VANGUARD FIXED INCOME SECURITIES FUND, INC.
PROSPECTUS SUPPLEMENT
FEBRUARY 27, 1998
USE OF ASSET-BACKED SECURITIES
The Short-Term Federal, Short-Term Corporate, Intermediate-Term Corporate, and
Long-Term Corporate Portfolios of the Fund may invest in asset-backed
securities. These securities represent partial ownership in pools of consumer or
commercial loans--such as mortgage or automobile loans, credit card balances,
equipment lease loans, and collateralized bond obligations (bonds backed by
other securities).
Besides being backed by the loans or other assets in the pool, many of
these securities come with credit enhancements as additional protection against
default. Such credit enhancements could include over-collateralization or
insurance coverage provided by a highly-rated (usually AAA) institution other
than the security's issuer.
The value of asset-backed securities ultimately depends on whether the
borrowers repay the underlying loans, and whether the credit enhancements, if
any, are adequate. Despite any credit enhancements, the value of an asset-backed
security may fluctuate because of several factors, including:
- The market's perception of the value of the assets backing the security.
- The creditworthiness of the agent in charge of collecting loan payments and
passing them through to security holders, the firm that originated the
loans, and the institution providing any credit insurance or guarantees.
- The nature of any insurance or other credit enhancements.
Another risk of asset-backed securities, especially in periods of declining
interest rates, is that borrowers may prepay the underlying loans. These
prepayments shorten the weighted average life of an asset-backed security and
may lower its return.
FOREIGN INVESTMENTS
The Short-Term Corporate, Intermediate-Term Corporate and Long-Term Corporate
Portfolios may invest without limitation in securities of foreign issuers, as
long as they are denominated in U.S. dollars. This includes securities issued by
foreign governments. Please see the prospectus for details.
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