Associates; $1,283,000 for T. Rowe Price Services, Inc.; and $177,000 for T. Rowe Price Retirement Plan Services, Inc. The total amount payable at period-end pursuant to these service agreements is reflected as Due to Affiliates in the accompanying financial statements. Additionally, the fund is one of several mutual funds in which certain college savings plans managed by Price Associates may invest. As approved by the fund’s Board of Directors, shareholder servicing costs associated with each college savings plan are borne by the fund in proportion to the average daily value of its shares owned by the college savings plan. For the year ended May 31, 2017, the fund was charged $788,000 for shareholder servicing costs related to the college savings plans, of which $666,000 was for services provided by Price. The amount payable at period-end pursuant to this agreement is reflected as Due to Affiliates in the accompanying financial statements. At May 31, 2017, approximately 13% of the outstanding shares of the Investor Class were held by college savings plans. The fund is also one of several mutual funds sponsored by Price Associates (underlying Price funds) in which the T. Rowe Price Spectrum Funds (Spectrum Funds) may invest. The Spectrum Funds do not invest in the underlying Price funds for the purpose of exercising management or control. Pursuant to special servicing agreements, expenses associated with the operation of the Spectrum Funds are borne by each underlying Price fund to the extent of estimated savings to it and in proportion to the average daily value of its shares owned by the Spectrum Funds. Expenses allocated under these

79


agreements are reflected as shareholder servicing expense in the accompanying financial statements. For the year ended May 31, 2017, the fund was allocated $376,000 of Spectrum Funds’ expenses. Of these amounts, $256,000 related to services provided by Price. At period-end, the amount payable to Price pursuant these agreements is reflected as Due to Affiliates in the accompanying financial statements. At May 31, 2017, approximately 7% of the outstanding shares of the Investor Class were held by the Spectrum Funds. The fund may invest in the T. Rowe Price Government Reserve Fund, the T. Rowe Price Treasury Reserve Fund, or the T. Rowe Price Short-Term Fund (collectively, the Price Reserve Funds), open-end management investment companies managed by Price Associates and considered affiliates of the fund. The Price Reserve Funds are offered as short-term investment options to mutual funds, trusts, and other accounts managed by Price Associates or its affiliates and are not available for direct purchase by members of the public. The Price Reserve Funds pay no investment management fees. As of May 31, 2017, T. Rowe Price Group, Inc., or its wholly owned subsidiaries owned 35,648,358 shares of the Investor Class, representing 4% of the Investor Class’s net assets. The fund may participate in securities purchase and sale transactions with other funds or accounts advised by Price Associates (cross trades), in accordance with procedures adopted by the fund’s Board and Securities and Exchange Commission rules, which require, among other things, that such purchase and sale cross trades be effected at the independent current market price of the security. During the year ended May 31, 2017, the fund had no purchases or sales cross trades with other funds or accounts advised by Price Associates.

80


R eport of I ndependent R egistered P ublic A ccounting F irm

To the Board of Directors of T. Rowe Price Short-Term Bond Fund, Inc. and Shareholders of T. Rowe Price Short-Term Bond Fund

In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the T. Rowe Price Short-Term Bond Fund (one of the portfolios comprising T. Rowe Price Short-Term Bond Fund, Inc., hereafter referred to as the “Fund”) as of May 31, 2017, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities as of May 31, 2017 by correspondence with the custodian and brokers, and confirmation of the underlying fund by correspondence with the transfer agent, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP Baltimore, Maryland July 19, 2017

81


T ax I nformation (U naudited ) for the T ax Y ear E nded 5/31/17 We are providing this information as required by the Internal Revenue Code. The amounts shown may differ from those elsewhere in this report because of differences between tax and financial reporting requirements. The fund’s distributions to shareholders included $35,000 from short-term capital gains.

I nformation on P roxy V oting P olicies, P rocedures, and R ecords A description of the policies and procedures used by T. Rowe Price funds and portfolios to determine how to vote proxies relating to portfolio securities is available in each fund’s Statement of Additional Information. You may request this document by calling 1-800-225-5132 or by accessing the SEC’s website, sec.gov. The description of our proxy voting policies and procedures is also available on our corporate website. To access it, please visit the following Web page: https://www3.troweprice.com/usis/corporate/en/utility/policies.html Scroll down to the section near the bottom of the page that says, “Proxy Voting Policies.” Click on the Proxy Voting Policies link in the shaded box. Each fund’s most recent annual proxy voting record is available on our website and through the SEC’s website. To access it through T. Rowe Price, visit the website location shown above, and scroll down to the section near the bottom of the page that says, “Proxy Voting Records.” Click on the Proxy Voting Records link in the shaded box.

H ow to O btain Q uarterly P ortfolio H oldings The fund files a complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available electronically on the SEC’s website (sec.gov); hard copies may be reviewed and copied at the SEC’s Public Reference Room, 100 F St. N.E., Washington, DC 20549. For more information on the Public Reference Room, call 1-800-SEC-0330.

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A pproval of I nvestment M anagement A greement Each year, the fund’s Board of Directors (Board) considers the continuation of the investment management agreement (Advisory Contract) between the fund and its investment advisor, T. Rowe Price Associates, Inc. (Advisor). In that regard, at an in-person meeting held on March 6–7, 2017 (Meeting), the Board, including a majority of the fund’s independent directors, approved the continuation of the fund’s Advisory Contract. At the Meeting, the Board considered the factors and reached the conclusions described below relating to the selection of the Advisor and the approval of the Advisory Contract. The independent directors were assisted in their evaluation of the Advisory Contract by independent legal counsel from whom they received separate legal advice and with whom they met separately. In providing information to the Board, the Advisor was guided by a detailed set of requests for information submitted by independent legal counsel on behalf of the independent directors. In considering and approving the Advisory Contract, the Board considered the information it believed was relevant, including, but not limited to, the information discussed below. The Board considered not only the specific information presented in connection with the Meeting but also the knowledge gained over time through interaction with the Advisor about various topics. The Board meets regularly and, at each of its meetings, covers an extensive agenda of topics and materials and considers factors that are relevant to its annual consideration of the renewal of the T. Rowe Price funds’ advisory contracts, including performance and the services and support provided to the funds and their shareholders. Services Provided by the Advisor The Board considered the nature, quality, and extent of the services provided to the fund by the Advisor. These services included, but were not limited to, directing the fund’s investments in accordance with its investment program and the overall management of the fund’s portfolio, as well as a variety of related activities such as financial, investment operations, and administrative services; compliance; maintaining the fund’s records and registrations; and shareholder communications. The Board also reviewed the background and experience of the Advisor’s senior management team and investment personnel involved in the management of the fund, as well as the Advisor’s compliance record. The Board concluded that it was satisfied with the nature, quality, and extent of the services provided by the Advisor. Investment Performance of the Fund The Board took into account discussions with the Advisor and reports that it receives throughout the year relating to fund performance. In connection with the Meeting, the Board reviewed the fund’s net annualized total returns for the 1-, 2-, 3-, 4-, 5-, and 10-year periods as of September 30, 2016, and compared these returns with the performance of a peer group of funds with similar investment programs and a wide variety of other previously agreed-upon comparable performance measures and market data, including those supplied by Broadridge, which is an independent provider of mutual fund data.

83


A pproval of I nvestment M anagement A greement ( continued ) On the basis of this evaluation and the Board’s ongoing review of investment results, and factoring in the relative market conditions during certain of the performance periods, the Board concluded that the fund’s performance was satisfactory. Costs, Benefits, Profits, and Economies of Scale The Board reviewed detailed information regarding the revenues received by the Advisor under the Advisory Contract and other benefits that the Advisor (and its affiliates) may have realized from its relationship with the fund, including any research received under “soft dollar” agreements and commission-sharing arrangements with broker-dealers. The Board considered that the Advisor may receive some benefit from soft-dollar arrangements pursuant to which research is received from broker-dealers that execute the fund’s portfolio transactions. The Board received information on the estimated costs incurred and profits realized by the Advisor from managing the T. Rowe Price funds. The Board also reviewed estimates of the profits realized from managing the fund in particular, and the Board concluded that the Advisor’s profits were reasonable in light of the services provided to the fund. The Board also considered whether the fund benefits under the fee levels set forth in the Advisory Contract from any economies of scale realized by the Advisor. Under the Advisory Contract, the fund pays a fee to the Advisor for investment management services composed of two components—a group fee rate based on the combined average net assets of most of the T. Rowe Price funds (including the fund) that declines at certain asset levels and an individual fund fee rate based on the fund’s average daily net assets—and the fund pays its own expenses of operations. At the Meeting, the Board approved an additional 0.005% breakpoint to the group fee schedule, effective May 1, 2017. With the new breakpoint, the group fee rate will decline to 0.265% when the combined average net assets of the applicable T. Rowe Price funds exceed $650 billion. The Board also noted that the fund’s individual fund fee rate was reduced from 0.10% to 0.05%, effective November 1, 2016. The Board concluded that the advisory fee structure for the fund continued to provide for a reasonable sharing of benefits from any economies of scale with the fund’s investors. Fees and Expenses The Board was provided with information regarding industry trends in management fees and expenses. Among other things, the Board reviewed data for peer groups that were compiled by Broadridge, which compared: (i) contractual management fees, total expenses, actual management fees, and non-management expenses of the Investor Class of the fund with a group of competitor funds selected by Broadridge (Investor Class Expense Group); (ii) total expenses and actual management fees of the Advisor Class of the fund with a group of competitor funds selected by Broadridge (Advisor Class Expense Group); and (iii) total expenses, actual management fees, and non-management expenses of the Investor Class of the fund with a broader set of funds within the Lipper investment classification (Expense Universe). The Board considered the fund’s contractual management fee rate, actual management fee rate (which reflects the management fees actually received from the fund by the Advisor after any applicable waivers, reductions, or reimbursements), 84


A pproval of I nvestment M anagement A greement ( continued ) operating expenses, and total expenses (which reflects the net total expense ratio of the fund after any waivers, reductions, or reimbursements) in comparison with the information for the Broadridge peer groups. Broadridge generally constructed the peer groups by seeking the most comparable funds based on similar investment classifications and objectives, expense structure, asset size, and operating components and attributes and ranked funds into quintiles, with the first quintile representing the funds with the lowest relative expenses and the fifth quintile representing the funds with the highest relative expenses. The information provided to the Board indicated that the fund’s contractual management fee ranked in the fourth quintile (Investor Class Expense Group), the fund’s actual management fee rate ranked in the fourth quintile (Investor Class Expense Group and Expense Universe), and the fund’s total expenses ranked in the second and fifth quintiles (Investor Class Expense Group) and second and fourth quintiles (Expense Universe). The Board requested additional information from management with respect to the fund’s relative contractual management fee, actual management fee ranking in the fourth quintile, and relative total expenses ranking in the fourth and fifth quintiles. The Board reviewed and considered the information provided relating to the fund, other funds in the peer groups, and other factors, including the fact that Broadridge’s rankings did not reflect the 0.05% reduction to the fund’s management fee that became effective on November 1, 2016, that the Board determined to be relevant. The Board also reviewed the fee schedules for institutional accounts and private accounts with similar mandates that are advised or subadvised by the Advisor and its affiliates. Management provided the Board with information about the Advisor’s responsibilities and services provided to subadvisory and other institutional account clients, including information about how the requirements and economics of the institutional business are fundamentally different from those of the mutual fund business. The Board considered information showing that the Advisor’s mutual fund business is generally more complex from a business and compliance perspective than its institutional account business and considered various relevant factors, such as the broader scope of operations and oversight, more extensive shareholder communication infrastructure, greater asset flows, heightened business risks, and differences in applicable laws and regulations associated with the Advisor’s proprietary mutual fund business. In assessing the reasonableness of the fund’s management fee rate, the Board considered the differences in the nature of the services required for the Advisor to manage its mutual fund business versus managing a discrete pool of assets as a subadvisor to another institution’s mutual fund or for an institutional account and that the Advisor generally performs significant additional services and assumes greater risk in managing the fund and other T. Rowe Price funds than it does for institutional account clients. On the basis of the information provided and the factors considered, the Board concluded that the fees paid by the fund under the Advisory Contract are reasonable.

85


A pproval of I nvestment M anagement A greement ( continued ) Approval of the Advisory Contract As noted, the Board approved the continuation of the Advisory Contract. No single factor was considered in isolation or to be determinative to the decision. Rather, the Board concluded, in light of a weighting and balancing of all factors considered, that it was in the best interests of the fund and its shareholders for the Board to approve the continuation of the Advisory Contract (including the fees to be charged for services thereunder).

86


A bout the F und’s D irectors and O fficers Your fund is overseen by a Board of Directors (Board) that meets regularly to review a wide variety of matters affecting or potentially affecting the fund, including performance, investment programs, compliance matters, advisory fees and expenses, service providers, and business and regulatory affairs. The Board elects the fund’s officers, who are listed in the final table. At least 75% of the Board’s members are independent of T. Rowe Price Associates, Inc. (T. Rowe Price), and its affiliates; “inside” or “interested” directors are employees or officers of T. Rowe Price. The business address of each director and officer is 100 East Pratt Street, Baltimore, Maryland 21202. The Statement of Additional Information includes additional information about the fund directors and is available without charge by calling a T. Rowe Price representative at 1-800-638-5660.

Independent Directors Name (Year of Birth) Year Elected* [Number of T. Rowe Price Portfolios Overseen]

Principal Occupation(s) and Directorships of Public Companies and Other Investment Companies During the Past Five Years

Anthony W. Deering (1945) 1983 [189]

Chairman, Exeter Capital, LLC, a private investment firm (2004 to present); Director and Advisory Board Member, Deutsche Bank North America (2004 to present); Director, Vornado Real Estate Investment Trust (2004 to 2012); Director, Under Armour (2008 to present); Director, Brixmor Real Estate Investment Trust (2012 to present)

Bruce W. Duncan (1951) 2013 [189]

Chief Executive Officer and Director (2009 to December 2016), Chairman of the Board (January 2016 to present), and President (2009 to September 2016), First Industrial Realty Trust, an owner and operator of industrial properties; Chairman of the Board (2005 to September 2016) and Director (1999 to September 2016), Starwood Hotels & Resorts, a hotel and leisure company; Director, Boston Properties (May 2016 to present); Director, Marriott International, Inc. (September 2016 to present)

Robert J. Gerrard, Jr. (1952) 2013 [189]

Advisory Board Member, Pipeline Crisis/Winning Strategies, a collaborative working to improve opportunities for young African Americans (1997 to present)

Paul F. McBride (1956) 2013 [189]

Advisory Board Member, Vizzia Technologies (2015 to present)

*Each independent director serves until retirement, resignation, or election of a successor.

87


Independent Directors (continued) Name (Year of Birth) Year Elected* [Number of T. Rowe Price Portfolios Overseen]


Cecilia E. Rouse, Ph.D. (1963) 2013 [189]

Dean, Woodrow Wilson School (2012 to present); Professor and Researcher, Princeton University (1992 to present); Member of National Academy of Education (2010 to present); Director, MDRC, a nonprofit education and social policy research organization (2011 to present); Research Associate of Labor Studies Program (2011 to 2015) and Board Member (2015 to present), National Bureau of Economic Research (2011 to present); Chair of Committee on the Status of Minority Groups in the Economic Profession (2012 to present); Vice President (2015 to present), American Economic Association

John G. Schreiber (1946) 1992 [189]

Owner/President, Centaur Capital Partners, Inc., a real estate investment company (1991 to present); Cofounder, Partner, and Cochairman of the Investment Committee, Blackstone Real Estate Advisors, L.P. (1992 to 2015); Director, General Growth Properties, Inc. (2010 to 2013); Director, Blackstone Mortgage Trust, a real estate finance company (2012 to 2016); Director and Chairman of the Board, Brixmor Property Group, Inc. (2013 to present); Director, Hilton Worldwide (2013 to present); Director, Hudson Pacific Properties (2014 to 2016)

Mark R. Tercek (1957) 2009 [189]

President and Chief Executive Officer, The Nature Conservancy (2008 to present)

*Each independent director serves until retirement, resignation, or election of a successor.

88


Inside Directors Name (Year of Birth) Year Elected* [Number of T. Rowe Price Portfolios Overseen]


Edward C. Bernard (1956) 2006 [189]

Director and Vice President, T. Rowe Price; Vice Chairman of the Board, Director, and Vice President, T. Rowe Price Group, Inc.; Chairman of the Board, Director, and Vice President, T. Rowe Price Investment Services, Inc., and T. Rowe Price Services, Inc.; Chairman of the Board and Director, T. Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, Chief Executive Officer, Director, and President, T. Rowe Price International and T. Rowe Price Trust Company; Chairman of the Board, all funds

Edward A. Wiese, CFA (1959) 2015 [57]

Vice President, T. Rowe Price, T. Rowe Price Group, Inc., T. Rowe Price International, and T. Rowe Price Trust Company

*Each inside director serves until retirement, resignation, or election of a successor.

Officers Name (Year of Birth) Position Held With Short-Term Bond Fund

Principal Occupation(s)

Stephen L. Bartolini, CFA (1977) Vice President

Vice President, T. Rowe Price and T. Rowe Price Group, Inc.

Darrell N. Braman (1963) Vice President and Secretary

Vice President, Price Hong Kong, Price Singapore, T. Rowe Price, T. Rowe Price Group, Inc., T. Rowe Price International, T. Rowe Price Investment Services, Inc., and T. Rowe Price Services, Inc.

Steven G. Brooks, CFA (1954) Vice President


Jason T. Collins (1971) Vice President


M. Helena Condez (1962) Vice President


Michael P. Daley (1981) Vice President


Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe Price International for at least 5 years.

89


Officers (continued) Name (Year of Birth) Position Held With Short-Term Bond Fund


Levent Demirekler (1974) Vice President

Vice President, T. Rowe Price

John R. Gilner (1961) Chief Compliance Officer

Chief Compliance Officer and Vice President, T. Rowe Price; Vice President, T. Rowe Price Group, Inc., and T. Rowe Price Investment Services, Inc.

Michael J. Grogan, CFA (1971) Vice President


Geoffrey M. Hardin (1971) Vice President


Charles B. Hill, CFA (1961) Vice President


Keir R. Joyce, CFA (1972) Vice President


Steven M. Kohlenstein (1987) Vice President


Paul J. Krug, CPA (1964) Vice President

Vice President, T. Rowe Price, T. Rowe Price Group, Inc., and T. Rowe Price Trust Company

Joseph K. Lynagh, CFA (1958) Executive Vice President


Catherine D. Mathews (1963) Treasurer and Vice President


Andrew C. McCormick (1960) Vice President


Cheryl A. Mickel, CFA (1967) President

Director and Vice President, T. Rowe Price Trust Company; Vice President, T. Rowe Price and T. Rowe Price Group, Inc.

Alexander S. Obaza (1981) Vice President



90


Officers (continued) Name (Year of Birth) Position Held With Short-Term Bond Fund


David Oestreicher (1967) Vice President

Director, Vice President, and Secretary, T. Rowe Price Investment Services, Inc., T. Rowe Price Retirement Plan Services, Inc., T. Rowe Price Services, Inc., and T. Rowe Price Trust Company; Chief Legal Officer, Vice President, and Secretary, T. Rowe Price Group, Inc.; Vice President and Secretary, T. Rowe Price and T. Rowe Price International; Vice President, Price Hong Kong and Price Singapore

John W. Ratzesberger (1975) Vice President

Vice President, T. Rowe Price, T. Rowe Price Group, Inc., and T. Rowe Price Trust Company; formerly, North American Head of Listed Derivatives Operation, Morgan Stanley (to 2013)

Shannon H. Rauser (1987) Assistant Secretary

Employee, T. Rowe Price

Vernon A. Reid, Jr. (1954) Vice President


Michael F. Reinartz (1973) Executive Vice President


Deborah D. Seidel (1962) Vice President

Vice President, T. Rowe Price, T. Rowe Price Group, Inc., T. Rowe Price Investment Services, Inc., and T. Rowe Price Services, Inc.

Chen Shao (1980) Vice President


Douglas D. Spratley, CFA (1969) Vice President


John D. Wells (1960) Vice President



91

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T. Rowe Price Mutual Funds This page contains supplementary information that is not part of the shareholder report.

STOCK FUNDS

BOND FUNDS

MONEY MARKET FUNDS (cont.)

Domestic

Domestic Taxable

Tax-Free

Blue Chip Growth Capital Appreciation‡ Capital Opportunity Diversified Mid-Cap Growth Dividend Growth Equity Income Equity Index 500 Extended Equity Market Index Financial Services Growth & Income Growth Stock Health Sciences‡ Media & Telecommunications Mid-Cap Growth‡ Mid-Cap Value‡ New America Growth New Era New Horizons‡ QM U.S. Small & Mid-Cap Core Equity QM U.S. Small-Cap Growth Equity QM U.S. Value Equity Real Estate Science & Technology Small-Cap Stock‡ Small-Cap Value Tax-Efficient Equity Total Equity Market Index U.S. Large-Cap Core Value

ASSET ALLOCATION FUNDS Balanced Global Allocation Personal Strategy Balanced Personal Strategy Growth Personal Strategy Income Real Assets Spectrum Growth Spectrum Income Spectrum International Target Date Fundsˆ

Corporate Income Credit Opportunities Floating Rate GNMA High Yield‡ Inflation Protected Bond Limited Duration Inflation Focused Bond New Income Short-Term Bond Total Return Ultra Short-Term Bond U.S. Bond Enhanced Index U.S. High Yield U.S. Treasury Intermediate U.S. Treasury Long-Term

Domestic Tax-Free

California Tax-Free Bond Georgia Tax-Free Bond Intermediate Tax-Free High Yield Maryland Short-Term Tax-Free Bond Maryland Tax-Free Bond New Jersey Tax-Free Bond New York Tax-Free Bond Summit Municipal Income Summit Municipal Intermediate Tax-Free High Yield Tax-Free Income Tax-Free Short-Intermediate Virginia Tax-Free Bond

MONEY MARKET FUNDS Taxable

Cash Reserves1 Government Money2 U.S. Treasury Money2

California Tax-Free Money1 Maryland Tax-Free Money1 New York Tax-Free Money1 Summit Municipal Money Market1 Tax-Exempt Money1

INTERNATIONAL/GLOBAL FUNDS Stock

Africa & Middle East Asia Opportunities Emerging Europe Emerging Markets Stock Emerging Markets Value Stock European Stock Global Consumer Global Growth Stock Global Industrials Global Real Estate Global Stock Global Technology International Concentrated Equity International Discovery International Equity Index International Stock International Value Equity Japan Latin America New Asia Overseas Stock QM Global Equity

Bond

Dynamic Global Bond Emerging Markets Bond Emerging Markets Corporate Bond Emerging Markets Local Currency Bond Global High Income Bond Global Multi-Sector Bond International Bond

Call 1-800-225-5132 to request a prospectus or summary prospectus; each includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. ‡ Closed to new investors except for a direct rollover from a retirement plan into a T. Rowe Price IRA invested in this fund. ˆThe Target Date Funds are inclusive of the Retirement Funds, the Target Funds, and the Retirement Balanced Fund. 1 Retail Funds: You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. Beginning October 14, 2016, the Fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time. 2 Government Funds: You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.

T. Rowe Price Investment Services, Inc. 100 East Pratt Street Baltimore, MD 21202 201707-188276

F55-050 7/17