<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-47371) UNDER
THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 41
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
Amendment No.
VANGUARD FIXED INCOME
SECURITIES FUND, INC.
(Exact Name of Registrant as Specified in Charter)
100 Vanguard Boulevard
Malvern, PA 19355-0741
(Address of Principal Executive Office)
Registrant's Telephone Number (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
It is hereby requested that this filing become effective on May 25, 1994,
pursuant to paragraph (b) of Rule 485.
Approximate Date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes effective.
Registrant elects to register an indefinite number of shares pursuant to
Regulation 24f-2 under the Investment Company Act of 1940. Registrant filed its
Rule 24f-2 Notice for the year ended January 31, 1994 on March 8, 1994.
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<PAGE>
VANGUARD FIXED INCOME SECURITIES FUND, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Cover Page...................................... Cover Page
Item 2. Synopsis........................................ Highlights
Item 3. Condensed Financial Information................. Financial Highlights
Item 4. General Description of Registrant............... Investment Objective; Investment Limitations;
Investment Policies; General Information
Item 5. Management of the Fund.......................... Directors and Officers; Management of the Fund
Item 6. Capital Stock and Other Securities.............. Opening an Account and Purchasing Shares;
Selling Your Shares; The Share Price of Each
Portfolio; Dividends, Capital Gains and Taxes;
General Information
Item 7. Purchase of Securities Being Offered............ Cover Page; Opening an Account and Purchasing
Shares
Item 8. Redemption or Repurchase........................ Selling Your Shares
Item 9. Pending Legal Proceedings....................... Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page...................................... Cover Page
Item 11. Table of Contents............................... Cover Page
Item 12. General Information and History................. Investment Objective and Policies; General
Information
Item 13. Investment Objective and Policies............... Investment Objective and Policies; Investment
Limitations
Item 14. Management of the Fund.......................... Management of the Fund; Investment Management
Item 15. Control Persons and Principal Holders of
Securities...................................... Management of the Fund; General Information
Item 16. Investment Advisory and Other Services.......... Management of the Fund; Investment Management
Item 17. Brokerage Allocation............................ Not Applicable
Item 18. Capital Stock and Other Securities.............. General Information; Financial Statements
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................... Purchase of Shares; Redemption of Shares
Item 20. Tax Status...................................... Appendix
Item 21. Underwriters.................................... Not Applicable
Item 22. Calculations of Yield Quotations of Money Market
Fund............................................ Not Applicable
Item 23. Financial Statements............................ Financial Statements
</TABLE>
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[LOGO]
A MEMBER OF THE VANGUARD GROUP
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<TABLE>
<S> <C>
PROSPECTUS--MAY 25, 1994
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
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INVESTMENT Vanguard Fixed Income Securities Fund, Inc. (the "Fund") is
OBJECTIVE AND an open-end diversified investment company that seeks to
POLICIES provide investors with a high level of current income
consistent with the maintenance of principal and liquidity.
The Fund consists of nine distinct Portfolios, each of which
invests in fixed income securities within prescribed
maturity and credit quality standards. There is no assurance
that any of the Fund's Portfolios will achieve its stated
objective. This prospectus pertains to each of the Fund's
Portfolios, except the High Yield Corporate Portfolio, which
is offered by a separate prospectus.
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OPENING AN ACCOUNT To open a regular (non-retirement) account, please complete
and return the Account Registration Form. If you need
assistance in completing this Form, please call the Investor
Information Department. To open an Individual Retirement
Account (IRA), please use a Vanguard IRA Adoption Agreement.
To obtain a copy of this form, call 1-800-662-7447, Monday
through Friday, from 8:00 a.m. to 9:00 p.m. and Saturday,
from 9:00 a.m. to 4:00 p.m. (Eastern time). The minimum
initial investment is $3,000 per Portfolio ($500 for
Individual Retirement Accounts and Uniform Gifts/ Transfers
to Minors Act accounts). The Fund is offered on a no-load
basis (i.e., there are no sales commissions or 12b-1 fees).
However, the Fund incurs expenses for investment advisory,
management, administrative, and distribution services.
- --------------------------------------------------------------------------------
ABOUT THIS This Prospectus is designed to set forth concisely the
PROSPECTUS information you should know about the Fund before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing additional
information about the Fund has been filed with the
Securities and Exchange Commission. This Statement is dated
May 25, 1994, and has been incorporated by reference into
this Prospectus. A copy may be obtained without charge by
writing to the Fund or by calling the Investor Information
Department.
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TABLE OF CONTENTS
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Highlights........................ 2
Fund Expenses..................... 5
Financial Highlights.............. 6
Yield and Total Return............ 11
FUND INFORMATION
Investment Objective.............. 11
Investment Policies............... 11
Investment Risks.................. 16
<CAPTION>
PAGE
<S> <C>
Who Should Invest................. 18
Implementation of Policies........ 19
Investment Limitations............ 23
Management of the Fund............ 24
Investment Advisers............... 24
Dividends, Capital Gains and
Taxes........................... 27
The Share Price of Each
Portfolio....................... 28
General Information............... 29
<CAPTION>
PAGE
<S> <C>
SHAREHOLDER GUIDE
Opening an Account and Purchasing
Shares.......................... 30
When Your Account Will Be
Credited........................ 33
Selling Your Shares............... 34
Exchanging Your Shares............ 36
Important Information About
Telephone Transactions.......... 38
Transferring Registration......... 38
Other Vanguard Services........... 38
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<PAGE>
HIGHLIGHTS
<TABLE>
<S> <C>
OBJECTIVE AND The Fund is a no-load, open-end diversified investment
POLICIES company that seeks to provide investors with a high level of
income consistent with the maintenance of principal and
liquidity. The Fund consists of nine distinct Portfolios,
each of which invests in fixed income securities within
prescribed maturity and quality standards. There is no
assurance that the Fund will achieve its stated
objective. PAGE 11
</TABLE>
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<TABLE>
<S> <C>
NINE SEPARATE The investment characteristics of each Portfolio are
PORTFOLIOS summarized in the chart below. As illustrated, the Fund
consists of three short-term Portfolios, three intermediate-
term Portfolios, two long-term Portfolios, and a high-risk
Portfolio investing in low-quality bonds. PAGE11
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO SUMMARY
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PRIMARY EXPECTED
PORTFOLIO INVESTMENTS AVERAGE MATURITY
<S> <C> <C>
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Short-Term U.S. Treasury U.S. Treasury bonds 1-3 years
Short-Term Federal U.S. Government 1-3 years
agency bonds
Short-Term Corporate Investment grade 1-3 years
corporate bonds
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Intermediate-Term U.S. Treasury U.S. Treasury bonds 5-10 years
GNMA GNMA mortgage Intermediate*
certificates
Intermediate-Term Corporate Investment grade 5-10 years
corporate bonds
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Long-Term U.S. Treasury U.S. Treasury bonds 15-30 years
Long-Term Corporate Investment grade 15-25 years
corporate bonds
- -------------------------------------------------------------------------------
High Yield Corporate** Speculative grade Intermediate*
corporate bonds
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<FN>
*WHILE NEITHER THE GNMA NOR THE HIGH YIELD CORPORATE PORTFOLIOS OBSERVE
SPECIFIC MATURITY GUIDELINES, EACH IS EXPECTED TO MAINTAIN AN
INTERMEDIATE-TERM AVERAGE WEIGHTED MATURITY.
**THE HIGH YIELD CORPORATE PORTFOLIO IS OFFERED BY A SEPARATE PROSPECTUS, WHICH
MAY BE OBTAINED BY CALLING 1-800-662-7447.
</TABLE>
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2
<PAGE>
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<TABLE>
<S> <C>
RISK Investors in the Fund are exposed to four types of risk from
CHARACTERISTICS fixed income securities. (1) INTEREST RATE RISK is the
potential for fluctuations in bond prices due to changing
interest rates. (2) INCOME RISK is the potential for a
decline in a Portfolio's income due to falling market
interest rates. (3) CREDIT RISK is the possibility that a
bond issuer will fail to make timely payments of either
interest or principal to a Portfolio. (4) PREPAYMENT RISK
(for mortgage-backed securities) or CALL RISK (for corporate
bonds) is the likelihood that, during periods of falling
interest rates, securities with high stated interest rates
will be prepaid (or "called") prior to maturity, requiring a
Portfolio to invest the proceeds at generally lower interest
rates.
The following chart summarizes interest rate, credit, income
and prepayment/call risks for each of the eight Portfolios
of the Fund offered by this Prospectus. As shown, interest
rate risk should be low for the three short-term Portfolios,
moderate for the three intermediate-term Portfolios, and
high for the two long-term Portfolios. PAGE 16
</TABLE>
RISK SUMMARY
<TABLE>
<CAPTION>
INTEREST INCOME CREDIT PREPAYMENT/
PORTFOLIO RATE RISK RISK RISK CALL RISK
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-Term U.S. Low High Negligible Negligible
Treasury
Short-Term Federal Low High Very Low Low
Short-Term Corpo- Low High Low Negligible
rate
------------------------------------------------------------------------------------
Intermediate-Term Medium Medium Negligible Negligible
U.S. Treasury
GNMA Medium Medium Negligible High
Intermediate-Term Medium Medium Low Low
Corporate
------------------------------------------------------------------------------------
Long-Term U.S. High Low Negligible Negligible
Treasury
Long-Term High Low Low Medium
Corporate
------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<S> <C>
THE VANGUARD The Fund is a member of The Vanguard Group of Investment
GROUP Companies, a group of 32 investment companies with 78
distinct investment portfolios and total assets in excess of
$120 billion. The Vanguard Group, Inc. ("Vanguard"), a
subsidiary jointly owned by the Vanguard funds, provides all
corporate management, administrative, distribution, and
shareholder accounting services on an at-cost basis to the
funds in the Group. As a result, Vanguard's operating
expenses are substantially lower than those of the mutual
fund industry. PAGE 24
</TABLE>
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3
<PAGE>
<TABLE>
<S> <C>
INVESTMENT Wellington Management Company serves as investment adviser
ADVISERS to the GNMA and Long-Term Corporate Portfolios. Vanguard's
Fixed Income Group provides investment advisory services on
an at-cost basis to the three Short-Term Portfolios, the two
Intermediate-Term Portfolios and the Long-Term U.S. Treasury
Portfolio. PAGE 24
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DIVIDEND POLICY Each Portfolio declares a dividend each business day based
on its ordinary income. Dividends are paid on the first
business day of each month. Net capital gains (excess of
long-and short-term capital gains over capital losses), if
any, will be distributed annually. Dividend and capital
gains distributions may be received in cash or reinvested in
additional shares. PAGE27
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TAXES Dividends paid by the Fund's Portfolios are generally
subject to federal, state and local income taxes. However,
it is expected that most of the income paid by the
Short-Term, Intermediate-Term, and Long-Term U.S. Treasury
Portfolios, and a meaningful portion of the income from the
Short-Term Federal Portfolio, will be attributable to U.S.
Treasury and other "direct" Government obligations. Such
income may be exempt from state and local taxes, depending
on state and local tax laws. Any capital gains distributions
from a Portfolio are subject to federal income tax, as well
as any applicable state and local taxes. A sale of
shares--whether by outright redemption, checkwriting
redemption or an exchange--is a taxable event and may result
in a capital gain or loss. PAGE27
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PURCHASING SHARES You may purchase shares by mail, wire, or exchange from
another Vanguard Portfolio. The minimum initial investment
is $3,000 per Portfolio ($500 for Individual Retirement
Accounts and Uniform Gifts/Transfers to Minors Act
accounts); the minimum for subsequent investments is $100.
There are no sales commissions or 12b-1 fees. PAGE 30
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SELLING SHARES You may redeem shares of each Portfolio by mail, telephone
or check. Telephone redemption proceeds may be received by
mail or by wire. There is no charge for redemptions, except
for wire withdrawals under $5,000, which are subject to a $5
charge. (Your bank may also impose a fee upon receipt of a
wire.) Each Portfolio's share price is expected to
fluctuate, and at the time of redemption may be more or less
than at the time of initial purchase, resulting in a gain or
loss. PAGE 34
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SERVICES TO The Fund offers free checkwriting services (minimum $250 per
SHAREHOLDERS check) for easy access to your account balance. PAGE 34
The Fund offers other special services, including: Fund
Express, for electronic transfers between the Fund and your
bank account; and Tele-Account, for "round-the-clock"
telephone access to your Fund account. PAGE 39
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SPECIAL (1) Each Portfolio, except the Short-Term Federal Portfolio,
CONSIDERATIONS may invest a portion of its assets in bond (interest rate)
futures contracts and options; each Portfolio may hold
restricted securities. The Short-Term Corporate,
Intermediate-Term Corporate and Long-Term Corporate
Portfolios may invest in securities of foreign
issuers. PAGE 20
(2) Each Portfolio may lend its securities. PAGE 21
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</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
FUND EXPENSES The following table illustrates all expenses and fees that
you would incur as a shareholder of the Fund. These expenses
and fees are for the fiscal year ended January 31, 1994,
and, in the case of the Intermediate-Term Corporate
Portfolio are estimates, since that Portfolio commenced
operations on November 1, 1993.
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM SHORT-TERM SHORT-TERM INTERMEDIATE-TERM
U.S. TREASURY FEDERAL CORPORATE U.S. TREASURY
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales Load Imposed on Purchases...... None None None None
Sales Load Imposed on Reinvested
Dividends........................... None None None None
Redemption Fees*..................... None None None None
Exchange Fees........................ None None None None
<CAPTION>
SHORT-TERM SHORT-TERM SHORT-TERM INTERMEDIATE-TERM
U.S. TREASURY FEDERAL CORPORATE U.S. TREASURY
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management & Administrative
Expenses............................ 0.21% 0.20% 0.20% 0.21%
Investment Advisory Fees............. 0.01 0.01 0.01 0.01
12b-1 Fees........................... None None None None
Other Expenses
Distribution Costs................. 0.03% 0.03% 0.03% 0.03%
Miscellaneous Expenses............. 0.01 0.02 0.02 0.01
----- ----- ----- -----
Total Other Expenses................. 0.04 0.05 0.05 0.04
----- ----- ----- -----
TOTAL OPERATING EXPENSES..... 0.26% 0.26% 0.26% 0.26%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE-TERM LONG-TERM LONG-TERM
GNMA CORPORATE U.S. TREASURY CORPORATE
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO**
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales Load Imposed on Purchases...... None None None None
Sales Load Imposed on Reinvested
Dividends........................... None None None None
Redemption Fees*..................... None None None None
Exchange Fees........................ None None None None
<CAPTION>
INTERMEDIATE-TERM LONG-TERM LONG-TERM
GNMA CORPORATE U.S. TREASURY CORPORATE
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO**
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management & Administrative
Expenses............................ 0.21% 0.19% 0.20% 0.22%
Investment Advisory Fees............. 0.02 0.01 0.01 0.04
12b-1 Fees........................... None None None None
Other Expenses
Distribution Costs................. 0.03% 0.03% 0.03% 0.02%
Miscellaneous Expenses............. 0.02 0.02 0.02 0.02
----- ----- ----- -----
Total Other Expenses................. 0.05 0.05 0.05 0.04
----- ----- ----- -----
TOTAL OPERATING EXPENSES..... 0.28% 0.25% 0.26% 0.30%
----- ----- ----- -----
----- ----- ----- -----
<FN>
*WIRE REDEMPTIONS OF LESS THAN $5,000 ARE SUBJECT TO A $5 PROCESSING FEE.
**FORMERLY THE "INVESTMENT GRADE CORPORATE PORTFOLIO."
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
The purpose of this table is to assist you in understanding
the various costs and expenses that you would bear directly
or indirectly as an investor in the Fund.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2) redemption
at the end of each period.
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Short-Term U.S. Treasury Portfolio.............. $3 $ 8 $15 $33
Short-Term Federal Portfolio.................... $3 $ 8 $15 $33
Short-Term Corporate Portfolio.................. $3 $ 8 $15 $33
Intermediate-Term U.S. Treasury Portfolio....... $3 $ 8 $15 $33
Intermediate-Term Corporate Portfolio........... $3 $ 8 $14 $32
GNMA Portfolio.................................. $3 $ 9 $16 $36
Long-Term U.S. Treasury Portfolio............... $3 $ 8 $15 $33
Long-Term Corporate Portfolio*.................. $3 $10 $17 $38
<FN>
*FORMERLY THE "INVESTMENT GRADE CORPORATE PORTFOLIO."
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL
EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
</TABLE>
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<TABLE>
<S> <C>
FINANCIAL The following financial highlights for a share outstanding
HIGHLIGHTS throughout each period, insofar as they relate to each of
the five years in the period ended January 31, 1994, have
been audited by Price Waterhouse, independent accountants,
whose reports thereon were unqualified. This information
should be read in conjunction with the Fund's financial
statements and notes thereto, which are incorporated by
reference in the Statement of Additional Information and in
this Prospectus, and which appear, along with the reports of
Price Waterhouse, in the Fund's 1994 Annual Report to
Shareholders. For a more complete discussion of the Fund's
performance, please see the Fund's 1994 Annual Report to
Shareholders which may be obtained without charge by writing
to the Fund or by calling our Investor Information
Department at 1-800-662-7447.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------
SHORT-TERM U.S. TREASURY PORTFOLIO
---------------------------------------------------
YEAR ENDED
JANUARY 31, OCT. 28, 1991,+
------------------------------- TO JAN. 31,
1994 1993 1992
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD........................... $10.41 $10.12 $ 10.00
------------- ----------- -------
INVESTMENT OPERATIONS
Net Investment Income........... .486 .528 .140
Net Realized and Unrealized Gain
(Loss) on Investments.......... .079 .332 .120
------------- ----------- -------
TOTAL FROM INVESTMENT
OPERATIONS................... .565 .860 .260
----------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income......................... (.486) (.528) (.140)
Distributions from Realized
Capital Gains.................. (.079) (.042) --
------------- ----------- -------
TOTAL DISTRIBUTIONS........... (.565) (.570) (.140)
----------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.... $10.41 $10.41 $ 10.12
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
TOTAL RETURN...................... 5.54% 8.74% 2.60%
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)....................... $729 $526 $102
Ratio of Expenses to Average Net
Assets........................... .26% .26% .26%*
Ratio of Net Investment Income to
Average Net Assets............... 4.64% 5.12% 5.22%*
Portfolio Turnover Rate........... 86% 71% 40%
<FN>
*ANNUALIZED.
+COMMENCEMENT OF OPERATIONS.
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
SHORT-TERM FEDERAL PORTFOLIO
-----------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
--------------------------------------------------------- DEC. 31, 1987,+
1994 1993 1992 1991 1990 1989 TO JAN. 31, 1988
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD........................... $10.38 $10.31 $10.08 $ 9.89 $ 9.78 $10.05 $ 10.00
------- ------- ------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income........... .522 .609 .720 .801 .842 .817 .050
Net Realized and Unrealized Gain
(Loss) on Investments.......... .110 .232 .307 .190 .110 (.270) .050
------- ------- ------- ------- ------- ------- -------
TOTAL FROM INVESTMENT
OPERATIONS................... .632 .841 1.027 .991 .952 .547 .100
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income......................... (.522) (.609) (.720) (.801) (.842) (.817) (.050)
Distributions from Realized
Capital Gains.................. (.110) (.162) (.077) -- -- -- --
------- ------- ------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS........... (.632) (.771) (.797) (.801) (.842) (.817) (.050)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.... $10.38 $10.38 $10.31 $10.08 $ 9.89 $ 9.78 $ 10.05
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN...................... 6.23% 8.49% 10.59% 10.46% 10.09% 5.66% 1.01%
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)....................... $1,936 $1,688 $1,274 $508 $228 $159 $6
Ratio of Expenses to Average Net
Assets........................... .26% .27% .26% .30% .28% .32% --
Ratio of Net Investment Income to
Average Net Assets............... 4.98% 5.88% 6.98% 8.06% 8.59% 8.50% --
Portfolio Turnover Rate........... 49% 70% 111% 141% 133% 228% --
<FN>
+COMMENCEMENT OF OPERATIONS.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
SHORT-TERM CORPORATE PORTFOLIO
---------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
---------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR............................. $10.99 $10.88 $10.50 $10.34 $10.23 $10.43 $10.67 $10.55 $10.17 $9.94
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income........... .605 .695 .804 .876 .895 .833 .761 .877 1.001 1.067
Net Realized and Unrealized Gain
(Loss) on Investments.......... .049 .275 .380 .160 .110 (.200) (.240) .304 .380 .230
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS................... .654 .970 1.184 1.036 1.005 .633 .521 1.181 1.381 1.297
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income......................... (.605) (.695) (.804) (.876) (.895) (.833) (.761) (.877) (1.001) (1.067)
Distributions from Realized
Capital Gains.................. (.099) (.165) -- -- -- -- -- (.184) -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS........... (.704) (.860) (.804) (.876) (.895) (.833) (.761) (1.061) (1.001) (1.067)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR...... $10.94 $10.99 $10.88 $10.50 $10.34 $10.23 $10.43 $10.67 $10.55 $10.17
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN...................... 6.11% 9.29% 11.70% 10.47% 10.18% 6.31% 5.16% 11.58% 14.24% 14.01%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)....................... $3,573 $2,811 $1,911 $829 $597 $493 $429 $401 $198 $119
Ratio of Expenses to Average Net
Assets........................... .26% .27% .26% .31% .28% .34% .33% .38% .49% .62%
Ratio of Net Investment Income to
Average Net Assets............... 5.48% 6.33% 7.44% 8.48% 8.70% 8.17% 7.36% 7.79% 9.50% 11.26%
Portfolio Turnover Rate........... 61% 71% 99% 107% 121% 165% 258% 278% 460% 270%
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO
-------------------------------------------------------
YEAR ENDED JANUARY 31,
--------------------------------- OCT. 28, 1991,+ TO
1994 1993 JAN. 31, 1992
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD........................... $ 10.79 $ 10.19 $ 10.00
------- ------------- -------
INVESTMENT OPERATIONS
Net Investment Income........... .617 .676 .170
Net Realized and Unrealized Gain
(Loss) on Investments.......... .443 .617 .190
------- ------------- -------
TOTAL FROM INVESTMENT
OPERATIONS................... 1.060 1.293 .360
- --------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income......................... (.617) (.676) (.170)
Distributions from Realized
Capital Gains.................. (.413) (.017) --
------- ------------- -------
TOTAL DISTRIBUTIONS........... (1.030) (.693) (.170)
- --------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.... $ 10.82 $ 10.79 $ 10.19
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
TOTAL RETURN...................... 10.09% 13.14% 3.59%
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)....................... $1,007 $673 $190
Ratio of Expenses to Average Net
Assets........................... .26% .26% .26%*
Ratio of Net Investment Income to
Average Net Assets............... 5.55% 6.44% 6.47%*
Portfolio Turnover Rate........... 118% 123% 32%
<FN>
*ANNUALIZED.
+COMMENCEMENT OF OPERATIONS.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------
GNMA PORTFOLIO
----------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
----------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR...... $10.50 $10.25 $9.85 $9.54 $9.34 $9.69 $10.10 $9.92 $9.25 $9.20
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income................. .641 .778 .831 .855 .878 .882 .889 .965 1.04 1.08
Net Realized and Unrealized Gain
(Loss) on Investments................ (.110) .250 .400 .310 .200 (.350) (.410) .186 .67 .05
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS.... .531 1.028 1.231 1.165 1.078 .532 .479 1.151 1.71 1.13
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income............................... (.641) (.778) (.831) (.855) (.878) (.882) (.889) (.965) (1.04) (1.08)
Distributions from Realized Capital
Gains................................ -- -- -- -- -- -- -- (.006) -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS................. (.641) (.778) (.831) (.855) (.878) (.882) (.889) (.971) (1.04) (1.08)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR............ $10.39 $10.50 $10.25 $9.85 $9.54 $9.34 $9.69 $10.10 $9.92 $9.25
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN............................ 5.18% 10.40% 13.00% 12.85% 11.98% 5.80% 5.30% 12.19% 19.58% 13.52%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions)...... $7,043 $7,167 $5,207 $2,711 $2,128 $1,907 $1,910 $2,381 $1,262 $299
Ratio of Expenses to Average Net
Assets................................. .28% .29% .29% .34% .31% .35% .35% .38% .50% .58%
Ratio of Net Investment Income to
Average Net Assets..................... 6.19% 7.38% 8.22% 8.95% 9.25% 9.35% 9.35% 9.41% 10.16% 11.90%
Portfolio Turnover Rate................. 2% 7% 1% 1% 9% 8% 22% 28% 32% 23%
</TABLE>
<TABLE>
<CAPTION>
-----------------
INTERMEDIATE-TERM
CORPORATE
PORTFOLIO
-----------------
<S> <C>
<CAPTION>
NOVEMBER 1,
1993,+ TO
JANUARY 31, 1994
- ------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.... $ 10.00
-------
INVESTMENT OPERATIONS
Net Investment Income................. .125
Net Realized and Unrealized Gain
(Loss) on Investments................ .040
-------
TOTAL FROM INVESTMENT OPERATIONS.... .165
- ------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income............................... (.125)
Distributions from Realized Capital
Gains................................ --
- ------------------------------------------------------------
TOTAL DISTRIBUTIONS................. (.125)
- ------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.......... $ 10.04
- ------------------------------------------------------------
- ------------------------------------------------------------
TOTAL RETURN............................ 1.66%
- ------------------------------------------------------------
- ------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).... $85
Ratio of Expenses to Average Net
Assets................................. .25%*
Ratio of Net Investment Income to
Average Net Assets..................... 5.11%*
Portfolio Turnover Rate................. 74%
- ------------------------------------------------------------
<FN>
*ANNUALIZED.
+COMMENCEMENT OF OPERATIONS.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
LONG-TERM U.S. TREASURY PORTFOLIO
-------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, MAY 19, 1986,+
------------------------------------------------------------------------- TO
1994 1993 1992 1991 1990 1989 1988 JAN. 31, 1987
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD............................. $10.04 $10.14 $9.74 $9.53 $9.28 $9.49 $10.28 $10.00
------------- ------- ------- ------- ------- ------- ------- ------
INVESTMENT OPERATIONS
Net Investment Income............. .685 .733 .763 .776 .781 .778 .776 .530
Net Realized and Unrealized Gain
(Loss) on Investments............ .886 .600 .400 .210 .250 (.210) (.790) .314
------------- ------- ------- ------- ------- ------- ------- ------
TOTAL FROM INVESTMENT
OPERATIONS..................... 1.571 1.333 1.163 .986 1.031 .568 (.014) .844
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income........................... (.685) (.733) (.763) (.776) (.781) (.778) (.776) (.530)
Distributions from Realized
Capital Gains.................... (.176) (.700) -- -- -- -- -- (.034)
------------- ------- ------- ------- ------- ------- ------- ------
TOTAL DISTRIBUTIONS............. (.861) (1.433) (.763) (.776) (.781) (.778) (.776) (.564)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD...... $10.75 $10.04 $10.14 $9.74 $9.53 $9.28 $9.49 $10.28
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN........................ 16.09% 14.12% 12.44% 11.00% 11.33% 6.43% 0.29% 8.61%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)......................... $829 $874 $833 $722 $456 $172 $83 $35
Ratio of Expenses to Average Net
Assets............................. .26% .27% .26% .30% .28% .36% .32% --
Ratio of Net Investment Income to
Average Net Assets................. 6.44% 7.26% 7.72% 8.29% 8.08% 8.46% 8.10% 6.93%*
Portfolio Turnover Rate............. 7% 170% 89% 147% 83% 387% 182% 182%
<FN>
*ANNUALIZED.
+COMMENCEMENT OF OPERATIONS.
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
LONG-TERM CORPORATE PORTFOLIO+
----------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
----------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR...... $9.04 $8.63 $8.02 $8.00 $7.91 $8.11 $8.77 $8.42 $7.84 $7.84
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income................. .632 .680 .706 .720 .732 .741 .770 .847 .92 .96
Net Realized and Unrealized Gain
(Loss) on Investments................ .579 .561 .610 .020 .090 (.200) (.660) .473 .58 --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS.... 1.211 1.241 1.316 .740 .822 .541 .110 1.32 1.50 .96
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.. (.632) (.680) (.706) (.720) (.732) (.741) (.770) (.847) (.92) (.96)
Distributions from Realized Capital
Gains................................ (.259) (.151) -- -- -- -- -- (.123) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS................. (.891) (.831) (.706) (.720) (.732) (.741) (.770) (.970) (.92) (.96)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR............ $9.36 $9.04 $8.63 $8.02 $8.00 $7.91 $8.11 $8.77 $8.42 $7.84
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN............................ 13.83% 15.06% 17.09% 9.81% 10.67% 7.13% 1.76% 16.46% 20.31% 13.45%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions)...... $3,166 $2,763 $1,992 $1,254 $954 $734 $665 $753 $318 $107
Ratio of Expenses to Average Net
Assets................................. .30% .31% .31% .37% .34% .38% .37% .41% .55% .62%
Ratio of Net Investment Income to Aver-
age Net Assets......................... 6.71% 7.68% 8.46% 9.16% 9.07% 9.40% 9.40% 9.41% 10.78% 12.50%
Portfolio Turnover Rate................. 77% 50% 72% 62% 70% 60% 63% 47% 56% 55%
<FN>
+FORMERLY THE "INVESTMENT GRADE CORPORATE PORTFOLIO."
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
YIELD AND TOTAL From time to time a Portfolio may advertise its yield and
RETURN total return. BOTH YIELD AND TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE
FUTURE PERFORMANCE. The "total return" of a Portfolio refers
to the average annual compounded rates of return over one-,
five-and ten-year periods or for the life of the Portfolio
(as stated in the advertisement) that would equate an
initial amount invested at the beginning of a stated period
to the ending redeemable value of the investment, assuming
the reinvestment of all dividend and capital gains
distributions.
The "30-day yield" of a Portfolio is calculated by dividing
net investment income per share earned during a 30-day
period by the net asset value per share on the last day of
the period. Net investment income includes interest and
dividend income earned on the Portfolio's securities; it is
net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder accounts.
The yield calculation assumes that net investment income
earned over 30 days is compounded monthly for six months and
then annualized. Methods used to calculate advertised yields
are standardized for all stock and bond mutual funds.
However, these methods differ from the accounting methods
used by a Portfolio to maintain its books and records, and
so the advertised 30-day yield may not fully reflect the
income paid to your own account or the yield reported in the
Portfolio's Reports to Shareholders.
Additionally, a Portfolio may compare its performance to
that of the Lehman Aggregate Bond Index, and may advertise
its duration, a measure of a Portfolio's sensitivity to
interest rate changes.
- --------------------------------------------------------------------------------
INVESTMENT The Fund is an open-end diversified investment company. The
OBJECTIVE objective of the Fund is to provide investors with a high
level of current income consistent with the maintenance of
principal and liquidity.
THE FUND SEEKS TO
PROVIDE A HIGH The Fund consists of nine distinct Portfolios, each of which
LEVEL invests in fixed income securities within prescribed
OF CURRENT INCOME maturity and quality standards. There is no assurance that
the Fund will achieve its stated objective.
The investment objective for the Fund is not fundamental and
so may be changed by the Board of Directors without
shareholder approval. Any such change could result in the
Fund having investment objectives different from the
objectives which a shareholder considered appropriate at the
time of investment in the Fund. However, shareholders would
be notified prior to any material change in the Fund's
objective.
- --------------------------------------------------------------------------------
INVESTMENT While all of the Fund's Portfolios invest in fixed income
POLICIES securities, the individual Portfolios vary substantially in
terms of the type, credit quality, and average maturity of
the securities in which they invest. The Fund is managed
without regard to tax ramifications.
IMPORTANT NOTE: Five of the Portfolios invest in U.S.
Treasury or U.S. Government agency securities to minimize
credit risk. Examples of the Government agencies and
instrumentalities whose securities may be purchased by these
Portfolios include the Federal Home Loan Mortgage
Corporation, the Small Business Administration, the Gov-
ernment Export Trust and the Overseas Private Investment
Corporation. Government securities may be backed by (i) the
full faith and credit of the United States; (ii) the
particular Government agency's ability to borrow directly
from the Treasury; (iii) some other type of United States
support; or (iv) the credit of the issuing agency, only. As
described in the investment policies set forth below, each
of the five Portfolios which
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
invests in U.S. Treasury or U.S. Government agency
securities is required to invest a specified percentage of
its assets in securities backed by the full faith and credit
of the United States. WHILE U.S. TREASURY OR GOVERNMENT
AGENCY SECURITIES PROVIDE SUBSTANTIAL PROTECTION AGAINST
CREDIT RISK, THEY DO NOT PROTECT INVESTORS AGAINST PRICE
CHANGES DUE TO CHANGING INTEREST RATES. THE MARKET VALUES OF
GOVERNMENT SECURITIES ARE NOT GUARANTEED AND WILL FLUCTUATE.
See "Investment Risks" for additional information on these
and other important risks.
THREE PORTFOLIOS Three Portfolios of the Fund invest in short-term bonds. The
INVEST IN SHORT-TERM U.S. TREASURY PORTFOLIO invests at least 85% of
SHORT-TERM its assets in short-term securities backed by the full faith
BONDS and credit of the U.S. Government. Also, at least 65% of the
Portfolio's assets will be invested in U.S. Treasury bills,
notes and bonds. In an effort to minimize fluctuations in
market value, the Short-Term U.S. Treasury Portfolio is
expected to maintain a dollar-weighted average maturity
between one and three years.
The balance of the Short-Term U.S. Treasury Portfolio's
assets may be invested in U.S. Treasury or U.S. Government
agency securities, as well as in repurchase agreements
collateralized by such securities. The Portfolio may also
invest in bond (interest rate) futures and options to a
limited extent. See "Implementation of Policies" for a
description of these investment practices of the Portfolio.
The SHORT-TERM FEDERAL PORTFOLIO invests primarily in U.S.
Government agency securities, which are debt obligations
issued or guaranteed by agencies or instrumentalities of the
U.S. Government. Such "agency" securities may not be backed
by the "full faith and credit" of the U.S. Government. The
Portfolio may also invest in U.S. Treasury securities, as
well as in repurchase agreements collateralized by U.S.
Treasury or U.S. Government agency securities. In an effort
to minimize fluctuations in market value, the Short-Term
Federal Portfolio is expected to maintain a dollar
weighted-average maturity between 1 and 3 years. See
"Implementation of Policies" for a description of these
investment practices of the Portfolio.
The SHORT-TERM CORPORATE PORTFOLIO invests in the following
investment grade fixed income securities:
(1) Short-term and intermediate-term corporate debt
securities;
(2) U.S. Treasury and U.S. Government agency obligations;
(3) Bank obligations, including certificates of deposit and
bankers acceptances;
(4) Commercial paper; and
(5) Repurchase agreements collateralized by these
securities.
Investment grade corporate debt securities are those rated a
minimum of Baa3 by Moody's Investors Service, Inc.
("Moody's") or BBB- by Standard & Poor's Corporation
("Standard & Poor's"). Investment grade commercial paper is
rated A-1 or better by Standard & Poor's or Prime-1 by
Moody's, or, if unrated, issued by a corporation having an
outstanding unsecured debt issue rated A or better by
Moody's or Standard & Poor's. At least 70% of the Short-Term
Corporate Portfolio's assets will be invested in debt
securities rated a minimum of A3 by Moody's or A- by
Standard & Poor's, and not more than 30% of the Portfolio's
assets may be invested in debt securities rated Baa by
Moody's or BBB by Standard & Poor's.
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
Securities rated Baa or BBB are considered medium grade
obligations. Interest payments and principal are regarded as
adequate for the present, but certain protective elements
found in higher rated bonds may be lacking. Such bonds lack
outstanding investment characteristics and, in fact, have
speculative characteristics as well.
In the event that a security held by the Portfolio is
downgraded, the Portfolio may continue to hold such security
until such time as the adviser deems it advantageous to
dispose of the security.
In an effort to minimize fluctuations in market value, the
Short-Term Corporate Portfolio is expected to maintain an
dollar-weighted average maturity between 1 and 3 years. The
Short-Term Corporate Portfolio may also hold securities of
foreign issuers provided such securities are denominated in
U.S. dollars, and may invest in bond (interest rate) futures
and options to a limited extent. See "Implementation of
Policies" for a description of these investment practices of
the Portfolio.
THREE PORTFOLIOS The INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO invests at
INVEST IN least 85% of its assets in intermediate-term securities
INTERMEDIATE-TERM backed by the full faith and credit of the U.S. Government.
BONDS Also, at least 65% of the Portfolio's assets will be
invested in U.S. Treasury bills, notes and bonds. The
dollar-weighted average maturity of the Portfolio is
expected to range from 5 to 10 years.
The balance of the Portfolio's assets may be invested in
U.S. Treasury or U.S. Government agency securities, as well
as in repurchase agreements collateralized by such
securities. The Portfolio may also invest in bond (interest
rate) futures and options to a limited extent. See
"Implementation of Policies" for a description of these
investment practices of the Portfolio.
The GNMA PORTFOLIO invests at least 80% of its assets in
Government National Mortgage Association ("GNMA" or "Ginnie
Mae") pass-through certificates. The balance of the
Portfolio's assets may be invested in other U.S. Treasury or
U.S. Government agency securities, as well as in repurchase
agreements collateralized by such securities. The Portfolio
may also invest in bond (interest rate) futures and options
to a limited extent. See "Implementation of Policies" for a
description of these investment practices of the Portfolio.
GNMA pass-through certificates are mortgage-backed
securities representing part ownership of a pool of mortgage
loans. Monthly mortgage payments of both interest and
principal "pass through" from homeowners to certificate
investors, such as the GNMA Portfolio. The GNMA Portfolio
reinvests the principal portion in additional securities and
distributes the interest portion as income to the
Portfolio's shareholders. Under normal circumstances, GNMA
certificates are expected to provide higher yields than U.S.
Treasury securities of comparable maturity.
The mortgage loans underlying GNMA certificates--issued by
lenders such as mortgage bankers, commercial banks, and
savings and loan associations-are either insured by the
Federal Housing Administration (FHA) or guaranteed by the
Veterans Administration (VA). Each pool of mortgage loans
must also be approved by GNMA, a U.S. Government corporation
within the U.S. Department of Housing and Urban
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
Development. Once GNMA approval is obtained, the timely
payment of interest and principal on each underlying
mortgage loan is guaranteed by the "full faith and credit"
of the U.S. Government.
Although stated maturities on GNMA certificates generally
range from 25 to 30 years, effective maturities are usually
much shorter due to the prepayment of the underlying
mortgages by homeowners. On average, GNMA certificates are
repaid within 12 years and so are classified as
intermediate-term securities.
THE INTERMEDIATE-TERM CORPORATE PORTFOLIO invests in a
diversified portfolio of investment grade corporate and
Government bonds. Under normal circumstances, at least 65%
of the Portfolio's assets are invested in straight debt
corporate bonds rated a minimum of Baa3 by Moody's or BBB-
by Standard & Poor's at the time of purchase. Additionally,
at least 80% of the Portfolio's assets will normally be
invested in a combination of investment grade corporate
bonds and securities of the U.S. Government and its agencies
and instrumentalities. The Intermediate-Term Corporate
Portfolio is expected to maintain a dollar-weighted average
maturity between 5 and 10 years.
The preponderance of the Portfolio's holdings will be
classified in the top three credit-rating categories.
Specifically, at least 70% of the Portfolio's assets will be
invested in the following securities:
(1) Short-term and intermediate-term corporate debt
securities which at the time of purchase are rated a minimum
of A3 by Moody's or A- by Standard & Poor's;
(2) Securities issued by the U.S. Government or its agencies
and instrumentalities;
(3) Commercial paper of companies having, at the time of
purchase, outstanding debt securities rated as described in
(1) or commercial paper rated P-1 or P-2 by Moody's or
rated A-1 or A-2 by Standard & Poor's; and
(4) Short-term fixed income securities held as cash
reserves, including U.S. Treasury or U.S. Government agency
securities, certificates of deposit, bankers'
acceptances, or repurchase agreements collateralized by
these securities.
Up to 30% of the Intermediate-Term Corporate Portfolio's
assets may be invested in straight debt securities rated Baa
by Moody's or BBB by Standard & Poor's (see page 13 for a
description of these ratings), and in preferred stocks and
convertible securities. In addition, not more than 25% of
the Portfolio's assets may be invested in GNMA certificates
or other mortgage-backed securities. Mortgage-backed securi-
ties are subject to risks which are in addition to and
distinct from the risks inherent in investments in corporate
bonds. For a discussion of these special risks, see
"Investment Risks." In the event that a security held by the
Portfolio is downgraded, the Portfolio may continue to hold
such security until such time as the adviser deems it to be
advantageous to dispose of the security.
The Intermediate-Term Corporate Portfolio may also hold
securities of foreign issuers provided such securities are
denominated in U.S. dollars. The Portfolio may also invest
in bond (interest rate) futures and options to a limited
extent. See "Implementation of Policies" for a description
of these investment practices of the Portfolio.
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
TWO PORTFOLIOS The LONG-TERM U.S. TREASURY PORTFOLIO invests at least 85%
INVEST IN of its assets in long-term securities backed by the full
LONG-TERM BONDS faith and credit of the U.S. Government. Also, at least 65%
of the Portfolio's assets will be invested in U.S. Treasury
bills, notes and bonds. The dollar-weighted average maturity
of the Portfolio is expected to range from 15 to 30 years.
The balance of the Portfolio's assets may be invested in
U.S. Treasury or U.S. Government agency securities, as well
as in repurchase agreements collateralized by such
securities. The Portfolio may also invest in bond (interest
rate) futures and options to a limited extent. See
"Implementation of Policies" for a description of these
investment practices of the Portfolio.
The LONG-TERM CORPORATE PORTFOLIO (formerly the "Investment
Grade Corporate Portfolio") invests in a diversified
portfolio of investment grade corporate and Government
bonds. Under normal circumstances, at least 65% of the
Portfolio's assets are invested in straight debt corporate
bonds rated a minimum of Baa3 by Moody's or BBB- by Standard
& Poor's at the time of purchase. Additionally, at least 80%
of the Portfolio's assets will normally be invested in a
combination of investment grade corporate bonds and
securities of the U.S. Government and its agencies and
instrumentalities. The average dollar-weighted maturity of
the Portfolio is expected to range from 15 to 25 years.
The preponderance of the Portfolio's holdings will be
classified in the top three credit-rating categories.
Specifically, at least 70% of the Portfolio's assets will be
invested in the following securities:
(1) Straight debt corporate securities which at the time of
purchase are rated a minimum of A3 by Moody's or A- by
Standard & Poor's;
(2) Securities issued by the U.S. Government or its agencies
and instrumentalities;
(3) Commercial paper of companies having, at the time of
purchase, outstanding debt securities rated as described in
(1) or commercial paper rated P-1 or P-2 by Moody's or
rated A-1 or A-2 by Standard & Poor's; and
(4) Short-term fixed income securities held as cash
reserves, including U.S. Treasury or U.S. Government agency
securities, certificates of deposit, bankers'
acceptances, or repurchase agreements collateralized by
these securities.
Up to 30% of the Long-Term Corporate Portfolio's assets may
be invested in straight debt securities rated Baa by Moody's
or BBB by Standard & Poor's (see page 13 for a description
of these ratings), and in preferred stocks and convertible
securities. In addition, not more than 25% of the
Portfolio's assets may be invested in GNMA certificates or
other mortgage-backed securities. In the event that a
security held by the Portfolio is downgraded, the Portfolio
may continue to hold such security until such time as the
adviser deems it to be advantageous to dispose of the
security.
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
The Long-Term Corporate Portfolio may also hold securities
of foreign issuers provided such securities are denominated
in U.S. dollars. The Portfolio may also invest in bond
(interest rate) futures and options to a limited extent. See
"Implementation of Policies" for a description of these
investment practices of the Portfolio.
* * *
The investment policies for the Fund are not fundamental and
so may be changed by the Board of Directors without
shareholder approval. However, shareholders would be
notified prior to any material change in the Fund's
investment policies.
- --------------------------------------------------------------------------------
INVESTMENT RISKS As mutual funds investing in fixed income securities, the
THE PORTFOLIOS ARE Portfolios of the Fund are subject primarily to interest
SUBJECT PRIMARILY rate and credit risk. INTEREST RATE RISK is the potential
TO INTEREST RATE, for a decline in bond prices due to rising interest rates.
INCOME, CREDIT AND In general, bond prices vary inversely with interest rates.
MANAGER RISK When interest rates RISE, bond prices generally FALL.
Conversely, when interest rates FALL, bond prices generally
RISE. The change in price depends on several factors,
including the bond's maturity date. In general, bonds with
longer maturities are more sensitive to changes in interest
rates than bonds with shorter maturities.
These principles of interest rate risk also apply to U.S.
Treasury and U.S. Government agency securities. As with
other bond investments, U.S. Government securities will rise
and fall in value as interest rates change. A SECURITY
BACKED BY THE U.S. TREASURY OR THE FULL FAITH AND CREDIT OF
THE UNITED STATES IS GUARANTEED ONLY AS TO THE TIMELY
PAYMENT OF INTEREST AND PRINCIPAL WHEN HELD TO MATURITY. THE
CURRENT MARKET PRICES FOR SUCH SECURITIES ARE NOT GUARANTEED
AND WILL FLUCTUATE.
As an illustration of interest rate risk, the charts below
depict the effect of a one and two percentage point change
in interest rates on three bonds of varying maturities:
</TABLE>
<TABLE>
<CAPTION>
PERCENT CHANGE IN THE PRICE OF A PAR BOND YIELDING 5.5%
1 PERCENTAGE 1 PERCENTAGE
POINT POINT
INCREASE IN DECREASE IN
STATED MATURITY INTEREST RATES INTEREST RATES
- ---------------------------------------- ----------------- -----------------
<S> <C> <C>
Short-Term (2.5 years) - 2.3% + 2.3%
Intermediate-Term (10 years) - 7.3% + 8.0%
Long-Term (20 years) - 11.1% + 13.1%
</TABLE>
<TABLE>
<CAPTION>
2 PERCENTAGE 2 PERCENTAGE
POINT POINT
INCREASE IN DECREASE IN
STATED MATURITY INTEREST RATES INTEREST RATES
- ---------------------------------------- ----------------- -----------------
<S> <C> <C>
Short-Term (2.5 years) - 4.5% + 4.7%
Intermediate-Term (10 years) - 13.9% + 16.7%
Long-Term (20 years) - 20.5% + 28.6%
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These charts are intended to provide you with guidelines for
determining the degree of interest rate risk you may be
willing to assume. The yield and price changes shown should
not be taken as representative of a Portfolio's current or
future yield or expected changes in a Portfolio's share
price.
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INCOME RISK is the potential for a decline in a Portfolio's
income due to falling market interest rates. In relative
terms, income risk will be higher for the Fund's
shorter-term Portfolios and lower for the Fund's longer-term
Portfolios.
Each Portfolio of the Fund is also subject to credit risk.
CREDIT RISK, also known as default risk, is the possibility
that a bond issuer will fail to make timely payments of
interest or principal to a Portfolio. The credit risk of a
Portfolio depends on the quality of its investments.
Reflecting their higher risks, lower-quality bonds gener-
ally offer higher yields (all other factors being equal).
Besides interest rate risk and credit risk, investors are
exposed to PREPAYMENT RISK in the GNMA Portfolio and CALL
RISK in the Long-Term Corporate Portfolio.
Finally, the investment advisers manage the Fund's
Portfolios according to the traditional methods of "active"
investment management, which involves the buying and selling
of securities based upon economic, financial and market
analysis and investment judgement. MANAGER RISK refers to
the possibility that a Portfolio's investment adviser may
fail to execute the Portfolio's investment strategy
effectively. As a result, a Portfolio may fail to achieve
its stated objective.
THREE SHORT-TERM Interest rate risk for the SHORT-TERM U.S TREASURY
PORTFOLIOS PROVIDE PORTFOLIO, the SHORT-TERM FEDERAL PORTFOLIO, and the
MODERATE EXPOSURE SHORT-TERM CORPORATE PORTFOLIO should be modest. Because of
TO INTEREST RATE their short-term average weighted maturities, the three
RISK short-term Portfolios are expected to exhibit LOW TO
MODERATE price fluctuations as interest rates change.
The three Portfolios differ principally in terms of credit
quality and potential yield. For the Short-Term U.S.
Treasury Portfolio, credit risk should be negligible. In
relative terms, credit risk will be slightly higher for the
Short-Term Federal Portfolio because of its holdings of U.S.
Government agency securities. (Even though they carry top
(Aaa) credit ratings, "agency" obligations are not
explicitly guaranteed by the U.S. Government and so are
perceived as somewhat riskier than comparable Treasury
bonds.)
With its corporate bond holdings, the Short-Term Corporate
Portfolio offers the highest exposure to credit risk of the
three short-term Portfolios. However, because of the
Portfolio's well-diversified holdings and emphasis on
high-quality bonds, overall credit risk should still be
quite low.
INTEREST RATE RISK The three intermediate-term Portfolios are exposed to a
FOR THE THREE higher degree of interest rate risk than the three
INTERMEDIATE-TERM short-term Portfolios. The INTERMEDIATE-TERM U.S. TREASURY
PORTFOLIOS WILL BE PORTFOLIO, the GNMA PORTFOLIO and the INTERMEDIATE-TERM
HIGHER CORPORATE PORTFOLIO are expected to exhibit MODERATE TO HIGH
price fluctuations as interest rates change. Credit risk,
however, should be minimal for the Intermediate-Term U.S.
Treasury and the GNMA Portfolios, as both Portfolios invest
primarily in "full faith and credit" securities of the U.S.
Government.
Due to its investments in corporate securities, credit risk
associated with the Intermediate-Term Corporate Portfolio
will be higher than for the other two intermediate-term
Portfolios. However, the Intermediate-Term Corporate
Portfolio's diversification and quality of investments
should help limit credit risk.
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The GNMA Portfolio is unique among the Fund's Portfolios in
its exposure to prepayment risk. Prepayment risk is the
possibility that, as interest rates fall, homeowners are
more likely to refinance their home mortgages. When home
mortgages are refinanced, the principal on GNMA certificates
held by the Portfolio is "prepaid" earlier than expected.
The GNMA Portfolio must then reinvest the unanticipated
principal in new GNMA certificates, just at a time when
interest rates on new mortgage investments are falling.
Prepayment risk has two important effects on the GNMA
Portfolio:
- When interest rates fall and additional mortgage
prepayments must be reinvested at lower interest rates,
the income of the GNMA Portfolio will be reduced.
- When interest rates fall, prices on GNMA securities will
not rise as much as comparable Treasury bonds, as bond
market investors anticipate an increase in mortgage
prepayments and a likely decline in income.
In part to compensate for this risk, the GNMA Portfolio will
generally offer higher yields than a bond portfolio of
comparable quality--such as the Intermediate-Term U.S.
Treasury Portfolio.
FOR THE TWO The two long-term Portfolios are exposed to substantial
LONG-TERM interest rate risk. The LONG-TERM U.S. TREASURY PORTFOLIO
PORTFOLIOS, and the LONG-TERM CORPORATE PORTFOLIO, both of which
INTEREST RATE RISK maintain average maturities in excess of 15 years, may
MAY BE SUBSTANTIAL exhibit HIGH TO VERY HIGH price fluctuations due to changing
interest rates.
The main difference between the two Portfolios is credit
risk. The Long-Term U.S. Treasury Portfolio invests
primarily in "full faith and credit" U.S. Treasury bonds for
maximum credit protection, while the Long-Term Corporate
Portfolio invests in investment grade corporate bonds for
higher yields. Although credit risk for the Long-Term
Corporate Portfolio will be somewhat higher, overall credit
risk should still be low because of the Portfolio's
well-diversified holdings and its emphasis on high-quality
bonds.
An additional risk associated with the Long-Term Corporate
Portfolio is call risk. Call risk is the possibility that
corporate bonds held by the Portfolio will be repaid prior
to maturity. Call provisions, common in many corporate bonds
held by the Portfolio, allow bond issuers to redeem bonds
prior to maturity (at a specified price). When interest
rates are falling, bond issuers often exercise these call
provisions, paying off bonds that carry high stated interest
rates and often issuing new bonds at lower rates. For the
Portfolio, the result would be that bonds with high interest
rates are "called" and must be replaced with lower-yielding
instruments. In these circumstances, the income of the
Portfolio would decline.
Reflecting these additional credit and call risks, the
Long-Term Corporate Portfolio will generally offer higher
yields than the Long-Term U.S. Treasury Portfolio.
- --------------------------------------------------------------------------------
WHO SHOULD INVEST The Fund is intended for investors who are seeking a high
INVESTORS SEEKING level of current income from their investments. The Fund is
CURRENT INCOME also suitable for investors with common stock holdings who
are seeking a complementary fixed income investment to
create a more diversified and balanced investment mix.
Because of potential fluctuations in the share price of the
Fund's Portfolios, the Fund may be inappropriate for short-
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term investors who require maximum stability of principal.
Because of the risks associated with bond investments, the
Fund is intended to be a long-term investment vehicle and is
not designed to provide investors with a means of
speculating on short-term bond market movements.
Investors who engage in excessive account activity generate
additional costs which are borne by all of the Fund's
shareholders. In order to minimize such costs the Fund has
adopted the following policies. The Fund reserves the right
to reject any purchase request (including exchange purchases
from other Vanguard portfolios) that is reasonably deemed to
be disruptive to efficient portfolio management, either
because of the timing of the investment or previous
excessive trading by the investor. Additionally, the Fund
has adopted exchange privilege limitations as described in
the section "Exchange Privilege Limitations." Finally, the
Fund reserves the right to suspend the offering of its
shares.
You should base your selection of a Portfolio (or
Portfolios) of the Fund on your own objectives, risk
preferences, and time horizon.
Three short-term Portfolios--the SHORT-TERM U.S. TREASURY
PORTFOLIO, SHORT-TERM FEDERAL PORTFOLIO, and SHORT-TERM
CORPORATE PORTFOLIO--are designed for investors who are
seeking yields that are more durable and usually higher than
those available from money market funds, and who can
tolerate modest fluctuations in the value of their
investment. The choice among the three is one of credit
quality--U.S. Treasury, U.S. Government agency, or
corporate.
The three intermediate-term Portfolios--the
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO, the GNMA
PORTFOLIO and the INTERMEDIATE-TERM CORPORATE PORTFOLIO--
offer high credit quality, higher yields and a steadier
income than available from the three short-term Portfolios.
Price swings, however, can be substantial. The choice
between the three is again one of credit quality--U.S.
Treasury, U.S. Government Agency, or corporate--as well as
one of prepayment risk (i.e., whether you are willing to
take on the prepayment risk of the GNMA Portfolio in
exchange for generally higher yields).
The two long-term Portfolios, the LONG-TERM U.S. TREASURY
PORTFOLIO and the LONG-TERM CORPORATE PORTFOLIO, are
designed for investors seeking high credit quality and
steady levels of income, and who can withstand potentially
large fluctuations in the market value of their investment.
The choice between the two is one of credit quality and call
risk. The Long-Term Corporate Portfolio generally offers
higher yields than the Long-Term U.S. Treasury Portfolio in
exchange for higher credit and call risks.
- --------------------------------------------------------------------------------
IMPLEMENTATION OF Each Portfolio of the Fund utilizes a variety of investment
POLICIES practices in pursuit of its objective.
EACH PORTFOLIO MAY Each Portfolio of the Fund may invest in repurchase
INVEST IN agreements according to the restrictions and limitations set
REPURCHASE forth in "Investment Policies." A repurchase agreement is a
AGREEMENTS means of investing monies for a short period. In a
repurchase agreement, a seller--a U.S. commercial bank or
recognized U.S. securities dealer--sells securities to a
Portfolio and agrees to repurchase the securities at the
Portfolio's cost plus interest within a specified period
(normally one day). In these transactions, the
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securities purchased by the Portfolio will have a total
value equal to or in excess of the value of the repurchase
agreement, and will be held by the Fund's Custodian Bank
until repurchased.
The use of repurchase agreements involves certain risks. For
example, if the other party to the agreement defaults on its
obligation to repurchase the underlying security at a time
when the value of the security has declined, the Portfolio
may incur a loss upon disposition of the security. If the
other party to the agreement becomes insolvent and subject
to liquidation or reorganization under the Bankruptcy Code
or other laws, a court may determine that the underlying
security is collateral for a loan by the Portfolio and not
within the control of the Portfolio. As a result, the
Portfolio's ability to realize on such collateral may be
automatically stayed. Finally, it is possible that the
Portfolio may not be able to substantiate its interest in
the underlying security and may be deemed an unsecured
creditor of the other party to the agreement. While each
Portfolio's management acknowledges these risks, it is
expected that they can be controlled through careful
monitoring procedures.
EACH PORTFOLIO MAY Each Portfolio of the Fund may own restricted securities to
OWN RESTRICTED a limited extent. Restricted securities are securities which
SECURITIES are not freely marketable or which are subject to
restrictions upon sale under the Securities Act of 1933.
Each Portfolio may invest up to 15% of its net assets in
restricted securities. (Included within this limit are
restricted securities and, other securities for which price
quotations are not readily available.)
THREE PORTFOLIOS The Short-Term Corporate, Intermediate-Term Corporate and
MAY INVEST IN Long-Term Corporate Portfolios may hold securities of
SECURITIES OF foreign issuers, but all such securities must be denominated
FOREIGN ISSUERS in U.S. dollars. Securities of foreign issuers may trade in
U.S. or foreign securities markets. Securities of foreign
issuers may involve investment risks that are different from
those of domestic issuers. Such risks include the effect of
foreign economic policies and conditions, future political
and economic developments, and the possible imposition of
exchange controls or other foreign governmental restrictions
on foreign debt issuers. There may also be less publicly
available information about a foreign issuer than a domestic
issuer of securities. Foreign issuers are generally not
subject to the uniform accounting, auditing and financial
reporting standards that apply to domestic issuers. Also,
foreign debt markets may be characterized by lower
liquidity, greater price volatility, and higher transactions
costs. Additionally, it may be difficult to obtain or
enforce a legal judgement in a foreign court.
MOST PORTFOLIOS Each Portfolio of the Fund, except for the Short-Term
MAY INVEST IN Federal Portfolio, may invest in futures contracts and
FUTURES CONTRACTS, options to a limited extent. Specifically, a Portfolio may
OPTIONS, AND OTHER enter into futures contracts provided that not more than 5%
DERIVATIVE of its assets are required as a futures contract margin
SECURITIES deposit; in addition, a Portfolio may enter into futures
contracts and options transactions only to the extent that
obligations under such contracts or transactions represent
not more than 20% of the Portfolio's assets.
Futures contracts and options may be used for several
reasons: to maintain cash reserves while simulating full
investment, to facilitate trading, to reduce transaction
costs, or to seek higher investment returns when a specific
futures contract is priced more attractively than other
futures contracts or the underlying security or index. The
Portfolios intend to use futures contracts only for bona
fide hedging purposes and will not use futures contracts or
options for speculative purposes.
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FUTURES CONTRACTS The primary risks associated with the use of futures
AND OPTIONS POSE contracts and options are: (i) imperfect correlation between
CERTAIN RISKS the change in market value of the bonds held by a Portfolio
and the prices of futures contracts and options; and (ii)
possible lack of a liquid secondary market for a futures
contract and the resulting inability to close a futures
position prior to its maturity date. The risk of imperfect
correlation will be minimized by investing only in those
contracts whose price fluctuations are expected to resemble
those of the Portfolio's underlying securities. The risk
that a Portfolio will be unable to close out a futures
position will be minimized by entering into such transac-
tions on a national exchange with an active and liquid
secondary market.
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage
involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate
and substantial loss (or gain) to the investor. When
investing in futures contracts, a Portfolio will segregate
cash or cash equivalents in the amount of the underlying
obligation.
Derivatives are instruments whose value is linked to or
derived from an underlying security. The most common are
futures and options which are described above. Other
derivatives include swaps, inverse floaters, IO's (interest
only), and PO's (principal only). Derivatives may be traded
separately on exchanges or in the over-the-counter market,
or they may be imbedded in other securities. The most common
imbedded derivative is the call option attached to or
imbedded in a callable government or callable corporate
bond. The owner of a traditional callable bond holds a
combination of a long position in a non-callable bond and a
short position in a call option on that bond, i.e. the bond
issuer has the right to call the bond away from the holder
of the bond. Any of these instruments may also be used
individually or in combination to hedge against unfavorable
changes in interest rates, or to speculate on anticipated
changes in interest rates. Derivatives may be structured
with no or a high degree of leverage. When derivatives are
used as hedges, the risk incurred is that the derivative
instrument's value may change differently than the value of
the security being hedged. This "basis risk" is generally
lower than the risk associated with an unhedged position in
the security being hedged. Some derivatives may entail
liquidity risk, i.e. the risk that the instrument cannot be
sold at a reasonable price in highly volatile markets.
Leveraged derivatives used for speculation are very
volatile, and therefore, very risky. However, the Fund's
Portfolios will only utilize derivatives for hedging or
arbitrage purposes, and not for speculative purposes.
Over-the-counter derivatives involve a counterparty risk,
i.e. the risk that the individual or institution on the
other side of the agreement will not or cannot meet their
obligations under the derivative agreement.
EACH PORTFOLIO MAY Each Portfolio of the Fund may lend its investment
LEND ITS securities to qualified institutional investors for either
SECURITIES short-term or long-term purposes of realizing additional
income. Loans of securities by a Portfolio will be
collateralized by cash, letters of credit, or securities
issued or guaranteed by the U.S. Government or its agencies.
The collateral will equal at least 100% of the current
market value of the loaned securities, and such loans may
not exceed 33 1/3% of the value of the Portfolio's
securities.
MOST PORTFOLIOS The Short-Term Federal, Short-and Intermediate-Term
MAY INVEST IN CMOS Corporate and the Short-, Intermediate-and Long-Term U.S.
Treasury Portfolios may invest in collateralized mortgage
obligations (CMOs), bonds that are collateralized by whole
loan mortgages or mortgage pass-through securities. In the
case of the Short-Term Federal and the Short-, Intermediate-
and Long-Term U.S. Treasury Portfolios, only CMOs
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issued by agencies or instrumentalities of the U.S.
Government will be purchased. However, the Short-and
Intermediate-Term Corporate Portfolios may also purchase
privately-issued CMOs carrying investment grade ratings. The
bonds issued under a CMO structure are divided into groups
with varying maturities, and the cash flows generated by the
mortgages or mortgage pass-through securities in the
collateral pool are used to first pay interest and then pay
principal to the CMO bondholders. Under the CMO structure,
the repayment of principal among the different groups is
prioritized in accordance with the terms of the particular
CMO issuance. The "fastest-pay" group of bonds, as specified
in the prospectus for the issuance, would initially receive
all principal payments. When that group of bonds is retired,
the next group or groups, in the sequence, as specified in
the prospectus, receive all of the principal payments until
all of the groups are retired. Aside from market risk, the
primary risk involved in any mortgage security, such as a
CMO issuance, is its exposure to prepayment risk. To the
extent a particular group of bonds is exposed to this risk,
the bondholder is generally compensated in the form of
higher yield (see "Investment Risks"). In order to provide
security, in addition to the underlying collateral, many CMO
issues also include minimum reinvestment rate and minimum
sinking-fund guarantees. Typically, the Portfolios will
invest in those CMOs that most appropriately reflect their
average maturities and market risk profiles. Consequently,
the Short-Term Portfolios invest only in CMOs with highly
predictable short-term average maturities. Similarly, the
Intermediate-Term Portfolios will invest in those CMOs that
carry market risks and expected average maturities consis-
tent with intermediate-term bonds, and the Long-Term U.S.
Treasury Portfolio will invest in those CMO's that carry
market risks and expected average maturities consistent with
long-term bonds.
The maturity of some classes of CMOs may be very difficult
to predict because any such predictions are highly dependent
upon assumptions regarding the prepayments which CMOs may
experience. Deviations in the actual prepayments experi-
enced may significantly affect the ultimate maturity of
CMOs, and in such an event, the maturity and risk
characteristics of CMOs purchased by the Portfolios may be
significantly greater or less than intended. The possibility
that rising interest rates may cause prepayments to occur at
a slower than expected rate is known as extension risk. This
particular risk may effectively change a CMO which was
considered short-or intermediate-term at the time of
purchase into a long-term security. Alternatively, there are
certain classes of CMOs that are by design constructed to
have highly predictable average maturities. Such CMOs will
retain their relative predictability over a broad range of
prepayment experience. The Portfolios expect to control
extension risk by purchasing these specific classes of CMOs
which, in the advisers' opinions, are reasonably
predictable.
PORTFOLIO TURNOVER Although they generally seek to invest for the long term,
RATES WILL VARY the Portfolios of the Fund retain the right to sell
securities regardless of how long they have been held. It is
anticipated that the annual portfolio turnover rate for the
GNMA and Long-Term Corporate Portfolios will not exceed
100%. A 100% turnover rate would occur, for example, if all
of the securities in a Portfolio were replaced within one
year. For the Intermediate-Term and Long-Term U.S. Treasury
and the Intermediate-Term Corporate Portfolios, portfolio
turnover rates will generally not exceed 200%. For the
Short-Term U.S. Treasury, Short-Term Federal, and Short-Term
Corporate Portfolios,
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portfolio turnover rates will be higher due to the
short-term maturities of the securities purchased, but are
not expected to exceed 300%. A higher Portfolio turnover
rate will cause a Portfolio to incur additional brokerage
costs and may cause a Portfolio to realize a higher level of
capital gains or losses.
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INVESTMENT Each of the Fund's Portfolios has adopted certain
LIMITATIONS limitations designed to reduce its exposure to specific
situations. Some of these limitations are that a Portfolio
will not:
THE FUND HAS
ADOPTED
CERTAIN (a) with respect to 75% of its assets, invest more than 5%
FUNDAMENTAL of the value of its assets in the securities of any single
LIMITATIONS company;
(b) with respect to 75% of its assets, purchase more than
10% of the voting securities of any issuer;
(c) invest more than 5% of its assets in the securities of
companies that have a continuous operating history of less
than three years;
(d) invest more than 25% of its assets in any one industry,
provided that: (i) this limitation does not apply to
obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities; (ii) utility
companies will be divided according to their services.
For example, gas, gas transmission, electric, electric
and gas, and telephone will each be considered a
separate industry; and (iii) financial service companies
will be classified according to the end users of their
services. For example, automobile finance, bank finance,
and diversified finance will be considered as separate
industries;
(e) borrow money, except that the Portfolio may borrow from
banks (or through reverse repurchase agreements), for
temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might
otherwise require the untimely disposition of
securities, in an amount not exceeding 15% of the value
of the Portfolio's net assets (including the amount
borrowed and the value of any outstanding reverse
repurchase agreements) at the time the borrowing is
made. Whenever borrowings exceed 5% of the value of the
Portfolio's net assets, the Portfolio will not make any
additional investments.
(f) pledge, mortgage or hypothecate its assets to an extent
greater than 5% of the value of its total assets.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional Informa-
tion may be changed only with the approval of a majority of
the Fund's shareholders.
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MANAGEMENT OF THE The Fund is a member of The Vanguard Group of Investment
FUND Companies, a family of 32 investment companies with 78
VANGUARD distinct portfolios and total assets in excess of $120
ADMINISTERS AND billion. Through their jointly owned subsidiary, The
DISTRIBUTES THE Vanguard Group, Inc. ("Vanguard"), the Fund and the other
FUND funds in the Group obtain at cost virtually all of their
corporate management, administrative, shareholder accounting
and distribution services. Vanguard also provides investment
advisory services on an at-cost basis to certain Vanguard
funds. As a result of Vanguard's unique corporate struc-
ture, the Vanguard funds have costs substantially lower than
those of most competing mutual funds. In 1993, the average
expense ratio (annual costs including advisory fees divided
by total net assets) for the Vanguard funds amounted to
approximately .30% compared to an average of 1.02% for the
mutual fund industry (data provided by Lipper Analytical
Services).
The Officers of the Fund oversee its day-to-day operations
and are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. A list of the Directors and Officers of the Fund
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each fund
pays its share of Vanguard's net expenses, which are
allocated among the funds under methods approved by the
Board of Directors (Trustees) of each fund. In addition,
each fund bears its own direct expenses, such as legal,
auditing and custodian fees.
Vanguard also provides distribution and marketing services
to the Vanguard funds. The funds are available on a no-load
basis (i.e., there are no sales commissions or 12b-1 fees).
However, each fund bears its share of the Group's
distribution costs.
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INVESTMENT The Fund utilizes two investment advisers. Wellington
ADVISERS Management Company serves as investment adviser to the GNMA
THE FUND EMPLOYS and Long-Term Corporate Portfolios; Vanguard's Fixed Income
TWO INVESTMENT Group serves as investment adviser to the Short-Term U.S.
ADVISERS Treasury, Short-Term Federal, Short-Term Corporate,
Intermediate-Term U.S. Treasury, Intermediate-Term Corporate
and Long-Term U.S. Treasury Portfolios.
WELLINGTON Under an investment advisory agreement with the Fund dated
MANAGEMENT COMPANY May 31, 1993, Wellington Management Company ("WMC"), 75
State Street, Boston, MA 02109, manages the investment and
reinvestment of assets in the GNMA and Long-Term Corporate
Portfolios, and continuously reviews, supervises and
administers the investment program of these two Portfolios.
WMC discharges its responsibilities subject to the control
of the Officers and Directors of the Fund.
WMC is a professional investment counseling firm which
globally provides investment services to investment
companies, institutions and individuals. Among the clients
of WMC are 12 of the 32 investment companies of The Vanguard
Group. As of December 31, 1993, WMC held discretionary
management authority with respect to approximately $82.8
billion of assets. WMC and its predecessor organizations
have provided investment advisory services to investment
companies since 1933 and to investment counseling clients
since 1960.
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As of March 31, 1994, Paul D. Kaplan, Senior Vice President
of WMC, assumed the duties of portfolio manager for the GNMA
portfolio. Prior to this change, Mr. Kaplan was assistant
portfolio manager for the GNMA Portfolio. Mr. Kaplan has
been associated with WMC for 16 years and also currently
manages the bond component of Vanguard Utilities Income
Portfolio.
Also as of March 31, 1994, Earl E. McEvoy, Senior Vice
President of WMC, assumed responsibility for the management
of the Fund's Long-Term Corporate Portfolio. Mr. McEvoy
currently manages the Fund's High Yield Corporate Portfolio
as well as Vanguard Preferred Stock Fund and the bond
component of Vanguard/Wellesley Income Fund, Inc. Mr. McEvoy
has also been associated with Wellington Management Company
for 16 years.
Mr. Kaplan and Mr. McEvoy are supported by research and
other investment services provided by the professional staff
of WMC.
Under the Fund's investment advisory agreement, the fee paid
to WMC is based on the total assets of the GNMA Portfolio,
the Long-Term Corporate Portfolio, and the total assets of
the High Yield Corporate Portfolio of Vanguard Fixed Income
Securities Fund which is not included in this Prospectus.
The three Portfolios pay WMC an aggregate fee at the end of
each fiscal quarter, calculated by applying a quarterly rate
based on the following annual percentage rates, to the
aggregate average month-end net assets of the three
Portfolios:
</TABLE>
<TABLE>
<CAPTION>
NET ASSETS RATE
-------------------- -----
<S> <C> <C>
First $2.5 billion .125%
Next $2.5 billion .100%
Next $2.5 billion .075%
Over $7.5 billion .050%
</TABLE>
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The advisory fee is then apportioned to each Portfolio based
on the relative net assets of each; provided, however, that
following such an allocation, the fee to be paid by the GNMA
Portfolio is reduced by 75%, and the fee paid by the
Long-Term Corporate Portfolio is reduced by 50%. For the
fiscal year ended January 31, 1994, the GNMA and Long-Term
Corporate Portfolios paid annual advisory fees to WMC equal
to, respectively, .02 of 1%, and .04 of 1% of average net
assets. These fees were paid pursuant to a previous advisory
agreement that called for a higher rate of fees.
The investment advisory agreement authorizes WMC to select
brokers or dealers to execute purchases and sales of each
Portfolio's securities, and directs WMC to use its best
efforts to obtain the best available price and most
favorable execution with respect to all transactions. The
full range and quality of brokerage services are considered
in making these determinations.
The Fund has authorized WMC to pay higher commissions in
recognition of brokerage services felt necessary for the
achievement of better execution, provided the adviser
believes this to be in the best interest of the Fund.
Although the Fund does not market its shares through
intermediary brokers or dealers, WMC may place orders with
qualified broker-dealers who recommend the Fund to clients
if the Officers of the Fund believe that the quality of the
transaction and the commission are comparable to what they
would be with other qualified brokerage firms.
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VANGUARD FIXED The Short-Term U.S. Treasury, Short-Term Federal, Short and
INCOME GROUP Intermediate-Term Corporate, and Intermediate-and Long-Term
U.S. Treasury Portfolios receive all investment advisory
services on an at-cost basis from Vanguard's Fixed Income
Group. The Group also provides investment advisory services
to several other Vanguard money market and bond portfolios,
both taxable and tax-exempt. Total assets under management
by Vanguard's Fixed Income Group were $52 billion as of
December 31, 1993.
Ian A. MacKinnon, Senior Vice President of Vanguard, has
been in charge of the Fixed Income Group since its inception
in 1981. Mr. MacKinnon is responsible for setting the broad
investment strategies employed by the Fund, and for
overseeing the portfolio managers who implement those
strategies on a day-to-day basis. The Fund's portfolio
managers are as follows:
- Robert F. Auwaerter, Vice President of Vanguard, serves as
portfolio manager of the Short-Term Federal, Long-Term
U.S. Treasury Portfolio, Short-Term Corporate,
Intermediate-Term U.S. Treasury, and Intermediate-Term
Corporate Portfolios. Associated with the Fixed Income
Group since 1981, Mr. Auwaerter has managed the Short-Term
Corporate Portfolio since 1983, the Long-Term U.S.
Treasury Portfolio since 1994 and each of these other
Portfolios since their respective inceptions. (Previously,
the Long-Term U.S. Treasury Portfolio was managed by
Anthony Jiorle.)
- John Hollyer, Assistant Vice President of Vanguard, serves
as portfolio manager of the Short-Term U.S. Treasury
Portfolio. Associated with the Fixed Income Group since
1989, Mr. Hollyer began managing the Portfolio in 1993.
(Previously, the Portfolio was managed by Mr. Auwaerter.)
For two years prior to joining Vanguard, Mr. Hollyer
traded U.S. Government bonds for an international
investment bank.
The Fixed Income Group manages the investment and
reinvestment of the assets of these six Portfolios and
continuously reviews, supervises and administers each
Portfolio's investment program, subject to the maturity and
quality standards specified in this Prospectus and
supplemental guidelines approved by the Fund's Board of
Directors. The Fixed Income Group's selection of investments
for the Portfolios is based on: (a) continuing credit
analysis of those instruments held in the Portfolios and
those being considered for inclusion therein; (b) possible
disparities in yield relationships between different money
market instruments; and (c) actual or anticipated movements
in the general level of interest rates.
Vanguard's Fixed Income Group is also responsible for the
placement of portfolio transactions and the negotiation of
commissions for the six Portfolios. The purchase and sale of
investment securities will ordinarily be principal
transactions. Portfolio securities will normally be
purchased directly from the issuer or from an underwriter or
market maker for the securities. There usually will be no
brokerage commissions paid by a Portfolio for securities
purchased from an issuer. Purchases from underwriters of
securities will include a commission or concession paid by
the issuer to the underwriter, and purchases from dealers
serving as market makers will include a dealer's mark-up.
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In purchasing and selling securities for each of the six
Portfolios, it is the Fund's policy to seek to obtain
quality execution at the most favorable prices, through
responsible broker-dealers. In selecting broker-dealers to
execute the securities transactions for the Portfolios,
consideration will be given to such factors as the price of
the security; the rate of the commission; the size and
difficulty of the order; the reliability, integrity,
financial condition, general execution and operational ca-
pabilities of the competing broker-dealer; and the brokerage
and research services provided to the Fund.
Vanguard's Fixed Income Group may occasionally make
recommendations to other Vanguard Funds or clients which
result in their purchasing or selling securities
simultaneously with a Portfolio of the Fund. As a result,
the demand for securities being purchased or the supply of
securities being sold may increase, and this could have an
adverse effect on the price of those securities. It is the
policy of the Fixed Income Group not to favor one client
over another in making recommendations or placing an order.
If two or more clients are purchasing a given security on
the same day from the same broker-dealer, such transactions
may be averaged as to price.
Although the Fund does not market its shares through brokers
or dealers, the Fixed Income Group may place orders with
qualified broker-dealers who recommend the Fund to clients
if the Fund's Officers believe that the quality of the
transaction and the commission are comparable to what they
would be with other qualified brokerage firms.
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL Dividends consisting of virtually all of the ordinary income
GAINS AND TAXES of each Portfolio of the Fund are declared daily and are
DIVIDENDS ARE PAID payable to shareholders of record at the time of
ON declaration. Such dividends are paid on the first business
THE FIRST BUSINESS day of each month. Net capital gains distributions, if any,
DAY will be made annually.
OF EACH MONTH The Fund's dividend and capital gains distributions may be
reinvested in additional shares or received in cash. See
"Choosing a Distribution Option" for a description of these
distribution methods.
In order to satisfy certain requirements of the Tax Reform
Act of 1986, the Fund may declare year-end dividend and
capital gains distributions during December. Such
distributions, if received by shareholders by January 31,
are deemed to have been paid by the Fund and received by
shareholders on December 31 of the prior year.
Each Portfolio of the Fund intends to continue to qualify
for taxation as a "regulated investment company" under the
Internal Revenue Code so that none of the Portfolios will be
subject to federal income tax to the extent its income is
distributed to shareholders. Dividends paid by the Fund from
net investment income, whether received in cash or
reinvested in additional shares, will be taxable to
shareholders as ordinary income. For corporate investors,
dividends paid by the Fund from net investment income will
generally not qualify for the intercorporate dividends-re-
ceived deduction.
Distributions paid by the Fund from long-term capital gains,
whether received in cash or reinvested in additional shares,
are taxable as long-term capital gains, regardless of the
length of time you have owned shares in the Fund. Capital
gains
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distributions are made when the Fund realizes net capital
gains on sales of portfolio securities during the year. For
the Fund, realized capital gains are not expected to be a
significant or predictable part of investment return.
The Fund will notify you annually as to the tax status of
dividend and capital gains distributions paid by the Fund.
The Fund is managed without regard to tax ramifications.
A CAPITAL GAIN OR A sale of shares of the Fund is a taxable event and may
LOSS MAY BE result in a capital gain or loss. A capital gain or loss may
REALIZED UPON be realized from an ordinary redemption of shares, a
EXCHANGE OR check-writing redemption, or an exchange of shares between
REDEMPTION two mutual funds (or two portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges may
be subject to state and local taxes. However, depending on
provisions of your state's tax law, the portion of a
Portfolio's income derived from "full faith and credit" U.S.
Treasury obligations may be exempt from state and local
taxes. The Fund will indicate each year the portion of a
Portfolio's income, if any, that may qualify for this
exemption.
The Fund is required to withhold 31% of taxable dividends,
capital gains distributions, and redemptions paid to
shareholders who have not complied with IRS taxpayer
identification regulations. You may avoid this withholding
requirement by certifying on your Account Registration Form
your proper Social Security or Taxpayer Identification
Number and by certifying that you are not subject to backup
withholding.
The Fund has obtained a Certificate of Authority to do
business as a foreign corporation in Pennsylvania and does
business and maintains an office in that state. In the
opinion of counsel, the shares of the Fund are exempt from
Pennsylvania personal property taxes.
The tax discussion set forth above is included for general
information only. Prospective investors should consult their
own tax advisers concerning the tax consequences of an
investment in the Fund.
- --------------------------------------------------------------------------------
THE SHARE PRICE OF The share price or "net asset value" per share of each
EACH PORTFOLIO Portfolio is computed daily by dividing the total value of
the investments and other assets of each Portfolio, less any
liabilities, by the total outstanding shares of such
Portfolio. The net asset value per share of each Portfolio
is determined as of the regular close of the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on each day the
Exchange is open for trading. Securities which are traded
over-the-counter and on a stock exchange will be valued
according to the broadest and most representative market,
and it is expected that for bonds and other fixed income
securities this ordinarily will be the over-the-counter
market.
However, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service
when such prices are believed to reflect the fair market
value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale
prices but take into account institutional size trading in
similar groups of securities and any developments related to
specific securities. Securities not priced in this manner
are valued at the most recent
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28
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quoted bid price, or when stock exchange valuations are
used, at the latest quoted sale price on the date of
valuation. Short-term instruments are valued at cost, which
approximates market value. Other assets and securities for
which no quotations are readily available will be valued in
good faith at fair market value using methods determined by
the Board of Directors.
Each Portfolio's share price can be found daily in the
mutual fund listings of most major newspapers under the
heading of The Vanguard Group.
- --------------------------------------------------------------------------------
GENERAL The Fund is a Maryland corporation. The Articles of
INFORMATION Incorporation permit the Directors to issue 3,500,000,000
shares of common stock, with a $.001 par value. The Board of
Directors has the power to designate one or more classes
("Portfolios") of shares of common stock and to classify or
reclassify any unissued shares with respect to such classes.
Currently the Fund is offering shares of nine Portfolios.
The shares of each Portfolio are fully paid and
non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and have
no pre-emptive rights. Such shares have non-cumulative
voting rights, meaning that the holders of more than 50% of
the shares voting for the election of Directors can elect
100% of the Directors if they so choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Director or Directors of the Fund if
requested in writing by the holders of not less than 10% of
the outstanding shares of the Fund.
All securities and cash for the GNMA and Long-Term Corporate
Portfolios are held by Morgan Guaranty Trust Company, New
York, NY. For the Short-Term Federal, Short-Term Corporate,
and Long-Term U.S. Treasury Portfolios, all securities and
cash are held by CoreStates Bank, N.A., Philadelphia, PA.
For the Short-Term and Intermediate-Term U.S. Treasury and
the Intermediate Term Corporate Portfolios, all securities
and cash are held by State Street Bank and Trust Company,
Boston, MA. The Vanguard Group, Inc., Valley Forge, PA,
serves as the Fund's Transfer and Dividend Disbursing Agent.
Price Waterhouse serves as independent accountants for the
Fund and will audit its financial statements annually. The
Fund is not involved in any litigation.
- --------------------------------------------------------------------------------
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29
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SHAREHOLDER GUIDE
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OPENING AN ACCOUNT You may open a regular (non-retirement) account, either by
AND PURCHASING mail or wire. Simply complete and return an Account
SHARES Registration Form, and any required legal documentation,
indicating the Portfolio you have chosen and the amount you
wish to invest. Your purchase must be equal to or greater
than the $3,000 minimum initial investment requirement for a
Portfolio ($500 for Individual Retirement Accounts and
Uniform Gifts/Transfers to Minors Act accounts). You must
open a new Individual Retirement Account by mail (IRAs may
not be opened by wire) using a Vanguard IRA Adoption
Agreement. Your purchase must be equal to or greater than
the $500 minimum initial investment requirement, but no more
than $2,000 if you are making a regular IRA Contribution.
Rollover contributions are generally limited to the amount
withdrawn within the past 60 days from an IRA or other
qualified retirement plan. If you need assistance with the
forms or have any questions, please call our Investor
Information Department (1-800-662-7447). Note: For other
types of account registrations (e.g., corporations,
associations, other organizations, trusts or powers of
attorney), please call us to determine which additional
forms you may need.
Because of the risks associated with bond investments, the
Fund is intended to be a long term investment vehicle and is
not designed to provide investors with a means of
speculating on short-term market movements. Consequently,
the Fund reserves the right to reject any specific purchase
(and exchange purchase) request. The Fund also reserves the
right to suspend the offering of shares for a period of
time.
The Fund's shares are purchased at the next-determined net
asset value after your investment has been received in the
form of Federal Funds. See "When Your Account Will Be
Credited." The Fund is offered on a no-load basis (i.e.,
there are no sales commissions or 12b-1 fees).
ADDITIONAL Subsequent investments to regular accounts may be made by
INVESTMENTS mail ($100 minimum per Portfolio), wire ($1,000 minimum per
Portfolio), exchange from another Vanguard Fund account, or
Vanguard Fund Express. Subsequent investments to Individual
Retirement Accounts may be made by mail ($100 minimum) or
exchange from another Vanguard Fund account. In some
instances, contributions may be made by wire or Vanguard
Fund Express. Please call us for more information on these
options.
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<CAPTION>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
<S> <C> <C>
PURCHASING BY Please include the amount of Additional investments should
MAIL your initial investment and include the Invest-by-Mail
Complete and the Portfolio(s) you have remit-
sign the selected on the registration tance form attached to your
enclosed Account form, make your check payable Fund confirmation statements.
Registration to THE VANGUARD GROUP--(PORT- Please make your check payable
Form FOLIO NUMBER) (SEE BELOW FOR to THE VANGUARD
THE APPROPRIATE PORTFOLIO GROUP--(PORTFOLIO NUMBER) (SEE
NUMBER), and mail to: BELOW FOR THE APPROPRIATE
VANGUARD FINANCIAL CENTER PORTFOLIO NUMBER), write your
P.O. BOX 2600 account number on your check
VALLEY FORGE, PA 19482 and, using the return envelope
provided, mail to the address
indicated on the
Invest-by-Mail Form.
For express or VANGUARD FINANCIAL CENTER All written requests should be
registered mail, 455 DEVON PARK DRIVE mailed to one of the addresses
send to: WAYNE, PA 19087 indicated for new accounts. Do
not send registered or express
mail to the post office box
address.
VANGUARD FIXED INCOME SECURITIES FUND PORTFOLIO NUMBERS:
SHORT-TERM U.S. TREASURY--32
SHORT-TERM FEDERAL--49
SHORT-TERM CORPORATE--39
INTERMEDIATE-TERM U.S. TREASURY--35
GNMA--36
INTERMEDIATE-TERM CORPORATE--71
LONG-TERM U.S. TREASURY--83
LONG-TERM CORPORATE--28
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PURCHASING BY WIRE CORESTATES BANK, N.A.
Money should be ABA 031000011
wired to: CORESTATES NO 0101 9897
ATTN VANGUARD
VANGUARD FIXED INCOME SECURITIES FUND
NAME OF PORTFOLIO
ACCOUNT NUMBER
ACCOUNT REGISTRATION
BEFORE WIRING To assure proper receipt, please be sure your bank includes
Please contact the Portfolio name, the account number Vanguard has assigned
Client Services to you and the eight-digit CoreStates number. If you are
(1-800-662-2739) opening a new account, you must contact our Client Services
Department (1-800-662-2739) before wiring funds.
Additionally, complete the Account Registration Form and
mail it to the "New Account" address above after completing
your wire arrangement. NOTE: Federal Funds wire purchase
orders will be accepted only when the Fund and Custodian
Bank are open for business.
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PURCHASING BY You may open an account or purchase additional shares by
EXCHANGE (from a making an exchange from an existing Vanguard Fund account.
Vanguard account) However, the Fund reserves the right to refuse any exchange
purchase request. Call our Client Services Department
(1-800-662-2739) for assistance. The new account will have
the same registration as the existing account.
------------------------------------------------------------
PURCHASING BY The Fund Express SPECIAL PURCHASE option lets you move money
FUND EXPRESS from your bank account to your Vanguard account at your
Special Purchase request. Or, if you choose the AUTOMATIC INVESTMENT option,
and money will be moved from your bank account to your Vanguard
Automatic account on the schedule (monthly, bimonthly [every other
Investment month], quarterly or yearly) you select. To establish these
Fund Express options, please provide the appropriate
information on the Account Registration Form. We will send
you a confirmation of your Fund Express enrollment; please
wait three weeks before using the service.
- --------------------------------------------------------------------------------
CHOOSING A You must select one of three distribution options:
DISTRIBUTION 1. AUTOMATIC REINVESTMENT OPTION--Both dividends and capital
OPTION gains distributions will be reinvested in additional
Portfolio shares. This option will be selected for you
automatically unless you specify one of the other
options.
2. CASH DIVIDEND OPTION--Your dividends will be paid in cash
and your capital gains will be reinvested in additional
Portfolio shares.
3. ALL CASH OPTION--Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client Services
Department (1-800-662-2739).
In addition, an option to invest your cash dividends and/or
capital gains distributions in another Vanguard Fund account
is available. Please call our Client Services Department
(1-800-662-2739) for information. You may also elect
Vanguard Dividend Express which allows you to transfer your
cash dividends and/or capital gains distributions
automatically to your bank account. Please see "Other
Vanguard Services" for more information.
- --------------------------------------------------------------------------------
TAX CAUTION Under Federal tax laws, each Portfolio is required to
INVESTORS SHOULD distribute net capital gains and dividend income to
ASK Portfolio shareholders. These distributions are made to all
ABOUT THE TIMING shareholders who own Portfolio shares as of the
OF distribution's record date, regardless of how long the
CAPITAL GAINS AND shares have been owned. Purchasing shares just prior to the
DIVIDEND record date could have significant impact on your tax
DISTRIBUTIONS liability for the year. For example, if you purchase shares
BEFORE INVESTING immediately prior to the record date of a sizable capital
gain, you will be assessed taxes on the amount of the
capital gain distribution even though you owned the
Portfolio shares for just a short period of time. (Taxes are
due on the distributions even if the dividend or gain is
reinvested in additional Portfolio shares.) While the total
value of your investment will be the same after the capital
gain distribution--the amount of the capital gain
distribution will offset the drop in the net asset value of
the shares--you should be aware of the tax implications the
timing of your purchase may have.
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Prospective investors should, therefore, inquire about
potential distributions before investing. Each Portfolio of
the Fund's annual capital gains distribution normally occurs
in December, while income dividends are generally paid on
the first business day of each month. For additional
information on distributions and taxes, see the section
titled "Dividends, Capital Gains, and Taxes."
- --------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional Vanguard services on
INFORMATION your account is to select the options you desire when you
ESTABLISHING complete your Account Registration Form. IF YOU WISH TO ADD
OPTIONAL SERVICES OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD WITH
ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE. PLEASE
CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR
FURTHER ASSISTANCE.
SIGNATURE For our mutual protection, we may require a signature
GUARANTEES guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your signa-
ture and may be obtained from banks, brokers and any other
guarantor that Vanguard deems acceptable. A SIGNATURE
GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES Share certificates will be issued upon request for all
Portfolios except the Short and Intermediate-Term U.S.
Treasury and Intermediate-Term Corporate Portfolios. If a
certificate is lost, you may incur an expense to replace it.
BROKER-DEALER If you purchase shares in Vanguard Funds through a
PURCHASES registered broker-dealer or investment adviser, the
broker-dealer or adviser may charge a service fee.
CANCELLING TRADES The Fund will not cancel any trade (e.g., a purchase,
exchange or redemption) believed to be authentic, received
in writing or by telephone, once the trade has been
received.
- --------------------------------------------------------------------------------
WHEN YOUR ACCOUNT The TRADE DATE is the date on which your account is
WILL BE CREDITED credited. It is generally the day on which the Fund receives
your investment in the form of Federal Funds (monies
credited to the Fund's Custodian Bank by a Federal Reserve
Bank). Your trade date varies according to your method of
payment for your shares.
For purchases by check, the Fund is ordinarily credited with
Federal Funds within one business day. Thus, if your
purchase by check is received by the close of the New York
Stock Exchange (generally 4:00 p.m. Eastern time), your
trade date is the business day following receipt of your
check. If your purchase is received after the close of the
Exchange, your trade date is the second business day
following receipt of your check.
For purchases by Federal Funds wire or exchange, the Fund is
credited immediately with Federal Funds. Thus, if your
purchase by Federal Funds wire or exchange is received by
the close of the Exchange, your trade date is the day of
receipt. If your purchase is received after the close of the
Exchange, your trade date is the business day following
receipt of your wire or exchange.
Your shares are purchased at the next determined net asset
value after your investment has been received in the form of
Federal Funds. You will begin to earn dividends on the
calendar day following the trade date. (For a Friday trade
date, you will begin earning dividends on Saturday.)
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33
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In order to prevent lengthy processing delays caused by the
clearing of foreign checks, Vanguard will only accept a
foreign check which has been drawn in U.S. dollars and has
been issued by a foreign bank with a U.S. correspondent
bank. The name of the U.S. correspondent bank must be
printed on the face of the foreign check.
- --------------------------------------------------------------------------------
SELLING YOUR You may withdraw any portion of the funds in your account by
SHARES redeeming shares at any time. You may initiate a request by
writing or by telephoning. Your redemption proceeds are
normally mailed, credited or wired--depending upon the
method of withdrawal you have previously chosen--within two
business days after the receipt of the request in Good
Order.
SELLING BY WRITING You may withdraw funds from your account by writing a check
A CHECK payable in the amount of $250 or more. When a check is
presented for payment to the Fund's agent, CoreStates Bank,
N.A., the Fund will redeem sufficient shares in your account
at the next determined net asset value to cover the amount
of the check.
In order to establish the checkwriting option on your
account, all registered shareholders must sign a signature
card. After your completed signature card is received by the
Fund, an initial supply of checks will be mailed within 10
business days. There is no charge for checks or for their
clearance. CORPORATIONS, TRUSTS AND OTHER ORGANIZATIONS
SHOULD CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739)
BEFORE SUBMITTING SIGNATURE CARDS, AS ADDITIONAL DOCUMENTS
MAY BE REQUIRED TO ESTABLISH THE CHECKWRITING SERVICE.
Before establishing the checkwriting option, you should be
aware that:
1. Writing a check (a redemption of shares) is a taxable
event.
2. The Fund does not allow an account to be closed through
the checkwriting option.
3. Vanguard cannot guarantee a stop payment on the
checkwriting option. If you wish to reverse a stop payment
order, you must do so in writing.
4. Shares held in certificate form cannot be redeemed using
the checkwriting option.
5. The Fund reserves the right to terminate or alter this
service at any time.
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SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD FIXED INCOME SECURITIES FUND, P.O. BOX 1120, VALLEY
FORGE, PA 19482. (For express or registered mail, send your
request to Vanguard Financial Center, Vanguard Fixed Income
Securities Fund, 455 Devon Park Drive, Wayne, PA 19087.)
The redemption price of shares will be the Portfolio's net
asset value next determined after Vanguard has received all
required documents in Good Order.
------------------------------------------------------------
DEFINITION OF GOOD GOOD ORDER means that the request includes the following:
ORDER 1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars or
shares).
3. The signatures of all owners EXACTLY as they are
registered on the account.
4. Any required signature guarantees.
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34
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5. Any other supporting legal documentation that might be
required in the case of estates, corporations, trusts and
certain other accounts.
6. Any certificates that you hold for the account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS
TO YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES DEPARTMENT
(1-800-662-2739).
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SELLING BY To sell shares by telephone, you or your pre-authorized
TELEPHONE representative may call our Client Services Department at
1-800-662-2739. For telephone redemptions, you may have the
proceeds sent to you by mail or by wire. In addition to the
details below, please see "Important Information About
Telephone Transactions."
BY MAIL: Telephone mail redemption is automatically
established on your account unless you indicate otherwise on
your Account Registration Form. You may redeem any amount by
calling Vanguard. The proceeds will be paid to the
registered shareholders and mailed to the address of record.
BY WIRE: Telephone wire redemption must be specifically
elected for your account. The best time to elect telephone
wire redemption is at the time you complete your Account
Registration Form. If you do not presently have telephone
wire redemption and wish to establish it, please contact our
Client Services Department.
With the wire redemption option, you may withdraw a minimum
of $1,000 and have the amount wired directly to your bank
account. Wire redemptions less than $5,000 are subject to a
$5 charge deducted by Vanguard. There is no Vanguard charge
for wire redemptions of $5,000 or more. However, your bank
may assess a separate fee to accept incoming wires.
A request to change the bank associated with your wire
redemption option must be received in writing, signed by
each registered shareholder, and accompanied by a voided
check or preprinted deposit slip. A signature guarantee is
required if your bank registration is not identical to your
Vanguard Fund account registration.
------------------------------------------------------------
SELLING BY FUND If you select the Fund Express AUTOMATIC WITHDRAWAL option,
EXPRESS money will be automatically moved from your Vanguard Fund
Automatic account to your bank account according to the schedule you
Withdrawal & have selected. The SPECIAL REDEMPTION option lets you move
Special Redemption money from your Vanguard account to your bank account on
your request. You may elect Fund Express on the Account
Registration Form or call our Investor Information
Department (1-800-662-7447) for a Fund Express application.
------------------------------------------------------------
SELLING BY You may sell shares of the Fund by making an exchange into
EXCHANGE another Vanguard Fund account. Please see "Exchanging Your
Shares" for details.
------------------------------------------------------------
IMPORTANT Shares purchased by check or Fund Express may not be
REDEMPTION redeemed until payment for the purchase is collected, which
INFORMATION may take up to ten calendar days. Your money is invested
during the holding period.
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DELIVERY OF Redemption requests received by telephone prior to the
REDEMPTION regular close of the New York Stock Exchange (generally 4:00
PROCEEDS p.m. Eastern time) are processed on the day of receipt and
the redemption proceeds are normally sent on the following
business day.
Redemption requests received by telephone after the regular
close of the New York Stock Exchange are processed on the
business day following receipt and the proceeds are normally
sent on the second business day following receipt.
Redemption proceeds must be sent to you within seven days of
receipt of your request in Good Order.
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular or
express mail. It will be implemented at the net asset value
next determined after your request has been received by
Vanguard in Good Order. The Fund reserves the right to
revise or terminate the telephone redemption privilege at
any time.
The Fund may suspend the redemption right or postpone
payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the
United States Securities and Exchange Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of the Fund's remaining
shareholders to make payment in cash, the Fund may pay
redemption proceeds of amounts in excess of $250,000 in
whole or in part by a distribution in kind of readily
marketable securities.
------------------------------------------------------------
VANGUARD'S AVERAGE If you make a redemption from a qualifying account, Vanguard
COST STATEMENT will send you an Average Cost Statement which provides you
with the tax basis of the shares you redeemed. Please see
"Other Vanguard Services" for additional information.
------------------------------------------------------------
MINIMUM ACCOUNT Due to the relatively high cost of maintaining smaller
BALANCE accounts, each Portfolio reserves the right to redeem shares
REQUIREMENT in any account that is below the minimum initial investment
amount of $3,000. In addition, if at any time your total
investment in a Portfolio does not have a value of at least
$1,000, you may be notified that the value of your account
is below the Fund's minimum account balance requirement. You
would then be allowed 60 days to make an additional
investment before the account is liquidated. Proceeds would
be promptly paid to the shareholder. This minimum
requirement does not apply to IRAs, other Vanguard
retirement accounts, and Uniform Gifts/Transfers to Minors
Act accounts.
- --------------------------------------------------------------------------------
EXCHANGING YOUR Should your investment goals change, you may exchange your
SHARES shares of Vanguard Fixed Income Securities Fund for those of
EXCHANGING BY other available Vanguard Funds.
TELEPHONE In addition to the details below, please see "Important
Call Client Information About Telephone Transactions."
Services When exchanging shares by telephone, please have ready the
(1-800-662-2739) Portfolio name, account number, Social Security Number or
Taxpayer Identification Number listed on the account, and
exact name in which the account is registered. Requests for
telephone exchanges received prior to the close of the New
York Stock Exchange
</TABLE>
36
<PAGE>
<TABLE>
<S> <C>
(generally 4:00 p.m. Eastern time) are processed at the
close of business that same day. Requests received after the
close of the Exchange are processed the next business day.
TELEPHONE EXCHANGES ARE NOT ACCEPTED INTO OR FROM VANGUARD
BALANCED INDEX FUND, VANGUARD EXPLORER FUND, VANGUARD INDEX
TRUST, VANGUARD INTERNATIONAL EQUITY INDEX FUND--EUROPEAN,
PACIFIC AND EMERGING MARKETS PORTFOLIOS, AND VANGUARD
QUANTITATIVE PORTFOLIOS. If you experience difficulty in
making a telephone exchange, your exchange request may be
made by regular or express mail, and it will be implemented
at the closing net asset value on the date received by
Vanguard, provided the request is received in Good Order.
EXCHANGING BY MAIL Please be sure to include on your exchange request the name
and account number of your current Portfolio, the name of
the Fund you wish to exchange into, the amount you wish to
exchange, and the signatures of all registered account
holders. Send your request to VANGUARD FINANCIAL CENTER,
VANGUARD FIXED INCOME SECURITIES FUND, P.O. BOX 1120, VALLEY
FORGE, PA 19482. (For express or registered mail, send your
request to Vanguard Financial Center, Vanguard Fixed Income
Securities Fund, 455 Devon Park Drive, Wayne, PA 19087.)
------------------------------------------------------------
IMPORTANT EXCHANGE Before you make an exchange, you should consider the
INFORMATION following:
- Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions you
may have, call our Investor Information Department
(1-800-662-7447).
- An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on the
transaction.
- Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
- New accounts are not currently accepted in
Vanguard/Windsor Fund.
- The redemption price of shares redeemed by exchange is the
net asset value next determined after Vanguard has
received all required documentation in Good Order.
- When opening a new account by exchange, you must meet the
minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange
privilege. However, the Fund reserves the right to revise or
terminate its provisions, limit the amount of or reject any
exchange, as deemed necessary, at any time.
The exchange privilege is only available in states in which
the shares of the Fund are registered for sale. The Fund's
shares are currently registered for sale in all 50 states
and the Fund intends to maintain such registration.
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE The Fund's exchange privilege is not intended to afford
LIMITATIONS shareholders a way to speculate on short-term movements in
the market. Accordingly, in order to prevent excessive use
of the exchange privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the
Fund has established a policy of limiting excessive exchange
activity.
</TABLE>
37
<PAGE>
<TABLE>
<S> <C>
Exchange activity will not be deemed excessive if limited to
TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT LEAST 30 DAYS
APART) from a Portfolio during any twelve month period.
Notwithstanding these limitations, the Fund reserves the
right to reject any purchase request (including exchange
purchases from other Vanguard portfolios) that is reasonably
deemed to be disruptive to efficient portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire
INFORMATION ABOUT redemptions) and exchanges by telephone is automatically
TELEPHONE established on your account unless you request in writing
TRANSACTIONS that telephone transactions on your account not be
permitted. The ability to initiate wire redemptions by
telephone will be established on your account only if you
specifically elect this option in writing.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions, Vanguard
adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone,
the caller must know (i) the name of the Portfolio; (ii) the
10-digit account number; (iii) the exact name in which
the account is registered; and (iv) the Social Security
or Taxpayer Identification number listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone redemption
by mail will be made payable to the registered shareowner
and mailed to the address of record, only. In the case of
a telephone redemption by wire, the wire transfer will be
made only in accordance with the shareowner's prior
written instructions.
Neither the Fund nor Vanguard will be responsible for the
authenticity of transaction instructions received by
telephone, provided that reasonable security procedures have
been followed. Vanguard believes that the security
procedures described above ARE reasonable and that if such
procedures are followed, YOU WILL BEAR THE RISK OF ANY
LOSSES RESULTING FROM UNAUTHORIZED OR FRAUDULENT TELEPHONE
TRANSACTIONS ON YOUR ACCOUNT. If Vanguard fails to follow
reasonable security procedures, it may be liable for any
losses resulting from unauthorized or fraudulent telephone
transactions on your account.
- --------------------------------------------------------------------------------
TRANSFERRING You may transfer the registration of any of your Fund shares
REGISTRATION to another person by completing a transfer form and sending
it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110, VALLEY
FORGE, PA 19482, ATTENTION: TRANSFER DEPARTMENT. The request
must be in Good Order. To receive a transfer form and full
instructions, please call our Client Services Department
(1-800-662-2739).
- --------------------------------------------------------------------------------
OTHER VANGUARD For more information about any of these services, please
SERVICES call our Investor Information Department at 1-800-662-7447.
STATEMENTS AND Vanguard will send you a confirmation statement each time
REPORTS you initiate a transaction in your account except for
checkwriting redemptions from Vanguard money market
accounts. You will also receive a comprehensive account
statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement,
listing all transaction activity for the entire calendar
year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account, using the
average cost single category method. This
</TABLE>
38
<PAGE>
<TABLE>
<S> <C>
service is available for most taxable accounts opened since
January 1, 1986. In general, investors who redeemed shares
from a qualifying Vanguard account may expect to receive
their Average Cost Statement in February of the following
year. Please call our Client Services Department
(1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you
semi-annually, according to the Fund's fiscal year-end.
VANGUARD DIRECT With Vanguard's Direct Deposit Service, most U.S. Government
DEPOSIT SERVICE checks (including Social Security and military pension
checks) and private payroll checks may be automatically
deposited into your Vanguard Fund account. Separate
brochures and forms are available for direct deposit of U.S.
Government and private payroll checks.
VANGUARD AUTOMATIC Vanguard's Automatic Exchange Service allows you to move
EXCHANGE SERVICE money automatically among your Vanguard Fund accounts. For
instance, the service can be used to "dollar cost average"
from a money market portfolio into a stock or bond fund or
to contribute to an IRA or other retirement plan.
VANGUARD FUND Vanguard's Fund Express allows you to transfer money between
EXPRESS your Fund account and your account at a bank, savings and
loan association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our
Investor Information Department (1-800-662-7447) for a Fund
Express application.
The minimum amount that can be transferred by telephone is
$100. However, if you have established one of the automatic
options, the minimum amount is $50. The maximum amount that
can be transferred using any of the options is $100,000.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition, some
services of Fund Express cannot be used with specific
Vanguard Funds. For more information, please refer to the
Vanguard Fund Express brochure.
VANGUARD DIVIDEND Vanguard's Dividend Express allows you to transfer your
EXPRESS dividends and/or capital gains distributions automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or a credit union that is a member of the
Automated Clearing House (ACH) network. You may elect this
service on the Account Registration Form or call the
Investor Information Department (1-800-662-7447) for a
Vanguard Dividend Express application.
VANGUARD Vanguard's Tele-Account is a convenient, automated service
TELE-ACCOUNT that provides share price, price change and yield quotations
on Vanguard Funds through any TouchTone-TM- telephone. This
service also lets you obtain information about your account
balance, your last transaction, and your most recent
dividend or capital gains payment. To contact Vanguard's
Tele-Account service, dial 1-800-ON-BOARD (1-800-662-6273).
A brochure offering detailed operating instructions is
available from our Investor Information Department
(1-800-662-7447).
- --------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
[LOGO] [LOGO]
- --------------------------- P R O S P E C T U S
THE VANGUARD GROUP MAY 25, 1994
OF INVESTMENT
COMPANIES
Vanguard Financial Center [LOGO]
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON BOARD)
TELECOMMUNICATIONS SERVICE FOR
THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(LOGO)
A MEMBER OF THE VANGUARD GROUP
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS--MAY 25, 1994
- --------------------------------------------------------------------------------
FUND INFORMATION: PARTICIPANT SERVICES--1-800-523-1188
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVE AND
POLICIES
Vanguard Fixed Income Securities Fund, Inc. (the "Fund") is
an open-end diversified investment company that seeks to
provide investors with a high level of current income
consistent with the maintenance of principal and liquidity.
The Fund consists of nine distinct Portfolios, each of
which invests in fixed income securities within prescribed
maturity and credit quality standards. There is no
assurance that any of the Fund's Portfolios will achieve
its stated objective. A MAJORITY OF THE ASSETS OF THE HIGH
YIELD CORPORATE PORTFOLIO MAY BE RATED BA OR B. SECURITIES
WITH SUCH RATINGS ARE COMMONLY REFERRED TO AS "JUNK BONDS"
AND ARE CONSIDERED SPECULATIVE BY THE MAJOR RATINGS
AGENCIES. PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS
ASSOCIATED WITH AN INVESTMENT IN THIS PORTFOLIO.
- --------------------------------------------------------------------------------
IMPORTANT NOTE
This Prospectus is intended exclusively for participants in
employer-sponsored retirement or savings plans, such as
tax-qualified pension or profit-sharing plans and 401(k)
thrift plans, as well as 403(b) custodial accounts for
non-profit educational and charitable organizations.
Another version of this Prospectus, containing information
on how to open a personal investment account with the Fund,
is available for individual investors. To obtain a copy of
that version of the Prospectus, please call 1-800-662-7447.
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT
A Portfolio(s) of the Fund is an investment option under a
retirement or savings program sponsored by your employer.
The administrator of your retirement plan or your employee
benefits office can provide you with detailed information
on how to participate in your plan and how to elect a
Portfolio(s) of the Fund as an investment option(s). If you
have any questions about the Fund, please contact
Participant Services (1-800-523-1188). If you have any
questions about your plan account, contact your plan
administrator or the organization that provides
recordkeeping services for your plan.
- --------------------------------------------------------------------------------
ABOUT THIS
PROSPECTUS
This Prospectus is designed to set forth concisely the
information you should know about the Fund before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing additional
information about the Fund has been filed with the
Securities and Exchange Commission. This Statement is dated
May 25, 1994, and has been incorporated by reference into
this Prospectus. A copy may be obtained without charge by
writing to the Fund or by calling 1-800-662-7447.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Highlights.................... 2
Fund Expenses................. 5
Financial Highlights.......... 6
Yield and Total Return........ 11
Investment Objective.......... 12
<CAPTION>
PAGE
<S> <C>
Investment Policies........... 12
Investment Risks.............. 17
Who Should Invest............. 22
Implementation of Policies.... 23
Investment Limitations........ 26
Management of the Fund........ 27
<CAPTION>
PAGE
<S> <C>
Investment Advisers........... 27
Dividends, Capital Gains and
Taxes....................... 30
The Share Price of Each
Portfolio................... 31
General Information........... 31
Service Guide................. 32
</TABLE>
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
<PAGE>
HIGHLIGHTS
OBJECTIVE AND
POLICIES
The Fund is a no-load, open-end diversified investment
company that seeks to provide investors with a high level
of income consistent with the maintenance of principal and
liquidity. The Fund consists of nine distinct Portfolios,
each of which invests in fixed income securities within
prescribed maturity and quality standards. There is no
assurance that the Fund will achieve its stated
objective. PAGE 12
- --------------------------------------------------------------------------------
NINE SEPARATE
PORTFOLIOS
The investment characteristics of each Portfolio are
summarized in the chart below. As illustrated, the Fund
consists of three short-term Portfolios, three
intermediate-term Portfolios, two long-term Portfolios,
and a high-risk Portfolio investing in low-quality
bonds. PAGE 12
<TABLE>
<CAPTION>
PORTFOLIO SUMMARY
- -----------------------------------------------------------------------
PRIMARY EXPECTED
PORTFOLIO INVESTMENTS AVERAGE MATURITY
<S> <C> <C>
- -----------------------------------------------------------------------
Short-Term U.S. Treasury U.S. Treasury 1-3 years
bonds
Short-Term Federal U.S. Government 1-3 years
agency bonds
Short-Term Corporate Investment grade 1-3 years
corporate bonds
- -----------------------------------------------------------------------
Intermediate-Term U.S. U.S. Treasury 5-10 years
Treasury bonds
GNMA GNMA mortgage Intermediate*
certificates
Intermediate-Term Corporate Investment grade 5-10 years
corporate bonds
- -----------------------------------------------------------------------
Long-Term U.S. Treasury U.S. Treasury 15-30 years
bonds
Long-Term Corporate Investment grade 15-25 years
corporate bonds
- -----------------------------------------------------------------------
High Yield Corporate Speculative grade Intermediate*
corporate bonds
- -----------------------------------------------------------------------
<FN>
*WHILE NEITHER THE GNMA NOR THE HIGH YIELD CORPORATE PORTFOLIOS OBSERVE
SPECIFIC MATURITY GUIDELINES, EACH IS EXPECTED TO MAINTAIN AN
INTERMEDIATE-TERM AVERAGE WEIGHTED MATURITY.
</TABLE>
- --------------------------------------------------------------------------------
2
<PAGE>
RISK
CHARACTERISTICS
Investors in the Fund are exposed to four types of risk
from fixed income securities. (1) INTEREST RATE RISK is
the potential for fluctuations in bond prices due to
changing interest rates. (2) INCOME RISK is the potential
for a decline in a Portfolio's income due to falling
market interest rates. (3) CREDIT RISK is the possibility
that a bond issuer will fail to make timely payments of
either interest or principal to a Portfolio. (4)
PREPAYMENT RISK (for mortgage-backed securities) or CALL
RISK (for corporate bonds) is the likelihood that, during
periods of falling interest rates, securities with high
stated interest rates will be prepaid (or "called") prior
to maturity, requiring a Portfolio to invest the proceeds
at generally lower interest rates.
The following chart summarizes interest rate, credit,
income and prepayment/call risks for each of the nine
Portfolios of the Fund. As shown, interest rate risk
should be low for the three short-term Portfolios,
moderate for the three intermediate-term Portfolios and
the High Yield Portfolio, and high for the two long-term
Portfolios. The High Yield Corporate Portfolio is unique
among the Fund's Portfolios in its substantial exposure to
credit risk. PAGE 17
RISK SUMMARY
<TABLE>
<CAPTION>
INTEREST INCOME CREDIT PREPAYMENT/
PORTFOLIO RATE RISK RISK RISK CALL RISK
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-Term U.S. Low High Negligible Negligible
Treasury
Short-Term Federal Low High Very Low Low
Short-Term Corpo- Low High Low Negligible
rate
----------------------------------------------------------------------------------------
Intermediate-Term Medium Medium Negligible Negligible
U.S. Treasury
GNMA Medium Medium Negligible High
Intermediate-Term Medium Medium Low Low
Corporate
----------------------------------------------------------------------------------------
Long-Term U.S. High Low Negligible Negligible
Treasury
Long-Term High Low Low Medium
Corporate
----------------------------------------------------------------------------------------
High Yield Medium Medium Very High Medium
Corporate
----------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
THE VANGUARD
GROUP
The Fund is a member of The Vanguard Group of Investment
Companies, a group of 35 investment companies with 78
distinct investment portfolios and total assets in excess
of $120 billion. The Vanguard Group, Inc. ("Vanguard"), a
subsidiary jointly owned by the Vanguard funds, provides
all corporate management, administrative,
3
<PAGE>
distribution, and shareholder accounting services on an
at-cost basis to the funds in the Group. As a result,
Vanguard's operating expenses are substantially lower than
those of the mutual fund industry. PAGE 27
- --------------------------------------------------------------------------------
INVESTMENT
ADVISERS
Wellington Management Company serves as investment adviser
to the GNMA, Long-Term Corporate and High Yield Corporate
Portfolios. Vanguard's Fixed Income Group provides
investment advisory services on an at-cost basis to the
three Short-Term Portfolios, the two Intermediate-Term
Portfolios and the Long-Term U.S. Treasury
Portfolio. PAGE 27
- --------------------------------------------------------------------------------
DIVIDEND POLICY
Each Portfolio declares a dividend each business day based
on its ordinary income. Dividends are paid on the first
business day of each month. Net capital gains (excess of
long-and short-term capital gains over capital losses), if
any, will be distributed annually. Dividend and capital
gains distributions are automatically reinvested in
additional shares. PAGE 30
- --------------------------------------------------------------------------------
SPECIAL
CONSIDERATIONS
(1) Each Portfolio, except the Short-Term Federal
Portfolio, may invest a portion of its assets in bond
(interest rate) futures contracts and options. Each
Portfolio may hold restricted securities. The Short-Term
Corporate, Intermediate-Term Corporate, and Long-Term
Corporate Portfolios may invest in securities of foreign
issuers. PAGE 24
(2) Each Portfolio may lend its securities. PAGE 25
- --------------------------------------------------------------------------------
4
<PAGE>
FUND EXPENSES
The following table illustrates all expenses and fees that
a shareholder of the Fund would incur. These expenses and
fees are for the fiscal year ended January 31, 1994, and,
in the case of the Intermediate-Term Corporate Portfolio
are estimates, since that Portfolio commenced operations
on November 1, 1993.
<TABLE>
<CAPTION>
SHORT-TERM SHORT-TERM SHORT-TERM INTERMEDIATE-TERM
U.S. TREASURY FEDERAL CORPORATE U.S. TREASURY
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Sales Load Imposed on Purchases...... None None None None
Sales Load Imposed on Reinvested
Dividends............................ None None None None
Redemption Fees*..................... None None None None
Exchange Fees........................ None None None None
<CAPTION>
SHORT-TERM SHORT-TERM SHORT-TERM INTERMEDIATE-TERM
U.S. TREASURY FEDERAL CORPORATE U.S. TREASURY
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Management & Administrative
Expenses............................. 0.21% 0.20% 0.20% 0.21%
Investment Advisory Fees............. 0.01 0.01 0.01 0.01
12b-1 Fees........................... None None None None
Other Expenses
Distribution Costs................. 0.03% 0.03% 0.03% 0.03%
Miscellaneous Expenses............. 0.01 0.02 0.02 0.01
--- --- --- ---
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Total Other Expenses................. 0.04 0.05 0.05 0.04
----- ----- ----- -----
TOTAL OPERATING EXPENSES..... 0.26% 0.26% 0.26% 0.26%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE- LONG-TERM
SHAREHOLDER TERM U.S. LONG-TERM HIGH YIELD
TRANSACTION GNMA CORPORATE TREASURY CORPORATE CORPORATE
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO* PORTFOLIO
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
Sales Load Imposed
on Purchases....... None None None None None
Sales Load Imposed
on Reinvested
Dividends.......... None None None None None
Redemption Fees*.... None None None None None
Exchange Fees....... None None None None None
<CAPTION>
INTERMEDIATE- LONG-TERM
TERM U.S. LONG-TERM HIGH YIELD
ANNUAL FUND GNMA CORPORATE TREASURY CORPORATE CORPORATE
OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO** PORTFOLIO
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
Management &
Administrative
Expenses........... 0.21% 0.19% 0.20% 0.22% 0.20%
Investment Advisory
Fees............... 0.02 0.01 0.01 0.04 0.06
12b-1 Fees.......... None None None None None
Other Expenses
Distribution
Costs............ 0.03% 0.03% 0.03% 0.02% 0.02%
Miscellaneous
Expenses......... 0.02 0.02 0.02 0.02 0.04
----- ----- ----- ----- -----
Total Other
Expenses........... 0.05 0.05 0.05 0.04 0.06
----- ----- ----- ----- -----
TOTAL
OPERATING
EXPENSES... 0.28% 0.25% 0.26% 0.30% 0.32%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
<FN>
*WIRE REDEMPTIONS OF LESS THAN $5,000 ARE SUBJECT TO A $5 PROCESSING FEE.
**FORMERLY THE "INVESTMENT GRADE CORPORATE PORTFOLIO."
</TABLE>
5
<PAGE>
The purpose of this table is to assist you in
understanding the various costs and expenses that an
investor would bear directly or indirectly as a
shareholder in the Fund.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2) redemption
at the end of each period. As noted in the table above,
the Fund charges no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Short-Term U.S. Treasury Portfolio.............. $3 $ 8 $15 $33
Short-Term Federal Portfolio.................... $3 $ 8 $15 $33
Short-Term Corporate Portfolio.................. $3 $ 8 $15 $33
Intermediate-Term U.S. Treasury Portfolio....... $3 $ 8 $15 $33
Intermediate-Term Corporate Portfolio........... $3 $ 8 $14 $32
GNMA Portfolio.................................. $3 $ 9 $16 $36
Long-Term U.S. Treasury Portfolio............... $3 $ 8 $15 $33
Long-Term Corporate Portfolio*.................. $3 $10 $17 $38
High Yield Corporate Portfolio.................. $3 $10 $18 $41
<FN>
*FORMERLY THE "INVESTMENT GRADE CORPORATE PORTFOLIO."
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
FINANCIAL
HIGHLIGHTS
The following financial highlights for a share outstanding
throughout each period, insofar as they relate to each of
the five years in the period ended January 31, 1994, have
been audited by Price Waterhouse, independent accountants,
whose reports thereon were unqualified. This information
should be read in conjunction with the Fund's financial
statements and notes thereto, which are incorporated by
reference in the Statement of Additional Information and
in this Prospectus, and which appear, along with the
reports of Price Waterhouse, in the Fund's 1994 Annual
Report to Shareholders. For a more complete discussion of
the Fund's performance, please see the Fund's 1994 Annual
Report to Shareholders which may be obtained without
charge by writing to the Fund or by calling Participant
Services at 1-800-523-1188.
6
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------
SHORT-TERM U.S. TREASURY PORTFOLIO
---------------------------------------------------
YEAR ENDED
JANUARY 31,
------------------------------- OCT. 28, 1991,+
1994 1993 TO JAN. 31, 1992
<S> <C> <C> <C>
-----------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD............................ $10.41 $10.12 $ 10.00
------------- ----------- -------
INVESTMENT OPERATIONS
Net Investment Income............ .486 .528 .140
Net Realized and Unrealized Gain
(Loss) on Investments........... .079 .332 .120
------------- ----------- -------
TOTAL FROM INVESTMENT
OPERATIONS.................... .565 .860 .260
-----------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income.......................... (.486) (.528) (.140)
Distributions from Realized
Capital Gains................... (.079) (.042) --
------------- ----------- -------
TOTAL DISTRIBUTIONS............ (.565) (.570) (.140)
-----------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD..... $10.41 $10.41 $ 10.12
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
TOTAL RETURN....................... 5.54% 8.74% 2.60%
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)........................ $729 $526 $102
Ratio of Expenses to Average Net
Assets............................ .26%* .26% .26%*
Ratio of Net Investment Income to
Average Net Assets................ 4.64%* 5.12% 5.22%*
Portfolio Turnover Rate............ 86%* 71% 40%
<FN>
*ANNUALIZED.
+COMMENCEMENT OF OPERATIONS.
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
SHORT-TERM FEDERAL PORTFOLIO
-----------------------------------------------------------------------------
DEC. 31,
YEAR ENDED JANUARY 31, 1987,+
--------------------------------------------------------------- TO JAN. 31,
1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $10.38 $10.31 $10.08 $ 9.89 $ 9.78 $10.05 $10.00
-------- -------- -------- -------- -------- -------- -----------
INVESTMENT OPERATIONS
Net Investment Income....... .522 .609 .720 .801 .842 .817 .050
Net Realized and Unrealized
Gain (Loss) on
Investments................ .110 .232 .307 .190 .110 (.270) .050
-------- -------- -------- -------- -------- -------- -----------
TOTAL FROM INVESTMENT
OPERATIONS............... .632 .841 1.027 .991 .952 .547 .100
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income.......... (.522) (.609) (.720) (.801) (.842) (.817) (.050)
Distributions from Realized
Capital Gains.............. (.110) (.162) (.077) -- -- -- --
-------- -------- -------- -------- -------- -------- -----------
TOTAL DISTRIBUTIONS....... (.632) (.771) (.797) (.801) (.842) (.817) (.050)
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD....................... $10.38 $10.38 $10.31 $10.08 $ 9.89 $ 9.78 $10.05
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
TOTAL RETURN.................. 6.23% 8.49% 10.59% 10.46% 10.09% 5.66% 1.01%
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)................... $1,936 $1,688 $1,274 $508 $228 $159 $6
Ratio of Expenses to Average
Net Assets................... .26% .27% .26% .30% .28% .32% --
Ratio of Net Investment Income
to Average Net Assets........ 4.98% 5.88% 6.98% 8.06% 8.59% 8.50% --
Portfolio Turnover Rate....... 49% 70% 111% 141% 133% 228% --
<FN>
+COMMENCEMENT OF OPERATIONS.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
SHORT-TERM CORPORATE PORTFOLIO
---------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
---------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
YEAR............................. $10.99 $10.88 $10.50 $10.34 $10.23 $10.43 $10.67 $10.55 $10.17 $9.94
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income........... .605 .695 .804 .876 .895 .833 .761 .877 1.001 1.067
Net Realized and Unrealized Gain
(Loss) on Investments.......... .049 .275 .380 .160 .110 (.200) (.240) .304 .380 .230
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS................... .654 .970 1.184 1.036 1.005 .633 .521 1.181 1.381 1.297
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net investment
income......................... (.605) (.695) (.804) (.876) (.895) (.833) (.761) (.877) (1.001) (1.067)
Distributions from Realized
Capital Gains.................. (.099) (.165) -- -- -- -- -- (.184) -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS........... (.704) (.860) (.804) (.876) (.895) (.833) (.761) (1.061) (1.001) (1.067)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR...... $10.94 $10.99 $10.88 $10.50 $10.34 $10.23 $10.43 $10.67 $10.55 $10.17
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN...................... 6.11% 9.29% 11.70% 10.47% 10.18% 6.31% 5.16% 11.58% 14.24% 14.01%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)....................... $3,573 $2,811 $1,911 $829 $597 $493 $429 $401 $198 $119
Ratio of Expenses to Average Net
Assets........................... .26% .27% .26% .31% .28% .34% .33% .38% .49% .62%
Ratio of Net Investment Income to
Average Net Assets............... 5.48% 6.33% 7.44% 8.48% 8.70% 8.17% 7.36% 7.79% 9.50% 11.26%
Portfolio Turnover Rate........... .61% 71% 99% 107% 121% 165% 258% 278% 460% 270%
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO
-------------------------------------------------------
YEAR ENDED JANUARY 31,
--------------------------------- OCT. 28, 1991,+ TO
1994 1993 JAN. 31, 1992
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD............................ $ 10.79 $ 10.19 $ 10.00
------- ------------- -------
INVESTMENT OPERATIONS
Net Investment Income............ .617 .676 .170
Net Realized and Unrealized Gain
(Loss) on Investments........... .443 .617 .190
------- ------------- -------
TOTAL FROM INVESTMENT
OPERATIONS.................... 1.060 1.293 .360
- ---------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income.......................... (.617) (.676) (.170)
Distributions from Realized
Capital Gains................... (.413) (.017) --
------- ------------- -------
TOTAL DISTRIBUTIONS............ (1.030) (.693) (.170)
- ---------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD..... $ 10.82 $ 10.79 $ 10.19
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
TOTAL RETURN....................... 10.09% 13.14% 3.59%
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)........................ $1,007 $673 $190
Ratio of Expenses to Average Net
Assets............................ .26% .26% .26%*
Ratio of Net Investment Income to
Average Net Assets................ 5.55% 6.44% 6.47%*
Portfolio Turnover Rate............ 118% 123% 32%
<FN>
*ANNUALIZED.
+COMMENCEMENT OF OPERATIONS.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
GNMA PORTFOLIO
--------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
--------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF
YEAR............... $10.50 $10.25 $9.85 $9.54 $9.34 $9.69 $10.10 $9.92 $9.25 $9.20
------ ------ ------ ------ ------ ------ ------ ------ ------ -----------
INVESTMENT
OPERATIONS
Net Investment
Income........... .641 .778 .831 .855 .878 .882 .889 .965 1.04 1.08
Net Realized and
Unrealized Gain
(Loss) on
Investments...... (.110) .250 .400 .310 .200 (.350) (.410) .186 .67 .05
------ ------ ------ ------ ------ ------ ------ ------ ------ -----------
TOTAL FROM
INVESTMENT
OPERATIONS..... .531 1.028 1.231 1.165 1.078 .532 .479 1.151 1.71 1.13
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment
Income........... (.641) (.778) (.831) (.855) (.878) (.882) (.889) (.965) (1.04) (1.08)
Distributions from
Realized Capital
Gains............ -- -- -- -- -- -- -- (.006) -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ -----------
TOTAL
DISTRIBUTIONS... (.641) (.778) (.831) (.855) (.878) (.882) (.889) (.971) (1.04) (1.08)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR............ $10.39 $10.50 $10.25 $9.85 $9.54 $9.34 $9.69 $10.10 $9.92 $9.25
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN........ 5.18% 10.40% 13.00% 12.85% 11.98% 5.80% 5.30% 12.19% 19.58% 13.52%
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL
DATA
Net Assets, End of
Year (Millions).... $7,043 $7,167 $5,207 $2,711 $2,128 $1,907 $1,910 $2,381 $1,262 $299
Ratio of Expenses to
Average Net
Assets............. .28% .29% .29% .34% .31% .35% .35% .38% .50% .58%
Ratio of Net
Investment
Income to Average
Net
Assets............. 6.19% 7.38% 8.22% 8.95% 9.25% 9.35% 9.35% 9.41% 10.16% 11.90%
Portfolio Turnover
Rate............... 2% 7% 1% 1% 9% 8% 22% 28% 32% 23%
</TABLE>
<TABLE>
<CAPTION>
-----------------
INTERMEDIATE-TERM
CORPORATE
PORTFOLIO
-----------------
NOVEMBER 1,
1993+, TO
JANUARY 31, 1994
<S> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD.... $ 10.00
-------
INVESTMENT OPERATIONS
Net Investment Income................. .125
Net Realized and Unrealized Gain
(Loss) on Investments................ .040
-------
TOTAL FROM INVESTMENT OPERATIONS.... .165
- ------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income............................... (.125)
Distributions from Realized Capital
Gains................................ --
-------
TOTAL DISTRIBUTIONS................. (.125)
- ------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.......... $10.04
- ------------------------------------------------------------
- ------------------------------------------------------------
TOTAL RETURN............................ 1.66%
- ------------------------------------------------------------
- ------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions)...... $85
Ratio of Expenses to Average Net
Assets................................. .25%*
Ratio of Net Investment Income to
Average Net Assets..................... 5.11%*
Portfolio Turnover Rate................. 74%
<FN>
*ANNUALIZED.
+COMMENCEMENT OF OPERATIONS.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
LONG-TERM U.S. TREASURY PORTFOLIO
-------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, MAY 19, 1986,+
------------------------------------------------------------------------- TO JAN. 31,
1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF
PERIOD............. $10.04 $10.14 $9.74 $9.53 $9.28 $9.49 $10.28 $10.00
------------- ------- ------- ------- ------- ------- ------- ------
INVESTMENT
OPERATIONS
Net Investment
Income........... .685 .733 .763 .776 .781 .778 .776 .530
Net Realized and
Unrealized Gain
(Loss) on
Investments...... .886 .600 .400 .210 .250 (.210) (.790) .314
------------- ------- ------- ------- ------- ------- ------- ------
TOTAL FROM
INVESTMENT
OPERATIONS..... 1.571 1.333 1.163 .986 1.031 .568 (.014) .844
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment
Income........... (.685) (.733) (.763) (.776) (.781) (.778) (.776) (.530)
Distributions from
Realized Capital
Gains............ (.176) (.700) -- -- -- -- -- (.034)
------------- ------- ------- ------- ------- ------- ------- ------
TOTAL
DISTRIBUTIONS... (.861) (1.433) (.763) (.776) (.781) (.778) (.776) (.564)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END
OF PERIOD.......... $10.75 $10.04 $10.14 $9.74 $9.53 $9.28 $9.49 $10.28
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN........ 16.09% 14.12% 12.44% 11.00% 11.33% 6.43% 0.29% 8.61%
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL
DATA
Net Assets, End of
Period
(Millions)......... $829 $874 $833 $722 $456 $172 $83 $35
Ratio of Expenses to
Average Net
Assets............. .26% .27% .26% .30% .28% .36% .32% --
Ratio of Net
Investment Income
to Average Net
Assets............. 6.44% 7.26% 7.72% 8.29% 8.08% 8.46% 8.10% 6.93%*
Portfolio Turnover
Rate............... 7% 170% 89% 147% 83% 387% 182% 182%
<FN>
*ANNUALIZED.
+COMMENCEMENT OF OPERATIONS.
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
LONG-TERM CORPORATE PORTFOLIO+
----------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
----------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR...... $9.04 $8.63 $8.02 $8.00 $7.91 $8.11 $8.77 $8.42 $7.84 $7.84
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income................. .632 .680 .706 .720 .732 .741 .770 .847 .92 .96
Net Realized and Unrealized Gain
(Loss) on Investments................ .579 .561 .610 .020 .090 (.200) (.660) .473 .58 --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS.... 1.211 1.241 1.316 .740 .822 .541 .110 1.32 1.50 .96
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.. (.632) (.680) (.706) (.720) (.732) (.741) (.770) (.847) (.92) (.96)
Distributions from Realized Capital
Gains................................ (.259) (.151) -- -- -- -- -- (.123) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS................. (.891) (.831) (.706) (.720) (.732) (.741) (.770) (.970) (.92) (.96)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR............ $9.36 $9.04 $8.63 $8.02 $8.00 $7.91 $8.11 $8.77 $8.42 $7.84
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN............................ 13.83% 15.06% 17.09% 9.81% 10.67% 7.13% 1.76% 16.46% 20.31% 13.45%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions)...... $3,166 $2,763 $1,992 $1,254 $954 $734 $665 $753 $318 $107
Ratio of Expenses to Average Net
Assets................................. .30% .31% .31% .37% .34% .38% .37% .41% .55% .62%
Ratio of Net Investment Income to
Average Net Assets..................... 6.71% 7.68% 8.46% 9.16% 9.07% 9.40% 9.40% 9.41% 10.78% 12.50%
Portfolio Turnover Rate................. 77% 50% 72% 62% 70% 60% 63% 47% 56% 55%
<FN>
+FORMERLY THE "INVESTMENT GRADE CORPORATE PORTFOLIO."
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
HIGH YIELD CORPORATE PORTFOLIO
----------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
----------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
YEAR.............................. $7.56 $7.27 $6.19 $7.31 $8.44 $8.53 $9.33 $8.84 $8.52 $8.97
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income............ .695 .727 .770 .904 1.004 1.016 1.006 1.091 1.13 1.18
Net Realized and Unrealized Gain
(Loss) on Investments........... .580 .290 1.080 (1.120) (1.130) (.090) (.800) .598 .33 (.45)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL FROM INVESTMENT
OPERATIONS.................... 1.275 1.017 1.850 (.216) (.126) .926 .206 1.689 1.46 .73
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income.......................... (.695) (.727) (.770) (.904) (1.004) (1.016) (1.006) (1.081) (1.14) (1.18)
Distributions from Realized
Capital Gains................... -- -- -- -- -- -- -- (.118) -- --
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS............ (.695) (.727) (.770) (.904) (1.004) (1.016) (1.006) (1.199) (1.14) (1.18)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR....... $8.14 $7.56 $7.27 $6.19 $7.31 $8.44 $8.53 $9.33 $8.84 $8.52
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN....................... 17.54% 14.68% 31.27% (3.21)% (1.84)% 11.41% 2.54% 20.12% 18.40% 9.42%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)........................ $2,625 $2,184 $1,593 $699 $828 $1,234 $933 $1,370 $634 $252
Ratio of Expenses to Average Net
Assets............................ .32% .34% .34% .40% .38% .41% .41% .45% .60% .65%
Ratio of Net Investment Income to
Average Net Assets................ 8.81% 9.82% 11.13% 13.35% 12.56% 12.07% 11.47% 11.43% 12.51% 13.61%
Portfolio Turnover Rate............ 51% 83% 44% 61% 41% 48% 82% 67% 61% 71%
</TABLE>
- --------------------------------------------------------------------------------
YIELD AND TOTAL
RETURN
From time to time a Portfolio may advertise its yield and
total return. BOTH YIELD AND TOTAL RETURN FIGURES ARE
BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO
INDICATE FUTURE PERFORMANCE. The "total return" of a
Portfolio refers to the average annual compounded rates of
return over one-, five-and ten-year periods or for the
life of the Portfolio (as stated in the advertisement)
that would equate an initial amount invested at the
beginning of a stated period to the ending redeemable
value of the investment, assuming the reinvestment of all
dividend and capital gains distributions.
The "30-day yield" of a Portfolio is calculated by
dividing net investment income per share earned during a
30-day period by the net asset value per share on the last
day of the period. Net investment income includes interest
and dividend income earned on the Portfolio's securities;
it is net of all expenses and all recurring and
nonrecurring charges that have been applied to all
shareholder accounts. The yield calculation assumes that
net investment income earned over 30 days is compounded
monthly for six months and then annualized. Methods used
to calculate advertised yields are standardized for all
stock and bond mutual funds. However, these methods differ
from the accounting methods used by a Portfolio to
maintain its books and records, and so the advertised
30-day yield may not fully reflect the income paid to your
own account or the yield reported in the Portfolio's
Reports to Shareholders.
Additionally, a Portfolio may compare its performance to
that of the Lehman Aggregate Bond Index, and may advertise
its duration, a measure of a Portfolio's sensitivity to
interest rate changes.
- --------------------------------------------------------------------------------
11
<PAGE>
INVESTMENT
OBJECTIVE
THE FUND SEEKS TO
PROVIDE A HIGH LEVEL
OF CURRENT INCOME
The Fund is an open-end diversified investment company.
The objective of the Fund is to provide investors with a
high level of current income consistent with the
maintenance of principal and liquidity.
The Fund consists of nine distinct Portfolios, each of
which invests in fixed income securities within prescribed
maturity and quality standards. There is no assurance that
the Fund will achieve its stated objective.
The investment objective for the Fund is not fundamental
and so may be changed by the Board of Directors without
shareholder approval. Any such change could result in the
Fund having investment objectives different from the
objectives which a shareholder considered appropriate at
the time of investment in the Fund. However, shareholders
would be notified prior to any material change in the
Fund's objective.
- --------------------------------------------------------------------------------
INVESTMENT
POLICIES
While all of the Fund's Portfolios invest in fixed income
securities, the individual Portfolios vary substantially
in terms of the type, credit quality, and average maturity
of the securities in which they invest. The Fund is
managed without regard to tax ramifications.
IMPORTANT NOTE: Five of the Portfolios invest in U.S.
Treasury or U.S. Government agency securities to minimize
credit risk. Examples of the Government agencies and
instrumentalities whose securities may be purchased by
these Portfolios include the Federal Home Loan Mortgage
Corporation, the Small Business Administration, the
Government Export Trust and the Overseas Private
Investment Corporation. Government securities may be
backed by (i) the full faith and credit of the United
States; (ii) the particular Government agency's ability to
borrow directly from the Treasury; (iii) some other type
of United States support; or (iv) the credit of the
issuing agency, only. As described in the investment
policies set forth below, each of the five Portfolios
which invests in U.S. Treasury or U.S. Government agency
securities is required to invest a specified percentage of
its assets in securities backed by the full faith and
credit of the United States. WHILE U.S. TREASURY OR
GOVERNMENT AGENCY SECURITIES PROVIDE SUBSTANTIAL
PROTECTION AGAINST CREDIT RISK, THEY DO NOT PROTECT
INVESTORS AGAINST PRICE CHANGES DUE TO CHANGING INTEREST
RATES. THE MARKET VALUES OF GOVERNMENT SECURITIES ARE NOT
GUARANTEED AND WILL FLUCTUATE. See "Investment Risks" for
additional information on these and other important risks.
THREE PORTFOLIOS
INVEST
IN SHORT-TERM BONDS
Three Portfolios of the Fund invest in short-term bonds.
THE SHORT-TERM U.S. TREASURY PORTFOLIO invests at least
85% of its assets in short-term securities backed by the
full faith and credit of the U.S. Government. Also, at
least 65% of the Portfolio's assets will be invested in
U.S. Treasury bills, notes and bonds. In an effort to
minimize fluctuations in market value, the Short-Term U.S.
Treasury Portfolio is expected to maintain a
dollar-weighted average maturity between one and three
years.
The balance of the Short-Term U.S. Treasury Portfolio's
assets may be invested in U.S. Treasury or U.S. Government
agency securities, as well as in repurchase agreements
collateralized by such securities. The Portfolio may also
invest in bond (interest rate) futures and options to a
limited extent. See "Implementation of Policies" for a
description of these investment practices of the
Portfolio.
12
<PAGE>
THE SHORT-TERM FEDERAL PORTFOLIO invests primarily in U.S.
Government agency securities, which are debt obligations
issued or guaranteed by agencies or instrumentalities of
the U.S. Government. Such "agency" securities may NOT be
backed by the "full faith and credit" of the U.S.
Government. The Portfolio may also invest in U.S. Treasury
securities, as well as in repurchase agreements
collateralized by U.S. Treasury or U.S. Government agency
securities. In an effort to minimize fluctuations in
market value, the Short-Term Federal Portfolio is expected
to maintain a dollar-weighted average maturity between one
and three years. See "Implementation of Policies" for a
description of these and other investment practices of the
Portfolio.
THE SHORT-TERM CORPORATE PORTFOLIO invests in the
following investment grade fixed income securities:
(1) Short-term and intermediate-term corporate debt
securities;
(2) U.S. Treasury and U.S. Government agency obligations;
(3) Bank obligations, including certificates of deposit
and bankers' acceptances;
(4) Commercial paper; and
(5) Repurchase agreements collateralized by these
securities.
Investment grade securities are those rated a minimum of
Baa3 by Moody's Investors Service, Inc. ("Moody's") or
BBB- by Standard & Poor's Corporation ("Standard &
Poor's"). Investment grade commercial paper is rated A-1
or better by Standard & Poor's or Prime-1 by Moody's, or,
if unrated, issued by a corporation having an outstanding
unsecured debt issue rated A or better by Moody's or
Standard & Poor's. At least 70% of the Short-Term
Corporate Portfolio's assets will be invested in debt
securities rated a minimum of A3 by Moody's or A- by
Standard & Poor's, and not more than 30% of the
Portfolio's assets may be invested in debt securities
rated Baa by Moody's or BBB by Standard & Poor's.
Securities rated Baa or BBB are considered medium grade
obligations. Interest payments and principal are regarded
as adequate for the present, but certain protective
elements found in higher rated bonds may be lacking. Such
bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
In the event that a security held by the Portfolio is
downgraded, the Portfolio may continue to hold such
security until such time as the adviser deems it
advantageous to dispose of the security.
In an effort to minimize fluctuations in market value, the
Short-Term Corporate Portfolio is expected to maintain a
dollar-weighted average maturity between 1 and 3 years.
The Short-Term Corporate Portfolio may also hold
securities of foreign issuers provided such securities are
denominated in U.S. dollars, and may invest in bond
(interest rate) futures and options to a limited extent.
See "Implementation of Policies" for a description of
these and other investment practices of the Portfolio.
THREE PORTFOLIOS
INVEST
IN INTERMEDIATE-TERM
GOVERNMENT SECURITIES
THE INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO invests at
least 85% of its assets in intermediate-term, short-term
securities backed by the full faith and credit of the U.S.
Government. Also, at least 65% of the Portfolio's assets
will be invested in U.S. Treasury bills, notes and bonds.
The dollar-weighted average maturity of the Portfolio is
expected to range from 5 to 10 years.
13
<PAGE>
The balance of the Portfolio's assets may be invested in
U.S. Treasury or U.S. Government agency securities, as
well as in repurchase agreements collateralized by such
securities. The Portfolio may also invest in bond
(interest rate) futures and options to a limited extent.
See "Implementation of Policies" for a description of
these investment practices of the Portfolio.
The GNMA PORTFOLIO invests at least 80% of its assets in
Government National Mortgage Association ("GNMA" or
"Ginnie Mae") pass-through certificates. The balance of
the Portfolio's assets may be invested in other U.S.
Treasury or U.S. Government agency securities, as well as
in repurchase agreements collateralized by such
securities. The Portfolio may also invest in bond
(interest rate) futures and options to a limited extent.
See "Implementation of Policies" for a description of
these investment practices of the Portfolio.
GNMA pass-through certificates are mortgage-backed
securities representing part ownership of a pool of
mortgage loans. Monthly mortgage payments of both interest
and principal "pass through" from homeowners to
certificate investors, such as the GNMA Portfolio. The
GNMA Portfolio reinvests the principal portion in
additional securities and distributes the interest portion
as income to the Portfolio's shareholders. Under normal
circumstances, GNMA certificates are expected to provide
higher yields than U.S. Treasury securities of comparable
maturity.
The mortgage loans underlying GNMA certificates--issued by
lenders such as mortgage bankers, commercial banks, and
savings and loan associations--are either insured by the
Federal Housing Administration (FHA) or guaranteed by the
Veterans Administration (VA). Each pool of mortgage loans
must also be approved by GNMA, a U.S. Government
corporation within the U.S. Department of Housing and
Urban Development. Once GNMA approval is obtained, the
timely payment of interest and principal on each
underlying mortgage loan is guaranteed by the "full faith
and credit" of the U.S. Government.
Although stated maturities on GNMA certificates generally
range from 25 to 30 years, effective maturities are
usually much shorter due to the prepayment of the
underlying mortgages by homeowners. On average, GNMA
certificates are repaid within 12 years and so are
classified as intermediate-term securities.
THE INTERMEDIATE-TERM CORPORATE PORTFOLIO invests in a
diversified portfolio of investment grade corporate and
Government bonds. Under normal circumstances, at least 65%
of the Portfolio's assets are invested in straight debt
corporate bonds rated a minimum of Baa3 by Moody's or BBB-
by Standard & Poor's at the time of purchase.
Additionally, at least 80% of the Portfolio's assets will
normally be invested in a combination of investment grade
corporate bonds and securities of the U.S. Government and
its agencies or instrumentalities. The Intermediate-Term
Corporate Portfolio is expected to maintain a
dollar-weighted average maturity between 5 and 10 years.
The preponderance of the Portfolio's holdings will be
classified in the top three credit-rating categories.
Specifically, at least 70% of the Portfolio's assets will
be invested in the following securities:
(1) Short-term and intermediate-term corporate debt
securities which at the time of purchase are rated a
minimum of A3 by Moody's or A- by Standard & Poor's;
14
<PAGE>
(2) Securities issued by the U.S. Government or its
agencies or instrumentalities;
(3) Commercial paper of companies having, at the time of
purchase, outstanding debt securities rated as
described in (1) or commercial paper rated P-1 or P-2
by Moody's or rated A-1 or A-2 by Standard & Poor's;
and
(4) Short-term fixed income securities held as cash
reserves, including U.S. Treasury or U.S. Government
agency securities, certificates of deposit, bankers'
acceptances, or repurchase agreements collateralized
by these securities.
Up to 30% of the Intermediate-Term Corporate Portfolio's
assets may be invested in straight debt securities rated
Baa by Moody's or BBB by Standard & Poor's (see page 13
for a description of these ratings), and in preferred
stocks and convertible securities. In addition, not more
than 25% of the Portfolio's assets may be invested in GNMA
certificates or other mortgage-backed securities.
Mortgage-backed securities are subject to risks which are
in addition to and distinct from the risks inherent in
investments in corporate bonds. For a discussion of these
special risks, see "Investment Risks." In the event that a
security held by the Portfolio is downgraded, the
Portfolio may continue to hold such security until such
time as the adviser deems it to be advantageous to dispose
of the security.
The Intermediate-Term Corporate Portfolio may also hold
securities of foreign issuers provided such securities are
denominated in U.S. dollars. The Portfolio may also invest
in bond (interest rate) futures and options to a limited
extent. See "Implementation of Policies" for a description
of these investment practices of the Portfolio.
TWO PORTFOLIOS INVEST
IN LONG-TERM BONDS
THE LONG-TERM U.S. TREASURY PORTFOLIO invests at least 85%
of its assets in long-term securities backed by the full
faith and credit of the U.S. Government. Also, at least
65% of the Portfolio's assets will be invested in U.S.
Treasury bills, notes and bonds. The dollar-weighted
average maturity of the Portfolio is expected to range
from 15 to 30 years.
The balance of the Portfolio's assets may be invested in
U.S. Treasury or U.S. Government agency securities, as
well as in repurchase agreements collateralized by such
securities. The Portfolio may also invest in bond
(interest rate) futures and options to a limited extent.
See "Implementation of Policies" for a description of
these investment practices of the Portfolio.
THE LONG-TERM CORPORATE PORTFOLIO (formerly the
"Investment Grade Corporate Portfolio") invests in a
diversified portfolio of investment grade corporate and
Government bonds. Under normal circumstances, at least 65%
of the Portfolio's assets are invested in straight debt
corporate bonds rated a minimum of Baa3 by Moody's or BBB-
by Standard & Poor's at the time of purchase.
Additionally, at least 80% of the Portfolio's assets will
normally be invested in a combination of investment grade
corporate bonds and securities of the U.S. Government and
its agencies and instrumentalities. The average weighted
maturity of the Portfolio is expected to range from 15 to
25 years.
15
<PAGE>
The preponderance of the Portfolio's holdings will be
classified in the top three credit-rating categories.
Specifically, at least 70% of the Portfolio's assets will
be invested in the following securities:
(1) Straight debt corporate securities which at the time
of purchase are rated a minimum of A3 by Moody's or A-
by Standard & Poor's;
(2) Securities issued by the U.S. Government or its
agencies and instrumentalities;
(3) Commercial paper of companies having, at the time of
purchase, outstanding debt securities rated as
described in (1) or commercial paper rated P-1 or P-2
by Moody's or rated A-1 or A-2 by Standard & Poor's;
and
(4) Short-term fixed income securities held as cash
reserves, including U.S. Treasury or U.S. Government
agency securities, certificates of deposit, bankers'
acceptances, or repurchase agreements collateralized
by these securities.
Up to 30% of the Long-Term Corporate Portfolio's assets
may be invested in straight debt securities rated Baa by
Moody's or BBB by Standard & Poor's (see page 13 for a
description of these ratings), and in preferred stocks and
convertible securities. In addition, not more than 25% of
the Portfolio's assets may be invested in GNMA
certificates or other mortgage-backed securities. In the
event that a security held by the Portfolio is downgraded,
the Portfolio may continue to hold such security until
such time as the advisers deems it to be advantageous to
dispose of the security.
The Long-Term Corporate Portfolio may also hold securities
of foreign issuers provided such securities are
denominated in U.S. dollars. The Portfolio may also invest
in bond (interest rate) futures and options to a limited
extent. See "Implementation of Policies" for a description
of these investment practices of the Portfolio.
ONE PORTFOLIO INVESTS
IN LOW-QUALITY,
HIGH-RISK BONDS
THE HIGH YIELD CORPORATE PORTFOLIO invests in a
diversified portfolio of high-yielding corporate debt
securities (so-called "junk bonds"). Under normal
circumstances, at least 80% of the Portfolio's assets will
be invested in high-yield corporate debt obligations rated
B or better by Moody's or Standard & Poor's. Not more than
20% of the High Yield Corporate Portfolio's assets may be
invested in debt securities which are rated less than B or
unrated, and convertible securities and preferred stocks.
The Portfolio may invest up to 25% of its assets in cash
reserves and U.S. Government securities under unusual
market conditions for temporary defensive measures.
The High Yield Corporate Portfolio will not invest in
securities that, at the time of initial investment, are
rated less than Caa by Moody's or CCC by Standard &
Poor's. Securities that are subsequently downgraded in
quality below Caa or CCC may continue to be held by the
Portfolio, and will be sold only if the Portfolio's
adviser believes it would be advantageous to do so. In
addition, the credit quality of unrated securities
purchased by the Portfolio must be, in the opinion of the
Portfolio's adviser, at least equivalent to a Caa rating
by Moody's or a CCC rating by Standard & Poor's.
Securities rated less than Baa by Moody's or BBB by
Standard & Poor's are classified as non-investment grade
securities. Such securities carry a high degree of risk
and are considered speculative by the major credit rating
agencies. The following are excerpts from the Moody's and
Standard & Poor's definitions for speculative grade debt
obligations:
16
<PAGE>
MOODY'S: Ba-rated bonds have "speculative elements,"
their future "cannot be considered assured," and
protection of principal and interest is "moderate" and
"not well safeguarded." B-rated bonds "lack
characteristics of a desirable investment" and the
assurance of interest or principal payments "may be
small." Caa-rated bonds are "of poor standing" and "may
be in default" or may have "elements of danger with
respect to principal or interest."
STANDARD & POOR'S: BB-rated bonds have "less near-term
vulnerability to default" than B-or CCC-rated securities
but face "major ongoing uncertainties . . . which may
lead to inadequate capacity" to pay interest or
principal. B-rated bonds have a "greater vulnerability to
default" than BB-rated bonds and the ability to pay
interest or principal will likely be impaired by adverse
business conditions. CCC-rated bonds have a "currently
identifiable vulnerability to default" and, without
favorable business conditions, will be unable to repay
interest and principal.
Credit quality in the high-yield bond market can change
suddenly and unexpectedly, and even recently-issued credit
ratings may not fully reflect the actual risks posed by a
particular high-yield security. For these reasons, it is
the High Yield Corporate Portfolio's policy not to rely
primarily on ratings issued by established credit rating
agencies, but to utilize such ratings in conjunction with
the adviser's own independent and ongoing review of credit
quality.
In the past, the High Yield Corporate Portfolio has not
invested in non-income-producing high-yield
securities--such as zero coupon bonds, which pay interest
only at maturity, or payment-in-kind bonds, which pay
interest in the form of additional securities. Although it
has no present plans to do so, the Portfolio may invest up
to 5% of its assets in such securities in the future.
The High Yield Corporate Portfolio may also hold
securities of foreign issuers provided such securities are
denominated in U.S. dollars. The Portfolio may also invest
in bond (interest rate) futures and options to a limited
extent. See "Implementation of Policies" for a description
of these investment practices of the Portfolio.
* * *
The investment policies for the Fund are not fundamental
and so may be changed by the Board of Directors without
shareholder approval. However, shareholders would be
notified prior to any material change in the Fund's
investment policies.
- --------------------------------------------------------------------------------
INVESTMENT RISKS
THE PORTFOLIOS ARE
SUBJECT PRIMARILY TO
INTEREST RATE,
INCOME,
CREDIT AND MANAGER
RISK
As mutual funds investing in fixed income securities, the
Portfolios of the Fund are subject primarily to interest
rate and credit risk. INTEREST RATE RISK is the potential
for a decline in bond prices due to rising interest rates.
In general, bond prices vary inversely with interest
rates. When interest rates RISE, bond prices generally
FALL. Conversely, when interest rates FALL, bond prices
generally RISE. The change in price depends on several
factors, including the bond's maturity date. In general,
bonds with longer maturities are more sensitive to changes
in interest rates than bonds with shorter maturities.
These principles of interest rate risk also apply to U.S.
Treasury and U.S. Government agency securities. As with
other bond investments, U.S. Government securities will
rise and fall in value as interest rates change. A
SECURITY BACKED BY THE U.S.
17
<PAGE>
TREASURY OR THE FULL FAITH AND CREDIT OF THE UNITED STATES
IS GUARANTEED ONLY AS TO THE TIMELY PAYMENT OF INTEREST
AND PRINCIPAL WHEN HELD TO MATURITY. THE CURRENT MARKET
PRICES FOR SUCH SECURITIES ARE NOT GUARANTEED AND WILL
FLUCTUATE.
As an illustration of interest rate risk, the charts below
depict the effect of a one and two percentage point change
in interest rates on three bonds of varying maturities:
<TABLE>
<CAPTION>
PERCENT CHANGE IN THE PRICE OF A PAR BOND YIELDING 5.5%
1 PERCENTAGE 1 PERCENTAGE
POINT POINT
INCREASE IN DECREASE IN
INTEREST INTEREST
STATED MATURITY RATES RATES
- ---------------------------------------- ------------- -------------
<S> <C> <C>
Short-Term (2.5 years) - 2.3% + 2.3%
Intermediate-Term (10 years) - 7.3% + 8.0%
Long-Term (20 years) -11.1% +13.1%
<CAPTION>
2 PERCENTAGE 2 PERCENTAGE
POINT POINT
INCREASE IN DECREASE IN
INTEREST INTEREST
STATED MATURITY RATES RATES
- ---------------------------------------- ------------- -------------
<S> <C> <C>
Short-Term (2.5 years) - 4.5% + 4.7%
Intermediate-Term (10 years) -13.9% +16.7%
Long-Term (20 years) -20.5% +28.6%
</TABLE>
These charts are intended to provide you with guidelines
for determining the degree of interest rate risk you may
be willing to assume. The yield and price changes shown
should not be taken as representative of a Portfolio's
current or future yield or expected changes in a
Portfolio's share price.
INCOME RISK is the potential for a decline in a
Portfolio's income due to falling market interest rates.
In relative terms, income risk will be higher for the
Fund's shorter-term Portfolios and lower for the Fund's
longer-term Portfolios.
Each Portfolio of the Fund is also subject to credit risk.
CREDIT RISK, also known as default risk, is the
possibility that a bond issuer will fail to make timely
payments of interest or principal to a Portfolio. The
credit risk of a Portfolio depends on the quality of its
investments. Reflecting their higher risks, lower-quality
bonds generally offer higher yields (all other factors
being equal).
NOTE: Unlike other Portfolios of the Fund, the High Yield
Corporate Portfolio holds speculative-grade investments
that pose substantial risks. Potential investors should
review the risk discussion below and the special risk
section on the High Yield Corporate Portfolio.
Besides interest rate risk and credit risk, investors are
exposed to PREPAYMENT RISK in the GNMA Portfolio and CALL
RISK in the Long-Term Corporate Portfolio.
Finally, the investment advisers manage the Fund's
Portfolios according to the traditional methods of
"active" investment management, which involves the buying
and selling of securities based upon economic, financial
and market analysis and investment judgement. MANAGER RISK
refers to the possibility that a Portfolio's investment
adviser may fail to execute the Portfolio's investment
strategy effectively. As a result, a Portfolio may fail to
achieve its stated objective.
18
<PAGE>
THREE SHORT-TERM
PORTFOLIOS PROVIDE
MODERATE EXPOSURE TO
INTEREST RATE RISK
Interest rate risk for the SHORT-TERM U.S TREASURY
PORTFOLIO, the SHORT-TERM FEDERAL PORTFOLIO, and the
SHORT-TERM CORPORATE PORTFOLIO should be modest. Because
of their short-term average weighted maturities, the three
short-term Portfolios are expected to exhibit LOW TO
MODERATE price fluctuations as interest rates change.
The three Portfolios differ principally in terms of credit
quality and potential yield. For the Short-Term U.S.
Treasury Portfolio, credit risk should be negligible. In
relative terms, credit risk will be slightly higher for
the Short-Term Federal Portfolio because of its holdings
of U.S. Government agency securities. (Even though they
carry top (Aaa) credit ratings, "agency" obligations are
not explicitly guaranteed by the U.S. Government and so
are perceived as somewhat riskier than comparable Treasury
bonds.)
With its corporate bond holdings, the Short-Term Corporate
Portfolio offers the highest exposure to credit risk of
the three short-term Portfolios. However, because of the
Portfolio's well-diversified holdings and emphasis on
high-quality bonds, overall credit risk should still be
quite low.
INTEREST RATE RISK
FOR THE THREE
INTERMEDIATE-TERM
PORTFOLIOS WILL BE
HIGHER
The three intermediate-term Portfolios are exposed to a
higher degree of interest rate risk than the three
short-term Portfolios. Both the INTERMEDIATE-TERM U.S.
TREASURY PORTFOLIO, the GNMA PORTFOLIO and the
INTERMEDIATE-TERM CORPORATE PORTFOLIO are expected to
exhibit MODERATE TO HIGH price fluctuations as interest
rates change. Credit risk, however, should be minimal for
the Intermediate-Term U.S. Treasury and the GNMA
Portfolios, as both Portfolios invest primarily in "full
faith and credit" securities of the U.S. Government.
Due to its investments in corporate securities, credit
risk associated with the Intermediate-Term Corporate
Portfolio will be higher than for the other two
intermediate-term Portfolios. However, the
Intermediate-Term Corporate Portfolio's diversification
and quality of investments should help limit credit risk.
The GNMA Portfolio is unique among the Fund's Portfolios
in its exposure to prepayment risk. Prepayment risk is the
possibility that, as interest rates fall, homeowners are
more likely to refinance their home mortgages. When home
mortgages are refinanced, the principal on GNMA
Certificates held by the Portfolio is "prepaid" earlier
than expected. The GNMA Portfolio must then reinvest the
unanticipated principal in new GNMA certificates, just at
a time when interest rates on new mortgage investments are
falling.
Prepayment risk has two important effects on the GNMA
Portfolio:
- When interest rates fall and additional mortgage
prepayments must be reinvested at lower interest rates,
the income of the GNMA Portfolio will be reduced.
- When interest rates fall, prices on GNMA securities will
not rise as much as comparable Treasury bonds, as bond
market investors anticipate an increase in mortgage
prepayments and a likely decline in income.
In part to compensate for this risk, the GNMA Portfolio
will generally offer higher yields than a bond portfolio
of comparable quality--such as the Intermediate-Term U.S.
Treasury Portfolio.
19
<PAGE>
FOR THE TWO LONG-TERM
PORTFOLIOS, INTEREST
RATE RISK MAY BE
SUBSTANTIAL
The two long-term Portfolios are exposed to substantial
interest rate risk. The LONG-TERM U.S. TREASURY PORTFOLIO
and the LONG-TERM CORPORATE PORTFOLIO, both of which
maintain average maturities in excess of 15 years, may
exhibit HIGH TO VERY HIGH PRICE fluctuations due to
changing interest rates.
The main difference between the two Portfolios is credit
risk. The Long-Term U.S. Treasury Portfolio invests
primarily in "full faith and credit" U.S. Treasury bonds
for maximum credit protection, while the Long-Term
Corporate Portfolio invests in investment grade corporate
bonds for higher yields. Although credit risk for the
Long-Term Corporate Portfolio will be somewhat higher,
overall credit risk should still be low because of the
Portfolio's well-diversified holdings and its emphasis on
high-quality bonds.
An additional risk associated with the Long-Term Corporate
Portfolio is call risk. Call risk is the possibility that
corporate bonds held by the Portfolio will be repaid prior
to maturity. Call provisions, common in many corporate
bonds held by the Portfolio, allow bond issuers to redeem
bonds prior to maturity (at a specified price). When
interest rates are falling, bond issuers often exercise
these call provisions, paying off bonds that carry high
stated interest rates and often issuing new bonds at lower
rates. For the Portfolio, the result would be that bonds
with high interest rates are "called" and must be replaced
with lower-yielding instruments. In these circumstances,
the income of the Portfolio would decline.
Reflecting these additional credit and call risks, the
Long-Term Corporate Portfolio will generally offer higher
yields than the Long-Term U.S. Treasury Portfolio.
THE HIGH YIELD
CORPORATE PORTFOLIO
POSES SUBSTANTIAL
RISKS
The HIGH YIELD CORPORATE PORTFOLIO is unique among the
Portfolios of the Fund in its exposure to a substantial
degree of credit risk. The medium-and low-grade bonds held
by the Portfolio are considered speculative by traditional
investment standards. High-yield bonds may be issued as a
consequence of corporate restructurings, such as leveraged
buyouts, mergers, acquisitions, debt recapitalizations, or
similar events. Also, high-yield bonds are often issued by
smaller, less creditworthy companies or by highly
leveraged (indebted) firms, which are generally less able
than more financially stable firms to make scheduled
payments of interest and principal. The risks posed by
bonds issued under such circumstances are substantial.
In an effort to minimize credit risk, the High Yield
Corporate Portfolio diversifies its holdings widely among
many issuers. As of January 31, 1994, the Portfolio held
securities of 107 corporate issuers, and the Portfolio's
holdings had the following credit quality characteristics:
<TABLE>
<CAPTION>
PERCENT OF
INVESTMENT NET ASSETS
------------------------- ------------
<S> <C>
U.S. Treasury Securities 7%
Cash Reserves 6
Corporate Bonds
Baa/BBB 12
Ba/BB 31
B 44
Caa/CCC 0
Nonrated 0
---
100%
---
---
</TABLE>
20
<PAGE>
In the past, the high yields from a portfolio of low-grade
bonds have more than compensated for the higher default
rates on such securities. However, there can be no
assurance that diversification will protect the Portfolio
from widespread bond defaults brought about by a sustained
economic downturn, or that yields will continue to offset
default rates on high-yield bonds in the future. A
long-term track record on bond default rates, such as that
for investment grade corporate bonds, does not exist for
the high-yield market. It may be that future default rates
on high-yield bonds will be more widespread and higher
than in the past, especially during periods of
deteriorating economic conditions.
The share price of the High Yield Corporate Portfolio will
be influenced not only by changing interest rates, but
also by the bond market's perception of credit quality and
the outlook for economic growth. When economic conditions
appear to be deteriorating, low-and medium-rated bonds may
decline in market value due to investors' heightened
concern over credit quality, regardless of prevailing
interest rates.
Especially at such times, trading in the secondary market
for high-yield bonds may become thin and market liquidity
may be significantly reduced. Even under normal
conditions, the market for high-yield bonds may be less
liquid than the market for investment grade corporate
bonds. There are fewer securities dealers in the high-
yield market, and purchasers of high-yield bonds are
concentrated among a smaller group of securities dealers
and institutional investors.
In periods of reduced market liquidity, high-yield bond
prices may become more volatile, and both the high-yield
market and the Portfolio may experience sudden and
substantial price declines. Also, there may be significant
disparities in the prices quoted for high-yield securities
by various dealers. Under such conditions, the Portfolio
may find it difficult to value its securities accurately.
The Portfolio may also be forced to sell securities at a
significant loss in order to meet shareholder redemptions.
Under unusual circumstances, the Portfolio may hold a
significant portion of its assets in U.S. Government
obligations and cash reserves for temporary defensive
purposes. As of January 31, 1994, for example, such
securities represented approximately 13% of the
Portfolio's assets.
Besides credit and liquidity concerns, prices for
high-yield bonds may be affected by legislative and
regulatory developments. For example, from time to time,
Congress has considered legislation to restrict or
eliminate the corporate tax deduction for interest
payments or to regulate corporate restructurings such as
takeovers or mergers. Such legislation may significantly
depress the prices of outstanding high-yield bonds.
Overall, investors should expect that the High Yield
Corporate Portfolio may fluctuate in price independently
of the broad bond market and prevailing interest rate
trends, and that price volatility at times may be very
high, especially as a result of credit concerns, market
liquidity, and anticipated or actual legislative and
regulatory changes.
- --------------------------------------------------------------------------------
21
<PAGE>
WHO SHOULD INVEST
INVESTORS SEEKING
CURRENT INCOME
The Fund is intended for investors who are seeking a high
level of current income from their investments. The Fund
is also suitable for investors with common stock holdings
who are seeking a complementary fixed income investment to
create a more diversified and balanced investment mix.
Because of potential fluctuations in the share price of
the Fund's Portfolios, the Fund may be inappropriate for
short-term investors who require maximum stability of
principal. Because of the risks associated with bond
investments, the Fund is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term bond
market movements.
Investors who engage in excessive account activity
generate additional costs which are borne by all of the
Fund's shareholders. In order to minimize such costs the
Fund has adopted the following policies. The Fund reserves
the right to reject any purchase request (including
exchange purchases from other Vanguard portfolios) that is
reasonably deemed to be disruptive to efficient portfolio
management, either because of the timing of the investment
or previous excessive trading by the investor.
Additionally, the Fund reserves the right to suspend the
offering of its shares.
You should base your selection of a Portfolio (or
Portfolios) of the Fund on your own objectives, risk
preferences, and time horizon.
Three short-term Portfolios--the SHORT-TERM U.S. TREASURY
PORTFOLIO, SHORT-TERM FEDERAL PORTFOLIO, and SHORT-TERM
CORPORATE PORTFOLIO--are designed for investors who are
seeking yields that are more durable and usually higher
than those available from money market funds, and who can
tolerate modest fluctuations in the value of their
investment. The choice among the three is one of credit
quality--U.S. Treasury, U.S. Government agency, or
corporate.
The three intermediate-term Portfolios--the
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO, the GNMA
PORTFOLIO and the INTERMEDIATE-TERM CORPORATE PORTFOLIO
offer high credit quality, higher yields and a steadier
income than available from the three short-term
Portfolios. Price swings, however, can be substantial. The
choice between the three is again one of credit
quality--U.S. Treasury, U.S. Government Agency, or
corporate--as well as one of prepayment risk (i.e.,
whether you are willing to take on the prepayment risk of
the GNMA Portfolio in exchange for generally higher
yields).
The two long-term Portfolios, the LONG-TERM U.S. TREASURY
PORTFOLIO and the LONG-TERM CORPORATE PORTFOLIO, are
designed for investors seeking higher credit quality and
steady levels of income, and who can withstand potentially
large fluctuations in the market value of their
investment. The choice between the two is one of credit
quality and call risk. The Long-Term Corporate Portfolio
generally offers higher yields than the Long-Term U.S.
Treasury Portfolio in exchange for higher credit and call
risks.
Finally, the HIGH YIELD CORPORATE PORTFOLIO is designed
for aggressive investors willing to take substantial risks
in pursuit of potentially higher rewards. Since the High
Yield Corporate Portfolio invests in securities that are
considered speculative by traditional investment
standards, an investment in the Portfolio should represent
only a limited portion of a balanced investment program
for most investors.
- --------------------------------------------------------------------------------
22
<PAGE>
IMPLEMENTATION
OF POLICIES
EACH PORTFOLIO MAY
INVEST IN REPURCHASE
AGREEMENTS
Each Portfolio of the Fund utilizes a variety of
investment practices in pursuit of its objective.
Each Portfolio of the Fund may invest in repurchase
agreements according to the restrictions and limitations
set forth in "Investment Policies." A repurchase agreement
is a means of investing monies for a short period. In a
repurchase agreement, a seller--a U.S. commercial bank or
recognized U.S. securities dealer--sells securities to a
Portfolio and agrees to repurchase the securities at the
Portfolio's cost plus interest within a specified period
(normally one day). In these transactions, the securities
purchased by the Portfolio will have a total value equal
to or in excess of the value of the repurchase agreement,
and will be held by the Fund's Custodian bank until
repurchased.
The use of repurchase agreements involves certain risks.
For example, if the other party to the agreement defaults
on its obligation to repurchase the underlying security at
a time when the value of the security has declined, the
Portfolio may incur a loss upon disposition of the
security. If the other party to the agreement becomes
insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may
determine that the underlying security is collateral for a
loan by the Portfolio and not within the control of the
Portfolio. As a result, the Portfolio's ability to realize
on such collateral may be automatically stayed. Finally,
it is possible that the Portfolio may not be able to
substantiate its interest in the underlying security and
may be deemed an unsecured creditor of the other party to
the agreement. While each Portfolio's management
acknowledges these risks, it is expected that they can be
controlled through careful monitoring procedures.
EACH PORTFOLIO MAY
OWN RESTRICTED
SECURITIES
Each Portfolio of the Fund may own restricted securities
to a limited extent. Restricted securities are securities
which are not freely marketable or which are subject to
restrictions upon sale under the Securities Act of 1933.
Each Portfolio may invest up to 15% of its net assets in
restricted securities. (Included within these 5% and 10%
limits are restricted securities and other securities for
which price quotations are not readily available.)
FOUR PORTFOLIOS MAY
INVEST IN SECURITIES
OF
FOREIGN ISSUERS
The Short-Term Corporate, Intermediate-Term Corporate,
Long-Term Corporate, and High-Yield Corporate Portfolios
may hold securities of foreign issuers, but all such
securities must be denominated in U.S. dollars. Securities
of foreign issuers may trade in U.S. or foreign securities
markets. Securities of foreign issuers may involve
investment risks that are different from those of domestic
issuers. Such risks include the effect of foreign economic
policies and conditions, future political and economic
developments, and the possible imposition of exchange
controls or other foreign governmental restrictions on
foreign debt issuers. There may also be less publicly
available information about a foreign issuer than a
domestic issuer of securities. Foreign issuers are
generally not subject to the uniform accounting, auditing
and financial reporting standards that apply to domestic
issuers. Also, foreign debt markets may be characterized
by lower liquidity, greater price volatility, and higher
transactions costs. Additionally, it may be difficult to
obtain or enforce a legal judgement in a foreign court.
23
<PAGE>
MOST PORTFOLIOS MAY
INVEST IN FUTURES
CONTRACTS, OPTIONS,
AND
OTHER DERIVATIVE
SECURITIES
Each Portfolio of the Fund, except for the Short-Term
Federal Portfolio, may invest in futures contracts and
options to a limited extent. Specifically, a Portfolio may
enter into futures contracts provided that not more than
5% of its assets are required as a futures contract margin
deposit; in addition, a Portfolio may enter into futures
contracts and options transactions only to the extent that
obligations under such contracts or transactions represent
not more than 20% of the Portfolio's assets.
Futures contracts and options may be used for several
reasons: to maintain cash reserves while simulating full
investment to facilitate trading, to reduce transaction
costs, or to seek higher investment returns when a
specific futures contract is priced more attractively than
other futures contracts or the underlying security or
index. The Portfolios intend to use futures contracts only
for bona fide hedging purposes and will not use futures
contracts or options for speculative purposes.
FUTURES CONTRACTS AND __________________________________________________________
OPTIONS POSE CERTAIN
RISKS
The primary risks associated with the use of futures
contracts and options are: (i) imperfect correlation
between the change in market value of the bonds held by a
Portfolio and the prices of futures contracts and options;
and (ii) possible lack of a liquid secondary market for a
futures contract and the resulting inability to close a
futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing only
in those contracts whose price fluctuations are expected
to resemble those of the Portfolio underlying securities.
The risk that a Portfolio will be unable to close out a
futures position will be minimized by entering into such
transactions on a national exchange with an active and
liquid secondary market.
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of
leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may
result in immediate and substantial loss (or gain) to the
investor. When investing in futures contracts, a Portfolio
will segregate cash or cash equivalents in the amount of
the underlying obligation.
Derivatives are instruments whose value is linked to or
derived from an underlying security. The most common are
futures and options which are described above. Other
derivatives include swaps, inverse floaters, IO's
(interest only), and PO's (principal only). Derivatives
may be traded separately on exchanges or in the
over-the-counter market, or they may be imbedded in other
securities. The most common imbedded derivative is the
call option attached to or imbedded in a callable
government or callable corporate bond. The owner of a
traditional callable bond holds a combination of a long
position in a non-callable bond and a short position in a
call option on that bond, i.e. the bond issuer has the
right to call the bond away from the holder of the bond.
Any of these instruments may also be used individually or
in combination to hedge against unfavorable changes in
interest rates, or to speculate on anticipated changes in
interest rates. Derivatives may be structured with no or a
high degree of leverage. When derivatives are used as
hedges, the risk incurred is that the derivative
instrument's value may change differently than the value
of the security being hedged. This "basis risk" is
generally lower than the risk associated with an unhedged
position in the security being hedged. Some derivatives
may entail liquidity risk, i.e. the risk that the
instrument cannot be sold at a reasonable price in highly
volatile markets. Leveraged derivatives used for
speculation are very volatile, and therefore, very risky.
However, the Fund's Portfolios will only utilize
derivatives for hedging or arbitrage purposes, and not for
speculative purposes. Over-the-counter derivatives involve
a counterparty risk, i.e. the risk that the individual or
institution on the other side of the agreement will not or
cannot meet their obligations under the derivative
agreement.
24
<PAGE>
EACH PORTFOLIO MAY __________________________________________________________
LEND ITS SECURITIES
Each Portfolio of the Fund may lend its investment
securities to qualified institutional investors for either
short-term or long-term purposes of realizing additional
income. Loans of securities by a Portfolio will be
collateralized by cash, letters of credit, or securities
issued or guaranteed by the U.S. Government or its
agencies. The collateral will equal at least 100% of the
current market value of the loaned securities, and such
loans may not exceed 33 1/3% of the value of the
Portfolio's securities.
MOST PORTFOLIOS MAY __________________________________________________________
INVEST IN CMOS
The Short-Term Federal, Short-and Intermediate-Term
Corporate and the Short-, Intermediate-and Long-Term U.S.
Treasury Portfolios may invest in collateralized mortgage
obligations (CMOs), bonds that are collateralized by whole
loan mortgages or mortgage pass-through securities. In the
case of the Short-Term Federal and the Short-and
Intermediate-Term U.S. Treasury Portfolios, only CMOs
issued by agencies or instrumentalities of the U.S.
Government will be purchased. However, the Short-,
Intermediate-and Long-term Corporate Portfolios may also
purchase privately-issued CMOs carrying investment grade
ratings. The bonds issued under a CMO structure are
divided into groups with varying maturities, and the cash
flows generated by the mortgages or mortgage pass-through
securities in the collateral pool are used to first pay
interest and then pay principal to the CMO bondholders.
Under the CMO structure, the repayment of principal among
the different groups is prioritized in accordance with the
terms of the particular CMO issuance. The "fastest-pay"
group of bonds, as specified in the prospectus for the
issuance, would initially receive all principal payments.
When that group of bonds is retired, the next group or
groups, in the sequence, as specified in the prospectus,
receive all of the principal payments until all of the
groups are retired. Aside from market risk, the primary
risk involved in any mortgage security, such as a CMO
issuance, is its exposure to prepayment risk. To the
extent a particular group of bonds is exposed to this
risk, the bondholder is generally compensated in the form
of higher yield (see "Investment Risks"). In order to
provide security, in addition to the underlying
collateral, many CMO issues also include minimum
reinvestment rate and minimum sinking-fund guarantees.
Typically, the Portfolios will invest in those CMOs that
most appropriately reflect their average maturities and
market risk profiles. Consequently, the Short-Term
Portfolios invest only in CMOs with highly predictable
short-term average maturities. Similarly, the
Intermediate-Portfolios will invest in those CMOs that
carry market risks and expected average maturities
consistent with intermediate term bonds, and the Long-Term
U.S. Treasury Portfolio will invest in those CMOs that
carry market risks and expected average maturities
consistent with long-term bonds.
The maturity of some classes of CMOs may be very difficult
to predict because any such predictions are highly
dependent upon assumptions regarding the prepayments which
CMOs may experience. Deviations in the actual prepayments
experienced may significantly affect the ultimate maturity
of CMOs, and in such an event, the maturity and risk
characteristics of CMOs purchased by the Portfolios may be
significantly greater or less than intended. The
possibility that rising interest rates may cause
prepayments to occur at a slower than expected rate is
known as extension risk. This particular risk may
effectively change a CMO which was considered short-or
intermediate-term at the time of purchase into a long-term
security. Alternatively, there are certain classes of CMOs
that are by design constructed to have
25
<PAGE>
highly predictable average maturities. Such CMOs will
retain their relative predictability over a broad range of
prepayment experience. The Portfolios expect to control
extension risk by purchasing these specific classes of
CMOs which, in the advisers' opinions, are reasonably
predictable.
PORTFOLIO TURNOVER __________________________________________________________
RATES WILL VARY
Although they generally seek to invest for the long term,
the Portfolios of the Fund retain the right to sell
securities regardless of how long they have been held. It
is anticipated that the annual portfolio turnover rate for
the GNMA, Long-Term Corporate and High Yield Corporate
Portfolios will not exceed 100%. A 100% turnover rate
would occur, for example, if all of the securities in a
Portfolio were replaced within one year. For the
Intermediate-Term and Long-Term U.S. Treasury and the
Intermediate-Term Corporate Portfolios, portfolio turnover
rates will generally not exceed 200%. For the Short-Term
U.S. Treasury, Short-Term Federal, and Short-Term
Corporate Portfolios, portfolio turnover rates will be
higher due to the short-term maturities of the securities
purchased, but are not expected to exceed 300%. A higher
Portfolio turnover rate will cause a Portfolio to incur
additional brokerage costs and may cause a Portfolio to
realize a higher level of capital gains or losses.
- --------------------------------------------------------------------------------
________________________________________________________________________________
INVESTMENT
LIMITATIONS
THE FUND HAS
ADOPTED CERTAIN
FUNDAMENTAL
LIMITATIONS
Each of the Fund's Portfolios has adopted certain
limitations designed to reduce its exposure to specific
situations. Some of these limitations are that a Portfolio
will not:
(a)_ with respect to 75% of its assets, invest more than
5% of the value of its assets in the securities of
any single company;
(b)_ with respect to 75% of its assets, purchase more than
10% of the voting securities of any issuer;
(c)_ invest more than 5% of its assets in the securities
of companies that have a continuous operating history
of less than three years;
(d)_ invest more than 25% of its assets in any one
industry, provided that: (i) this limitation does not
apply to obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities; (ii)
utility companies will be divided according to their
services (for example, gas, gas transmission,
electric, electric and gas, and telephone will each
be considered a separate industry); and (iii)
financial service companies will be classified
according to the end users of their services (for
example, automobile finance, bank finance, and
diversified finance will be considered as separate
industries);
(e)_ borrow money, except that the Portfolio may borrow
from banks (or through reverse repurchase
agreements), for temporary or emergency (not
leveraging) purposes, including the meeting of
redemption requests which might otherwise require the
untimely disposition of securities, in an amount not
exceeding 15% of the value of the Portfolio's net
assets (including the amount borrowed and the value
of any outstanding reverse repurchase agreements) at
the time the borrowing is made. Whenever borrowings
exceed 5% of the value of the Portfolio's net assets,
the Portfolio will not make any additional
investments.
(f)_ pledge, mortgage or hypothecate its assets to an
extent greater than 5% of the value of its total
assets.
26
<PAGE>
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information may be changed only with the approval of a
majority of the Fund's shareholders.
- --------------------------------------------------------------------------------
________________________________________________________________________________
MANAGEMENT OF THE
FUND
VANGUARD
ADMINISTERS AND
DISTRIBUTES THE FUND
The Fund is a member of The Vanguard Group of Investment
Companies, a family of 32 investment companies with 78
distinct portfolios and total assets in excess of $120
billion. Through their jointly owned subsidiary, The
Vanguard Group, Inc. ("Vanguard"), the Fund and the other
funds in the Group obtain at cost virtually all of their
corporate management, administrative, shareholder
accounting and distribution services. Vanguard also
provides investment advisory services on an at-cost basis
to certain Vanguard funds. As a result of Vanguard's
unique corporate structure, the Vanguard funds have costs
substantially lower than those of most competing mutual
funds. In 1993, the average expense ratio (annual costs
including advisory fees divided by total net assets) for
the Vanguard funds amounted to approximately .30% compared
to an average of 1.02% for the mutual fund industry (data
provided by Lipper Analytical Services).
The Officers of the Fund oversee its day-to-day operations
and are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. A list of the Directors and Officers of the Fund
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each
fund pays its share of Vanguard's net expenses, which are
allocated among the funds under methods approved by the
Board of Directors (Trustees) of each fund. In addition,
each fund bears its own direct expenses, such as legal,
auditing and custodian fees.
Vanguard also provides distribution and marketing services
to the Vanguard funds. The funds are available on a
no-load basis (i.e., there are no sales commissions or
12b-1 fees). However, each fund bears its share of the
Group's distribution costs.
- --------------------------------------------------------------------------------
________________________________________________________________________________
INVESTMENT
ADVISERS
THE FUND EMPLOYS TWO
INVESTMENT ADVISERS
The Fund utilizes two investment advisers. Wellington
Management Company serves as investment adviser to the
GNMA, Long-Term Corporate and High Yield Corporate
Portfolios; Vanguard's Fixed Income Group serves as
investment adviser to the Short-Term U.S. Treasury,
Short-Term Federal, Short-Term Corporate,
Intermediate-Term U.S. Treasury, Intermediate-Term
Corporate and Long-Term U.S. Treasury Portfolios.
WELLINGTON __________________________________________________________
MANAGEMENT
COMPANY
Under an investment advisory agreement with the Fund dated
May 31, 1993, WELLINGTON MANAGEMENT COMPANY ("WMC"), 75
State Street, Boston, MA 02109, manages the investment and
reinvestment of assets in the GNMA, Long-Term Corporate,
and High-Yield Corporate Portfolios, and continuously
reviews, supervises and administers the investment program
of these three Portfolios. WMC discharges its
responsibilities subject to the control of the Officers
and Directors of the Fund.
27
<PAGE>
WMC is a professional investment counseling firm which
globally provides investment services to investment
companies, institutions and individuals. Among the clients
of WMC are 12 of the 32 investment companies of The
Vanguard Group. As of December 31, 1993, WMC held
discretionary management authority with respect to
approximately $82.8 billion of assets. WMC and its
predecessor organizations have provided investment
advisory services to investment companies since 1933 and
to investment counseling clients since 1960.
As of March 31, 1994, Paul D. Kaplan, Senior Vice
President of WMC assumed the duties of portfolio manager
for the GNMA Portfolio. Prior to this change, Mr. Kaplan
was assistant portfolio manager for the GNMA Portfolio.
Mr. Kaplan has been associated with WMC for 16 years and
also currently manages the bond component of Vanguard
Utilities Income Portfolio.
Also as of March 31, 1994, Earl E. McEvoy, Senior Vice
President of WMC assumed responsibility for the management
of the Fund's Long-Term Corporate Portfolio. Mr. McEvoy
currently manages the Fund's High Yield Corporate
Portfolio as well as Vanguard Preferred Stock Fund and the
bond component of Vanguard/Wellesley Income Fund, Inc. Mr.
McEvoy has also been associated with Wellington Management
Company for 16 years.
Mr. Kaplan and Mr. McEvoy are supported by research and
other investment services provided by the professional
staff of WMC.
Under the Fund's investment advisory agreement, the fee
paid to WMC is based on the total assets of the GNMA
Portfolio, the Long-Term Corporate Portfolio, and the
total assets of the High Yield Corporate Portfolio of
Vanguard Fixed Income Securities Fund. The three
Portfolios pay WMC an aggregate fee at the end of each
fiscal quarter, calculated by applying a quarterly rate
based on the following annual percentage rates, to the
aggregate average month-end net assets of the three
Portfolios for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
-------------------- -------
<S> <C>
First $2.5 billion .125%
Next $2.5 billion .100%
Next $2.5 billion .075%
Over $7.5 billion .050%
</TABLE>
The advisory fee is then apportioned to each Portfolio
based on the relative net assets of each; provided,
however, that following such an allocation, the fee to be
paid by the GNMA Portfolio is reduced by 75%, and the fee
paid by the Long-Term Corporate Portfolio is reduced by
50%, and the fee paid by the High Yield Corporate
Portfolio is reduced by 25%. For the fiscal year ended
January 31, 1994, the GNMA, Investment Grade Corporate and
High Yield Corporate Portfolios paid annual advisory fees
to WMC equal to, respectively, .02 of 1%, and .04 of 1%,
and .06 of 1% of average net assets. These fees were paid
pursuant to a previous advisory agreement that called for
a higher rate of fees.
The investment advisory agreement authorizes WMC to select
brokers or dealers to execute purchases and sales of each
Portfolio's securities, and directs WMC to use its
28
<PAGE>
best efforts to obtain the best available price and most
favorable execution with respect to all transactions. The
full range and quality of brokerage services are
considered in making these determinations.
The Fund has authorized WMC to pay higher commissions in
recognition of brokerage services felt necessary for the
achievement of better execution provided the adviser
believes this to be in the best interest of the Fund.
Although the Fund does not market its shares through
intermediary brokers or dealers, WMC may place orders with
qualified broker-dealers who recommend the Fund to clients
if the Officers of the Fund believe that the quality of
the transaction and the commission are comparable to what
they would be with other qualified brokerage firms.
VANGUARD FIXED INCOME __________________________________________________________
GROUP
The Short-Term U.S. Treasury, Short-Term Federal, Short
and Intermediate-Term Corporate, and Intermediate-Term and
Long-Term U.S. Treasury Portfolios receive all investment
advisory services on an at cost basis from Vanguard's
Fixed Income Group. The Group also provides investment
advisory services to several other Vanguard money market
and bond portfolios, both taxable and tax-exempt. Total
assets under management by Vanguard's Fixed Income Group
were $52 billion as of December 31, 1993.
Ian A. MacKinnon, Senior Vice President of Vanguard, has
been in charge of the Fixed Income Group since its
inception in 1981. Mr. MacKinnon is responsible for
setting the broad investment strategies employed by the
Fund, and for overseeing the portfolio managers who
implement those strategies on a day-to-day basis. The
Fund's portfolio managers are as follows:
-_ Robert F. Auwaerter, Vice President of Vanguard, serves
as portfolio manager of the Short-Term Federal,
Long-Term U.S. Treasury Portfolio, Short-Term
Corporate, Intermediate-Term U.S. Treasury, and
Intermediate-Term Corporate Portfolios. Associated with
the Fixed Income Group since 1981, Mr. Auwaerter has
managed the Short-Term Corporate Portfolio since 1983,
the Long-Term U.S. Treasury Portfolio since 1994 and
each of these other Portfolios since their respective
inceptions. (Previously, the Long-Term U.S. Treasury
Portfolio was managed by Anthony Jiorle.)
-_ John Hollyer, Assistant Vice President of Vanguard,
serves as portfolio manager of the Short-Term U.S.
Treasury Portfolio. Associated with the Fixed Income
Group since 1989, Mr. Hollyer began managing the
Portfolio in 1993. (Previously, the Portfolio was
managed by Mr. Auwaerter.) For two years prior to
joining Vanguard, Mr. Hollyer traded U.S. Government
bonds for an international investment bank.
The Fixed Income Group manages the investment and
reinvestment of the assets of the six Portfolios and
continuously reviews, supervises and administers each
Portfolio's investment program, subject to the maturity
and quality standards specified in this Prospectus and
supplemental guidelines approved by the Fund's Board of
Directors. The Fixed Income Group's selection of
investments for the Portfolios is based on: (a) continuing
credit analysis of those instruments held in the
Portfolios and those being considered for inclusion
therein; (b) possible disparities in yield relationships
between different money market instruments; and (c) actual
or anticipated movements in the general level of interest
rates.
29
<PAGE>
Vanguard's Fixed Income Group is also responsible for the
placement of portfolio transactions and the negotiation of
commissions for the six Portfolios. The purchase and sale
of investment securities will ordinarily be principal
transactions. Portfolio securities will normally be
purchased directly from the issuer or from an underwriter
or market maker for the securities. There usually will be
no brokerage commissions paid by a Portfolio for
securities purchased from an issuer. Purchases from
underwriters of securities will include a commission or
concession paid by the issuer to the underwriter, and
purchases from dealers serving as market makers will
include a dealer's mark-up.
In purchasing and selling securities for each of the six
Portfolios, it is the Fund's policy to seek to obtain
quality execution at the most favorable prices, through
responsible broker-dealers. In selecting broker-dealers to
execute the securities transactions for the Portfolios,
consideration will be given to such factors as the price
of the security; the rate of the commission; the size and
difficulty of the order; the reliability, integrity,
financial condition, general execution and operational
capabilities of the competing broker-dealer; and the
brokerage and research services provided to the Fund.
Vanguard's Fixed Income Group may occasionally make
recommendations to other Vanguard Funds or clients which
result in their purchasing or selling securities
simultaneously with a Portfolio of the Fund. As a result,
the demand for securities being purchased or the supply of
securities being sold may increase, and this could have an
adverse effect on the price of those securities. It is the
policy of the Fixed Income Group not to favor one client
over another in making recommendations or placing an
order. If two or more clients are purchasing a given
security on the same day from the same broker-dealer, such
transactions may be averaged as to price.
Although the Fund does not market its shares through
brokers or dealers, the Fixed Income Group may place
orders with qualified broker-dealers who recommend the
Fund to clients if the Fund's Officers believe that the
quality of the transaction and the commission are
comparable to what they would be with other qualified
brokerage firms.
- --------------------------------------------------------------------------------
________________________________________________________________________________
DIVIDENDS,
CAPITAL GAINS
AND TAXES
DIVIDENDS ARE PAID ON
THE FIRST BUSINESS
DAY
OF EACH MONTH
Dividends consisting of virtually all of the ordinary
income of each Portfolio of the Fund are declared daily
and are payable to shareholders of record at the time of
declaration. Such dividends are paid on the first business
day of each month. Net capital gains distributions, if
any, will be made annually. Each Portfolio's dividends and
capital gains distributions are automatically reinvested
in additional shares. The Fund is managed without regard
to tax ramifications.
Each Portfolio of the Fund intends to continue to qualify
for taxation as a "regulated investment company" under the
Internal Revenue Code so that none of the Portfolios will
be subject to federal income tax to the extent its income
is distributed to shareholders.
If you utilize the Fund as an investment option in an
employer-sponsored retirement or savings plan, dividend
distributions from the Fund will generally not be subject
to current taxation, but will accumulate on a tax-deferred
basis. In general, employer-sponsored retirement and
savings plans are governed by complex tax rules. If you
participate in such a plan, consult your plan
administrator, your plan's Summary Plan Description, or a
professional tax adviser regarding the tax consequences of
your participation in the plan and of any plan
contributions or withdrawals.
- --------------------------------------------------------------------------------
________________________________________________________________________________
30
<PAGE>
THE SHARE
PRICE OF EACH
PORTFOLIO
The share price or "net asset value" per share of each
Portfolio is computed daily by dividing the total value of
the investments and other assets of each Portfolio, less
any liabilities, by the total outstanding shares of such
Portfolio. The net asset value per share of each Portfolio
is determined as of the regular close of the New York
Stock Exchange (generally 4:00 p.m. Eastern time) on each
day the Exchange is open for trading. Securities which are
traded over-the-counter and on a stock exchange will be
valued according to the broadest and most representative
market, and it is expected that for bonds and other fixed
income securities this ordinarily will be the
over-the-counter market.
However, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing
service when such prices are believed to reflect the fair
market value of such securities. The prices provided by a
pricing service may be determined without regard to bid or
last sale prices but take into account institutional size
trading in similar groups of securities and any
developments related to
specific securities. Securities not priced in this manner
are valued at the most recent quoted bid price, or when
stock exchange valuations are used, at the latest quoted
sale price on the date of valuation. Short-term
instruments are valued at cost, which approximates market
value. Other assets and securities for which no quotations
are readily available will be valued in good faith at fair
market value using methods determined by the Board of
Directors.
Each Portfolio's share price can be found daily in the
mutual fund listings of most major newspapers under the
heading of The Vanguard Group.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION
The Fund is a Maryland corporation. The Articles of
Incorporation permit the Directors to issue 3,500,000,000
shares of common stock, with a $.001 par value. The Board
of Directors has the power to designate one or more
classes ("Portfolios") of shares of common stock and to
classify or reclassify any unissued shares with respect to
such classes. Currently the Fund is offering shares of
nine Portfolios.
The shares of each Portfolio are fully paid and
non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and
have no pre-emptive rights. Such shares have
non-cumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors if they so
choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Director or Directors of the Fund if
requested in writing by the holders of not less than 10%
of the outstanding shares of the Fund.
All securities and cash for the GNMA, Long-Term Corporate
and High Yield Corporate Portfolios are held by Morgan
Guaranty Trust Company, New York, NY. For the Short-Term
Federal, Short-Term Corporate, and Long-Term U.S. Treasury
Portfolios, all securities and cash are held by CoreStates
Bank, N.A., Philadelphia, PA. For the Short-Term and
Intermediate-Term U.S. Treasury Portfolios, all securities
and cash are held by State Street Bank and Trust Company,
Boston, MA. The Vanguard Group, Inc., Valley Forge, PA,
serves as the Fund's Transfer and Dividend Disbursing
Agent. Price Waterhouse serves as independent accountants
for the Fund and will audit its financial statements
annually. The Fund is not involved in any litigation.
- --------------------------------------------------------------------------------
31
<PAGE>
SERVICE GUIDE
PARTICIPATING IN
YOUR PLAN
One or more Portfolios of the Fund is available as an
investment option in your retirement or savings plan. The
administrator of your plan or your employee benefits
office can provide you with detailed information on how to
participate in your plan and how to elect a Portfolio of
the Fund as an investment option.
IF YOU HAVE ANY QUESTIONS ABOUT A PORTFOLIO, including the
Portfolio's investment objective, policies, risk
characteristics or historical performance, please contact
Vanguard's Participant Services (1-800-523-1188). Please
have your Social Security Number available when you call.
IF YOU HAVE QUESTIONS ABOUT YOUR ACCOUNT, contact your
plan administrator or the organization which provides
recordkeeping services for your plan.
----------------------------------------------------------
INVESTMENT OPTIONS
AND ALLOCATIONS
You may be permitted to elect different investment
options, alter the amounts contributed to your plan, or
change how contributions are allocated among your
investment options in accordance with your plan's specific
provisions. See your plan administrator or employee
benefits office for more details.
----------------------------------------------------------
TRANSACTIONS IN FUND
SHARES
Contributions, exchanges or redemptions of a Portfolio's
shares are effective when received in "good order" by
Vanguard. "Good order" means that complete information on
the purchase, exchange or redemption and the appropriate
monies have been received by Vanguard.
----------------------------------------------------------
MAKING EXCHANGES
Your plan may allow you to exchange monies from one
investment option to another. However, the Fund reserves
the right to refuse any exchange purchase request. Check
with your plan administrator for details on the rules
governing exchanges in your plan. Certain investment
options, particularly company stock or investment
contracts (ICs), may be subject to unique restrictions.
Before making an exchange, you should consider the
following:
- If you are making an exchange to another Vanguard Fund
option, please read the Fund's prospectus. Contact
Participant Services (1-800-523-1188) for a copy.
- Exchanges are accepted by Vanguard only as permitted by
your plan. Your plan administrator can explain how
frequently exchanges are allowed.
- --------------------------------------------------------------------------------
32
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[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
<PAGE>
(LOGO)
- ---------------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2900
Valley Forge, PA 19482
INSTITUTIONAL PARTICIPANT
SERVICES DEPARTMENT:
1-800-523-1188
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
I028
(LOGO)
INSTITUTIONAL
PROSPECTUS
MAY 25, 1994
(LOGO)
<PAGE>
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- --------------------------------------------------------------------------------
[LOGO]
- ---------------------
High Yield
Corporate Portfolio A MEMBER OF THE VANGUARD GROUP
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
PROSPECTUS--MAY 25, 1994
- --------------------------------------------------------------------------------
NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
- --------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
- --------------------------------------------------------------------------------
INVESTMENT Vanguard Fixed Income Securities Fund, Inc. (the "Fund") is
OBJECTIVE AND an open-end diversified investment company which consists of
POLICIES nine Portfolios. This prospectus relates only to the High
Yield Corporate Portfolio (the "Portfolio"). The objective
of the Portfolio is to provide investors with a high level
of current income. There is no assurance that the Portfolio
will achieve its stated objective. A MAJORITY OF THE ASSETS
OF THE HIGH YIELD CORPORATE PORTFOLIO MAY BE RATED BA OR B.
SECURITIES WITH SUCH RATINGS ARE COMMONLY REFERRED TO AS
"JUNK BONDS" AND ARE CONSIDERED SPECULATIVE BY THE MAJOR
RATINGS AGENCIES. INVESTORS SHOULD CAREFULLY ASSESS THE
RISKS ASSOCIATED WITH AN INVESTMENT IN THIS PORTFOLIO BEFORE
PURCHASING SHARES.
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT To open a regular (non-retirement) account, please complete
and return the Account Registration Form. If you need
assistance in completing this Form, please call the Investor
Information Department. To open an Individual Retirement
Account (IRA), please use a Vanguard IRA Adoption Agreement.
To obtain a copy of this form, call 1-800-662-7447, Monday
through Friday, from 8:00 a.m. to 9:00 p.m. and Saturday
from 9:00 a.m. to 4:00 p.m. (Eastern time). The minimum
initial investment is $3,000 ($500 for Individual Retirement
Accounts and Uniform Gifts/Transfers to Minors Act
accounts). The Portfolio is offered on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees).
However, the Portfolio incurs expenses for investment
advisory, management, administrative and distribution
services. If shares of this Portfolio are redeemed or
exchanged prior to being held for one year they will be
subject to a 1% redemption fee. See "Fund Expenses".
- --------------------------------------------------------------------------------
ABOUT THIS This Prospectus is designed to set forth concisely the
PROSPECTUS information you should know about the Portfolio before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing additional
information about the Portfolio has been filed with the
Securities and Exchange Commission. This Statement is dated
May 25, 1994, and has been incorporated by reference into
this Prospectus. A copy may be obtained without charge by
writing to the Portfolio or by calling the Investor
Information Department.
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TABLE OF CONTENTS
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Portfolio Expenses...................... 2
Financial Highlights.................... 3
Yield and Total Return.................. 4
FUND INFORMATION
Investment Objective.................... 4
Investment Policies..................... 4
Investment Risks........................ 5
Who Should Invest....................... 8
Implementation of Policies.............. 8
<CAPTION>
PAGE
<S> <C>
Investment Limitations.................. 10
Management of the Portfolio............. 11
Investment Adviser...................... 12
Dividends, Capital Gains and Taxes...... 13
The Share Price of the Portfolio........ 14
General Information..................... 15
SHAREHOLDER GUIDE
Opening an Account and Purchasing
Shares................................ 16
<CAPTION>
PAGE
<S> <C>
When Your Account Will Be Credited...... 19
Selling Your Shares..................... 19
Exchanging Your Shares.................. 22
Important Information About Telephone
Transactions.......................... 23
Transferring Registration............... 24
Other Vanguard Services................. 24
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<S> <C>
PORTFOLIO EXPENSES The following table illustrates all expenses and fees that
you would incur as a shareholder of the Portfolio. The
expenses set forth below are for the fiscal year ended
January 31, 1994.
</TABLE>
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
- -------------------------------------
Sales Load Imposed on
Purchases.................... None
Sales Load Imposed on
Reinvested Dividends......... None
Redemption Fees*+............. 1%
Exchange Fees................. None
ANNUAL FUND OPERATING EXPENSES
- -------------------------------------
Management & Administrative
Expenses..................... 0.20%
Investment Advisory Fees...... 0.06
12b-1 Fees.................... None
Other Expenses
Distribution Costs.......... 0.02%
Miscellaneous Expenses...... 0.04
Total Other Expenses.......... 0.06
TOTAL OPERATING
EXPENSES............... 0.32%
<FN>
*WIRE REDEMPTIONS OF LESS THAN $5,000 ARE SUBJECT TO
A $5 PROCESSING FEE.
+THE 1% FEE WITHHELD FROM REDEMPTION PROCEEDS IS
PAID TO THE PORTFOLIO.
</TABLE>
<TABLE>
<S> <C>
1% REDEMPTION FEE The High Yield Corporate Portfolio is intended for long-term
investors who can withstand substantial price fluctuation.
For this reason, the Portfolio will assess a 1% redemption
fee on shares that are redeemed or exchanged out before they
have been held for one year. Solely for purposes of
calculating the one year holding period, the Portfolio will
use the "first-in, first-out" (FIFO) method. That is, the
date of the redemption or exchange will be compared to the
earliest purchase date. If this holding period is less than
one year, the fee will be assessed. The fee will be prorated
if a portion of the shares being redeemed or exchanged has
been held for more than one year. This fee will not apply to
dividend or capital gain reinvestments and it is paid
directly to the Portfolio.
The purpose of the above table is to assist you in
understanding the various expenses that you would bear
directly or indirectly as an investor in the Portfolio. The
following example illustrates the expenses that you would
incur on a $1,000 investment over various periods, assuming
(1) a 5% annual rate of return and (2) redemption at the end
of each period.
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C>
$3 $10 $18 $41
</TABLE>
<TABLE>
<S> <C>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY
BE HIGHER OR LOWER THAN THOSE SHOWN.
</TABLE>
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2
<PAGE>
<TABLE>
<S> <C>
FINANCIAL The following financial highlights for a share outstanding
HIGHLIGHTS throughout each period, insofar as they relate to each of
the five years in the period ended January 31, 1994, have
been audited by Price Waterhouse, independent accountants,
whose report thereon was unqualified. This information
should be read in conjunction with the Portfolio's financial
statements and notes thereto, which are incorporated by
reference in the Statement of Additional Information and in
this Prospectus, and which appear, along with the report of
Price Waterhouse, in the Fund's 1994 Annual Report to
Shareholders. For a more complete discussion of the Fund's
performance, please see the Fund's 1994 Annual Report to
Shareholders which may be obtained without charge by writing
to the Fund or by calling our Investor Information
Department at 1-800-662-7447.
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
HIGH YIELD CORPORATE PORTFOLIO
----------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
----------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD................ $7.56 $7.27 $6.19 $7.31 $8.44 $8.53 $9.33 $8.84 $8.52 $8.97
------- ------- ------- ------- ------- -------- -------- -------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income... .695 .727 .770 .904 1.004 1.016 1.006 1.091 1.13 1.18
Net Realized and
Unrealized Gain (Loss)
on Investments......... .580 .290 1.080 (1.120) (1.130) (.090) (.800) .598 .33 (.45)
------- ------- ------- ------- ------- -------- -------- -------- ------- -------
TOTAL FROM
INVESTMENT
OPERATIONS......... 1.275 1.017 1.850 (.216) (.126) .926 .206 1.689 1.46 .73
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income...... (.695) (.727) (.770) (.904) (1.004) (1.016) (1.006) (1.081) (1.14) (1.18)
Distributions from
Realized Capital
Gains.................. -- -- -- -- -- -- -- (.118) -- --
------- ------- ------- ------- ------- -------- -------- -------- ------- -------
TOTAL
DISTRIBUTIONS...... (.695) (.727) (.770) (.904) (1.004) (1.016) (1.006) (1.199) (1.14) (1.18)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD............ $8.14 $7.56 $7.27 $6.19 $7.31 $8.44 $8.53 $9.33 $8.84 $8.52
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN.............. 17.54% 14.68% 31.27% (3.21)% (1.84)% 11.41% 2.54% 20.12% 18.40% 9.42%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
RATIO/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions)...... $2,625 $2,184 $1,593 $699 $828 $1,234 $933 $1,370 $634 $252
Ratio of Expenses to
Average Net Assets..... .32% .34% .34% .40% .38% .41% .41% .45% .60% .65%
Ratio of Net Investment
Income to Average Net
Assets................. 8.81% 9.82% 11.13% 13.35% 12.56% 12.07% 11.47% 11.43% 12.51% 13.61%
Portfolio Turnover Rate... 51% 83% 44% 61% 41% 48% 82% 67% 61% 71%
</TABLE>
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3
<PAGE>
<TABLE>
<S> <C>
YIELD AND TOTAL From time-to-time the Portfolio may advertise its yield and
RETURN total return. BOTH YIELD AND TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE
FUTURE PERFORMANCE. The "total return" of the Portfolio
refers to the average annual compounded rates of return over
one-, five-and ten-year periods or for the life of the
Portfolio (as stated in the advertisement) that would equate
an initial amount invested at the beginning of a stated
period to the ending redeemable value of the investment,
assuming the reinvestment of all dividend and capital gains
distributions.
The "30-day yield" of the Portfolio is calculated by
dividing net investment income per share earned during a
30-day period by the net asset value per share on the last
day of the period. Net investment income includes interest
and dividend income earned on the Portfolio's securities; it
is net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder accounts.
The yield calculation assumes that net investment income
earned over 30 days is compounded monthly for six months and
then annualized. Methods used to calculate advertised yields
are standardized for all stock and bond mutual funds.
However, these methods differ from the accounting methods
used by the Portfolio to maintain its books and records, and
so the advertised 30-day yield may not fully reflect the
income paid to your own account or the yield reported in the
Portfolio's Reports to Shareholders.
Additionally, the Portfolio may compare its performance to
that of the Lehman Aggregate Bond Index and may advertise
its duration, a measure of the Portfolio's sensitivity to
interest rate changes.
- --------------------------------------------------------------------------------
INVESTMENT The objective of the Portfolio is to provide investors with
OBJECTIVE a high level of current income. There is no assurance that
the Portfolio will achieve its stated objective. The
investment objective of the Portfolio is not fundamental and
so may be changed by the Board of Directors without
shareholder approval. Any such change could result in the
Portfolio having an investment objective different from the
objective which a shareholder considered appropriate at the
time of investment in the Portfolio. However, shareholders
would be notified prior to any material change in the
Portfolio's objective.
- --------------------------------------------------------------------------------
INVESTMENT The High Yield Corporate Portfolio invests in a diversified
POLICIES portfolio of high-yielding corporate debt securities
THE PORTFOLIO (so-called "junk bonds"). Under normal circumstances, at
INVESTS IN least 80% of the Portfolio's assets will be invested in
LOW-QUALITY, high-yield corporate debt obligations rated B or better by
HIGH-RISK BONDS Moody's or Standard & Poor's. Not more than 20% of the High
Yield Corporate Portfolio's assets may be invested in debt
securities which are rated less than B or unrated, and
convertible securities and preferred stocks. The Portfolio
may invest up to 25% of its assets in cash reserves and U.S.
Government securities, under unusual market conditions for
temporary defensive measures. The Portfolio is managed
without regard to tax ramifications.
The High Yield Corporate Portfolio will not invest in
securities that, at the time of initial investment, are
rated less than Caa by Moody's or CCC by Standard & Poor's.
Securities that are subsequently downgraded in quality below
Caa or CCC may continue to be held by the Portfolio, and
will be sold only if the Portfolio's adviser believes it
would be advantageous to do so. In addition, the credit
quality of unrated securities purchased by the Portfolio
must be, in the opinion of the Portfolio's adviser, at least
equivalent to a Caa rating by Moody's or a CCC rating by
Standard & Poor's.
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Securities rated less than Baa by Moody's or BBB by Standard
& Poor's are classified as non-investment grade securities.
Such securities carry a high degree of risk and are
considered speculative by the major credit rating agencies.
The following are excerpts from the Moody's and Standard &
Poor's definitions for speculative grade debt obligations:
MOODY'S: Ba-rated bonds have "speculative elements," their
future "cannot be considered assured," and protection of
principal and interest is "moderate" and "not well
safeguarded." B-rated bonds "lack characteristics of a
desirable investment" and the assurance of interest or
principal payments "may be small." Caa-rated bonds are "of
poor standing" and "may be in default" or may have
"elements of danger with respect to principal or
interest."
STANDARD & POOR'S: BB-rated bonds have "less near-term
vulnerability to default" than B-or CCC-rated securities but
face "major ongoing uncertainties . . . which may lead to
inadequate capacity" to pay interest or principal. B-rated
bonds have a "greater vulnerability to default" than
BB-rated bonds and the ability to pay interest or
principal will likely be impaired by adverse business
conditions. CCC-rated bonds have a "currently identifiable
vulnerability to default" and, without favorable business
conditions, will be unable to repay interest and
principal.
Credit quality in the high-yield bond market can change
suddenly and unexpectedly, and even recently-issued credit
ratings may not fully reflect the actual risks posed by a
particular high-yield security. For these reasons, it is the
High Yield Corporate Portfolio's policy not to rely
primarily on ratings issued by established credit rating
agencies, but to utilize such ratings in conjunction with
the Portfolio adviser's own independent and ongoing review
of credit quality.
In the past, the High Yield Corporate Portfolio has not
invested in non-income-producing high-yield securities--such
as zero coupon bonds, which pay interest only at maturity,
or payment-in-kind bonds, which pay interest in the form of
additional securities. Although it has no present plans to
do so, the Portfolio may invest up to 5% of its assets in
such securities in the future.
The High Yield Corporate Portfolio may also hold securities
of foreign issuers provided such securities are denominated
in U.S. dollars. The Portfolio may also
invest in bond (interest rate) futures and options to a
limited extent. See "Implementation of Policies" for a
description of these investment practices of the Portfolio.
* * *
The investment policies for the Portfolio are not
fundamental and so may be changed by the Board of Directors
without shareholder approval. However, shareholders would be
notified prior to any material change in the Portfolio's
investment policies.
- --------------------------------------------------------------------------------
INVESTMENT RISKS As a mutual fund investing in fixed income securities, the
THE PORTFOLIO IS Portfolio is subject primarily to interest rate, income and
SUBJECT TO credit risk. INTEREST RATE RISK is the potential for a
INTEREST RATE, decline in bond prices due to rising interest rates. In
INCOME, CREDIT AND general, bond prices vary inversely with interest rates.
MANAGER RISK When interest rates RISE, bond prices generally FALL.
Conversely, when interest rates FALL, bond prices generally
RISE. The change in price depends on several factors,
including the bond's maturity date. In general, bonds with
longer maturities are more sensitive to interest rates than
bonds with shorter maturities.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
As an illustration of interest rate risk, the charts below
depict the effect of a one and two percentage point change
in interest rates on three bonds of varying maturities:
</TABLE>
<TABLE>
<CAPTION>
PERCENT CHANGE IN THE PRICE OF A PAR BOND YIELDING 5.5%
1 PERCENTAGE POINT 1 PERCENTAGE POINT
INCREASE IN DECREASE IN
STATED MATURITY INTEREST RATES INTEREST RATES
------------------------------ ------------------- -------------------
<S> <C> <C>
Short-Term (2.5 years) - 2.3% + 2.3%
Intermediate-Term (10 years) - 7.3% + 8.0%
Long-Term (20 years) -11.1% +13.1%
</TABLE>
<TABLE>
<CAPTION>
2 PERCENTAGE POINT 2 PERCENTAGE POINT
INCREASE IN DECREASE IN
STATED MATURITY INTEREST RATES INTEREST RATES
------------------------------ ------------------- -------------------
<S> <C> <C>
Short-Term (2.5 years) - 4.5% + 4.7%
Intermediate-Term (10 years) -13.9% +16.7%
Long-Term (20 years) -20.5% +28.6%
</TABLE>
<TABLE>
<S> <C>
These charts are intended to provide you with guidelines for
determining the degree of interest rate risk you may be
willing to assume. The yield and price changes shown should
not be taken as representative of the Portfolio's current or
future yield or expected changes in the Portfolio's share
price.
The Portfolio is also subject to INCOME RISK which is the
potential for a decline in the Portfolio's income due to
falling market interest rates.
In addition to interest rate and income risks, the Portfolio
is subject to credit risk. CREDIT RISK, also known as
default risk, is the possibility that a bond issuer will
fail to make timely payments of interest or principal to the
Portfolio. The credit risk of the Portfolio depends on the
quality of its investments. Reflecting their higher risks,
lower-quality bonds generally offer higher yields (all other
factors being equal).
Finally, the investment adviser manages the Portfolio
according to the traditional methods of "active" investment
management, which involves the buying and selling of
securities based upon economic, financial and market
analysis and investment judgement. MANAGER RISK refers to
the possibility that a Portfolio's investment adviser may
fail to execute the Portfolio's investment strategy
effectively. As a result, a Portfolio may fail to achieve
its stated objective.
THE PORTFOLIO The High Yield Corporate Portfolio is exposed to a
POSES SUBSTANTIAL substantial degree of credit risk. The medium-and low-grade
RISKS bonds held by the Portfolio are considered speculative by
traditional investment standards. High-yield bonds may be
issued as a consequence of corporate restructurings, such as
leveraged buyouts, mergers, acquisitions, debt
recapitalizations, or similar events. Also, high-yield bonds
are often issued by smaller, less creditworthy companies or
by highly leveraged (indebted) firms, which are generally
less able than more financially stable firms to make
scheduled payments of interest and principal. The risks
posed by bonds issued under such circumstances are
substantial.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
In an effort to minimize credit risk, the High Yield
Corporate Portfolio diversifies its holdings widely among
many issuers. As of January 31, 1994, the Portfolio held
securities of 107 corporate issuers, and the Portfolio's
holdings had the following credit quality characteristics:
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF
INVESTMENT NET ASSETS
------------------------------ ------------
<S> <C>
U.S. Treasury Securities 7%
Cash Reserves 6
Corporate Bonds
Baa/BBB 12
Ba/BB 31
B 44
Caa/CC 0
Nonrated 0
---
100%
</TABLE>
<TABLE>
<S> <C>
In the past, the high yields from a portfolio of low-grade
bonds have more than compensated for the higher default
rates on such securities. However, there can be no assurance
that diversification will protect the Portfolio from
widespread bond defaults brought about by a sustained
economic downturn, or that yields will continue to offset
default rates on high-yield bonds in the future. A long-term
track record on bond default rates, such as that for
investment grade corporate bonds, does not exist for the
high-yield market. It may be that future default rates on
high-yield bonds will be more widespread and higher than in
the past, especially during periods of deteriorating
economic conditions.
The share price of the High Yield Corporate Portfolio will
be influenced not only by changing interest rates, but also
by the bond market's perception of credit quality and the
outlook for economic growth. When economic conditions appear
to be deteriorating, low-and medium-rated bonds may decline
in market value due to investors' heightened concern over
credit quality, regardless of prevailing interest rates.
Especially at such times, trading in the secondary market
for high-yield bonds may become thin and market liquidity
may be significantly reduced. Even under normal conditions,
the market for high-yield bonds may be less liquid than the
market for investment grade corporate bonds. There are fewer
securities dealers in the high-yield market, and purchasers
of high-yield bonds are concentrated among a smaller group
of securities dealers and institutional investors.
In periods of reduced market liquidity, high-yield bond
prices may become more volatile, and both the high-yield
market and the Portfolio may experience sudden and
substantial price declines. Also, there may be significant
disparities in the prices quoted for high-yield securities
by various dealers. Under such conditions, the Portfolio may
find it difficult to value its securities accurately. The
Portfolio may also be forced to sell securities at a
significant loss in order to meet shareholder redemptions.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Under unusual circumstances, the Portfolio may hold a
significant portion of its assets in U.S. Government
obligations and cash reserves for temporary defensive
purposes. As of January 31, 1994, for example, such
securities represented approximately 13% of the Portfolio's
assets.
Besides credit and liquidity concerns, prices for high-yield
bonds may be affected by legislative and regulatory
developments. For example, from time to time, Congress has
considered legislation to restrict or eliminate the
corporate tax deduction for interest payments or to regulate
corporate restructurings such as takeovers or mergers. Such
legislation may significantly depress the prices of
outstanding high-yield bonds.
Overall, investors should expect that the High Yield
Corporate Portfolio may fluc-
tuate in price independently of the broad bond market and
prevailing interest
rate trends, and that price volatility at times may be very
high, especially as a
result of credit concerns, market liquidity, and anticipated
or actual legislative and
regulatory changes.
</TABLE>
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
WHO SHOULD INVEST The High Yield Corporate Portfolio is designed for
aggressive investors willing to take substantial risks in
pursuit of potentially higher rewards. Since the High Yield
Corporate Portfolio invests in securities that are
considered speculative by traditional investment standards,
an investment in the Portfolio should represent only a
limited portion of a balanced investment program for most
investors. Because of the risks associated with bond
investments, the Portfolio is intended to be a long-term
investment vehicle and is not designed to provide investors
with a means of speculating on short-term bond market
movements.
Investors who engage in excessive account activity generate
additional costs which are borne by all of the Portfolio's
shareholders. In order to minimize such costs the Portfolio
has adopted the following policies. The Portfolio reserves
the right to reject any purchase request (including exchange
purchases from other Vanguard portfolios) that is reasonably
deemed to be disruptive to efficient portfolio management,
either because of the timing of the investment or previous
excessive trading by the investor. Additionally, the
Portfolio has adopted exchange privilege limitations as
described in the section "Exchange Privilege Limitations."
Finally, the Portfolio reserves the right to suspend the
offering of its shares.
- --------------------------------------------------------------------------------
IMPLEMENTATION OF The Portfolio utilizes a variety of investment practices in
POLICIES pursuit of its objective.
THE PORTFOLIO MAY The Portfolio may invest in repurchase agreements according
INVEST IN to the restrictions and limitations set forth in "Investment
REPURCHASE Policies." A repurchase agreement is a means of investing
AGREEMENTS monies for a short period. In a repurchase agreement, a
seller--a U.S. commercial bank or recognized U.S. securities
dealer--sells securities to a Portfolio and agrees to
repurchase the securities at the Portfolio's cost plus
interest within a specified period (normally one day). In
these transactions, the securities purchased by the
Portfolio will have a total value equal to or in excess of
the value of the repurchase agreement, and will be held by
the Fund's Custodian Bank until repurchased.
The use of repurchase agreements involves certain risks. For
example, if the other party to the agreement defaults on its
obligation to repurchase the underlying security at a
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
time when the value of the security has declined, the
Portfolio may incur a loss upon disposition of the security.
If the other party to the agreement becomes insolvent and
subject to liquidation or reorganization under the
Bankruptcy Code or other laws, a court may determine that
the underlying security is collateral for a loan by the
Portfolio and not within the control of the Portfolio. As a
result, the Portfolio's ability to realize on such
collateral may be automatically stayed. Finally, it is
possible that the Portfolio may not be able to substantiate
its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement.
While each Portfolio's management acknowledges these risks,
it is expected that they can be controlled through careful
monitoring procedures.
THE PORTFOLIO MAY The Portfolio may own restricted securities to a limited
OWN RESTRICTED extent. Restricted securities are securities which are not
SECURITIES freely marketable or which are subject to restrictions upon
sale under the Securities Act of 1933. The Portfolio may
invest up to 15% of its net assets in restricted securities.
(Included within this 15% limit are restricted securities
and other securities for which price quotations are not
readily available.)
THE PORTFOLIO MAY The Portfolio may hold securities of foreign issuers, but
INVEST IN all such securities must be denominated in U.S. dollars.
SECURITIES OF Securities of foreign issuers may trade in U.S. or foreign
FOREIGN ISSUERS securities markets. Securities of foreign issuers may
involve investment risks that are different from those of
domestic issuers. Such risks include the effect of foreign
economic policies and conditions, future political and
economic developments, and the possible imposition of
exchange controls or other foreign governmental restrictions
on foreign debt issuers. There may also be less publicly
available information about a foreign issuer than a domestic
issuer of securities. Foreign issuers are generally not
subject to the uniform accounting, auditing and financial
reporting standards that apply to domestic issuers. Also,
foreign debt markets may be characterized by lower
liquidity, greater price volatility, and higher transactions
costs. Additionally, it may be difficult to obtain or
enforce a legal judgment in a foreign court.
THE PORTFOLIO MAY The Portfolio may invest in futures contracts and options to
INVEST IN FUTURES a limited extent. Specifically, the Portfolio may enter into
CONTRACTS, futures contracts provided that not more than 5% of its
OPTIONS, AND OTHER assets are required as a futures contract margin deposit; in
DERIVATIVE addition, the Portfolio may enter into futures contracts and
SECURITIES options transactions only to the extent that obligations
under such contracts or transactions represent not more than
20% of the Portfolio's assets.
Futures contracts and options may be used for several
reasons: to simulate full investment in the underlying
securities while retaining a cash balance for Portfolio
management purposes, to facilitate trading, to reduce
transaction costs, or to seek higher investment returns when
a futures contract is priced more attractively than the
underlying equity security or index.
FUTURES CONTRACTS The risk of loss in trading futures contracts in some
AND OPTIONS POSE strategies can be substantial, due both to the low margin
CERTAIN RISK deposits required, and the extremely high degree of leverage
involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor.
However, the Portfolio will not use futures contracts or
options for speculative purposes. Accordingly, the primary
risks associated with the use of
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futures contracts and options are: (i) imperfect correlation
between the change in market value of the bonds held by the
Portfolio and the prices of futures contracts and options;
and (ii) possible lack of a liquid secondary market for a
futures contract and the resulting inability to close a
futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing only in
those contracts whose price fluctuations are expected to
resemble those of the Portfolio's underlying securities. The
risk that the Portfolio will be unable to close out a
futures position will be minimized by entering into such
transactions on a national exchange with an active and
liquid secondary market.
Derivatives are instruments whose value is linked to or
derived from an underlying security. The most common are
futures and options which are described above. Other
derivatives include swaps, inverse floaters, IO's (interest
only), and PO's (principal only). Derivatives may be traded
separately on exchanges or in the over-the-counter market,
or they may be imbedded in other securities. The most common
imbedded derivative is the call option attached to or
imbedded in a callable government or callable corporate
bond. The owner of a traditional callable bond holds a
combination of a long position in a non-callable bond and a
short position in a call option on that bond, i.e. the bond
issuer has the right to call the bond away from the holder
of the bond. Any of these instruments may also be used
individually or in combination to hedge against unfavorable
changes in interest rates, or to speculate on anticipated
changes in interest rates. Derivatives may be structured
with no or a high degree of leverage. When derivatives are
used as hedges, the risk incurred is that the derivative
instrument's value may change differently than the value of
the security being hedged. This "basis risk" is generally
lower than the risk associated with an unhedged position in
the security being hedged. Some derivatives may entail
liquidity risk, i.e. the risk that the instrument cannot be
sold at a reasonable price in highly volatile markets.
Leveraged derivatives used for speculation are very
volatile, and therefore, very risky. However, the Fund's
Portfolios will only utilize derivatives for hedging or
arbitrage purposes, and not for speculative purposes.
Over-the-counter derivatives involve a counterparty risk,
i.e. the risk that the individual or institution on the
other side of the agreement will not or cannot meet their
obligations under the derivative agreement.
THE PORTFOLIO MAY The Portfolio may lend its investment securities to
LEND ITS qualified institutional investors for either short-term or
SECURITIES long-term purposes of realizing additional income. Loans of
securities by a Portfolio will be collateralized by cash,
letters of credit, or securities issued or guaranteed by the
U.S. Government or its agencies. The collateral will equal
at least 100% of the current market value of the loaned
securities, and such loans may not exceed 33 1/3% of the
value of the Portfolio's securities.
PORTFOLIO TURNOVER Although it generally seeks to invest for the long term, the
IS NOT EXPECTED TO Portfolio retains the right to sell securities regardless of
EXCEED 100% how long they have been held. It is anticipated that the
annual portfolio turnover rate for the Portfolio will not
exceed 100%. A 100% turnover rate would occur, for example,
if all of the securities in the Portfolio were replaced
within one year.
- --------------------------------------------------------------------------------
INVESTMENT The Portfolio has adopted certain limitations designed to
LIMITATIONS reduce its exposure to specific situations. Some of these
limitations are that the Portfolio will not:
THE PORTFOLIO HAS (a) with respect to 75% of its assets, invest more than 5%
ADOPTED CERTAIN of the value of its assets in the securities of any single
company;
FUNDAMENTAL (b) with respect to 75% of its assets, purchase more than
LIMITATIONS 10% of the voting securities of any issuer;
(c) invest more than 5% of its assets in the securities of
companies that have a continuous operating history of less
than three years;
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(d) invest more than 25% of its assets in any one industry,
provided that: (i) this limitation does not apply to
obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities; (ii) utility
companies will be divided according to their services
(for example, gas, gas transmission, electric, electric
and gas, and telephone will each be considered a
separate industry); and (iii) financial service
companies will be classified according to the end users
of their services (for example, automobile finance, bank
finance, and diversified finance will be considered as
separate industries);
(e) borrow money, except that the Portfolio may borrow from
banks (or through reverse repurchase agreements), for
temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might
otherwise require the untimely disposition of
securities, in an amount not exceeding 15% of the value
of the Portfolio's net assets (including the amount
borrowed and the value of any outstanding reverse
repurchase agreements) at the time the borrowing is
made. Whenever borrowings exceed 5% of the value of the
Portfolio's net assets, the Portfolio will not make any
additional investments.
(f) pledge, mortgage or hypothecate its assets to an extent
greater than 5% of the value of its total assets.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional Informa-
tion may be changed only with the approval of a majority of
the Fund's shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT OF THE The Portfolio is one of nine Portfolios of Vanguard Fixed
PORTFOLIO Income Securities Fund ("the Fund"), a member of The
VANGUARD Vanguard Group of Investment Companies, a family of 32
ADMINISTERS AND investment companies with 78 distinct portfolios and total
DISTRIBUTES THE assets in excess of $120 billion. Through their jointly
PORTFOLIO owned subsidiary, The Vanguard Group, Inc. ("Vanguard"), the
Portfolio and the other funds in the Group obtain at cost
virtually all of their corporate management, administrative,
shareholder accounting and distribution services. Vanguard
also provides investment advisory services on an at-cost
basis to certain Vanguard funds. As a result of Vanguard's
unique corporate structure, the Vanguard funds have costs
substantially lower than those of most competing mutual
funds. In 1993, the average expense ratio (annual costs
including advisory fees divided by total net assets) for the
Vanguard funds amounted to approximately .30% compared to an
average of 1.02% for the mutual fund industry (data provided
by Lipper Analytical Services).
The Officers of the Portfolio manage its day-to-day
operations and are responsible to the Portfolio's Board of
Directors. The Directors set broad policies for the
Portfolio and choose its Officers. A list of the Directors
and Officers of the Fund and a statement of their present
positions and principal occupations during the past five
years can be found in the Statement of Additional
Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each fund
pays its share of Vanguard's net expenses, which are
allocated among the funds under methods approved by the
Board of Directors (Trustees) of each fund. In addition,
each fund bears its own direct expenses, such as legal,
auditing and custodian fees.
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Vanguard also provides distribution and marketing services
to the Vanguard funds. The funds are available to investors
on a no-load basis (i.e., there are no sales commissions or
12b-1 fees). However, each fund bears its share of the
Group's distribution costs.
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INVESTMENT ADVISER Under an investment advisory agreement with the Fund dated
WELLINGTON September 1, 1987, Wellington Management Company ("WMC"), 75
MANAGEMENT COMPANY State Street, Boston, MA 02109, manages the investment and
MANAGES reinvestment of assets in the High Yield Corporate
INVESTMENTS FOR Portfolio, and continuously reviews, supervises and
THE PORTFOLIO administers the investment program of the Portfolio. WMC
discharges its responsibilities subject to the control of
the Officers and Directors of the Fund.
WMC is a professional investment counseling firm which
globally provides investment services to investment
companies, institutions and individuals. Among the clients
of WMC are 12 of the 32 investment companies of The Vanguard
Group. As of December 31, 1993, WMC held discretionary
management authority with respect to approximately $82.8
billion of assets. WMC and its predecessor organizations
have provided investment advisory services to investment
companies since 1933 and to investment counseling clients
since 1960.
Earl E. McEvoy, Senior Vice President of WMC, serves as
portfolio manager of the High Yield Corporate Portfolio, a
position he has held since 1984. Mr. McEvoy is supported by
research and other investment services provided by the
professional staff of WMC.
Under the Fund's investment advisory agreement, the fee paid
to WMC is based on the total assets of the High Yield
Corporate Portfolio and the total assets of two other
Portfolios of Vanguard Fixed Income Securities Fund, managed
by WMC (GNMA and Investment Grade Corporate Portfolios). The
three Portfolios pay WMC an aggregate fee at the end of each
fiscal quarter, calculated by applying a quarterly rate
based on the following annual percentage rates, to the
aggregate average month-end net assets of the three
Portfolios:
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NET ASSETS RATE
----------------- -------
<S> <C>
First $2.5 billion .125%
Next $2.5 billion .100%
Next $2.5 billion .075%
Over $7.5 billion .050%
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The advisory fee is then apportioned to each Portfolio based
on the relative net assets of each; provided, however, that
following such an allocation, the fee to be paid by the GNMA
Portfolio is reduced by 75%, the fee paid by the Investment
Grade Corporate Portfolio is reduced by 50%, and the fee
paid by the High Yield Corporate Portfolio is reduced by
25%. For the fiscal year ended January 31, 1994, the High
Yield Corporate Portfolio paid annual advisory fees to WMC
equal to .06 of 1% of average net assets. This Fee was paid
pursuant to a previous advisory agreement that called for a
higher rate of fees.
The investment advisory agreement authorizes WMC to select
brokers or dealers to execute purchases and sales of the
Portfolio's securities, and directs WMC to use its
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best efforts to obtain the best available price and most
favorable execution with respect to all transactions. The
full range and quality of brokerage services are considered
in making these determinations.
The Portfolio has authorized WMC to pay higher commissions
in recognition of brokerage services felt necessary for the
achievement of better execution, provided the adviser
believes this to be in the best interest of the Portfolio.
Although the Portfolio does not market its shares through
intermediary brokers or dealers, WMC may place orders with
qualified broker-dealers who recommend the Portfolio to
clients if the Officers of the Fund believe that the quality
of the transaction and the commission are comparable to what
they would be with other qualified brokerage firms.
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL Dividends consisting of virtually all of the ordinary income
GAINS AND TAXES of the Portfolio are declared daily and are payable to
DIVIDENDS ARE PAID shareholders of record at the time of declaration. Such
ON THE FIRST dividends are paid on the first business day of each month.
BUSINESS DAY OF Net capital gains distributions, if any, will be made
EACH MONTH annually.
The Portfolio's dividend and capital gains distributions may
be reinvested in additional shares or received in cash. See
"Choosing a Distribution Option" for a description of these
distribution methods.
In order to satisfy certain requirements of the Tax Reform
Act of 1986, the Portfolio may declare year-end dividend and
capital gains distributions during December. Such distri-
butions, if received by shareholders by January 31, are
deemed to have been paid by the Portfolio and received by
shareholders on December 31 of the prior year.
The Portfolio intends to continue to qualify for taxation as
a "regulated investment company" under the Internal Revenue
Code so that it will not be subject to federal income tax to
the extent its income is distributed to shareholders.
Dividends paid by the Portfolio from net investment income,
whether received in cash or reinvested in additional shares,
will be taxable to shareholders as ordinary income. For
corporate investors, dividends paid by the Portfolio from
net investment income will generally not qualify for the
intercorporate dividends-received deduction.
Distributions paid by the Portfolio from long-term capital
gains, whether received in cash or reinvested in additional
shares, are taxable as long-term capital gains, regardless
of the length of time you have owned shares in the
Portfolio. Capital gains distributions are made when the
Portfolio realizes net capital gains on sales of portfolio
securities during the year. For the Portfolio, realized
capital gains are not expected to be a significant or
predictable part of investment return.
The Portfolio will notify you annually as to the tax status
of dividend and capital gains distributions paid by the
Portfolio. The Portfolio is managed without regard to tax
ramifications.
A CAPITAL GAIN OR A sale of shares of the Portfolio is a taxable event and may
LOSS MAY BE result in a capital gain or loss. A capital gain or loss may
REALIZED UPON be realized from an ordinary redemption of shares or an
EXCHANGE OR exchange of shares between two mutual funds (or two
REDEMPTION portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges may
be subject to state and local taxes.
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The Portfolio is required to withhold 31% of taxable
dividends, capital gains distributions, and redemptions paid
to shareholders who have not complied with IRS taxpayer
identification regulations. You may avoid this withholding
requirement by certifying on your Account Registration Form
your proper Social Security or Taxpayer Identification
Number and by certifying that you are not subject to backup
withholding.
The Portfolio has obtained a Certificate of Authority to do
business as a foreign corporation in Pennsylvania and does
business and maintains an office in that state. In the
opinion of counsel, the shares of the Portfolio are exempt
from Pennsylvania personal property taxes.
The tax discussion set forth above is included for general
information only. Prospective investors should consult their
own tax advisers concerning the tax consequences of an
investment in the Portfolio.
- --------------------------------------------------------------------------------
THE SHARE PRICE The share price or "net asset value" per share of the
OF THE PORTFOLIO Portfolio is computed daily by dividing the total value of
the investments and other assets of the Portfolio, less any
liabilities, by the total outstanding shares of such
Portfolio. The net asset value per share of the Portfolio is
determined as of the regular close of the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on each day the
Exchange is open for trading. Securities which are traded
over-the-counter and on a stock exchange will be valued
according to the broadest and most representative market,
and it is expected that for bonds and other fixed income
securities this ordinarily will be the over-the-counter
market.
However, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service
when such prices are believed to reflect the fair market
value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale
prices but take into account institutional size trading in
similar groups of securities and any developments related to
specific securities. Securities not priced in this manner
are valued at the most recent quoted bid price, or when
stock exchange valuations are used, at the latest quoted
sale price on the date of valuation. Short-term instruments
are valued at cost, which approximates market value. Other
assets and securities for which no quotations are readily
available will be valued in good faith at fair market value
using methods determined by the Board of Directors.
The Portfolio's share price can be found daily in the mutual
fund listings of most major newspapers under the heading of
The Vanguard Group.
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GENERAL The Portfolio is one of nine Portfolios of Vanguard Fixed
INFORMATION Income Securities Fund (the "Fund"). The Fund is a Maryland
corporation. The Articles of Incorporation permit the
Directors to issue 3,500,000,000 shares of common stock,
with a $.001 par value. The Board of Directors has the power
to designate one or more classes ("Portfolios") of shares of
common stock and to classify or reclassify any unissued
shares with respect to such classes. Currently the Fund is
offering nine classes of shares.
The shares of each Portfolio are fully paid and
non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and have
no pre-emptive rights. Such shares have non-cumulative
voting rights, meaning that the holders of more than 50% of
the shares voting for the election of Directors can elect
100% of the Directors if they so choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Director or Directors of the Fund if
requested in writing by the holders of not less than 10% of
the outstanding shares of the Fund.
All securities and cash for the High Yield Corporate
Portfolio are held by Morgan Guaranty Trust Company, New
York, NY. The Vanguard Group, Inc., Valley Forge, PA, serves
as the Fund's Transfer and Dividend Disbursing Agent. Price
Waterhouse serves as independent accountants for the Fund
and will audit its financial statements annually. The Fund
is not involved in any litigation.
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15
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SHAREHOLDER GUIDE
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OPENING AN You may open a regular (non-retirement) account, either by
ACCOUNT AND mail or wire. Simply complete and return an Account
PURCHASING Registration Form, and any required legal documentation,
SHARES indicating the amount you wish to invest. Your purchase must
be equal to or greater than the $3,000 minimum initial
investment requirement ($500 for Individual Retirement
Accounts and Uniform Gifts/Transfers to Minors Act ac-
counts). You must open a new Individual Retirement Account
by mail (IRAs may not be opened by wire) using a Vanguard
IRA Adoption Agreement. Your purchase must be equal to or
greater than the $500 minimum initial investment
requirement, but no more than $2,000 if you are making a
regular IRA contribution. Rollover contributions are
generally limited to the amount withdrawn within the past 60
days from an IRA or other qualified retirement plan. If you
need assistance with the forms or have any questions, please
call our Investor Information Department (1-800-662-7447).
Note: For other types of account registrations (e.g.,
corporations, associations, other organizations, trust or
powers of attorney), please call us to determine which
additional forms you may need.
Because of the risks associated with bond investments, the
Portfolio is intended to be a long-term investment vehicle
and is not designed to provide investors with a means of
speculating on short-term market movements. Consequently,
the Portfolio reserves the right to reject any specific
purchase (and exchange purchase) request. The Portfolio also
reserves the right to suspend the offering of shares for a
period of time.
IMPORTANT NOTE Potential investors should note that a 1% fee is charged on
redemptions or exchanges out of this Portfolio of shares
held for less than one year. Please see "Portfolio Expenses"
for more information.
The Portfolio's shares are purchased at the next-determined
net asset value after your investment has been received in
the form of Federal Funds. See "When Your Account Will Be
Credited". The Portfolio is offered on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees).
ADDITIONAL Subsequent investments to regular accounts may be made by
INVESTMENTS mail ($100 minimum per portfolio), wire ($1,000 minimum per
Portfolio), exchange from another Vanguard Fund account, or
Vanguard Fund Express. Subsequent investments to Individual
Retirement Accounts may be made by mail ($100 minimum) or
exchange from another Vanguard Fund account. In some
instances, contributions may be made by wire or Vanguard
Fund Express. Please call us for more information on these
options.
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ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
<S> <C> <C>
PURCHASING BY MAIL Please include the amount of Additional investments should
Complete and sign your initial investment on the include the Invest-by-Mail
the registration form, make your remittance form attached to your
enclosed Account check payable to THE VANGUARD Portfolio confirmation
Registration Form GROUP-29, and mail to; statements. Please make your
VANGUARD FINANCIAL CENTER check payable to THE VANGUARD
P.O. BOX 2600 GROUP-29, write your account
VALLEY FORGE, PA 19482 number on your check and, using
the return envelope provided,
mail to the address indicated on
the Invest-by-Mail Form.
For express or VANGUARD FINANCIAL CENTER All written requests should be
registered mail, 455 DEVON PARK DRIVE mailed to one of the addresses
send to: WAYNE, PA 19087 indicated for new accounts. Do
not send registered or express
mail to the post office box
address.
------------------------------------------------------------------
PURCHASING BY WIRE CORESTATES BANK, N.A.
Money should be ABA 031000011
wired to: CORESTATES NO 0101 9897
ATTN VANGUARD
BEFORE WIRING VANGUARD FIXED INCOME SECURITIES FUND
Please contact HIGH YIELD CORPORATE PORTFOLIO
Client Services ACCOUNT NUMBER
(1-800-662-2739) ACCOUNT REGISTRATION
To assure proper receipt, please be sure your bank includes
the Portfolio name, the account number Vanguard has assigned
to you and the eight-digit CoreStates number. If you are
opening a new account, you must contact our Client Services
Department (1-800-662-2739) before wiring funds.
Additionally, complete the Account Registration Form and
mail it to the "New Account" address above after completing
your wire arrangement. Note: Federal Funds wire purchase
orders will be accepted only when the Fund and Custodian
Bank are open for business.
------------------------------------------------------------
PURCHASING BY You may open an account or purchase additional shares by
EXCHANGE (from a making an exchange from an existing Vanguard Fund account.
Vanguard account) However, the Portfolio reserves the right to refuse any
exchange purchase request. Call our Client Services
Department (1-800-662-2739) for assistance. The new account
will have the same registration as the existing account.
------------------------------------------------------------
PURCHASING BY The Fund Express SPECIAL PURCHASE option lets you move money
FUND EXPRESS from your bank account to your Vanguard account at your
Special Purchase request. Or, if you choose the AUTOMATIC INVESTMENT option,
and Automatic money will be moved from your bank account to your Vanguard
Investment account on the schedule (monthly, bimonthly [every other
month], quarterly or yearly) you select. To establish these
Fund Express options, please provide the appropriate
information on the Account Registration Form. We will send
you a confirmation of your Fund Express enrollment; please
wait three weeks before using the service.
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CHOOSING A You must select one of three distribution options:
DISTRIBUTION
OPTION 1. AUTOMATIC REINVESTMENT OPTION--Both dividends and
capital gains distributions will be reinvested in additional
Portfolio shares. This option will be selected for you
automatically unless you specify one of the other
options.
2. CASH DIVIDEND OPTION--Your dividends will be paid in
cash and your capital gains will be reinvested in additional
Portfolio shares.
3. ALL CASH OPTION--Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client Services
Department (1-800-662-2739).
In addition, an option to invest your cash dividends and/or
capital gains distributions in another Vanguard Fund account
is available. Please call our Client Services Department
(1-800-662-2739) for information. You may also elect
Vanguard Dividend Express which allows you to transfer your
cash dividends and/or capital gains distributions
automatically to your bank account. Please see "Other
Vanguard Services" for more information.
- --------------------------------------------------------------------------------
TAX CAUTION Under Federal tax laws, the Portfolio is required to
INVESTORS SHOULD distribute net capital gains and dividend income to
ASK ABOUT THE Portfolio shareholders. These distributions are made to all
TIMING OF CAPITAL shareholders who own Portfolio shares as of the
GAINS AND DIVIDEND distribution's record date, regardless of how long the
DISTRIBUTIONS shares have been owned. Purchasing shares just prior to the
BEFORE INVESTING. record date could have a significant impact on your tax
liability for the year. For example, if you purchase shares
immediately prior to the record date of a sizable capital
gain or income dividend distribution, you will be assessed
taxes on the amount of the capital gain and/or dividend
distribution later paid even though you owned the Portfolio
shares for just a short period of time. (Taxes are due on
the distributions even if the dividend or gain is reinvested
in additional Portfolio shares.) While the total value of
your investment will be the same after the distribu-
tion--the amount of the distribution will offset the drop in
the net asset value of the shares--you should be aware of
the tax implications the timing of your purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. The Portfolio's
annual capital gains distribution normally occurs in De-
cember, while income dividends are generally paid on the
first business day of each month. For additional information
on distributions and taxes, see the section titled
"Dividends, Capital Gains, and Taxes."
- --------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional Vanguard services on
INFORMATION your account is to select the options you desire when you
ESTABLISHING complete your Account Registration Form. IF YOU WISH TO ADD
OPTIONAL SERVICES OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD WITH
ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE. PLEASE
CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR
FURTHER ASSISTANCE.
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SIGNATURE For our mutual protection, we may require a signature
GUARANTEES guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your signa-
ture and may be obtained from banks, brokers and any other
guarantor that Vanguard deems acceptable. A SIGNATURE
GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES Share certificates will be issued upon request. If a
certificate is lost, you may incur an expense to replace it.
BROKER-DEALER If you purchase shares in Vanguard Funds through a
PURCHASES registered broker-dealer or investment adviser, the
broker-dealer or adviser may charge a service fee.
CANCELLING TRADES The Fund will not cancel any trade (e.g., a purchase,
exchange or redemption) believed to be authentic, received
in writing or by telephone, once the trade has been
received.
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WHEN YOUR The TRADE DATE is the date on which your account is
ACCOUNT WILL BE credited. It is generally the day on which the Portfolio
CREDITED receives your investment in the form of Federal Funds
(monies credited to the Portfolio's Custodian Bank by a
Federal Reserve Bank). Your trade date varies according to
your method of payment for your shares.
For purchases by check, the Portfolio is ordinarily credited
with Federal Funds within one business day. Thus, if your
purchase by check is received by the close of the New York
Stock Exchange (generally 4:00 p.m. Eastern time), your
trade date is the business day following receipt of your
check. If your purchase is received after the close of the
Exchange, your trade date is the second business day
following receipt of your check.
For purchases by Federal Funds wire or exchange, the
Portfolio is credited immediately with Federal Funds. Thus,
if your purchase by Federal Funds wire or exchange is
received by the close of the Exchange, your trade date is
the day of receipt. If your purchase is received after the
close of the Exchange, your trade date is the business day
following receipt of your wire or exchange.
Your shares are purchased at the next determined net asset
value after your investment has been received in the form of
Federal Funds. You will begin to earn dividends on the
calendar day following the trade date. (For a Friday trade
date, you will begin earning dividends on Saturday.)
In order to prevent lengthy processing delays caused by the
clearing of foreign checks, Vanguard will only accept a
foreign check which has been drawn in U.S. dollars and has
been issued by a foreign bank with a U.S. correspondent
bank. The name of the U.S. correspondent bank must be
printed on the face of the foreign check.
- --------------------------------------------------------------------------------
SELLING YOUR You may withdraw any portion of the funds in your account by
SHARES redeeming shares at any time. You may initiate a request by
writing or by telephoning. Your redemption proceeds are
normally mailed, credited or wired--depending upon the
method of withdrawal you have previously chosen--within two
business days after the receipt of the request in Good
Order.
IMPORTANT NOTE A redemption fee of 1% of the value of shares redeemed will
be deducted from the redemption proceeds of any shares held
for less than one year. This fee is paid directly to
Portfolio.
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SELLING BY MAIL REQUESTS SHOULD BE MAILED TO VANGUARD FINANCIAL CENTER,
VANGUARD FIXED INCOME SECURITIES FUND, P.O. BOX 1120, VALLEY
FORGE, PA 19482. (For express or registered mail, send your
request to Vanguard Financial Center, Vanguard Fixed Income
Securities Fund, 455 Devon Park Drive, Wayne, PA 19087.)
The redemption price of shares will be the Portfolio's net
asset value next determined after Vanguard has received all
required documents in Good Order.
------------------------------------------------------------
DEFINITION OF GOOD ORDER means that the request includes the following:
GOOD ORDER 1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars or
shares).
3. The signatures of all owners EXACTLY as they are
registered on the account.
4. Any required signature guarantees.
5. Any other supporting legal documentation that might be
required, in the case of estates, corporations, trusts and
certain other accounts.
6. Any certificates that you hold for the account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS
TO YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES DEPARTMENT
(1-800-662-2739).
------------------------------------------------------------
SELLING BY To sell shares by telephone, you or your pre-authorized
TELEPHONE representative may call our Client Services Department at
1-800-662-2739. For telephone redemptions, you may have the
proceeds sent to you by mail or by wire. In addition to the
details below, please see "Important Information About
Telephone Transactions."
BY MAIL: Telephone mail redemption is automatically
established on your account unless you indicate otherwise on
your Account Registration Form. You may redeem any amount by
calling Vanguard. The proceeds will be paid to the
registered shareholders and mailed to the address of record.
BY WIRE: Telephone wire redemption must be specifically
elected for your account. The best time to elect telephone
wire redemption is at the time you complete your Account
Registration Form. If you do not presently have telephone
wire redemption and wish to establish it, please contact
Client Services.
With the wire redemption option, you may withdraw a minimum
of $1,000 and have the amount wired directly to your bank
account. Wire redemptions less than $5,000 are subject to a
$5 charge deducted by Vanguard. There is no Vanguard charge
for wire redemptions of $5,000 or more. However, your bank
may assess a separate fee to accept incoming wires.
A request to change the bank associated with your wire
redemption option must be received in writing, signed by
each registered shareholder, and accompanied by a voided
check or preprinted deposit slip. A signature guarantee is
required if your bank registration is not identical to your
Vanguard Fund account registration.
------------------------------------------------------------
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SELLING BY FUND If you select the Fund Express AUTOMATIC WITHDRAWAL option,
EXPRESS money will be automatically moved from your Vanguard Fund
Automatic account to your bank account according to the schedule you
Withdrawal have selected. The SPECIAL REDEMPTION option lets you move
& Special money from your Vanguard account to your bank account on
Redemption your request. You may elect Fund Express on the Account
Registration Form or call our Investor Information
Department (1-800-662-7447) for a Fund Express application.
------------------------------------------------------------
SELLING BY You may sell shares of the Portfolio by making an exchange
EXCHANGE into another Vanguard Fund account. Please see "Exchanging
Your Shares" for details.
------------------------------------------------------------
IMPORTANT Shares purchased by check or Fund Express may not be
REDEMPTION redeemed until payment for the purchase is collected, which
INFORMATION may take up to ten calendar days. Your money is invested
during the holding period.
------------------------------------------------------------
DELIVERY OF Redemption requests received by telephone prior to the
REDEMPTION regular close of the New York Stock Exchange (generally 4:00
PROCEEDS p.m. Eastern time) are processed on the day of receipt and
the redemption proceeds are normally sent on the following
business day.
Redemption requests received by telephone after the regular
close of the New York Stock Exchange are processed on the
business day following receipt and the proceeds are normally
sent on the second business day following receipt.
Redemption proceeds must be sent to you within seven days of
receipt of your request in Good Order.
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular or
express mail. It will be implemented at the net asset value
next determined after your request has been received by
Vanguard in Good Order. The Fund reserves the right to
revise or terminate the telephone redemption privilege at
any time.
The Fund may suspend the redemption right or postpone
payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the
United States Securities and Exchange Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of the Fund's remaining
shareholders to make payment in cash, the Fund may pay
redemption proceeds of amounts in excess of $250,000 in
whole or in part by a distribution in kind of readily
marketable securities.
------------------------------------------------------------
VANGUARD'S AVERAGE If you make a redemption from a qualifying account, Vanguard
COST STATEMENT will send you an Average Cost Statement which provides you
with the tax basis of the shares you redeemed. Please see
"Other Vanguard Services" for additional information.
------------------------------------------------------------
MINIMUM ACCOUNT Due to the relatively high cost of maintaining smaller
BALANCE accounts, the Portfolio reserves the right to redeem shares
REQUIREMENT in any account that is below the minimum initial investment
amount of $3,000. In addition, if at any time your total
investment in a Portfolio does not have a value of at least
$1,000, you may be notified that the value of your account
is below the Portfolio's minimum account balance
requirement. You would then be allowed 60 days to make an
additional investment before the account
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is liquidated. Proceeds would be promptly paid to the
shareholder. This minimum requirement does not apply to
IRAs, other Vanguard retirement accounts, and Uniform
Gifts/Transfers to Minors Act accounts.
- --------------------------------------------------------------------------------
EXCHANGING YOUR Should your investment goals change, you may exchange your
SHARES shares of Vanguard Fixed Income Securities Fund for those of
other available Vanguard Funds.
IMPORTANT NOTE A redemption fee of 1% of the value of shares exchanged out
will be deducted from the exchange proceeds if shares held
for less than one year are exchanged. This fee is paid
directly to the Portfolio.
EXCHANGING BY In addition to the details below, please see "Important
TELEPHONE Information About Telephone Transactions."
Call Client When exchanging shares by telephone, please have ready the
Services Portfolio name, account number, Social Security Number or
(1-800-662-2739) Taxpayer Identification Number listed on the account, and
exact name in which the account is registered. Requests for
telephone exchanges received prior to the close of the New
York Stock Exchange (generally 4:00 p.m. Eastern time) are
processed at the close of business that same day. Requests
received after the close of the Exchange are processed the
next business day. TELEPHONE EXCHANGES ARE NOT ACCEPTED INTO
OR FROM VANGUARD BALANCED INDEX FUND, VANGUARD EXPLORER
FUND, VANGUARD INDEX TRUST, VANGUARD INTERNATIONAL EQUITY
INDEX FUND--EUROPEAN, PACIFIC AND EMERGING MARKETS
PORTFOLIOS, AND VANGUARD QUANTITATIVE PORTFOLIOS. If you
experience difficulty in making a telephone exchange, your
exchange request may be made by regular or express mail, and
it will be implemented at the closing net asset value on the
date received by Vanguard, provided the request is received
in Good Order.
------------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the name
and account number of your current Portfolio, the name of
the Fund you wish to exchange into, the amount you wish to
exchange, and the signatures of all registered account
holders. Send your request to VANGUARD FINANCIAL CENTER,
VANGUARD FIXED INCOME SECURITIES FUND, P.O. BOX 1120, VALLEY
FORGE, PA 19482. (For express or registered mail, send your
request to Vanguard Financial Center, Vanguard Fixed Income
Securities Fund, 455 Devon Park Drive, Wayne, PA 19087.)
------------------------------------------------------------
IMPORTANT EXCHANGE Before you make an exchange, you should consider the
following:
INFORMATION - Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions you
may have, call our Investor Information Department
(1-800-662-7447).
- An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on the
transaction.
- Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
- New accounts are not currently accepted in
Vanguard/Windsor Fund.
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- The redemption price of shares redeemed by exchange is the
net asset value next determined after Vanguard has received
all required documentation in Good Order.
- When opening a new account by exchange, you must meet the
minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange
privilege. However, the Fund reserves the right to revise or
terminate its provisions, limit the amount of or reject any
exchange, as deemed necessary, at any time.
The exchange privilege is only available in states in which
the shares of the Fund are registered for sale. The Fund's
shares are currently registered for sale in all 50 states
and the Fund intends to maintain such registration.
- --------------------------------------------------------------------------------
EXCHANGE The Portfolio's exchange privilege is not intended to afford
PRIVILEGE shareholders a way to speculate on short-term movements in
LIMITATIONS the market. Accordingly, in order to prevent excessive use
of the exchange privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the
Fund has established a policy of limiting excessive exchange
activity.
Exchange activity will not be deemed excessive if limited to
TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT LEAST 30 DAYS
APART) from a Portfolio during any twelve month period.
Notwithstanding these limitations, the Portfolio reserves
the right to reject any purchase request (including exchange
purchases from other Vanguard portfolios) that is reasonably
deemed to be disruptive to efficient portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT The ability to initiate share redemptions (except wire
INFORMATION ABOUT redemptions) and exchanges by telephone is automatically
TELEPHONE established on your account unless you request in writing
TRANSACTIONS that telephone transactions on your account not be
permitted. The ability to initiate wire redemptions by
telephone will be established on your account only if you
specifically elect this option in writing.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions, Vanguard
adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone,
the caller must know (i) the name of the Portfolio; (ii) the
10-digit account number; (iii) the exact name in which
the account is registered; and (iv) the Social Security
or Taxpayer Identification number listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone redemption
by mail will be made payable to the registered shareowner
and mailed to the address of record, only. In the case
of a telephone redemption by wire, the wire will be made
only in accordance with the shareowner's prior written
instructions.
Neither the Fund nor Vanguard will be responsible for the
authenticity of transaction instructions received by
telephone, provided that reasonable security procedures have
been followed. Vanguard believes that the security
procedures described above ARE reasonable and that if such
procedures are followed, YOU WILL BEAR THE RISK OF ANY
LOSSES RESULTING FROM UNAUTHORIZED OR FRAUDULENT TELEPHONE
TRANSACTIONS ON
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YOUR ACCOUNT. If Vanguard fails to follow reasonable
security procedures, it may be liable for any losses
resulting from unauthorized or fraudulent telephone transac-
tions on your account.
- --------------------------------------------------------------------------------
TRANSFERRING You may transfer the registration of any of your Fund shares
REGISTRATION to another person by completing a transfer form and sending
it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110, VALLEY
FORGE, PA 19482, ATTENTION: TRANSFER DEPARTMENT. The request
must be in Good Order. To receive a transfer form and full
instructions, please call our Client Services Department
(1-800-662-2739).
- --------------------------------------------------------------------------------
OTHER VANGUARD For more information about any of these services, please
SERVICES call our Investor Information Department at 1-800-662-7447.
STATEMENTS AND Vanguard will send you a confirmation statement each time
REPORTS you initiate a transaction in your account except for
checkwriting redemptions from Vanguard money market
accounts. You will also receive a comprehensive account
statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement,
listing all transaction activity for the entire calendar
year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account, using the
average cost single category method. This service is
available for most taxable accounts opened since January 1,
1986. In general, investors who redeemed shares from a
qualifying Vanguard account may expect to receive their
Average Cost Statement in February of the following year.
Please call our Client Services Department (1-800-662-2739)
for information.
Financial reports on the Portfolio will be mailed to you
semi-annually, according to the Portfolio's fiscal year-end.
VANGUARD DIRECT With Vanguard's Direct Deposit Service, most U.S. Government
DEPOSIT SERVICE checks (including Social Security and military pension
checks) and private payroll checks may be automatically
deposited into your Vanguard Fund account. Separate
brochures and forms are available for direct deposit of U.S.
Government and private payroll checks.
VANGUARD AUTOMATIC Vanguard's Automatic Exchange Service allows you to move
EXCHANGE SERVICE money automatically among your Vanguard Fund accounts. For
instance, the service can be used to "dollar cost average"
from a money market portfolio into a stock or bond fund or
to contribute to an IRA or other retirement plan.
VANGUARD FUND Vanguard's Fund Express allows you to transfer money between
EXPRESS your Fund account and your account at a bank, savings and
loan association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our
Investor Information Department (1-800-662-7447) for a Fund
Express application.
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The minimum amount that can be transferred by telephone is
$100. However, if you have established one of the automatic
options, the minimum amount is $50. The maximum amount that
can be transferred using any of the options is $100,000.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition, some
services of Fund Express cannot be used with specific
Vanguard Funds. For more information, please refer to the
Vanguard Fund Express brochure.
VANGUARD DIVIDEND Vanguard's Dividend Express allows you to transfer your
EXPRESS dividends and/or capital gains distributions automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or a credit union that is a member of the
Automated Clearing House (ACH) network. You may elect this
service on the Account Registration Form or call the
Investor Information Department (1-800-662-7447) for a
Vanguard Dividend Express application.
VANGUARD Vanguard's Tele-Account is a convenient, automated service
TELE-ACCOUNT that provides share price, price change and yield quotations
on Vanguard Funds through any TouchTone-TM- telephone. This
service also lets you obtain information about your account
balance, your last transaction, and your most recent
dividend or capital gains payment. To contact Vanguard's
Tele-Account service, dial 1-800-ON-BOARD (1-800-662-6273).
A brochure offering detailed operating instructions is
available from our Investor Information Department
(1-800-662-7447).
- --------------------------------------------------------------------------------
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[LOGO] [LOGO]
-------------------------- -------------------
High Yield High Yield
Corporate Portfolio Corporate Portfolio
-----------------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center P R O S P E C T U S
P.O. Box 2600 MAY 25, 1994
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON BOARD)
TELECOMMUNICATION SERVICE FOR
THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
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[LOGO]
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PART B
VANGUARD FIXED INCOME SECURITIES FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
MAY 24, 1994
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated May 24, 1994). To obtain this Prospectus,
please call the Investor Information Department:
1-800-662-7447
TABLE OF CONTENTS
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PAGE
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The Fund.......................................... 1
Investment Objective and Policies................. 1
Purchase of Shares................................ 5
Redemption of Shares.............................. 5
Shareholder Services.............................. 6
Investment Limitations............................ 7
Management of the Fund............................ 9
Investment Advisory Services...................... 11
Portfolio Transactions............................ 13
Yield and Total Return............................ 15
Financial Statements.............................. 15
Performance Measures.............................. 16
Other Definitions................................. 17
Appendix--Description of Securities and Ratings... 17
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THE FUND
Vanguard Fixed Income Securities Fund, Inc. (the "Fund") is an open-end,
diversified, management investment company whose shares are currently offered in
nine distinct Portfolios. Each Portfolio of the Fund in effect represents a
separate mutual fund with its own investment objective and policies.
INVESTMENT OBJECTIVE AND POLICIES
The following policies supplement the investment objective and policies set
forth in the Fund's Prospectus:
REPURCHASE AGREEMENTS
Each Portfolio may invest in repurchase agreements with commercial banks,
brokers or dealers either for defensive purposes due to market conditions or to
generate income from its excess cash balances. A repurchase agreement is an
agreement under which the Portfolio acquires a money market instrument
(generally a security issued by the U.S. Government or an agency thereof, a
banker's acceptance or a certificate of deposit) from a commercial bank, broker
or dealer, subject to resale to the seller at an agreed upon price and date
(normally, the next business day). A repurchase agreement may be considered a
loan collateralized by securities. The resale price reflects an agreed upon
interest rate effective for the period the instrument is held by the Portfolio
and is unrelated to the interest rate on the underlying instrument. In
B-1
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these transactions, the securities acquired by the Portfolio (including accrued
interest earned thereon) must have a total value in excess of the value of the
repurchase agreement and are held by the Fund's Custodian Bank until
repurchased. In addition, the Fund's Board of Directors will monitor a
Portfolio's repurchase agreement transactions generally and will establish
guidelines and standards for review by the investment adviser of the
creditworthiness of any bank, broker or dealer party to a repurchase agreement
with the Portfolio. No more than an aggregate of 10% of a Portfolio's assets (5%
of total net assets in the case of the GNMA, and Long-Term Corporate
Portfolios), at the time of investment, will be invested in repurchase
agreements having maturities longer than seven days and securities subject to
legal or contractual restrictions on resale, or for which there are no readily
available market quotations.
The use of repurchase agreements involves certain risks. For example, if the
other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Portfolio may incur a loss upon disposition of the security. If the other party
to the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Portfolio not within the
control of the Portfolio and therefore the realization by the Portfolio on such
collateral may be automatically stayed. Finally, it is possible that the
Portfolio may not be able to substantiate its interest in the underlying
security and may be deemed an unsecured creditor of the other party to the
agreement. While each Portfolio's management acknowledges these risks, it is
expected that they can be controlled through careful monitoring procedures.
LENDING OF SECURITIES
Each Portfolio of the Fund may lend its investment securities to qualified
brokers, dealers, banks or other financial institutions, so long as the terms
and the structure of such loans are not inconsistent with the Investment Company
Act of 1940, as amended, or the Rules and Regulations or interpretations of the
Securities and Exchange Commission thereunder, which currently require that (a)
the borrower pledge and maintain with the Portfolio collateral consisting of
cash, and irrevocable letter of credit or securities issued or guaranteed by the
United States Government having a value at all times not less than 100 percent
of the value of the securities loaned, (b) the borrower add to such collateral
whenever the price of the securities loaned rises (i.e., the borrower "marks to
the market" on a daily basis), (c) the loan be made subject to termination by
the Portfolio at any time and (d) the Portfolio receive reasonable interest on
the loan (which may include the Portfolio's investing any cash collateral in
interest bearing short-term investments), and distributions on the loaned
securities and any increase in their market value. Each Portfolio of the Fund
will not lend securities if, as a result, the aggregate of such loans exceeds
33 1/3% of the value of the Portfolio's total assets. Loan arrangements made by
the Fund will comply with all other applicable regulatory requirements,
including the rules of the New York Stock Exchange, which rules presently
require the borrower, after notice, to redeliver the securities within the
normal settlement time of five business days.
RESTRICTED SECURITIES
Each Portfolio may invest in restricted securities (privately placed debt
securities) and other securities which are not readily marketable, but will not
acquire such securities if as a result they, together with the aggregate of
other securities for which no quotations are readily available, would comprise
more than 15% of the value of the Portfolio's net assets. Pursuant to Rule 144A
under the Securities Act of 1933, as amended, if a substantial market among
qualified institutional buyers develops for restricted securities held by any
Portfolio, the Fund intends to treat such securities as liquid securities, in
accordance with procedures approved by the Fund's Board of Directors.
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933. Where registration is required, a
Portfolio may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Portfolio may be permitted to
B-2
<PAGE>
sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Portfolio might obtain a
less favorable price than prevailed when it decided to sell. Restricted
securities will be priced at fair value as determined in good faith by the Board
of Directors. If through the appreciation of restricted securities or the
depreciation of unrestricted securities, a Portfolio should be in a position
where more than 15% of the value of its net assets are invested in illiquid
assets, including restricted securities, the Portfolio will take appropriate
steps to protect liquidity.
FUTURES CONTRACTS AND OPTIONS
Each Portfolio except the Short-Term Federal Portfolio may enter into
futures contracts, options, and options on futures contracts for several
reasons: to simulate full investment in the underlying securities while
retaining a cash balance for Fund management purposes, to facilitate trading, to
reduce transaction costs, or to seek higher investment returns when a futures
contract is priced more attractively than the underlying equity security or
index. Futures contracts provide for the future sale by one party and purchase
by another party of a specified amount of a specific security at a specified
future time and at a specified price. Futures contracts which are standardized
as to maturity date and underlying financial instrument are traded on national
futures exchanges. Futures exchanges and trading are regulated under the
Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC"), a
U.S. Government Agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin
deposits which may range upward from less than 5% of the value of the contract
being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Portfolios
expect to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities. The Portfolios intend to use futures
contracts only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bonafide hedging transactions. A Portfolio will
only sell futures contracts to protect securities it owns against price declines
or purchase contracts to protect against an increase in the price of securities
it intends to purchase. As evidence of this hedging interest, the Portfolios
expect that approximately 75% of its futures contract purchases will be
"completed," that is, equivalent amounts of related securities will have been
purchased or are being purchased by a Portfolio upon sale of open futures
contracts.
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Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolio's exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this exposure.
While a Portfolio will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS
A Portfolio of the Fund will not enter into futures contract transactions to
the extent that, immediately thereafter, the sum of its initial margin deposits
on open contracts exceeds 5% of the market value of each Portfolio's total
assets. In addition, a Portfolio of the Fund will not enter into futures
contracts to the extent that its outstanding obligations to purchase securities
under these contracts would exceed 20% of the Portfolio's total assets.
RISK FACTORS IN FUTURES TRANSACTIONS
Positions in futures contracts may be closed out only on an Exchange which
provides a secondary market for such futures. However, there can be no assurance
that a liquid secondary market will exist for any particular futures contract at
any specific time. Thus, it may not be possible to close a futures position. In
the event of adverse price movements, a Portfolio would continue to be required
to make daily cash payments to maintain its required margin. In such situations,
if the Portfolio has insufficient cash, it may have to sell portfolio securities
to meet daily margin requirements at a time when it may be disadvantageous to do
so. In addition, the Portfolio may be required to make delivery of the
instruments underlying futures contracts it holds. The inability to close
options and futures positions also could have an adverse impact on the ability
to effectively hedge it.
A Portfolio will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. Additionally, a portfolio incurs
the risk that the adviser will incorrectly predict future interest rate trends.
However, because the futures strategies of the Portfolio are engaged in only for
hedging purposes, the Adviser does not believe that the Portfolio is subject to
the risks of loss frequently associated with futures transactions. The Portfolio
would presumably have sustained comparable losses if, instead of the futures
contract, it had invested in the underlying financial instrument and sold it
after the decline.
Utilization of futures transactions by the Portfolio does involve the risk
of imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that the Portfolio could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Portfolio of margin deposits in the event of bankruptcy of a
broker with whom the Portfolio has an open position in a futures contract or
related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a
B-4
<PAGE>
price beyond that limit. The daily limit governs only price movement during a
particular trading day and therefore does not limit potential losses, because
the limit may prevent the liquidation of unfavorable positions. Futures contract
prices have occasionally moved to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation of
future positions and subjecting some futures traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS
Except for transactions a Portfolio has identified as hedging transactions,
the Portfolio is required for Federal income tax purposes to recognize as income
for each taxable year its net unrealized gains and losses on certain futures
contracts held as of the end of the year as well as those actually realized
during the year. In most cases, any gain or loss recognized with respect to a
futures contract is considered to be 60% long-term capital gain or loss and 40%
short-term capital gain or loss, without regard to the holding period of the
contract. Furthermore, sales of futures contracts which are intended to hedge
against a change in the value of securities held by the Portfolio may affect the
holding period of such securities and, consequently, the nature of the gain or
loss on such securities upon disposition.
In order for the Portfolio to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or of foreign currencies or other income derived with respect to the
Portfolio's business of investing in securities or currencies. In addition,
gains realized on the sale or other disposition of securities held for less than
three months must be limited to less than 30% of the Portfolio's annual gross
income. It is anticipated that any net gain realized from the closing out of
futures contracts will be considered gain from the sale of securities and
therefore be qualifying income for purposes of the 90% requirement. In order to
avoid realizing excessive gains on securities held less than three months, the
Portfolio may be required to defer the closing out of futures contracts beyond
the time when it would otherwise be advantageous to do so. It is anticipated
that unrealized gains on futures contracts, which have been open for less than
three months as of the end of the Portfolio's fiscal year and which are
recognized for tax purposes, will not be considered gains on sales of securities
held less than three months for the purpose of the 30% test.
A Portfolio will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes (including unrealized
gains at the end of the Portfolio's fiscal year) on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Portfolio's other investments and shareholders will be advised on the nature
of the transactions.
PURCHASE OF SHARES
Each Portfolio reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum for initial and subsequent investments for certain
fiduciary accounts such as employee benefit plans or under circumstances where
certain economies can be achieved in sales of the Portfolio's shares.
REDEMPTION OF SHARES
Each Portfolio may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange is closed, or
trading on the Exchange is restricted as determined by the Securities and
Exchange Commission (the "Commission"), (ii) during any period when an emergency
exists as defined by the rules of the Commission as a result of which it is not
reasonably practicable for a Portfolio to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the Commission may permit.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net
B-5
<PAGE>
assets of the Fund at the beginning of such period. Such commitment is
irrevocable without the prior approval of the Commission. Redemptions in excess
of the above limits may be paid in whole or in part, in readily marketable
investment securities or in cash, as the Directors may deem advisable; however,
payment will be made wholly in cash unless the Directors believe that economic
or market conditions exist which would make such a practice detrimental to the
best interests of the Fund. If redemptions are paid in investment securities,
such securities will be valued as set forth in the Prospectus under "The Share
Price of Each Portfolio" and a redeeming shareholder would normally incur
brokerage expenses if he converted these securities to cash.
No charge is made by a Portfolio for redemptions. Any redemption may be more
or less than the shareholder's cost depending on the market value of the
securities held by the Portfolio.
SIGNATURE GUARANTEES
To protect your account, the Fund and Vanguard from fraud, signature
guarantees are required for certain redemptions. Signature guarantees enable the
Fund to verify the identity of the person who has authorized a redemption from
your account. SIGNATURE GUARANTEES ARE REQUIRED IN CONNECTION WITH: (1)
REDEMPTIONS INVOLVING MORE THAN $25,000 ON THE DATE OF RECEIPT BY VANGUARD OF
ALL NECESSARY DOCUMENTS; (2) ALL REDEMPTIONS, REGARDLESS OF THE AMOUNT INVOLVED,
WHEN THE PROCEEDS ARE TO BE PAID TO SOMEONE OTHER THAN THE REGISTERED OWNER(S),
AND/OR TO AN ADDRESS OTHER THAN THE ADDRESS OF RECORD; AND (3) SHARE TRANSFER
REQUESTS. These requirements are not applicable to redemptions in Vanguard's
prototype retirement plans, except in connection with: (1) distributions made
when the proceeds are to be paid to someone other than the plan participant; (2)
certain authorizations to effect exchanges by telephone; and (3) when proceeds
are to be wired. These requirements may be waived by the Fund in certain
instances.
A guarantor must be a bank, broker or any other guarantor that Vanguard
deems acceptable. NOTARIES PUBLIC ARE NOT ACCEPTABLE GUARANTORS.
The signature guarantees must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by the Fund are also
being redeemed, on the letter or stock power.
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE
Each Portfolio's shares may be exchanged without cost for shares of any
other Portfolio, or for the shares of any open-end Fund currently offering its
shares to new investors in The Vanguard Group ("Vanguard"). A shareholder of any
other open-end Fund in Vanguard may likewise exchange his shares for shares of
any of the Fund's Portfolios. Exchange requests may be made either by mail,
telephone or telegraph.
Telephone and telegraph exchanges (referred to as "expedited exchanges")
will be accepted only if the account of the shareholder and the registration of
the two accounts is identical. Requests for expedited exchanges received prior
to the close of the New York Stock Exchange (generally 4:00 p.m. Eastern time)
will be processed at the next determined net asset value after such request is
received. Requests received after the close of the New York Stock Exchange
(generally 4:00 p.m. Eastern time) will be processed on the next business day.
NO EXPEDITED EXCHANGES WILL BE ACCEPTED INTO, OR FROM, VANGUARD EXPLORER FUND,
VANGUARD BALANCED INDEX FUND, VANGUARD INDEX TRUST FUND, VANGUARD INTERNATIONAL
EQUITY INDEX FUND--EUROPEAN, PACIFIC AND EMERGING MARKETS PORTFOLIOS, AND
VANGUARD QUANTITATIVE PORTFOLIOS. Neither the Fund nor Vanguard will be
responsible for the authenticity of exchange instructions received by telephone
or telegraph, provided that reasonable security procedures are observed.
Expedited exchanges may also be subject to limitations as to amounts and
frequency, and to other restrictions
B-6
<PAGE>
established by the Board of Directors to assure that such exchanges do not
disadvantage the Fund and its shareholders. Shareholders may obtain the terms of
these limitations, which may be revised at any time, from Vanguard.
Any such exchange will be based on the respective net asset values of the
shares involved. There are no sales commissions or charges of any kind. Before
making an exchange, a shareholder should consider the investment objectives and
policies of the Portfolio or fund to be purchased, and other relevant
information (including the minimum initial investment), which can be found in
the prospectus relating to that particular Portfolio or fund. A prospectus for
any of the Vanguard funds or Portfolios may be obtained from Vanguard.
For Federal income tax purposes an exchange between funds or Portfolios is a
taxable event and, accordingly, a capital gain or loss may be realized. The
exchange privilege may be modified or terminated at any time, and any of the
Portfolios or Vanguard funds may limit or discontinue the offering of its shares
without notice to shareholders.
TRANSFER OF SHARES
Fund shares may be transferred to another person by sending appropriate
written instructions to Vanguard. The account must be clearly identified and
include the number of shares to be transferred and the signatures of all
registered owners. The signature on the letter of instructions or any stock
power must be guaranteed. As in the case of withdrawals, the written request
must be received in "Good Order" before any transfer can be made.
INFORMATION FOR SHAREHOLDERS
Following any purchase or redemption, a shareholder will receive a statement
which reflects all activity during the current calendar year. Each shareholder
will also receive a quarterly statement, which includes valuation as of the day
the statement is prepared.
Shareholders will receive semi-annual financial statements audited at least
annually by independent accountants whose selection is ratified by shareholders.
INVESTMENT LIMITATIONS
The Fund is subject to the following limitations which may not be changed
with respect to a particular Portfolio without the approval of at least a
majority of the outstanding voting securities (as defined in the Investment
Company Act of 1940) of that Portfolio. A Portfolio will not:
(1) Invest in commodities or commodity contracts or purchase or sell
real estate, although it may purchase and sell marketable securities of
companies which deal in real estate or interests therein; except that each
Portfolio except the Short-Term Federal Portfolio may invest in bond futures
contracts, bond options and options on bond futures contracts to the extent
that not more than 5% of its assets are required as deposit margin for
futures contracts and not more than 20% of its assets are invested in such
instruments at any time;
(2) Write, purchase or sell warrants, put or call options, or
combinations thereof, except as specified above in (1);
(3) Invest in interests in oil, gas, or other mineral exploration or
development programs;
(4) Make loans to other persons (except by (i) the purchase of the debt
obligations in which the Portfolio is authorized to invest in accordance
with its investment policies, and (ii) as provided under "Lending of
Securities");
(5) Purchase securities on margin or sell securities short, except as
specified above in (1);
(6) With respect to 75% of assets, purchase for the Portfolio more than
10% of the outstanding voting securities of any issuer, except securities
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities;
B-7
<PAGE>
(7) With respect to 75% of assets, purchase securities of any issuer
(except obligations of the U.S. Government and its agencies and
instrumentalities) if as a result more than 5% of the value of the
Portfolio's total assets would be invested in the securities of such issuer;
(8) Borrow money, except that the Portfolio may borrow from banks (or
through reverse repurchase agreements), for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests which
might otherwise require the untimely disposition of securities, in an amount
not exceeding 15% of the value of the Portfolio's net assets (including the
amount borrowed and the value of any outstanding reverse repurchase
agreements) at the time the borrowing is made. Whenever borrowings exceed 5%
of the value of the Portfolio's net assets, the Portfolio will not make any
additional investments;
(9) Pledge, mortgage or hypothecate the Portfolio's assets to an extent
greater than 5% of the value of its total assets;
(10) Purchase or otherwise acquire any security if, as a result, more
than 15% of its net assets would be invested in securities that are illiquid
(included in this limitation is the Fund's investment in The Vanguard Group,
Inc.);
(11) Invest for the purpose of controlling management of any company;
(12) Invest in securities of other investment companies, except as may
be acquired as a part of a merger, consolidation or acquisition of assets or
otherwise to the extent permitted by Section 12 of the Investment Company
Act of 1940. The Portfolio will invest only in investment companies which
have investment objectives and investment policies consistent with those of
the Portfolio;
(13) Invest more than 5% of the value of the Portfolio's total assets
in securities of companies which have (with predecessors) a record of less
than three years continuous operation, except investments in obligations
guaranteed by the U.S. Government, or issued by its agencies or
instrumentalities;
(14) Concentrate its investments in a particular industry, although it
may invest up to 25% of the Portfolio's total assets (taken at value) in the
securities of issuers, all of which conduct their principal business
activities in the same industry, provided that (i) this limitation does not
apply to obligations issued or guaranteed by the U.S. Government, or its
agencies or instrumentalities, and (ii) utility companies will be divided
according to their services; for example, gas, gas transmission, electric
and gas, electric, and telephone will each be considered a separate
industry, and (iii) financial service companies will be classified according
to the end users of their services, as follows: Finance-Automobiles,
Finance-Banks, Finance-Consumers and Finance-Diversified; and
(15) Engage in the business of underwriting securities issued by other
persons, except to the extent that the Fund may technically be deemed to be
an underwriter under the Securities Act of 1933, as amended, in disposing of
investment securities.
The above-referenced investment limitations are considered at the time that
portfolio securities are purchased. Notwithstanding these limitations, the Fund
may own all or any portion of the securities of, or make loans to, or contribute
to the costs or other financial requirements of any company which will be
wholly-owned by the Fund and one or more other investment companies and is
primarily engaged in the business of providing, at cost, management,
administrative or related services to the Fund and other investment companies.
See "MANAGEMENT OF THE FUND." As a non-fundamental policy each Portfolio may not
purchase or retain securities of an issuer if an officer or director of such
issuer is an officer or Director of the Fund or its investment adviser and one
or more of such officers or Directors of the Fund or its investment adviser owns
beneficially more than 1/2% of the shares or securities of such issuer and all
such directors and officers owning more than 1/2% of such shares or securities
together own more than 5% of such shares or securities.
B-8
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Officers of the Fund manage its day to day operations and are
responsible to the Fund's Board of Directors. The Directors set broad policies
for each Fund and choose its Officers. The following is a list of the Directors
and Officers of the Fund and a statement of their present positions and
principal occupations during the past five years. The mailing address of the
Directors and Officers of the Fund is Post Office Box 876, Valley Forge, PA
19482.
JOHN C. BOGLE, CHAIRMAN, CHIEF EXECUTIVE OFFICER AND DIRECTOR*
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The Vanguard Group; Director of The
Mead Corporation and General Accident Insurance.
JOHN J. BRENNAN, PRESIDENT & DIRECTOR*
President and Director of The Vanguard Group, Inc., and of each of the other
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, DIRECTOR
Chairman and Chief Executive Officer, Rhone-Poulenc Rorer, Inc.; Director of
Immune Response Corp. and Sun Company, Inc.; Trustee, Universal Health Realty
Income Trust.
BARBARA BARNES HAUPTFUHRER, DIRECTOR
Director of The Great Atlantic and Pacific Tea Company, ALCO Standard, Corp.,
Raytheon Company, Knight-Ridder, Inc. and Massachusetts Mutual Life Insurance
Co.
BRUCE K. MACLAURY, DIRECTOR
President, The Brookings Institution; Director of Dayton Hudson Corporation,
American Express Bank, Ltd. and The St. Paul Companies, Inc.
BURTON G. MALKIEL, DIRECTOR
Chemical Bank Chairmen's Professor of Economics, Princeton University;
Director of Prudential Insurance Co. of America, Amdahl Corporation, Baker
Fentress & Co., Jeffrey Co. and The Southern New England Telephone Company.
ALFRED M. RANKIN, JR. DIRECTOR
President, Chief Executive Officer and Director of NACCO Industries, Inc.;
Director of The BF Goodrich Company, The Standard Products Company and The
Reliance Electric Company.
JOHN C. SAWHILL, DIRECTOR
President and Chief Executive Officer, The Nature Conservancy; formerly,
Director and Senior Partner, McKinsey & Co.; President, New York University;
Director of Pacific Gas and Electric Company and NACCO Industries.
JAMES O. WELCH, JR., DIRECTOR
Retired Chairman of Nabisco Brands, Inc., retired Vice Chairman and Director
of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, DIRECTOR
Chairman and Director of Rohm & Haas Company; Director of Cummins Energy
Company and Vanderbilt University; Trustee of the Culver Educational
Foundation.
RAYMOND J. KLAPINSKY, SECRETARY*
Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary of
each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, TREASURER*
Treasurer of The Vanguard Group, Inc. and of each of the investment companies
in The Vanguard Group.
KAREN E. WEST, CONTROLLER*
Vice President of The Vanguard Group. Inc.; Controller of each of the
investment companies in The Vanguard Group.
- ---------
* OFFICERS OF THE FUND ARE "INTERESTED PERSONS" AS DEFINED IN THE INVESTMENT
COMPANY ACT OF 1940.
B-9
<PAGE>
THE VANGUARD GROUP
Vanguard Fixed Income Securities Fund is a member of The Vanguard Group of
Investment Companies. Through their jointly owned subsidiary, The Vanguard
Group, Inc. ("Vanguard"), the Fund and the other funds in the Group obtain at
cost virtually all of their corporate management, administrative and
distribution services. Vanguard also provides investment advisory services on an
at-cost basis to certain of the Vanguard funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the funds and also
furnishes the funds with necessary office space, furnishings and equipment. Each
fund pays its share of Vanguard's net expenses which are allocated among the
funds under methods approved by the Board of Directors (Trustees) of each fund.
In addition, each fund bears its own direct expenses, such as legal, auditing
and custodian fees.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds have invested are adjusted from time to time in
order to maintain the proportionate relationship between each Fund's relative
net assets and its contribution to Vanguard's capital. At January 31, 1994, the
Fund had contributed capital of $3,348,000 to Vanguard, representing 16.7% of
Vanguard's capitalization. The Funds' Service Agreement provides for the
following arrangement: (1) each Vanguard Fund may invest a maximum of 0.40% of
its assets in Vanguard and (2) there is no restriction on the maximum cash
investment that the Vanguard Funds may make in Vanguard.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended January 31, 1994, the Fund's share of Vanguard's actual net
costs of operation relating to management and administrative services (including
transfer agency) totaled approximately $42,470,000.
DISTRIBUTION. Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for shares of the
Funds, in connection with any sales made directly to investors in the states of
Florida, Missouri, New York, Ohio, Texas and such other states as it may be
required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The Directors and
officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon their relative net assets. The remaining
one half of these expenses is allocated among the Funds based upon each Fund's
sales for the preceding 24 months relative to the total sales of the Funds as a
Group, provided, however, that no Fund's aggregate quarterly rate of
contribution for distribution expenses of a marketing and promotional nature
shall exceed 125% of the average distribution expense rate for the Group, and
that no Fund shall incur annual distribution expenses in excess of 20/100 of 1%
of its average month-end net assets. During the fiscal year ended January 31,
1994, the Fund paid approximately $5,500,000 of the Group's distribution and
marketing expenses, which represented an effective annual rate of .03% of 1% of
the Fund's average net assets.
INVESTMENT ADVISORY SERVICES. Vanguard also provides investment advisory
services to the Short-Term Corporate, Short-Term Federal, Short-Term U.S.
Treasury, Intermediate-Term Corporate, Intermediate-Term U.S. Treasury and
Long-Term U.S. Treasury Portfolios of the Fund, Vanguard Money Market Reserves,
Vanguard Admiral Funds, Vanguard Institutional Portfolios, Vanguard Bond Index
Fund, Vanguard Municipal Bond Fund, Vanguard Florida Insured Tax-Free Fund,
Vanguard California Tax-Free Fund, Vanguard New Jersey Tax-Free
B-10
<PAGE>
Fund, Vanguard New York Insured Tax-Free Fund, Vanguard Ohio Tax-Free Fund,
Vanguard Pennsylvania Tax-Free Fund, and the Money Market and High-Grade Bond
Portfolios of Vanguard Variable Insurance Fund. These services are provided on
an at-cost basis from a money management staff employed directly by Vanguard.
The compensation and other expenses of this staff are paid by the Funds
utilizing these services.
REMUNERATION OF DIRECTORS AND OFFICERS. The Fund pays each Director, who is
not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. The Fund's Officers and employees are paid by Vanguard
which, in turn, is reimbursed by the Fund, and each other Fund in the Group, for
its proportionate share of Officers' and employees' salaries and retirement
benefits.
The following information is furnished with respect to the Directors and
Officers of the Fund for whom the Fund's proportionate shares of remuneration
exceeded $60,000 for the fiscal year ended January 31, 1994 and for all
Directors and Officers as a group:
<TABLE>
<CAPTION>
NAMES AND CAPACITIES IN WHICH
REMUNERATION WAS RECEIVED REMUNERATION
- ------------------------------------------------------- --------------
<S> <C>
John C. Bogle, Chief Executive Officer................. $ 507,065
John J. Brennan, President and Director................ $ 226,304
All Directors and Officers as a Group (12)............. $ 981,042(1)
<FN>
- ---------
(1) Includes approximately $99,000 of fees and expenses paid by the Fund to
its "non-interested" Directors, and the Fund's proportionate share of
remuneration paid by Vanguard to all Officers of the Fund, as a group.
(2) Includes the Fund's proportionate share of retirement benefits paid by
Vanguard under its Retirement and Thrift Plans to all Officers and
Directors of the Company as a group. Under its retirement plan, Vanguard
contributes annually an amount equal to 10% of each officer's annual
compensation plus 5.7% of that part of the Officer's compensation during
the year that exceeds the Social Security Taxable Wage Base then in
effect. Under the Thrift Plan, all officers are permitted to make pre-tax
basic contributions in a maximum amount equal to 4% of total compensation.
Vanguard matches the basic contributions on a 100% basis. The Fund's
proportionate share of retirement contributions paid by Vanguard under its
retirement and thrift plans on behalf of all eligible Officers of the
Fund, as a group, during the 1994 fiscal year was $102,511. Directors who
are not Officers are paid an annual fee based on the number of years of
service on the Board, up to fifteen years of service, upon retirement. The
fee is equal to $1,000 for each year of service and each investment
company member of The Vanguard Group contributes a proportionate amount to
this fee based on its relative net assets. This fee is paid, subsequent to
a Director's retirement, for a period of ten years or until the death of a
retired Director.
</TABLE>
INVESTMENT ADVISORY SERVICES GNMA, LONG-TERM CORPORATE
AND HIGH YIELD CORPORATE PORTFOLIOS
The Fund employs Wellington Management Company (the "Adviser") under an
investment advisory agreement dated May 31, 1993 to manage the investment and
reinvestment of the assets of the Fund's GNMA, Long-Term Corporate and High
Yield Corporate Portfolios and to continuously review, supervise and administer
the investment program for each such Portfolio. The Adviser discharges its
responsibilities subject to the control of the officers and Directors of the
Fund.
The GNMA, Long-Term Corporate, and High Yield Corporate Portfolios pay the
Adviser an aggregate fee at the end of each fiscal quarter, calculated by
applying a quarterly rate, based on the following annual percentage rates, to
the aggregate average month-end net assets of the three Portfolios for the
quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
----------------------------------- ------
<S> <C>
First $2.5 billion................. .125%
Next $2.5 billion.................. .100%
Next $2.5 billion.................. .075%
Over $7.5 billion.................. .050%
</TABLE>
B-11
<PAGE>
The fee, as determined above, is allocated to each Portfolio based on the
relative net assets of each. Provided, however, that following such allocation:
(a) the fee to be paid by the GNMA Portfolio is then reduced by seventy-five
percent (75%); (b) the fee to be paid by the Long-Term Corporate Portfolio is
then reduced by fifty percent (50%); and (c) the fee to be paid by the High
Yield Corporate Portfolio is then reduced by twenty-five percent (25%).
During the fiscal years ended January 30, 1992, 1993 and 1994, the three
Portfolios paid the following advisory fees to WMC:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
--------------------------------------
PORTFOLIO 1992 1993 1994
- ------------------------- ---------- ---------- -------------
<S> <C> <C> <C>
GNMA..................... $1,060,000 $1,341,000 1,454,000
Long-Term Corporate...... 849,000 1,026,000 1,252,000
High Yield Corporate..... 918,000 1,286,000 1,455,000
</TABLE>
The fees set forth above were paid under the terms of a previous advisory
agreement that called for a higher rate of fees. The present agreement continues
until May 30, 1995, and may be continued thereafter for successive one year
periods, as long as such continuance is specifically approved at least annually
(a) by a vote of a majority of those members of the Board of Directors of the
Fund who are not parties to the agreement or interested persons of any such
party, cast in person at a meeting called for the purpose of voting such
approval, and (b) by the Board of Directors of the Fund or by vote of a majority
of the outstanding shares of each of the GNMA, Long-Term Corporate and High
Yield Corporate Portfolios. Provided, however, that if the holders of any one of
these Portfolios fail to approve the agreement, the Adviser may continue to
serve as investment adviser to the Portfolio which approved the agreement, and
to the Portfolio which did not approve the agreement until new arrangements have
been made. The agreement may be terminated by any Portfolio at any time, without
penalty, by vote of the Board of Directors of the Fund or by vote of a majority
of the outstanding shares of the Portfolio on 60 days' written notice to the
Adviser, or by the Adviser on 90 days' written notice to the Fund. The agreement
will automatically terminate in the event of its assignment.
The Fund's Board of Directors may, without the approval of shareholders,
provide for:
A. The employment of a new investment adviser pursuant to the terms of
a new advisory agreement, either as a replacement for an existing adviser or
as an additional adviser.
B. A change in the terms of an advisory agreement.
C. The continued employment of an existing adviser on the same
advisory contract terms where a contract has been assigned because of a
change in control of the adviser.
Any such change will only be made upon not less than 30 days' prior written
notice to shareholders, which shall include the information concerning the
adviser that would have normally been included in a proxy statement.
Because the Adviser provides only investment advisory services to the Fund
and has no control over the Fund's expenses, the Adviser has not undertaken to
guarantee expenses of the Fund. The Officers of the Fund have worked out
alternative arrangements with state authorities which require an expense
guarantee.
DESCRIPTION OF THE ADVISER. Wellington Management Company, 75 State Street,
Boston, MA, is a Massachusetts general partnership, of which the following
persons are managing partners: Robert W. Doran, Duncan M. McFarland, and John B.
Neff.
B-12
<PAGE>
SHORT-TERM CORPORATE, SHORT-TERM FEDERAL,
SHORT-TERM U.S. TREASURY, INTERMEDIATE-TERM CORPORATE, INTERMEDIATE-TERM U.S.
TREASURY AND LONG-TERM U.S. TREASURY PORTFOLIOS
The Short-Term Corporate, Short-Term Federal, Short-Term U.S. Treasury,
Intermediate-Term Corporate, Intermediate-Term U.S. Treasury and Long-Term U.S.
Treasury Portfolios receive all investment advisory services on an
"internalized," at-cost, basis from an experienced investment management staff
employed directly by Vanguard. This staff also provides investment advisory
services to Vanguard Money Market Reserves, Vanguard Institutional Portfolios,
Vanguard Bond Index Fund, Vanguard Municipal Bond Fund, Vanguard California
Tax-Free Fund, Vanguard Florida Insured Tax-Free Fund, Vanguard New Jersey
Tax-Free Fund, Vanguard Ohio Tax-Free Fund, Vanguard New York Insured Tax-Free
Fund, Vanguard Pennsylvania Tax-Free Fund and the Money Market and High-Grade
Bond Portfolios of Vanguard Variable Insurance Fund. The compensation and other
expenses of the staff are allocated among the Portfolios of the Fund and the
other Funds listed above. During the fiscal years ended January 31, 1992, 1993
and 1994, the Short-Term Corporate Portfolio's share of these expenses totaled
approximately $97,000, $202,000 and $298,000, respectively. During the fiscal
years ended January 31, 1992, 1993 and 1994, the Long-Term U.S. Treasury
Portfolio's share of these expenses totaled approximately $126,000, $75,000 and
$84,000, respectively. During the fiscal years ended January 31, 1992, 1993 and
1994, the Short-Term Federal Portfolio's shares of these expenses totaled
approximately $44,000, $124,000 and $173,000, respectively. For the period
October 28, 1991 to January 31, 1992, 1993 and 1994 the Short-Term and
Intermediate-Term U.S. Treasury Portfolios' share of these expenses each totaled
approximately $25,000, $34,000 and $79,000, respectively.
The investment management staff is supervised by the senior Officers of the
Fund. The senior Officers, who are also Officers of Vanguard, Vanguard Money
Market Reserves, Vanguard Institutional Portfolios, Vanguard Bond Index Fund,
Vanguard Municipal Bond Fund, Vanguard State Tax-Exempt Funds, and Vanguard
Variable Insurance Fund, are directly responsible to the Board of Directors of
the Fund. The Board of Directors, elected annually by shareholders, sets broad
policies for the Fund and chooses its Officers.
PORTFOLIO TRANSACTIONS GNMA, LONG-TERM CORPORATE
AND HIGH YIELD CORPORATE PORTFOLIOS
The investment advisory agreement authorizes the Adviser (with the approval
of the Fund's Board of Directors) to select the brokers or dealers that will
execute the purchases and sales of portfolio securities for the Fund and directs
the Adviser to use its best efforts to obtain the best available price and most
favorable execution as to all transactions for the Fund. The Adviser has
undertaken to execute each investment transaction at a price and commission
which provides the most favorable total cost or proceeds reasonably obtainable
under the circumstances.
In placing portfolio transactions, the Adviser will use its best judgment to
choose the broker most capable of providing the brokerage services necessary to
obtain best available price and most favorable execution. The full range and
quality of brokerage services available will be considered in making these
determinations. In those instances where it is reasonably determined that more
than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration may be given to
those brokers which supply investment research and statistical information and
provide other services in addition to execution services to the Fund and/or the
Adviser. The Adviser considers such information useful in the performance of its
obligations under the agreement but is unable to determine the amount by which
such services may reduce its expenses.
The investment advisory agreement also incorporates the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Fund's Board of Directors, the Adviser may cause the Fund to pay
a broker-dealer which furnishes brokerage and research services a
B-13
<PAGE>
higher commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the Adviser to the Fund and the other Funds in the Group.
Currently, it is the Fund's policy that the Adviser may at times pay higher
commissions in recognition of brokerage services felt necessary for the
achievement of better execution of certain securities transactions that
otherwise might not be available. The Adviser will only pay such higher
commissions if it believes this to be in the best interest of the Fund. Some
brokers or dealers who may receive such higher commissions in recognition of
brokerage services related to execution of securities transactions are also
providers of research information to the Adviser and/or the Fund. However, the
Adviser has informed the Fund that it will not pay higher commission rates
specifically for the purpose of obtaining research services.
Some securities considered for investment by the Fund may also be
appropriate for other Funds and/ or clients served by the Adviser. If purchase
or sale of securities consistent with the investment policies of the Fund and
one or more of these other Funds or clients served by the Adviser are considered
at or about the same time, transactions in such securities will be allocated
among the several Funds and clients in a manner deemed equitable by the Adviser.
SHORT-TERM CORPORATE, SHORT-TERM FEDERAL,
SHORT-TERM U.S. TREASURY, INTERMEDIATE-TERM CORPORATE, INTERMEDIATE-TERM U.S.
TREASURY, AND LONG-TERM U.S. TREASURY PORTFOLIO
Brokers or dealers who execute transactions for the Short-Term Corporate,
Short-Term Federal, Short-Term U.S. Treasury, Intermediate-Term Corporate,
Intermediate-Term U.S. Treasury, and Long-Term U.S. Treasury Portfolios are
selected by Vanguard's investment management staff, which is responsible for
using its best efforts to obtain the best available price and most favorable
execution for each transaction. Principal transactions are made directly with
issuers, underwriters and market makers and usually do not involve brokerage
commissions, although underwriting commissions and dealer mark-ups may be
involved. Brokerage transactions are placed with brokers deemed most capable of
providing favorable terms; where more than one broker can offer such terms,
consideration may be given to brokers who provide the staff with research and
statistical information.
Vanguard's investment management staff may occasionally make recommendations
to other Vanguard Funds or clients which result in their purchasing or selling
securities simultaneously with the Portfolios. As a result, the demand for
securities being purchased or the supply of securities being sold may increase,
and this could have an adverse effect on the price of those securities. It is
the staff's policy not to favor one client over another in making
recommendations or placing an order. If two or more clients are purchasing a
given security on the same day from the same broker-dealer, such transactions
may be averaged as to price.
ALL PORTFOLIOS
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Fund may place portfolio orders with qualified brokers or
dealers who recommend the shares of the Fund to their clients and may, when a
number of brokers and dealers can provide comparable best price and execution on
a particular transaction, consider the sale of shares by a broker or dealer in
selecting among qualified brokers or dealers.
The total brokerage commissions paid by the Fund for the fiscal year ended
January 31, 1992 was $28,014. The Fund did not incur any brokerage commissions
in the 1993 and 1994 fiscal years.
B-14
<PAGE>
YIELD AND TOTAL RETURN
The yield* of each portfolio of the Fund for the 30-day period ended January
31, 1994 is set forth below:
<TABLE>
<S> <C>
Short-Term U.S. Treasury Portfolio................................ 4.09%
Short-Term Federal Portfolio...................................... 4.43%
Short-Term Corporate Portfolio.................................... 4.56%
Intermediate-Term U.S. Treasury Portfolio......................... 5.21%
GNMA Portfolio.................................................... 5.67%(2)
Long-Term U.S. Treasury Portfolio................................. 6.03%
Long-Term Corporate Portfolio..................................... 6.36%
High Yield Corporate Portfolio.................................... 8.02%(1)
Intermediate-Term Corporate....................................... 5.41%
<FN>
- ---------
* THE YIELD FOR EACH PORTFOLIO OF THE FUND IS CALCULATED DAILY. FURTHER, IN
CALCULATING THE YIELD, THE PREMIUMS AND DISCOUNTS ON ASSET-BACKED SECURITIES
ARE NOT AMORTIZED.
(1) YIELD FOR THE HIGH YIELD CORPORATE PORTFOLIO REFLECTS A PREMIUM BASED ON
THE POSSIBILITY THAT INTEREST PAYMENTS ON SOME BONDS MAY BE REDUCED OR
ELIMINATED. ALSO, SINCE BONDS WITH HIGHER INTEREST COUPONS MAY BE REPLACED
BY BONDS WITH LOWER COUPONS, INCOME DIVIDENDS ARE SUBJECT TO REDUCTION.
(2) YIELD FOR THE GNMA PORTFOLIO CALCULATED TO TAKE INTO ACCOUNT ESTIMATED
PREPAYMENT RISK OF MORTGAGE-BACKED OBLIGATIONS. LOWER INTEREST RATES ARE
LIKELY TO FURTHER ACCELERATE THESE PREPAYMENTS; IF SO, DIVIDEND INCOME
WOULD BE REDUCED. YIELD WOULD BE 5.95% UNDER SEC CALCULATION METHODOLOGY.
</TABLE>
The average annual total return of each portfolio of the Fund for the one,
five and ten year periods ending January 31, 1994 is set forth below:
<TABLE>
<CAPTION>
1 YEAR ENDED 5 YEARS ENDED 10 YEARS
1/31/94 1/31/94 ENDED 1/31/94
------------ ------------- -------------
<S> <C> <C> <C>
Short-Term U.S. Treasury
Portfolio......................... +5.5% +7.5%* N/A
Short-Term Federal Portfolio....... +6.2% +9.2% +8.6%*
Short-Term Corporate Portfolio..... +6.1% +9.5% +9.9%
GNMA Portfolio..................... +5.2% +10.6% +10.9%
Intermediate-Term U.S. Treasury
Portfolio......................... +10.1% +11.9%* N/A
Intermediate-Term Corporate
Portfolio......................... +1.7%* N/A N/A
Long-Term U.S. Treasury
Portfolio......................... +16.1% +13.0% +10.3%
Long-Term Corporate Portfolio...... +13.8% +13.3% +12.4%
High Yield Corporate Portfolio..... +17.5% +11.0% +11.6%
<FN>
- ---------
* Since inception: Short-Term Federal Portfolio--December 31, 1987
Long-Term U.S. Treasury Portfolio--May 19, 1986
Short-Term U.S. Treasury and Intermediate-Term U.S. Treasury
Portfolios--
began operations October 28, 1991
Intermediate-Term Corporate--November 1, 1993
</TABLE>
FINANCIAL STATEMENTS
The Fund's financial statements for the fiscal year ended January 31, 1994,
including the financial highlights for each of the five years in the period
ended January 31, 1994, appearing in the Fund's 1994 Annual Report to
Shareholders, and the reports thereon of Price Waterhouse, independent
accountants, also appearing in the Annual Report, are incorporated by reference
in this Statement of Additional Information.
B-15
<PAGE>
PERFORMANCE MEASURES
Each of the investment company members of the Vanguard Group, including each
Portfolio of Vanguard Fixed Income Securities, Inc., may, from time to time, use
one or more of the following unmanaged indices for comparative performance
purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX--is a well diversified list
of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEX--consists of nearly 5,000 common equity securities,
covering all stocks in the U.S. for which daily pricing is available.
WILSHIRE 4500 EQUITY INDEX--consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX--is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX--currently includes 67 bonds and 33
preferreds. The original list of names was generated by screening for
convertible issues of 100 million or greater in market capitalization. The index
is priced monthly.
SALOMON BROTHERS GNMA INDEX--includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX--consists of publicly issued,
non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
SALOMON BROTHERS BROAD INVESTMENT-GRADE BOND--is a market-weighted index that
contains approximately 4700 individually priced investment-grade corporate bonds
rated BBB or better, U.S. Treasury/ agency issues and mortgage passthrough
securities.
SHEARSON LEHMAN LONG-TERM TREASURY BOND--is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND--consists of over 4,500 U.S. Treasury,
Agency and investment grade corporate bonds.
SHEARSON LEHMAN CORPORATE (BAA) BOND INDEX--all publicly offered fixed rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND--is a yield index on current coupon
high grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX--is a yield index based upon the average yield
for four high grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX--is composed of more than 3,000 industrial issues. It is
a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX--70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX--35% Standard & Poor's 500 Index and 65% Salomon Brothers High
Grade Bond Index.
COMPOSITE INDEX--65% Standard & Poor's 500 Index, 35% Salomon Brothers High
Grade Bond Index.
B-16
<PAGE>
LEHMAN BROTHERS AGGREGATE BOND INDEX--is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX--is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate investment grade bonds rated BBB- or better with maturities between 1
and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX--is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX--is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate securities rated BBB- or better with maturities greater than 10 years.
The index has a market value of over $900 billion.
LEHMAN BROTHERS INTERMEDIATE-TERM CORPORATE BOND INDEX--consists of all
investment grade corporate debt with maturities of 5 to 10 years.
OTHER DEFINITIONS
Marketing literature for the Portfolios of Vanguard Fixed Income Securities
Fund, Inc., may from time to time refer to or discuss a Portfolio's DURATION.
Duration is the weighted average life of a Portfolio's debt instruments measured
on a present-value basis; it is generally superior to average weighted maturity
as a measure of a Portfolio's potential volatility due to changes in interest
rates.
Unlike a Portfolio's average weighted maturity, which takes into account
only the stated maturity date of the Portfolio's debt instruments, duration
represents a weighted average of both interest and principal payments,
discounted by the current yield-to-maturity of the securities held. For example,
a four-year, zero-coupon bond, which pays interest only upon maturity (along
with principal), has both a maturity and duration of 4 years. However, a
four-year bond priced at par with an 8% coupon has a maturity of 4 years but a
duration of 3.6 years (at an 8% yield), reflecting the bond's earlier payment of
interest.
In general, a bond with a longer duration will fluctuate more in price than
a bond with a shorter duration. Also, for small changes in interest rates,
duration serves to approximate the resulting change in a bond's price. For
example, a 1% change in interest rates will cause roughly a 4% move in the price
of a zero-coupon bond with a 4 year duration, while an 8% coupon bond (with a
3.6 year duration) will change by approximately 3.6%.
APPENDIX--DESCRIPTION OF SECURITIES AND RATINGS
I. DESCRIPTION OF BOND RATINGS
Excerpts from Moody's Investors Service, Inc., ("Moody's") description of
its four highest bond ratings: Aaa--judged to be the best quality. They carry
the smallest degree of investment risk; Aa--judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds; A--possess many favorable investment attributes and are to be
considered as "upper medium grade obligations"; Baa--considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Ba--judged to have speculative
elements; their future cannot be considered as well assured; B--generally lack
characteristics of the desirable investment; Caa--are of poor standing. Such
issues may be in default or there may be present elements of danger with respect
to principal or interest; Ca--speculative in a high degree; often in default;
C--lowest rated class of bonds; regarded as having extremely poor prospects.
B-17
<PAGE>
Moody's also supplies numerical indicators 1, 2 and 3 to rating categories.
The modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and 3 indicates a
ranking toward the lower end of the category.
Excerpts from Standard & Poor's Corporation ("S&P") description of its five
highest bond ratings: AAA--highest grade obligations. Capacity to pay interest
and repay principal is extremely strong; AA-- also qualify as high grade
obligations. A very strong capacity to pay interest and repay principal and
differs from AAA issues only in small degree; A--regarded as upper medium grade.
They have a strong capacity to pay interest and repay principal although it is
somewhat susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories; BBB--regarded as
having an adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories. This group is the lowest which qualifies for commercial bank
investment. BB, B, CCC, CC-- predominately speculative with respect to capacity
to pay interest and repay principal in accordance with terms of the obligation;
BB indicates the lowest degree of speculation and CC the highest.
S&P applies indicators "+," no character, and "-" to its rating categories.
The indicators show relative standing within the major rating categories.
II. DESCRIPTION OF GNMA MORTGAGE-BACKED CERTIFICATES
GNMA (Government National Mortgage Association) Certificates are mortgage
backed securities. The Certificates evidence part ownership of a pool of
mortgage loans. The Certificates which the GNMA Portfolio will purchase are of
the "modified pass-through" type. "Modified pass-through" Certificates entitle
the holder to receive all interest and principal payments owed on the mortgage
pool, net of fees paid to the "issuer" and GNMA, regardless of whether or not
the mortgagor actually makes the payment.
THE GNMA GUARANTEE. The National Housing Act authorizes GNMA to guarantee
the timely payment of principal of and interest on securities backed by a group
(or pool) of mortgages insured by FHA or FHMA, or guaranteed by VA. The GNMA
guarantee is backed by the full faith and credit of the U.S. Government. GNMA is
also empowered to borrow without limitation from the U.S. Treasury if necessary
to make any payments required under its guarantee.
THE LIFE OF GNMA CERTIFICATES. The average life of GNMA Certificates is
likely to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greatest part of principal
invested well before the maturity of the mortgages in the pool. (Note: Due to
the GNMA guarantee, foreclosures impose no risk to principal investment.) As
prepayment rates of individual mortgage pools will vary widely, it is not
possible to accurately predict the average life of a particular issue of GNMA
Certificates. However, statistics published by the FHA are normally used as an
indicator of the expected average life of GNMA Certificates. These statistics
indicate that the average life of single-family dwelling mortgages with 25-30
year maturities, the type of mortgages backing the vast majority of GNMA
Certificates, is approximately 12 years. For this reason, it is standard
practice to treat GNMA Certificates as 30-year mortgage-backed securities which
prepay fully in the twelfth year.
YIELD CHARACTERISTICS OF GNMA CERTIFICATES. The coupon rate of interest of
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, but only by the amount of the
fees paid to GNMA and the issuer. For the most common type of mortgage pool,
containing single-family dwelling mortgages. GNMA receives an annual fee of 0.06
of 1% of the outstanding principal for providing its guarantee, and the issuer
is paid an annual fee of 0.44 of 1% for assembling the mortgage pool and for
passing through monthly payments of interest and principal to Certificate
holders.
B-18
<PAGE>
The coupon rate by itself, however, does not indicate the yield which will
be earned on the Certificates for the following reasons:
1. Certificates may be issued at a premium or discount, rather than at
par.
2. After issuance, Certificates may trade in the secondary market at a
premium or discount.
3. Interest is earned monthly, rather than semi-annually as for
traditional bonds. Monthly compounding has the effect of raising the
effective yield earned on GNMA Certificates.
4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate. That
is, if mortgagors pay off their mortgages early, the principal returned to
Certificate holders may be reinvested at more or less favorable rates.
In quoting yields for GNMA Certificates, the standard practice is to assume
that the Certificates will have a 12 year life. Compared on this basis, GNMA
Certificates have historically yielded roughly .25 of 1% more than high grade
corporate bonds and .50 of 1% more than U.S. Government and U.S. Government
Agency bonds. As the life of individual pools may vary widely, however, the
actual yield earned on any issue of GNMA Certificates may differ significantly
from the yield estimated on the assumption of a 12 year life.
MARKET FOR GNMA CERTIFICATES. Since the inception of the GNMA
Mortgage-Backed Securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make the GNMA Certificates a highly liquid instrument. Prices of GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate.
"WHEN ISSUED" SECURITIES. GNMA securities may be purchased and sold on a
when issued and delayed delivery basis. Delayed delivery or when issued
transactions arise when securities are purchased or sold by a Portfolio with
payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price and yield to the Portfolio at the time of
entering into the transaction. When the Portfolio engages in when issued and
delayed delivery transactions, the Portfolio relies on the buyer or seller, as
the case may be, to consummate the sale. Failure to do so may result in the
Portfolio missing the opportunity of obtaining a price or yield considered to be
advantageous. When issued and delayed delivery transactions may be expected to
occur a month or more before delivery is due. However, no payment or delivery is
made by the Portfolio until it receives payment or delivery from the other party
to the transaction. A separate account of liquid assets equal to the value of
such purchase commitments will be maintained until payment is made. To the
extent the Portfolio engages in when issued and delayed delivery transactions,
it will do so for the purpose of acquiring securities consistent with its
investment objective and policies and not for the purpose of investment
leverage.
III. COMMERCIAL PAPER
A Portfolio may invest in commercial paper (including variable amount master
demand notes) rated A-1 or better by Standard & Poor's or Prime-1 by Moody's,
or, if unrated, issued by a corporation having an outstanding unsecured debt
issue rated A or better by Moody's or by Standard & Poor's. Commercial paper
refers to short-term, unsecured promissory notes issued by corporations to
finance short-term credit needs. Commercial paper is usually sold on a discount
basis and has a maturity at the time of issuance not exceeding nine months.
Variable amount master demand notes are demand obligations that permit the
investment of fluctuating amounts at varying market rates of interest pursuant
to arrangement between the issuer and a commercial bank acting as agent for the
payees of such notes, whereby both parties have the right to vary the amount of
the outstanding indebtedness on the notes. Because variable amount master demand
notes are direct lending arrangements between a lender and a borrower, it is not
generally contemplated that such instruments will be traded, and there is no
secondary market for these notes, although they are redeemable (and thus
immediately repayable by the borrower) at
B-19
<PAGE>
face value, plus accrued interest, at any time. In connection with the
Portfolio's investment in variable amount master demand notes, Vanguard's
investment management staff will monitor, on an ongoing basis, the earning
power, cash flow and other liquidity ratios of the issuer, and the borrower's
ability to pay principal and interest on demand.
Commercial paper rated A-1 by Standard & Poor's has the following
characteristics: (1) liquidity ratios are adequate to meet cash requirements;
(2) long-term senior debt is rated "A" or better; (3) the issuer has access to
at least two additional channels of borrowing; (4) basic earnings and cash flow
have an upward trend with allowance made for unusual circumstances; (5)
typically, the issuer's industry is well established and the issuer has a strong
position within the industry; (6) the reliability and quality of management are
unquestioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is A-1, A-2 or A-3. The rating Prime-1 is
the highest commercial paper rating assigned by Moody's. Among the factors
considered by Moody's in assigning ratings are the following: (1) evaluation of
the management of the issuer; (2) economic evaluation of the issuer's industry
or industries and the appraisal of speculative-type risks which may be inherent
in certain areas; (3) evaluation of the issuer's products in relation to
completion and customer acceptance; (4) liquidity; (5) amount and quality of
long-term debt; (6) trend of earnings over a period of ten years; (7) financial
strength of a parent company and the relationships which exist with the issuer,
and (8) recognition by the management of obligations which may be present or may
arise as a result of public interest questions and preparations to meet such
obligations.
IV. U.S. GOVERNMENT SECURITIES
The term "U.S. Government securities" refers to a variety of securities
which are issued or guaranteed by the United States Treasury, by various
agencies of the United States Government, and by various instrumentalities which
have been established or sponsored by the United States Government. The term
also refers to "repurchase agreements" collateralized by such securities.
U.S. Treasury securities are backed by the "full faith and credit" of the
United States. Securities issued or guaranteed by Federal agencies and U.S.
Government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment.
Some of the U.S. Government agencies that issue or guarantee securities
include the Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Maritime Administration, Small
Business Administration, and The Tennessee Valley Authority.
An instrumentality of the U.S. Government is a government agency organized
under Federal charter with government supervision. Instrumentalities issuing or
guaranteeing securities include, among others, Federal Home Loan Banks, the
Federal Land Banks, Central Bank for Cooperatives, Federal Intermediate Credit
Banks, and the Federal National Mortgage Association.
V. BANK OBLIGATIONS
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate.
Certificates of deposit are negotiable short-term obligations of commercial
banks. Variable rate certificates of deposit are certificates of deposit on
which the interest rate is periodically adjusted prior to their stated maturity
based upon a specified market rate. As a result of these adjustments, the
interest rate on these obligations may be increased or decreased periodically.
Frequently, dealers selling variable rate certificates of deposit to a Portfolio
will agree to repurchase such instruments, at the Portfolio's option, at par on
or near the coupon dates. The dealers' obligations to repurchase these
instruments are subject to conditions imposed by various dealers; such
conditions typically are the continued credit standing of the issuer and the
existence of reasonably orderly market conditions. The
B-20
<PAGE>
Portfolio is also able to sell variable rate certificates of deposit in the
secondary market. Variable rate certificates of deposit normally carry a higher
interest rate than comparable fixed rate certificates of deposit. A bankers'
acceptance is a time draft drawn on a commercial bank by a borrower usually in
connection with an international commercial transaction (to finance the import,
export, transfer or storage of goods). The borrower is liable for payment as
well as the bank, which unconditionally guarantees to pay the draft at its face
amount on the maturity date. Most acceptances have maturities of six months or
less and are traded in the secondary markets prior to maturity.
VI. SHORT AND INTERMEDIATE TERM CORPORATE DEBT SECURITIES
Outstanding non-convertible corporate debt securities (e.g. bonds and
debentures) which are rated Baa3 or better either by Moody's Investors Service,
Inc. ("Moody's") or BBB or better by Standard & Poor's Corporation ("Standard &
Poor's") are considered investment grade.
VII. FOREIGN INVESTMENTS
The Short-Term Corporate, Intermediate-Term Corporate, High Yield Corporate
and Long-Term Corporate Portfolios may invest in the securities (payable in U.S.
dollars) of foreign issues and in the securities of foreign branches of U.S.
banks such as negotiable certificates of deposit (Eurodollars). Because the
Portfolios invest in such securities, investment in the Portfolios involves
investment risks that are different in some respects from an investment in a
fund which invests only in debt obligations of U.S. issuers. Such risks may
include future political and economic developments, the possible imposition of
withholding taxes on interest income payable on the securities held, possible
seizure or nationalization of foreign deposits, the possible establishment of
exchange controls or the adoption of other restrictions by foreign governments
which may adversely affect the payment of principal and interest on securities
held by the Portfolios, difficulty in obtaining and enforcing court judgements
abroad, the possibility of restrictions on investments in other jurisdictions,
reduced levels of government regulation of securities markets in foreign
countries, and difficulties in effecting the repatriation of capital invested
abroad. A Portfolio will not purchase any such foreign security if, as a result,
more than 20% of the value of the Portfolio's total assets would be invested in
such securities.
VIII. ZERO COUPON TREASURY BONDS
The Short-Term Federal, Intermediate-Term U.S. Treasury, Short-Term U.S.
Treasury and Long-Term U.S. Treasury Portfolios may invest in zero coupon
Treasury bonds, a term used to describe U.S. Treasury notes and bonds which have
been stripped of their unmatured interest coupons, or the coupons themselves,
and also receipts or certificates representing interest in such stripped debt
obligations and coupons. The timely payment of coupon interest and principal on
these instruments remains guaranteed by the "full faith and credit" of the
United States Government.
A zero coupon bond does not pay interest. Instead, it is issued at a
substantial discount to its "face value"--what it will be worth at maturity. The
difference between a security's issue or purchase price and its face value
represents the imputed interest an investor will earn if the security is held
until maturity. For tax purposes, a portion of this imputed interest is deemed
as income received by zero coupon bondholders each year. The Fund, which expects
to qualify as a regulated investment company, intends to pass along such
interest as a component of a Portfolio's distributions of net investment income.
Zero coupon bonds may offer investors the opportunity to earn higher yields
than those available on U.S. Treasury bonds of similar maturity. However, zero
coupon bond prices may also exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest is
returned to the investor.
IX. COLLATERALIZED MORTGAGE OBLIGATIONS
The Short-Term Federal, Short-Term Corporate, Intermediate-Term Corporate
and the Short-, Intermediate-and Long-Term U.S. Treasury Portfolios may invest
in collateralized mortgage obligations (CMOs),
B-21
<PAGE>
bonds that are collateralized by whole loan mortgages or mortgage pass-through
securities. The bonds issued in a CMO deal are divided into groups, and each
group of bonds is referred to as a "tranche". Under the CMO structure, the cash
flows generated by the mortgages or mortgage pass-through securities in the
collateral pool are used to first pay interest and then pay principal to the CMO
bondholders. The bonds issued under a CMO structure are retired sequentially as
opposed to the pro rata return of principal found in traditional pass-through
obligations. Subject to the various provisions of individual CMO issues, the
cash flow generated by the underlying collateral (to the extent it exceeds the
amount required to pay the stated interest) is used to retire the bonds. Under
the CMO structure, the repayment of principal among the different tranches is
prioritized in accordance with the terms of the particular CMO issuance. The
"fastest-pay" tranche of bonds, as specified in the prospectus for the issuance,
would initially receive all principal payments. When that tranche of bonds is
retired, the next tranche, or tranches, in the sequence, as specified in the
prospectus, receive all of the principal payments until they are retired. The
sequential retirement of bond groups continues until the last tranche, or group
of bonds, is retired. Accordingly, the CMO structure allows the issuer to use
cash flows of long maturity, monthly-pay collateral to formulate securities with
short, intermediate and long final maturities and expected average lives. The
primary risks involved in any mortgage security, such as a CMO issuance, is its
exposure to prepayment risk. To the extent a particular tranche is exposed to
this risk, the bondholder is generally compensated in the form of higher yield.
In order to provide security, in addition to the underlying collateral, many CMO
issues also include minimum reinvestment rate and minimum sinking-fund
guarantees. Typically, the Portfolios will invest in those CMOs that most
appropriately reflect their average maturities and market risk profiles.
Consequently, the Short-Term Portfolios invest only in CMOs with highly
predictable short-term average maturities. Similarly, the Intermediate-and
Long-Term Treasury Portfolios will invest in those CMOs that carry market risks
consistent with intermediate-and long-term bonds.
B-22
<PAGE>
PART C
VANGUARD FIXED INCOME SECURITIES FUND, INC.
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A)FINANCIAL STATEMENTS
The Registrant's financial statements for the year ended January 31, 1994,
including Price Waterhouse's reports thereon, are incorporated by reference, in
the Statement of Additional Information, from the Registrant's 1994 Annual
Report to Shareholders which has been filed with the Commission. The financial
statements, for each of the Registrant's portfolios, included in the Annual
Report respectively are:
1. Statement of Net Assets as of January 31, 1994.
2. Statement of Operations for the period ended January 31, 1994.
3. Statement of Changes of Net Assets for the periods ended January 31, 1993
and January 31, 1994.
4. Financial Highlights for each of the five years (as applicable) in the
period ended January 31, 1994 (also included in the prospectuses).
5. Notes to Financial Statements.
6. Reports of Independent Accountants.
(B)EXHIBITS
(11) Consent of Independent Accountants.
(16) Schedule for Computation of Performance Quotations.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person. The
Officers of the Registrant, the 32 investment companies in The Vanguard Group of
Investment Companies and The Vanguard Group, Inc. are identical. Reference is
made to the caption "Management of the Fund" in the Prospectus constituting Part
A and in the Statement of Additional Information constituting Part B of this
Registration Statement.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
On January 31, 1994 the number of shareholders of each portfolio of the Fund
was:
<TABLE>
<S> <C>
Long-Term Corporate Portfolio..................................... 114,470
High Yield Corporate Portfolio.................................... 97,915
GNMA Portfolio.................................................... 280,159
Short-Term Corporate Portfolio.................................... 122,133
Long-Term U.S. Treasury Portfolio................................. 38,843
Short-Term Federal Portfolio...................................... 72,273
Intermediate-Term U.S. Treasury Portfolio......................... 43,965
Short-Term U.S. Treasury Portfolio................................ 25,122
Intermediate-Term Corporate Portfolio............................. 3,980
</TABLE>
ITEM 27. INDEMNIFICATION
Reference is made to Article XI of Registrant's Articles of Incorporation.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its
C-1
<PAGE>
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Reference is made to the caption "Investment Advisers" in the prospectus
constituting Part "A" of this Registration Statement and "Investment Advisory
Services" in Part "B" of this Registration Statement.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None.
(b) Not Applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc. c/o The Vanguard Financial Center, Valley Forge,
Pennsylvania 19482; and the Registrant's Custodians, CoreStates Bank, N.A.,
Philadelphia, Pa., State Street Bank and Trust Company, Boston, MA. and Morgan
Guaranty Trust Company, New York, N.Y.
ITEM 31. MANAGEMENT SERVICES
Other than the Amended and Restated Funds' Service Agreement with The
Vanguard Group, Inc. which was previously filed as Exhibit 9(c) and described in
Part B hereof under "Management of the Fund;" the Registrant is not a party of
any management-related service contract.
ITEM 32. UNDERTAKINGS
Annual meetings of shareholders will not be held except as required by the
Investment Company Act of 1940 ("1940 Act") or other applicable law. Registrant
hereby undertakes to comply with the provisions of Section 16(c) of the 1940 Act
in regard to shareholders' rights to call a meeting of shareholders for the
purpose of voting on the removal of Directors and to assist in shareholder
communications in such matters, to the extent required by law. Registrant
further undertakes to furnish each person to whom a prospectus is delivered a
copy of the Registrant's latest annual report to shareholders, upon request and
without charge.
Registrant hereby undertakes to provide an Annual Report to Shareholders or
prospective investors, free of charge, upon request.
C-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant hereby certifies that it meets
the requirements for effectiveness pursuant to paragraph (b) of Rule 485 and has
duly caused this Post-Effective Amendment to this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the Town
of Valley Forge and the Commonwealth of Pennsylvania, on the 20th day of May,
1994.
VANGUARD FIXED INCOME SECURITIES FUND,
INC.
By________RAYMOND J. KLAPINSKY________
(RAYMOND J. KLAPINSKY)
JOHN C. BOGLE*
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- -------------------------------------------- ---------------------- ----------------------
<C> <S> <C>
By: RAYMOND J. KLAPINSKY Chairman of the Board, May 20, 1994
--------------------------------------- Director, and Chief
(RAYMOND J. KLAPINSKY) Executive Officer
JOHN C. BOGLE*
By: RAYMOND J. KLAPINSKY President and Director May 20, 1994
---------------------------------------
(RAYMOND J. KLAPINSKY)
JOHN J. BRENNAN*
By: RAYMOND J. KLAPINSKY Director May 20, 1994
---------------------------------------
(RAYMOND J. KLAPINSKY)
ROBERT E. CAWTHORN*
By: RAYMOND J. KLAPINSKY Director May 20, 1994
---------------------------------------
(RAYMOND J. KLAPINSKY)
BARBARA B. HAUPTFUHRER*
By: RAYMOND J. KLAPINSKY Director May 20, 1994
---------------------------------------
(RAYMOND J. KLAPINSKY)
BURTON G. MALKIEL*
By: RAYMOND J. KLAPINSKY Director May 20, 1994
---------------------------------------
(RAYMOND J. KLAPINSKY)
BRUCE K. MACLAURY*
By: RAYMOND J. KLAPINSKY Director May 20, 1994
---------------------------------------
(RAYMOND J. KLAPINSKY)
ALFRED M. RANKIN, JR.*
By: RAYMOND J. KLAPINSKY Director May 20, 1994
---------------------------------------
(RAYMOND J. KLAPINSKY)
JOHN C. SAWHILL*
By: RAYMOND J. KLAPINSKY Director May 20, 1994
---------------------------------------
(RAYMOND J. KLAPINSKY)
JAMES O. WELCH, JR.*
By: RAYMOND J. KLAPINSKY Director May 20, 1994
---------------------------------------
(RAYMOND J. KLAPINSKY)
J. LAWRENCE WILSON*
By: RAYMOND J. KLAPINSKY Treasurer and May 20, 1994
--------------------------------------- Principal Financial
(RAYMOND J. KLAPINSKY) Officer and
RICHARD F. HYLAND* Accounting Officer
<FN>
* By Power of Attorney. See File Number 2-14336, January 23, 1990. Incorporated
by Reference.
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Exhibit 11 Consent of Independent Accountants
Exhibit 16 Schedules for Computation of Performance Quotations
</TABLE>
<PAGE>
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
the Statement of Additional Information, constituting parts of this amended
Registration Statement on Form N-1A, of our reports dated February 22, 1994
relating to the financial statements, including the financial highlights,
appearing in the January 31, 1994 Annual Report to Shareholders of Vanguard
Fixed Income Securities Fund, Inc. (comprised of the GNMA, Short-Term Federal,
the Short-, Intermediate-and Long-Term U.S. Treasury, and the Short-Term,
Intermediate-Term, Long-Term and High Yield Corporate Portfolios), which are
also incorporated by reference into the Registration Statement. We also consent
to the references to us under the headings "Financial Highlights" and "General
Information" in the Prospectuses and "Financial Statements" in the Statement of
Additional Information.
PRICE WATERHOUSE
Philadelphia, PA
May 19, 1994
<PAGE>
EXHIBIT 16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
SHORT-TERM CORPORATE PORTFOLIO
1. Average Annual Total Return (As of January 31, 1994)
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = +6.1%
N = 1
ERV = $1,061.13
Five Year
P = $1,000
T = +9.5%
N = 5
ERV = $1,576.62
Ten Year
P = $1,000
T = +9.9%
N = 10
ERV = $2,561.57
2. YIELD (30 days Ended January 31, 1994)
Yield = 2 [(a + 1)(6) - 1] - B X 100
c X d
Where: a = dividends and interest paid during the period
expense ratios during the period (net of
b = reimbursements)
the average daily number of shares outstanding
c = during the period
the maximum offering price per share on the last
d = day of the period
EXAMPLE:
a = $14,028,084.76
b = .25
c = 323,339,348
d = $10.94
Yield = 4.55%
<PAGE>
SHORT-TERM FEDERAL PORTFOLIO
1. Average Annual Total Return (As of January 31, 1994)
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = +6.2%
N = 1
ERV = $1,062.31
Five Years
P = $1,000
T = +9.2%
N = 5
ERV = $1,550.20
Since Inception-December 28, 1987
P = $1,000
T = +8.6%
N = since inception
ERV = $1,654.31
2. YIELD (30 days Ended January 31, 1994)
Yield = 2 [(a + 1)(6) - 1] - B X 100
c X d
Where: a = dividends and interest paid during the period
expense ratios during the period (net of
b = reimbursements)
the average daily number of shares outstanding
c = during the period
the maximum offering price per share on the last
d = day of the period
EXAMPLE:
a = $7,467,256.40
b = .25
c = 186,121,349
d = $10.38
Yield = 4.43%
<PAGE>
LONG-TERM U.S. TREASURY PORTFOLIO
1. Average Annual Total Return (As of January 31, 1994)
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = +16.1%
N = 1
ERV = $1,160.87
Five Year
P = $1,000
T = +13.0%
N = 5
ERV = $1,840.89
Since Inception-May 19, 1986
P = $1,000
T = +10.3%
N = since inception
ERV = $2,134.15
2. YIELD (30 days Ended January 31, 1994)
Yield = 2 [(a + 1)(6) - 1] - B X 100
c X d
Where: a = dividends and interest paid during the period
expense ratios during the period (net of
b = reimbursements)
the average daily number of shares outstanding
c = during the period
the maximum offering price per share on the last
d = day of the period
EXAMPLE:
a = $4,302,529.83
b = .25
c = 77,352,635
d = $10.75
Yield = 6.04%
<PAGE>
GNMA PORTFOLIO
1. Average Annual Total Return (As of January 31, 1994)
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = +5.2%
N = 1
ERV = $1,051.85
Five Year
P = $1,000
T = +10.6%
N = 5
ERV = $1,658.32
Ten Year
P = $1,000
T = +10.9%
N = 10
ERV = $2,813.59
2. YIELD (30 days Ended January 31, 1994)
Yield = 2 [(a + 1)(6) - 1] - B X 100
c X d
Where: a = dividends and interest paid during the period
expense ratios during the period (net of
b = reimbursements)
the average daily number of shares outstanding
c = during the period
the maximum offering price per share on the last
d = day of the period
EXAMPLE:
a = $36,122,136.58
b = .27
c = 678,453,954
d = $10.39
Yield = 5.95%
<PAGE>
LONG-TERM CORPORATE PORTFOLIO
1. Average Annual Total Return (As of January 31, 1994)
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = +13.8%
N = 1
ERV = $1,138.28
Five Year
P = $1,000
T = +13.3%
N = 5
ERV = $1,863.74
Ten Year
P = $1,000
T = +12.4%
N = 10
ERV = $3,229.37
2. YIELD (30 days Ended January 31, 1994)
Yield = 2 [(a + 1)(6) - 1] - B X 100
c X d
Where: a = dividends and interest paid during the period
expense ratios during the period (net of
b = reimbursements)
the average daily number of shares outstanding
c = during the period
the maximum offering price per share on the last
d = day of the period
EXAMPLE:
a = $17,317,124.47
b = .29
c = 339,113,379
d = $9.36
Yield = 6.34%
<PAGE>
HIGH YIELD CORPORATE PORTFOLIO
1. Average Annual Total Return (As of January 31, 1994)
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = +17.5%
N = 1
ERV = $1,175.39
Five Year
P = $1,000
T = +11.0%
N = 5
ERV = $1,681.28
Ten Year
P = $1,000
T = +11.6%
N = 10
ERV = $2,990.10
2. YIELD (30 days Ended January 31, 1994)
Yield = 2 [(a + 1)(6) - 1] - B X 100
c X d
Where: a = dividends and interest paid during the period
expense ratios during the period (net of
b = reimbursements)
the average daily number of shares outstanding
c = during the period
the maximum offering price per share on the last
d = day of the period
EXAMPLE:
a = $17,594,533.73
b = .31
c = 317,174,342
d = $8.15
Yield = 7.99%
<PAGE>
SHORT-TERM U.S. TREASURY PORTFOLIO
1. Average Annual Total Return (As of January 31, 1994)
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = +5.5%
N = 1
ERV = $1,055.44
Since Inception-October 28, 1991
P = $1,000
T = +7.5%
N = since inception
ERV = $1,177.51
2. YIELD (30 days Ended January 31, 1994)
Yield = 2 [(a + 1)(6) - 1] - B X 100
c X d
Where: a = dividends and interest paid during the period
expense ratios during the period (net of
b = reimbursements)
the average daily number of shares outstanding
c = during the period
the maximum offering price per share on the last
d = day of the period
EXAMPLE:
a = $2,590,764.47
b = .25
c = 69,416,116
d = $10.41
Yield = 4.09%
<PAGE>
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO
1. Average Annual Total Return (As of January 31, 1994)
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = +10.1%
N = 1
ERV = $1,100.92
Since Inception-October 28, 1991
P = $1,000
T = +11.9%
N = since inception
ERV = $1,290.40
2. YIELD (30 days Ended January 31, 1994)
Yield = 2 [(a+1)(6) - 1] - B X 100
c X d
Where: a = dividends and interest paid during the period
expense ratios during the period (net of
b = reimbursements)
the average daily number of shares outstanding
c = during the period
the maximum offering price per share on the last
d = day of the period
EXAMPLE:
a = $4,501,162.52
b = .25
c = 92,514,296
d = $10.82
Yield = 5.20%
<PAGE>
INTERMEDIATE-TERM CORPORATE PORTFOLIO
1. Average Annual Total Return (As of January 31, 1994)
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
P = $1,000
T = +1.7%
N = *
ERV = $1,016.62
*Since Inception-November 1, 1993
2. YIELD (30 days Ended January 31, 1994)
Yield = 2 [(a + 1)(6) - 1] - B X 100
c X d
Where: a = dividends and interest paid during the period
expense ratios during the period (net of
b = reimbursements)
the average daily number of shares outstanding
c = during the period
the maximum offering price per share on the last
d = day of the period
EXAMPLE:
a = $354,773.15
b = .25
c = 7,575,874
d = $10.04
Yield = 5.41%
