<PAGE> 1
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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. 45
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 46
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
60 days after filing pursuant to paragraph (a) of Rule 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
WE HAVE ELECTED 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, 1997 ON MARCH 13, 1997.
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<PAGE> 2
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 the 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>
<PAGE> 3
Vanguard Fixed Income Securities Fund Logo
LOGO
P R O S P E C T U S
JULY 21, 1997
THE VANGUARD GROUP Logo
<PAGE> 4
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LOGO A Member of The Vanguard Group
================================================================================
PROSPECTUS -- JULY 21, 1997
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FUND INFORMATION: PARTICIPANT SERVICES -- 1-800-523-1036
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INVESTMENT
OBJECTIVE
AND POLICIES Vanguard Fixed Income Securities Fund, Inc. (the "Fund")
is an open-end diversified investment company that
consists of nine Portfolios. This prospectus pertains only
to the Fund's Short-Term Corporate Portfolio (the
"Portfolio"). The objective of the Portfolio is to provide
investors with a high level of income consistent with the
maintenance of principal and liquidity by investing in
investment grade fixed income securities with an average
maturity of one to three years. There is no assurance that
the Portfolio will achieve its stated objective. Shares of
the Portfolio are neither insured nor guaranteed by any
agency of the U.S. Government, including the FDIC.
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INVESTMENT
ALTERNATIVES The Portfolio offers two separate classes of shares to
investors. The Portfolio's "Institutional Shares" are
designed primarily for investors who meet a minimum
initial investment of $50 million and generally do not
require special employee benefit plan services. Only the
Institutional Shares are offered through this prospectus;
the Portfolio's other class of shares, the "Investor
Shares," are offered through a separate prospectus. To
obtain information on the Investor Shares, please call
1-800-662-7447 (SHIP), 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 Portfolio's separate share classes
have different expenses; as a result, their investment
performance will vary.
- --------------------------------------------------------------------------------
OPENING AN
ACCOUNT Shares of the Portfolio may be purchased by Federal Funds
wire. The minimum initial investment is $50 million.
- --------------------------------------------------------------------------------
ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
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 July 21, 1997 and has been incorporated
by reference into this Prospectus. A copy may be obtained
without charge by writing to the Portfolio or by calling
our Participant Services Department. The Securities and
Exchange Commission maintains a web site
(http://www.sec.gov) which contains the Statement of
Additional Information, material incorporated by
reference, and other information regarding the Fund.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Portfolio Expenses................. 2
Financial Highlights............... 3
Yield and Total Return............. 4
FUND INFORMATION
Investment Objective............... 4
Investment Policies................ 5
Investment Risks................... 5
Who Should Invest.................. 7
Implementation of Policies......... 7
Investment Limitations............. 11
Management of the Portfolio........ 11
Investment Advisers................ 12
Dividends, Capital Gains
and Taxes........................ 13
The Share Price of
The Portfolio.................... 15
General Information................ 15
Shareholder Guide.................. 17
</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> 5
PORTFOLIO EXPENSES The following table illustrates ALL expenses and fees that
you would incur as a shareholder of each share class of
the Short-Term Corporate Portfolio. For the Investor
Shares, these expenses and fees are based upon those
incurred during the fiscal year ended January 31, 1997.
Because the Institutional Shares of the Portfolio were not
offered prior to July 21, 1997, expenses and fees for this
share class are estimates based on the historical expenses
of the Investor Shares for the 1997 fiscal year.
<TABLE>
<CAPTION>
INVESTOR INSTITUTIONAL
SHARES OF SHARES OF
SHORT-TERM SHORT-TERM
CORPORATE CORPORATE
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO
------------------------------------------------------------------------------
<S> <C> <C>
Sales Load Imposed on Purchases................. None None
Sales Load Imposed on Reinvested Dividends...... None None
Redemption Fees*................................ None None
Exchange Fees................................... None None
</TABLE>
<TABLE>
<CAPTION>
INVESTOR INSTITUTIONAL
SHARES OF SHARES OF
SHORT-TERM SHORT-TERM
CORPORATE CORPORATE
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO
------------------------------------------------------------------------------
<S> <C> <C>
Management & Administrative Expenses............ 0.19% 0.09%
Investment Advisory Fees........................ 0.01 0.01
12b-1 Fees...................................... None None
Other Expenses
Distribution Costs............................ 0.03% 0.03%
Miscellaneous Expenses........................ 0.02 0.02
--------- -----------
Total Other Expenses............................ 0.05 0.05
--------- -----------
TOTAL OPERATING EXPENSES.............. 0.25% 0.15%
========= ===========
</TABLE>
* Wire redemptions of less than $5,000 are subject to a
$5 processing fee.
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
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>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Short-Term Corporate
Portfolio - Investor Shares........... $ 3 $ 8 $14 $ 32
Short-Term Corporate
Portfolio - Institutional Shares...... $ 2 $ 5 $ 8 $ 19
</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.
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2
<PAGE> 6
FINANCIAL
HIGHLIGHTS The following financial highlights for a share outstanding
throughout each period have been audited by Price
Waterhouse LLP, independent accountants, whose reports on
the financial statements which contain this information
were unqualified. This information should be read in
conjunction with the Portfolio's financial statements and
notes thereto, which, together with the remaining portions
of the Fund's 1997 Annual Report to Shareholders, are
incorporated by reference in the Statement of Additional
Information and in this Prospectus, and which appear,
along with the reports of Price Waterhouse LLP, in the
Fund's 1997 Annual Report to Shareholders. For a more
complete discussion of the Fund's performance, please see
the Fund's 1997 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.
These financial highlights relate only to the Investor
Shares of the Short-Term Corporate Portfolio; the
Institutional Shares were not available prior to July 21,
1997.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
SHORT-TERM CORPORATE PORTFOLIO -- INVESTOR SHARES
-----------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
-----------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
YEAR............................. $10.94 $10.40 $10.94 $10.99 $10.88 $10.50 $10.34 $10.23 $10.43 $10.67
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income............ .663 .671 .596 .605 .695 .804 .876 .895 .833 .761
Net Realized and Unrealized Gain
(Loss) on Investments.......... (.190) .540 (.540) .049 .275 .380 .160 .110 (.200) (.240)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS................... .473 1.211 .056 .654 .970 1.184 1.036 1.005 .633 .521
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income.............. (.663) (.671) (.596) (.605) (.695) (.804) (.876) (.895) (.833) (.761)
Distributions from Realized
Capital Gains.................. -- -- -- (.099) (.165) -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS............ (.663) (.671) (.596) (.704) (.860) (.804) (.876) (.895) (.833) (.761)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR....... $10.75 $10.94 $10.40 $10.94 $10.99 $10.88 $10.50 $10.34 $10.23 $10.43
========================================================================================================================
TOTAL RETURN....................... 4.52% 11.95% 0.60% 6.11% 9.29% 11.70% 10.47% 10.18% 6.31% 5.16%
========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)....................... $4,531 $3,873 $2,924 $3,573 $2,811 $1,911 $829 $597 $493 $429
Ratio of Total Expenses to Average
Net Assets....................... 0.25% 0.27% 0.28% 0.26% 0.27% 0.26% 0.31% 0.28% 0.34% 0.33%
Ratio of Net Investment Income to
Average Net Assets............... 6.18% 6.23% 5.66% 5.48% 6.33% 7.44% 8.48% 8.70% 8.17% 7.36%
Portfolio Turnover Rate............ 45% 62% 69% 61% 71% 99% 107% 121% 165% 258%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 7
YIELD AND
TOTAL RETURN From time to time each share class of the 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 class of shares 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 class of
shares 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
dividends and capital gains distributions. The investment
results of each class of shares of the Portfolio will vary
due to their different expenses.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of each share class 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 per share earned by the class
of shares; it is net of all expenses and all recurring and
nonrecurring charges that have been applied to all
shareholder accounts of that class. 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 an investor's account or the yield reported
in the Fund'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 a Portfolio's sensitivity to
interest rate changes.
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INVESTMENT
OBJECTIVE
THE PORTFOLIO SEEKS TO
PROVIDE A HIGH LEVEL
OF CURRENT INCOME The Short-Term Corporate Portfolio is part of Vanguard
Fixed Income Securities Fund, 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 Portfolio seeks to achieve this objective by investing
in investment-grade fixed income securities and by
maintaining an average maturity of one to three years.
There is no assurance that the Portfolio will achieve its
stated objective.
The investment objective of 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.
- --------------------------------------------------------------------------------
4
<PAGE> 8
INVESTMENT
POLICIES 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) Obligations issued by state and municipal governments
and their agencies and instrumentalities;
(4) Bank obligations, including certificates of deposit
and bankers acceptances;
(5) Commercial paper; and
(6) 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.
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 have
speculative characteristics.
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 investment practices of the Portfolio.
The Portfolio is managed without regard to tax
ramifications, and is responsible for voting the shares of
all securities it holds.
- --------------------------------------------------------------------------------
INVESTMENT RISKS
THE PORTFOLIO IS
SUBJECT PRIMARILY
TO INTEREST RATE,
INCOME, CREDIT AND
MANAGER RISK As a mutual fund investing in fixed-income securities, the
Portfolio is 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.
5
<PAGE> 9
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:
PERCENT CHANGE IN THE PRICE OF A PAR BOND YIELDING 7.5%
<TABLE>
<CAPTION>
1 PERCENTAGE POINT 1 PERCENTAGE POINT
INCREASE IN DECREASE IN
STATED MATURITY INTEREST RATES INTEREST RATES
------------------------------- ------------------ ------------------
<S> <C> <C>
Short-Term (2.5 years) - 2.2% + 2.3%
Intermediate-Term (10 years) - 6.6% + 7.3%
Long-Term (20 years) - 9.5% +11.1%
</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) - 4.3% + 4.6%
Intermediate-Term (10 years) -12.7% +15.2%
Long-Term (20 years) -17.8% +24.1%
</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 the Portfolio's
current or future yield or expected changes in the
Portfolio's share price.
INCOME RISK is the potential for a decline in the
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.
The Portfolio 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 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 involve the buying and
selling of securities based upon economic, financial and
market analysis and investment judgment. MANAGER RISK
refers to the possibility that the Portfolio's investment
adviser may fail to execute the Portfolio's investment
strategy effectively. As a result, the Portfolio may fail
to achieve its stated objective.
THE PORTFOLIO PROVIDES
MODERATE EXPOSURE TO
INTEREST RATE RISK Interest rate risk for the SHORT-TERM CORPORATE PORTFOLIO
should be modest. Because of its short-term average
weighted maturity, the Portfolio is expected to exhibit
low to moderate price fluctuations as interest rates
change.
6
<PAGE> 10
THE PORTFOLIO PROVIDES
LOW EXPOSURE TO CREDIT
RISK With its well diversified corporate bond holdings and its
emphasis on high-quality bonds, overall credit risk should
be quite low.
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WHO SHOULD
INVEST
INVESTORS SEEKING
CURRENT INCOME The Portfolio is intended for investors who are seeking a
high level of current income from their investments. The
Portfolio 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 its
share price, the Portfolio may be inappropriate for
short-term investors who require maximum stability of
principal. 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.
You should base your selection of the Portfolio on your
own objectives, risk preferences, and time horizon.
The SHORT-TERM CORPORATE PORTFOLIO is 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.
- --------------------------------------------------------------------------------
IMPLEMENTATION
OF POLICIES
THE PORTFOLIO MAY
INVEST IN REPURCHASE
AGREEMENTS The Portfolio utilizes a variety of investment practices
in pursuit of its objective.
The Portfolio 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
7
<PAGE> 11
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 the Portfolio's management
acknowledges these risks, it is expected that they can be
controlled through careful monitoring procedures.
THE PORTFOLIO MAY
OWN RESTRICTED OR
ILLIQUID SECURITIES The Portfolio may own restricted or illiquid securities to
a limited extent. Restricted or illiquid securities are
securities which are not 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 or illiquid securities. The Fund's
Board of Directors may from time to time determine certain
restricted securities known as Rule 144A securities to be
liquid. Such securities will not be subject to the 15%
limitation described above.
THE PORTFOLIO MAY
INVEST IN SECURITIES
OF FOREIGN ISSUERS The Short-Term Corporate Portfolio 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 transaction costs.
Additionally, it may be difficult to obtain or enforce a
legal judgment in a foreign court.
THE PORTFOLIO MAY
INVEST IN FUTURES
CONTRACTS, OPTIONS,
AND OTHER DERIVATIVE
SECURITIES The 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, the 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 Portfolio intends 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
8
<PAGE> 12
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 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 other liquid portfolio securities
in the amount of the underlying obligation.
DERIVATIVE INVESTING Derivatives are instruments whose value is linked to or
derived from an underlying security or index. 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 Portfolio 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 its obligations under the derivative
agreement.
THE PORTFOLIO MAY LEND
ITS SECURITIES The Portfolio 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 the 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 total
assets.
9
<PAGE> 13
THE PORTFOLIO MAY
INVEST IN CMOS The Short-Term Corporate Portfolio may invest in
collateralized mortgage obligations (CMOs), bonds that are
collateralized by whole loan mortgages or mortgage
pass-through securities. The Portfolio may also purchase
CMO's issued by agencies or instrumentalities of the U.S.
Government and 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 Portfolio will invest in those CMOs that
most appropriately reflect its average maturity and market
risk profiles. Consequently, the Short-Term Portfolio
invests only in CMOs with highly predictable, short-term
average maturities.
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 Portfolio 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 Portfolio 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 it generally seek to invest for the long term,
the Portfolio retains the right to sell securities
regardless of how long they have been held. It is
anticipated that the annual portfolio turnover rate for
the Short-Term Corporate Portfolio is expected to be
relatively high, but not exceeding 300%. The relatively
high turnover is due to the short-term maturities of the
securities purchased. A higher portfolio turnover rate
will cause the Portfolio to incur additional brokerage
costs and may cause the Portfolio to realize a higher
level of capital gains or losses.
- --------------------------------------------------------------------------------
10
<PAGE> 14
INVESTMENT
LIMITATIONS
THE PORTFOLIO HAS
ADOPTED
CERTAIN FUNDAMENTAL
LIMITATIONS The Portfolio has adopted certain limitations designed to
reduce its exposure to specific situations. Some of these
limitations are that the 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 or purchase more than 10% of the voting
securities of any issuer (except for securities issued
or guaranteed by the U.S. Government or any of its
agencies or instrumentalities);
(b) invest more than 5% of its assets in the securities of
companies that have a continuous operating history of
less than three years;
(c) 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);
(d) 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; and
(e) 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
Information may be changed only with the approval of a
majority of the Portfolio's shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT OF
THE PORTFOLIO
VANGUARD ADMINISTERS
AND DISTRIBUTES THE
PORTFOLIO The Portfolio is one of nine Portfolios of Vanguard Fixed
Income Securities Fund, a member of The Vanguard Group of
Investment Companies, a family of more than 30 investment
companies with more than 90 distinct portfolios and total
assets in excess of $280 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 1996,
the average expense ratio (annual costs including advisory
fees divided by total net assets) for the Vanguard funds
amounted to approximately .29% compared to an average of
1.22% for the mutual fund industry (data provided by
Lipper Analytical Services).
11
<PAGE> 15
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
VANGUARD MANAGES THE
PORTFOLIO'S INVESTMENTS
The Short-Term Corporate Portfolio receives all investment
advisory services on an at-cost basis from Vanguard's
Fixed Income Group. The Group provides investment advisory
services to more than 40 Vanguard money market and bond
portfolios, both taxable and tax-exempt. Total assets
under management by Vanguard's Fixed Income Group were
more than $88 billion as of June 30, 1997.
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
Portfolio, and for overseeing the portfolio managers who
implement those strategies on a day-to-day basis.
The Portfolio's portfolio manager is Robert F. Auwaerter,
a Principal of Vanguard. Mr. Auwaerter also serves as
portfolio manager of the Short-Term U.S. Treasury,
Long-Term U.S. Treasury, 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 Fixed Income Group manages the investment and
reinvestment of the assets of the Portfolio and
continuously reviews, supervises and administers the
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 Portfolio is based on: (a) continuing
credit analysis of those instruments held in the Portfolio
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 Portfolio. 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 under-
12
<PAGE> 16
writer 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 the Portfolio, it
is the Portfolio'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 Portfolio,
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 Portfolio.
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 the Portfolio. 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.
- --------------------------------------------------------------------------------
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 the Portfolio 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.
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
distributions, 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 the Portfolio 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.
13
<PAGE> 17
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.
Dividends and capital gains are calculated and distributed
the same way for each class of shares. The amount of any
income dividends per share will vary, however, generally
due to the differences in marketing and distribution,
account maintenance and shareholder services expenses for
the Portfolio's separate share classes.
A CAPITAL GAIN OR LOSS
MAY BE REALIZED UPON
EXCHANGE OR
REDEMPTION A sale of shares of the Portfolio is a taxable event and
may result in a capital gain or loss. A capital gain or
loss may be realized from an ordinary redemption of
shares, a checkwriting redemption, or an exchange of
shares between 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 Portfolio will indicate each year the
portion of the Portfolio's income, if any, that may
qualify for this exemption.
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 employer
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.
- --------------------------------------------------------------------------------
14
<PAGE> 18
THE SHARE PRICE OF
EACH CLASS OF THE
PORTFOLIO The share price or "net asset value" per share of each
class of the Portfolio equals net assets attributable to a
class divided by shares outstanding of the class. The net
asset value is determined as of the close of the New York
Stock Exchange (generally 4:00 p.m. Eastern time) on each
day that 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 (those with remaining
maturities of 60 days or less) may be valued at cost, plus
or minus any amortized discount or premium which
approximates market. 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.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION The Fund is a Maryland corporation. The Articles of
Incorporation permit the Directors to issue 14,550,000,000
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 Short-Term Corporate Portfolio offers
two separate classes of shares, Investor Shares and
Institutional Shares. The Investor Shares are available to
investors who meet the minimum initial investment of
$3,000 ($1,000 for retirement plan accounts) and may
require special employee benefit plan services. The
Institutional Shares are designed for investors who
generally do not require special employee benefit plan
services and meet the minimum initial investment of $50
million.
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.
15
<PAGE> 19
All securities and cash for the Short-Term Corporate
Portfolio are held by CoreStates Bank, N.A., Philadelphia,
PA. CoreStates Bank, N.A. Philadelphia, PA, holds daily
cash balances that are used by the Portfolio to invest in
repurchase agreements or securities acquired in these
transactions. The Vanguard Group, Inc., Valley Forge, PA,
serves as the Portfolio's Transfer and Dividend Disbursing
Agent. Price Waterhouse LLP serves as independent
accountants for the Portfolio and will audit its financial
statements annually. The Portfolio is not involved in any
litigation.
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16
<PAGE> 20
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES To open an account, complete an Account Registration Form
and mail it to:
VANGUARD FINANCIAL CENTER
VANGUARD FIXED INCOME SECURITIES FUND
SHORT-TERM CORPORATE PORTFOLIO -- INSTITUTIONAL
SHARES
ATTN: INSTITUTIONAL INVESTOR SERVICES
P.O. BOX 1472
VALLEY FORGE, PA 19482
For express or registered mail, send your registration
form to: Vanguard Financial Center, Vanguard Fixed Income
Securities Fund, SHORT-TERM CORPORATE
PORTFOLIO -- INSTITUTIONAL SHARES, Attn: Institutional
Investor Services, 100 Vanguard Boulevard, Malvern, PA
19355.
Once the account has been opened, Vanguard will assign an
Institutional Investor Services Representative for future
account transactions.
Shares of the Portfolio may be purchased by Federal Funds
wire. The minimum initial investment for the Portfolio is
$50 million. Please contact your Institutional Investor
Service Representative or call the Vanguard Group at
1-800-523-1036 to notify the Portfolio of the intended
investment and to receive an account number. Wiring
instructions are provided below.
Subsequent investments of $5 million or more will be
credited to an account on the date of purchase if Vanguard
is notified one business day in advance of the intended
purchase and a Federal Funds wire is received by 4:00 p.m.
(Eastern time) on the date of purchase. See "Trade Date
Policy."
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).
PURCHASE
RESTRICTIONS 1) 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 Fund also reserves the right to suspend
the offering of shares for a period of time.
2) Vanguard will not accept third-party checks to purchase
shares of the Fund. Please be sure your purchase check
is made payable to The Vanguard Group.
ADDITIONAL
INVESTMENTS
Please contact your
Service Representative Additional investments may be made at any time by wiring
monies to Vanguard. As noted above, investments of $5
million or more require prior-day notification to qualify
for credit on the date of purchase. To ensure prompt
investment, please notify your Institutional Investor
Services Representative in advance of the wire.
- --------------------------------------------------------------------------------
17
<PAGE> 21
<TABLE>
<S> <C>
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 your VANGUARD SHORT-TERM CORPORATE PORTFOLIO INSTITUTIONAL
Service Representative SHARES
ACCOUNT NUMBER
ACCOUNT REGISTRATION
</TABLE>
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, 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 Portfolio and Custodian Bank are open for
business.
- --------------------------------------------------------------------------------
PURCHASING BY
EXCHANGE (from a
Vanguard account) You may open an account or purchase additional shares by
making an exchange from an existing Vanguard Fund account.
However, the Portfolio reserves the right to refuse any
exchange purchase request. Call your Service
Representative (1-800-523-1036.)
DISTRIBUTION
OPTIONS Dividend and capital gains distributions paid by the
Portfolio will be automatically reinvested in additional
shares of the same class of shares of the Fund that you
own. A cash dividend option is also available. Please
contact your Service Representative for further
information.
CERTIFICATES
Share certificates will not be issued for the Portfolio.
ELECTRONIC
PROSPECTUS
DELIVERY
You may receive a prospectus for the Fund or any of the
Vanguard Funds in an electronic format. Please call
1-800-231-7870 for additional information. If you elect to
do so, you may also receive a paper copy of the
prospectus, by calling 1-800-523-8066.
- --------------------------------------------------------------------------------
TRADE DATE
POLICY
Investments will be credited on the date of purchase under
the following conditions:
- FOR INVESTMENTS OF $5 MILLION OR MORE: The Fund must
be notified of the intended purchase by the close of
the New York Stock Exchange, (generally 4:00 p.m.
Eastern time) on the prior business day and the Federal
Funds wire must be received by Vanguard by the close of
the Exchange on the date of purchase.
- FOR INVESTMENTS OF LESS THAN $5 MILLION: The Fund must
be notified of the intended purchase by 10:45 a.m.
Eastern time) on the day of purchase and the Federal
Funds wire must be received by the close of the
Exchange.
Generally, if these requirements are not met, an
investment will be credited to the account on the business
day following receipt of a Federal Funds wire.
18
<PAGE> 22
The trade date, the day on which an account is credited,
is generally the day on which the Fund receives an
investment in the form of Federal Funds. For purchases by
Federal Funds wire or by exchange, the Fund is credited
immediately with Federal Funds. If a purchase by Federal
Funds wire or exchange is received by the close of the New
York Stock Exchange, (generally 4:00 p.m. Eastern time),
the trade date is the day of receipt assuming proper
notification has been given, as described above. If a
purchase is received after the close of the Exchange, the
trade date is the business day following the receipt of
the wire or exchange.
- --------------------------------------------------------------------------------
SELLING
SHARES
WIRE PROCEEDS Any portion of an account may be withdrawn by contacting
your Institutional Investor Services Representative. The
redemption proceeds will be wired to the bank account
indicated on the Account Registration Form on the business
day following receipt of a request.
For a redemption of an entire account balance, accrued
dividends will not be included in the initial redemption
wire, but will be sent separately by check or wire.
Wire redemptions of less than $5,000 are subject to a $5
charge deducted from the principal in your account. There
is no charge for wire redemptions of $5,000 or more, or
for subsequent dividend wires.
For our mutual protection, wiring instructions must be on
file at Vanguard prior to executing any redemption
request. A request to change the bank account associated
with the wire redemption feature or a request to wire
funds to a bank other than that on file must be received
in writing. A signature guarantee of an authorized officer
is required if the bank registration is not identical to
the Vanguard Fund account registration.
- --------------------------------------------------------------------------------
OTHER REDEMPTION
INFORMATION
The Portfolio may suspend the redemption rights 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.
- --------------------------------------------------------------------------------
MANDATORY
CONVERSION
TO INDIVIDUAL
SHARE CLASS The Portfolio reserves the right to convert an investor's
Institutional Shares into Investor Shares if the
investor's account balance falls below $50 million. Any
such conversion will be preceded by written notice to the
investor and will be effected on the basis of the relative
net asset values of the Portfolio's Investor Shares and
Institutional Shares. There will be no loads, fees or
other charges imposed on mandatory conversions.
- --------------------------------------------------------------------------------
EXCHANGING
SHARES Institutional shares of the Portfolio may be exchanged for
those of other available Vanguard funds, but only upon
prior approval by Vanguard. Contact your Institutional
Investor Services Representative for further information.
Telephone exchange requests must ordinarily be received in
writing or by telephone by the close of trading on the New
York Stock Exchange (generally 4:00 p.m. Eastern time) in
order to be processed on the date of receipt. The new Fund
account will bear the identical registration of the
Vanguard Short-Term Corporate Portfolio-Institutional
Shares account.
19
<PAGE> 23
Through December 31, 1997, Investor Shares of the
Portfolio may be exchanged for Institutional Shares of the
Portfolio, provided that the investor satisfies all
purchase eligibility requirements for Institutional
Shares.
Telephone exchanges are not permitted for several Vanguard
Funds, and there also may be restrictions on new
investments in certain Funds. Large exchange requests
(i.e., those over $250,000) require prior approval by
Vanguard on behalf of the Fund. Contact your Institutional
Investor Services Representative for full information,
including a prospectus.
Neither the Portfolio nor Vanguard is responsible for the
authenticity of exchange instructions received by
telephone. Every effort will be made to maintain the
exchange privilege. However, the Portfolio reserves the
right to revise or terminate its provisions, limit the
amount of or reject any exchange, as deemed necessary, at
any time.
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ABOUT TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire
redemptions) and exchanges by telephone is automatically
established on your account unless you request in writing
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 and address used in the registration; and
(iv) the Social Security or Employer Identification
number listed on the account.
2. PAYMENT POLICY. The proceeds or 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 Portfolio 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.
- --------------------------------------------------------------------------------
20
<PAGE> 24
OTHER
ACCOUNT
INFORMATION For corporate investors, a current corporate resolution
must be maintained on file at Vanguard at all times. The
initial application serves as a corporate resolution. Any
revisions to a corporate resolution must be submitted to
your Institutional Investor Services Representative at
Vanguard.
To change the registration of an account, a request must
be submitted in writing to Vanguard and include the
following information: the account number and portfolio
name; authorized signatures; any applicable signature
guarantees; and other supporting legal documents as
necessary.
All requests should be mailed to the following address:
VANGUARD FINANCIAL CENTER
ATTN: INSTITUTIONAL INVESTOR SERVICES
P.O. BOX 1472
VALLEY FORGE, PA 19482
- --------------------------------------------------------------------------------
21
<PAGE> 25
[THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE> 26
LOGO
- ----------------------------
THE VANGUARD GROUP
Vanguard Financial Center
P.O. Box 2900
Valley Forge, PA 19482
FOR PARTICIPANTS IN
EMPLOYER-SPONSORED PLANS
1-800-523-1188
FOR OTHER INSTITUTIONAL
INVESTORS
1-800-523-1036
TRANSFER AGENT
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
ELECTRONIC ACCESS TO THE
VANGUARD MUTUAL FUND
EDUCATION AND INFORMATION
CENTER
WORLD WIDE WEB
http://www.vanguard.com
E-MAIL
[email protected]
P858
<PAGE> 27
PART B
VANGUARD FIXED INCOME SECURITIES FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
JULY 21, 1997
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectuses, as they may be amended from time to time. The
Fund's current Prospectuses are dated May 9, 1997, except that the Prospectus
which offers Institutional Shares of the Short-Term Corporate Portfolio is dated
July 21, 1997. To obtain a Prospectus please call:
VANGUARD INVESTOR INFORMATION CENTER
1-800-662-7447
or
VANGUARD INSTITUTIONAL SERVICES
1-800-523-1036
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Fund.................................................................................. B-1
Investment Objective and Policies......................................................... B-1
Purchase of Shares........................................................................ B-6
Redemption of Shares...................................................................... B-6
Signature Guarantees...................................................................... B-6
Investment Limitations.................................................................... B-7
Management of the Fund.................................................................... B-9
Investment Advisory Services.............................................................. B-12
Portfolio Transactions.................................................................... B-14
Yield and Total Return.................................................................... B-15
Financial Statements...................................................................... B-16
Performance Measures...................................................................... B-16
Other Definitions......................................................................... B-17
Appendix -- Description of Securities and Ratings......................................... B-18
</TABLE>
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 has 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 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 a custodian bank until
B-1
<PAGE> 28
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 15% of a Portfolio's assets, 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 for which there are no readily available market
quotations. See "Illiquid Securities" below.
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,
for short or long-term purposes, 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, an 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 three 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 Section 4(2) of the Securities Act of 1933 and 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 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.
ILLIQUID SECURITIES. Illiquid securities are securities that may not be
sold or disposed of in the ordinary course of business within seven business
days at approximately the value at which they are being carried on a
B-2
<PAGE> 29
Fund's books. An illiquid security includes repurchase agreements which have a
maturity of longer than seven days, securities which are illiquid by virtue of
the absence of a readily available market, and demand instruments with a demand
notice exceeding seven days. Illiquid securities may include securities that are
not registered under the Securities Act of 1933 (the "1933 Act"); however,
unregistered securities that can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act will not be considered illiquid so
long as it is determined by the Fund's advisor that an adequate trading market
exists for the security. From time to time, the Fund's Board of Directors may
determine that certain restricted securities known as Rule 144A securities are
liquid and not subject to the 15% limitation described above.
FOREIGN INVESTMENTS. As indicated in the prospectus, the Fund may include
foreign securities to a certain extent. Investors should recognize that
investing in foreign companies involves certain special considerations which are
not typically associated with investing in U.S. companies.
Country Risk As foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.
Although the Fund will endeavor to achieve most favorable execution costs
in its portfolio transactions in foreign securities, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges. In addition, it is expected that the expenses for custodial
arrangements of the Fund's foreign securities will be somewhat greater than the
expenses for the custodial arrangement for handling U.S. securities of equal
value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income the Fund receives from its foreign investments.
Currency Risk Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since the Fund may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the Fund will be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies. The investment policies of the Fund permit it to enter into
forward foreign currency exchange contracts in order to hedge holdings and
commitments against changes in the level of future currency rates. Such
contracts involve an obligation to purchase or sell a specific currency at a
future date at a price set at the time of the contract.
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. Assets committed to
futures contracts will be segregated at the Fund's custodian bank to the extent
required by law.
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
B-3
<PAGE> 30
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 their 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 bona fide 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.
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 hedge it effectively.
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
B-4
<PAGE> 31
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 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. 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. A Portfolio may be required to defer the recognition of losses
on futures contracts to the extent of any unrecognized gains on related
positions held by the Portfolio.
In order for the Portfolio to continue to qualify for Federal income tax
treatment as a regulated invest-
ment 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
B-5
<PAGE> 32
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 investment for or any other restrictions on 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 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) 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 (2) share transfer requests. These requirements are
not applicable to redemptions in Vanguard's prototype retirement plans, except
in connec-
tion 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.
B-6
<PAGE> 33
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 is required as margin
deposit for futures contracts and not more than 20% of its assets is
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 or 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;
7) 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;
8) Pledge, mortgage or hypothecate the Portfolio's assets to an extent
greater than 5% of the value of its total assets;
9) 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.);
10) Invest for the purpose of controlling management of any company;
11) 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;
12) 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;
13) 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
B-7
<PAGE> 34
(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
14) 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."
B-8
<PAGE> 35
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.
<TABLE>
<S> <C>
JOHN C. BOGLE, Chairman and Director* ALFRED M. RANKIN, JR., Director
Chairman and Director of The Vanguard Group, Chairman, President, and Chief Executive
Inc., and of each of the investment Officer of NACCO Industries, Inc.; Director of
companies in The Vanguard Group; Director of The BFGoodrich Company, and The Standard
The Mead Corporation, General Accident Products Company.
Insurance and Chris-Craft Industries, Inc. JOHN C. SAWHILL, Director
JOHN J. BRENNAN, President, Chief Executive President and Chief Executive Officer, The
Officer and Director* Nature Conservancy; formerly, Director and
President, Chief Executive Officer and Senior Partner, McKinsey & Co., President,
Director of The Vanguard Group, Inc., and of New York University; Director of Pacific Gas
each of the other investment companies in and Electric Company, Procter & Gamble
The Vanguard Group. Company and NACCO Industries.
ROBERT E. CAWTHORN, Director JAMES O. WELCH, JR., Director
Chairman Emeritus and Director of Retired Chairman of Nabisco Brands, Inc.,
Rhone-Poulenc Rorer, Inc.; Director of Sun retired Vice Chairman and Director of RJR
Company, Inc., Westinghouse Electric Nabisco; Director of TECO Energy, Inc. and
Corporation and Global Health Care Kmart Corporation.
Partners/DLJ Merchant Banking Partners. J. LAWRENCE WILSON, Director
BARBARA BARNES HAUPTFUHRER, Director Chairman and Chief Executive Officer of Rohm &
Director of The Great Atlantic and Pacific Haas Company; Director of Cummins Engine
Tea Company, Ikon Business Solutions, Inc., Company; and Trustee of Vanderbilt
Raytheon Company, Knight-Ridder, Inc. and University.
Massachusetts Mutual Life Insurance Co. and
Trustee Emerita of Wellesley College. RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secretary of The
BRUCE K. MACLAURY, Director Vanguard Group, Inc.; Secretary of each of the
President Emeritus of The Brookings investment companies in The Vanguard Group.
Institution; Director of American Express
Bank, Ltd., The St. Paul Companies, Inc. and RICHARD F. HYLAND, Treasurer*
National Steel Corporation. Treasurer of The Vanguard Group, Inc. and of
each of the investment companies in The
BURTON G. MALKIEL, Director Vanguard Group.
Chemical Bank Chairman's Professor of
Economics, Princeton University; Director of KAREN E. WEST, Controller*
Prudential Insurance Co. of America, Amdahl Principal of The Vanguard Group, Inc.;
Corporation, Baker Fentress & Co., The Controller of each of the investment companies
Jeffrey Co. and Southern New England in The Vanguard Group.
Communications Company. ---------------
*Officers of the Fund are "interested persons"
as defined in the Investment Company Act of
1940.
</TABLE>
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 adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions.
B-9
<PAGE> 36
However, such transactions are subject to procedures and guidelines
substantially similar to those recommended by the mutual fund industry and
approved by the U.S. Securities and Exchange Commission.
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 has 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, 1997, the
Fund had contributed capital of $2,133,000 to Vanguard, representing 10.7% 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, 1997, the Fund's share of Vanguard's actual net
costs of operation relating to management and administrative services (including
transfer agency) totaled approximately $46,469,000.
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,
1997, the Fund paid approximately $5,413,000 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 Index Fund, Vanguard Index Trust,
Vanguard International Equity Index Fund, Vanguard Balanced Index Fund, Vanguard
Tax-Managed Fund, the Aggressive Growth Portfolio of Vanguard Horizon Fund, the
Total International Portfolio of Vanguard STAR Fund, the REIT Index Portfolio of
Vanguard Specialized Portfolio, Vanguard Bond Index Fund, Vanguard Municipal
Bond Fund, Vanguard Florida Insured Tax-Free Fund, Vanguard California Tax-Free
Fund, Vanguard New Jersey Tax-Free Fund, Vanguard New York Insured Tax-Free
Fund, Vanguard Ohio Tax-Free Fund, Vanguard Pennsylvania Tax-Free Fund, several
Portfolios of Vanguard Variable Insurance Fund, a portion of Vanguard/Windsor
II, a portion of Vanguard/Morgan Growth Fund as well as several indexed separate
accounts. 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
B-10
<PAGE> 37
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, 1997 and for all
Directors and Officers as a group:
<TABLE>
<CAPTION>
DIRECT
NAMES IN CAPACITIES IN WHICH REMUNERATION WAS RECEIVED REMUNERATION
-------------------------------------------------------------------------- ---------------
<S> <C>
John C. Bogle, Chairman................................................... $ 348,563
John J. Brennan, President and Chief Executive Officer.................... $ 214,111
All Directors and Officers as a group..................................... $ 678,496(1)
</TABLE>
- ---------------
(1) Includes, in the aggregate, $67,000 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.
VANGUARD FIXED INCOME SECURITIES FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAMES OF DIRECTORS FROM FUND PART OF FUND EXPENSES UPON RETIREMENT PAID TO DIRECTORS(2)
- --------------------------- ------------ --------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) -- -- -- --
John J. Brennan(1) -- -- -- --
Barbara Barnes Hauptfuhrer $7,543 $ 1,171 $15,000 $65,000
Robert E. Cawthorn $7,543 $ 976 $13,000 $65,000
Bruce K. MacLaury $8,173 $ 1,146 $12,000 $60,000
Burton G. Malkiel $7,543 $ 781 $15,000 $65,000
Alfred M. Rankin, Jr. $7,543 $ 616 $15,000 $65,000
John C. Sawhill $7,543 $ 732 $15,000 $65,000
James O. Welch, Jr. $7,543 $ 901 $15,000 $65,000
J. Lawrence Wilson $7,543 $ 651 $15,000 $65,000
</TABLE>
- ---------------
(1) As "Interested Directors," Messrs. Bogle and Brennan receive no compensation
for their service as Directors.
(2) The amounts reported in this column reflect the total compensation paid to
each Director for his or her service as Director or Trustee of 34 Vanguard
Funds (33 in the case of Mr. Malkiel; 27 in the case of Mr. MacLaury).
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. 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. The Fund's proportionate share
of retirement contributions made by Vanguard under its Retirement and Thrift
Plans on behalf of all eligible Officers of the Fund, as a group, during the
fiscal year ended January 31, 1997 was approximately $16,050.
B-11
<PAGE> 38
INVESTMENT ADVISORY SERVICES
GNMA, LONG-TERM CORPORATE AND HIGH YIELD CORPORATE PORTFOLIOS
The Fund employs Wellington Management Company, LLP (the "Adviser") under
an investment advisory agreement dated May 1, 1996 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:
GNMA PORTFOLIO
<TABLE>
<CAPTION>
NET ASSETS RATE
--------------------------------------------------------------------------------- ------
<S> <C>
First $3 billion................................................................. .020%
Next $3 billion.................................................................. .010%
Over $6 billion.................................................................. .008%
</TABLE>
LONG-TERM CORPORATE PORTFOLIO
<TABLE>
<CAPTION>
NET ASSETS RATE
--------------------------------------------------------------------------------- ------
<S> <C>
First $1 billion................................................................. .040%
Next $1 billion.................................................................. .030%
Next $1 billion.................................................................. .020%
Over $3 billion.................................................................. .015%
</TABLE>
HIGH-YIELD CORPORATE PORTFOLIO
<TABLE>
<CAPTION>
NET ASSETS RATE
--------------------------------------------------------------------------------- ------
<S> <C>
First $1 billion................................................................. .060%
Next $1 billion.................................................................. .040%
Next $1 billion.................................................................. .030%
Over $3 billion.................................................................. .025%
</TABLE>
The fee, as determined above, is allocated to each Portfolio based on the
relative net assets of each.
During the fiscal years ended January 30, 1995, 1996 and 1997, the three
Portfolios paid the following advisory fees to WMC:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
--------------------------------------
PORTFOLIO 1995 1996 1997
---------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
GNMA................................................ $1,286,000 $1,181,000 $ 992,000
Long-Term Corporate................................. $1,131,000 $1,118,000 $ 951,000
High Yield Corporate................................ $1,389,000 $1,444,000 $1,370,000
</TABLE>
The fees set forth above for the Funds' fiscal years ended January 31, 1995
and 1996, and for a portion of the Funds' fiscal year ended January 31, 1997,
were paid under the terms of a previous advisory agreement that called for a
higher rate of fees. The present agreement continues until April 30, 1998, 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
B-12
<PAGE> 39
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, LLP, 75 State
Street, Boston, MA 02109, is a Massachusetts limited liability partnership, of
which the following persons are managing partners: Robert W. Doran, Duncan M.
McFarland, and John R. Ryan.
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 Bond Index Fund, Vanguard
Municipal Bond Fund, Vanguard Balanced Index Fund, Vanguard Admiral Funds, the
Balanced Portfolio of Vanguard Tax-Managed 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, 1995, 1996 and 1997, the
Short-Term Corporate Portfolio's share of these expenses totaled approximately
$391,000, $408,000 and $543,000, respectively. During the fiscal years ended
January 31, 1995, 1996 and 1997, the Intermediate-Term Corporate Portfolio's
share of these expenses totaled approximately $10,000, $28,000 and $63,000,
respectively. During the fiscal years ended January 31, 1995, 1996 and 1997, the
Long-Term U.S. Treasury Portfolio's share of these expenses totaled
approximately $82,000, $94,000 and $122,000, respectively. During the fiscal
years ended January 31, 1995, 1996 and 1997, the Short-Term Federal Portfolio's
shares of these expenses totaled approximately $204,000, $193,000 and $185,000,
respectively. During the fiscal years ended January 31, 1995, 1996 and 1997 the
Short-Term and Intermediate-Term U.S. Treasury Portfolios' share of these
expenses totaled approximately $186,000, $230,000 and $288,000 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.
B-13
<PAGE> 40
PORTFOLIO TRANSACTIONS
GNMA, LONG-TERM CORPORATE AND HIGH YIELD CORPORATE PORTFOLIOS
The investment advisory agreement authorizes Wellington Management Company,
LLP (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 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 PORTFOLIOS
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
B-14
<PAGE> 41
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 Fund did not incur any brokerage commissions in the 1994 and 1995
fiscal years. The total brokerage commission paid by the Fund for the fiscal
year ended January 31, 1996 was $4,500. The Fund did not incur any brokerage
commissions for the fiscal year ended January 31, 1997.
YIELD AND TOTAL RETURN
The yield* of each portfolio of the Fund for the 30-day period ended
January 31, 1997 is set forth below:
<TABLE>
<S> <C>
Short-Term U.S. Treasury Portfolio.............................................. 5.91%
Short-Term Federal Portfolio.................................................... 5.93%
Short-Term Corporate Portfolio.................................................. 6.18%
Intermediate-Term U.S. Treasury Portfolio....................................... 6.42%
GNMA Portfolio.................................................................. 6.98%
Long-Term U.S. Treasury Portfolio............................................... 6.72%
Long-Term Corporate Portfolio................................................... 7.24%
High Yield Corporate Portfolio.................................................. 8.69%(1)
Intermediate-Term Corporate..................................................... 6.84%
</TABLE>
The Institutional Shares of the Short-Term Corporate Portfolio was not
offered prior to July 21, 1997.
- ---------------
* 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.
The average annual total return of each Portfolio of the Fund for the one-,
five- and ten-year periods ending January 31, 1997 is set forth below:
<TABLE>
<CAPTION>
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
1/31/97 1/31/97 1/31/97
------------ ------------- --------------
<S> <C> <C> <C>
Short-Term U.S. Treasury Portfolio.............. 3.89% 5.92% 6.13%*
Short-Term Federal Portfolio.................... 4.51% 6.02% 7.46%*
Short-Term Corporate Portfolio.................. 4.52% 6.42% 7.57%
GNMA Portfolio.................................. 5.15% 7.22% 8.47%
Intermediate-Term U.S. Treasury Portfolio....... 1.28% 7.60% 7.93*
Intermediate-Term Corporate Portfolio........... 2.29% 5.79%* N/A
Long-Term U.S. Treasury Portfolio............... -1.85% 8.99% 8.59%
Long-Term Corporate Portfolio................... 0.86% 9.16% 9.17%
High Yield Corporate Portfolio.................. 9.01% 11.26% 9.28%
</TABLE>
The Institutional Shares of the Short-Term Corporate Portfolio was not
offered prior to July 21, 1997.
- ---------------
* Since inception: Short-Term Federal Portfolio -- December 31, 1987
Short-Term U.S. Treasury and Intermediate-Term U.S. Treasury
Portfolios -- began operations October 28, 1991
Intermediate-Term Corporate -- November 1, 1993
B-15
<PAGE> 42
FINANCIAL STATEMENTS
The Fund's financial statements for the fiscal year ended January 31, 1997,
including the financial highlights for each of the five years in the period
ended January 31, 1997, appearing in the Fund's 1997 Annual Report to
Shareholders, and the reports thereon of Price Waterhouse LLP, independent
accountants, also appearing in the Annual Report, are incorporated by reference
in this Statement of Additional Information. The Fund's 1997 Annual Report to
Shareholders does not include information for the Institutional Shares of the
Short-Term Corporate Portfolio because such class of shares was not offered
during the Fund's 1997 fiscal year.
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies.
Each of the investment company members of the Vanguard Group, including
each Portfolio of Vanguard Fixed Income Securities Fund, 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 more than 7,000 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 71 bonds and 29
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 INDEX -- 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 pass-through
securities.
LEHMAN LONG-TERM TREASURY BOND INDEX -- 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 INDEX -- consists of over 4,500 U.S.
Treasury, agency and investment grade corporate bonds.
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.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX -- is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
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BOND BUYER MUNICIPAL BOND INDEX -- 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 -- 65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
COMPOSITE INDEX -- 65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index and 25% Standard & Poor's Utilities Index).
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX -- consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.
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 Baa- 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.
LIPPER GENERAL EQUITY FUND AVERAGE -- an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
LIPPER FIXED INCOME FUND AVERAGE -- an industry benchmark of average fixed
income funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
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.
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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.
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
they are 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.
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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.
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 semiannually 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 prepay-
ment 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
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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 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
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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 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 judgments
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. The Short-Term Corporate and Intermediate-Term Corporate Portfolios 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
All 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
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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-, Intermedi-
ate- 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. 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.
X. REAL ESTATE
The GNMA Portfolio may invest in real estate investment conduits
("REMICs"). REMICs, which were authorized under the Tax Reform Act of 1986, are
private entities formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities. A REMIC is a CMO that qualifies for
special tax treatment under the Internal Revenue Code and invests in certain
mortgages principally secured by interests in real property. Investors may
purchase beneficial interests in REMICs, which are known as "regular" interests,
or "residual" interests. Guaranteed REMIC pass-through certificates ("REMIC
Certificates") issued by FNMA or FHLMC represent beneficial ownership interests
in a REMIC trust consisting principally of mortgage loans or FNMA, FHLMC or
GNMA-guaranteed mortgage pass-through certificates. For FHLMC REMIC
Certificates, FHLMC guarantees the timely payment of interest, and also
guarantees the payment of principal as payments are required to be made on the
underlying mortgage participation certificates. FNMA REMIC Certificates are
issued and guaranteed as to timely distribution of principal and interest by
FNMA.
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