<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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. 49
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 50
VANGUARD FIXED INCOME SECURITIES FUNDS
(Exact Name of Registrant as Specified in Declaration of Trust)
100 Vanguard Boulevard
Malvern, PA 19355-0741
(Address of Principal Executive Office)
Registrant's Telephone Number (610) 669-1000
R. Gregory Barton, Esquire
P.O. Box 2600
Valley Forge, PA 19482
It is hereby requested that this filing become effective on June 1, 1999
pursuant to paragraph (b) 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 Regu-
lation 24f-2 under the Investment Company Act of 1940. We filed our Rule 24f-2
Notice for the year ended January 31, 1999 on April 28, 1999.
- -------------------------------------------------------------------------------
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<PAGE>
VANGUARD FIXED INCOME SECURITIES FUNDS
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Form N-1A
Item Number Location in Prospectus
<C> <C> <S>
Item 1. Front and Back Cover Pages............ Front and Back Cover Pages
Item 2. Risk/Return Summary: Investments,
Risks, and Performance................ Fund Profile
Item 3. Risk/Return Summary: Fee Table........ Fee Table
Item 4. Investment Objectives, Principal
Investment Strategies, and Related A Word About Risk; Who
Risks................................. Should Invest; Primary
Investment Strategies
Item 5. Management's Discussion of Fund
Performance........................... Herein incorporated by
reference to Registrant's
Report to Shareholders
dated January 31, 1999
filed with the Securities
and Exchange Commission's
EDGAR system on April 5,
1999
Item 6. Management, Organization, and Capital
Structure............................. The Fund and Vanguard;
Investment Adviser
Item 7. Shareholder Information............... Share Price; Dividends,
Capital Gains, and Taxes;
Investing With Vanguard
Item 8. Distribution Arrangements............. Inside Front Cover Page
Item 9. Financial Highlights Information...... Financial Highlights
<CAPTION>
Form N-1A Location in Statement
Item Number of Additional Information
<C> <C> <S>
Item 10. Cover Page and Table of Contents...... Cover Page; Table of
Contents
Item 11. Fund History.......................... Description of the Trust
Item 12. Description of the Fund and its
Investments and Risks................. Investment Policies;
Description of the Trust;
and Fundamental Investment
Limitations
Item 13. Management of the Fund................ Management of the Trust
Item 14. Control Persons and Principal Holders
of Securities......................... Management of the Trust
Item 15. Investment Advisory and Other Investment Advisory
Services.............................. Services
Item 16. Brokerage Allocation and Other
Practices............................. Portfolio Transactions
Item 17. Capital Stock and Other Securities.... Description of the Trust
Item 18. Purchase, Redemption, and Pricing of
Securities Being Offered.............. Purchase of Shares;
Redemption of Shares; and
Share Price
Item 19. Taxation of the Fund.................. Description of the Trust
Item 20. Underwriters.......................... Not Applicable
Item 21. Calculation of Performance Data....... Yield and Total Return
Item 22. Financial Statements.................. Financial Statements
</TABLE>
<PAGE>
Vanguard Bond Funds
Prospectus
June 1, 1999
A Group of Bond Mutual Funds
Contents
1 An Introduction to Vanguard Bond Funds
2 Fund Profiles
2 Vanguard Short-Term Treasury Fund
4 Vanguard Short-Term Federal Fund
6 Vanguard Short-Term Corporate Fund
8 Vanguard Intermediate-Term
Treasury Fund
10 Vanguard Intermediate-Term
Corporate Fund
12 Vanguard GNMA Fund
14 Vanguard Long-Term Treasury Fund
16 Vanguard Long-Term Corporate Fund
18 More on the Funds
24 The Funds and Vanguard
25 Investment Advisers
26 Year 2000 Challenge
26 Dividends, Capital Gains, and Taxes
27 Share Price
28 Financial Highlights
33 Investing with Vanguard
33 Services and Account Features
34 Types of Accounts
34 Buying Shares
36 Redeeming Shares
39 Transferring Registration
40 Fund and Account Updates
Glossary (inside back cover)
- --------------------------------------------------------------------------------
Why Reading This Prospectus Is Important
This prospectus explains the objective, risks, and strategies of each of the
Vanguard Bond Funds (except Vanguard High-Yield Corporate Fund, which is
offered through a separate prospectus). To highlight terms and concepts
important to mutual fund investors, we have provided "Plain Talk(R)"
explanations along the way. Reading the prospectus will help you to decide
which Funds, if any, are the right investment for you. We suggest that you
keep it for future reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Important Note on the Short-Term Corporate Fund
The Short-Term Corporate Fund features two separate classes of shares:
Investor and Institutional. Short-Term Corporate Fund Investor Shares have an
investment minimum of $3,000, and are available through this prospectus (for
individual investors) and a separate prospectus (for participants in
employer-sponsored retirement or savings plans). Short-Term Corporate Fund
Institutional Shares have an investment minimum of $10 million and are
available through a separate prospectus. Investor Shares and Institutional
Shares do not have the same expenses; as a result, the performance of these
separate classes will differ.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
<PAGE>
1
An Introduction to Vanguard Bond Funds
Vanguard Bond Funds consist of nine separate bond funds, eight of which are
offered through this prospectus (Vanguard High-Yield Corporate Fund is offered
through a separate prospectus). Each of these Funds seeks to provide a high
level of current income and preserve investors' principal. To achieve this
objective, each Fund invests in fixed-income securities meeting defined credit
quality and dollar-weighted average maturity standards. These standards vary, as
shown in the following table. As a result, the relative levels of income
provided by the Funds will vary to some extent, with the Short-Term Treasury
Fund generally providing the lowest level and the Long-Term Corporate Fund
providing the highest.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Dollar-Weighted
Fund Primary Investments Average Maturity
- -----------------------------------------------------------------------------------
<S> <C> <C>
Short-Term Treasury U.S. Treasury bonds 1-3 years
Short-Term Federal U.S. government agency bonds 1-3 years
Short-Term Corporate Investment-grade corporate bonds 1-3 years
Intermediate-Term Treasury U.S. Treasury bonds 5-10 years
Intermediate-Term Corporate Investment-grade corporate bonds 5-10 years
GNMA GNMA mortgage certificates Generally 5-10 years
Long-Term Treasury U.S. Treasury bonds 15-30 years
Long-Term Corporate Investment-grade corporate bonds 15-25 years
- -----------------------------------------------------------------------------------
</TABLE>
On the following pages, you'll find profiles that summarize key features of
each Fund. Following the profiles, there is important additional information
common to all of the Funds.
<PAGE>
2
Fund Profile--Vanguard Short-Term Treasury Fund
The following profile summarizes key features of Vanguard Short-Term Treasury
Fund.
INVESTMENT OBJECTIVE
The Fund is a bond fund that seeks to provide a high level of current income and
preserve investors' principal.
INVESTMENT STRATEGIES
The Fund invests at least 85% of its total assets in short-term bonds whose
interest and principal payments are backed by the full faith and credit of the
U.S. government. In addition, at least 65% of the Fund's total assets will
always be invested in U.S. Treasury securities. The Fund will maintain a
dollar-weighted average maturity of between one and three years. For more
information on investment strategies, see pages 22-23.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally high for short-term bonds.
. Interest rate risk, which is the chance that bond prices overall, including
the prices of bonds held by the Fund, will decline over short or even long
periods due to rising interest rates. Interest rate risk is generally low for
short-term bonds.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual returns for one and
five calendar years and since inception compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
1992 6.75%
1993 6.41%
1994 -0.58%
1995 12.11%
1996 4.39%
1997 6.39%
1998 7.36%
- --------------------------------------------------------------------------------
The Fund's year-to-date return as of the quarter ended March 31, 1999 was
0.22%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 3.86% (quarter ended September 30, 1992) and the lowest return for a
quarter was -1.19% (quarter ended March 31, 1994).
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years Since Inception*
- --------------------------------------------------------------------------------
Vanguard Short-Term Treasury Fund 7.36% 5.85% 6.36%
Lehman Brothers 1-5 Year U.S. Treasury
Bond Index 7.76 6.17 6.71
- --------------------------------------------------------------------------------
*October 28, 1991.
- --------------------------------------------------------------------------------
<PAGE>
3
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended January 31, 1999.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.23%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.27%
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$28 $87 $152 $343
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
Inception Date
October 28, 1991
Net Assets as of January 31, 1999
$1.20 billion
Suitable for IRAs
Yes
Minimum Initial Investment
$3,000; $1,000 for IRAs and custodial accounts for minors
Newspaper Abbreviation
STTsry
Vanguard Fund Number
032
Cusip Number
922031703
Ticker Symbol
VFISX
<PAGE>
4
Fund Profile--Vanguard Short-Term Federal Fund
The following profile summarizes key features of Vanguard Short-Term Federal
Fund.
INVESTMENT OBJECTIVE
The Fund is a bond fund that seeks to provide a high level of current income and
preserve investors' principal.
INVESTMENT STRATEGIES
The Fund invests primarily in short-term bonds issued by U.S. government
agencies, most of which are not backed by the full faith and credit of the U.S.
government. The Fund will maintain a dollar-weighted average maturity of between
one and three years. For more information on investment strategies, see pages
22-23.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally high for short-term bonds.
. Interest rate risk, which is the chance that bond prices overall, including
the prices of bonds held by the Fund, will decline over short or even long
periods due to rising interest rates. Interest rate risk is generally low for
short-term bonds.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner. Credit risk, which has the potential to hurt
the Fund's performance, should be very low for the Fund.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
1989 11.34%
1990 9.31%
1991 12.24%
1992 6.19%
1993 7.00%
1994 -0.94%
1995 12.26%
1996 4.78%
1997 6.46%
1998 7.22%
- --------------------------------------------------------------------------------
The Fund's year-to-date return as of the quarter ended March 31, 1999 was
0.38%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 5.48% (quarter ended June 30, 1989) and the lowest return for a
quarter was -0.98% (quarter ended March 31, 1994).
- -------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- -------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- -------------------------------------------------------------------------------
Vanguard Short-Term Federal Fund 7.22% 5.87% 7.52%
Lehman Brothers 1-5 Year U.S. Government Bond Index 7.65 6.16 7.85
- -------------------------------------------------------------------------------
<PAGE>
5
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended January 31, 1999.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.23%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.27%
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$28 $87 $152 $343
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
Inception Date
December 31, 1987
Net Assets as of January 31, 1999
$1.64 billion
Suitable for IRAs
Yes
Minimum Initial Investment
$3,000; $1,000 for IRAs and custodial accounts for minors
Newspaper Abbreviation
STFed
Vanguard Fund Number
049
Cusip Number
922031604
Ticker Symbol
VSGBX
<PAGE>
6
Fund Profile--Vanguard Short-Term Corporate Fund
The following profile summarizes key features of Vanguard Short-Term Corporate
Fund.
INVESTMENT OBJECTIVE
The Fund is a bond fund that seeks to provide a high level of current income and
preserve investors' principal.
INVESTMENT STRATEGIES
The Fund invests in a variety of high-quality and, to a lesser extent,
medium-quality fixed-income securities, primarily short-term and
intermediate-term corporate bonds. High-quality bonds are those rated the
equivalent of "A3" or better by Moody's Investors Service, Inc. or another
independent rating agency; medium-quality bonds are those rated the equivalent
of Moody's "Baa1", "Baa2" or "Baa3". The Fund is permitted to invest in foreign
bonds to a limited extent, so long as they are denominated in U.S. dollars. The
Fund will maintain a dollar-weighted average maturity of between one and three
years. For more information on investment strategies, see pages 22-23.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally high for short-term bonds.
. Interest rate risk, which is the chance that bond prices overall, including
the prices of bonds held by the Fund, will decline over short or even long
periods due to rising interest rates. Interest rate risk is generally low for
short-term bonds.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner. Credit risk, which has the potential to hurt
the Fund's performance, should be low for the Fund.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
1989 11.45%
1990 9.23%
1991 13.08%
1992 7.20%
1993 7.07%
1994 -0.08%
1995 12.74%
1996 4.79%
1997 6.95%
1998 6.57%
- --------------------------------------------------------------------------------
The Fund's year-to-date return as of the quarter ended March 31, 1999 was
0.93%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 5.01% (quarter ended June 30, 1989) and the lowest return for a
quarter was -1.00% (quarter ended March 31, 1994).
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Vanguard Short-Term Corporate Fund 6.57% 6.11% 7.83%
Lehman Brothers 1-5 Year Investment Grade Debt Index 7.55 6.70 8.45
- --------------------------------------------------------------------------------
<PAGE>
7
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended January 31, 1999.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.23%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.27%
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$28 $87 $152 $343
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
Inception Date
October 29, 1982
Net Assets as of January 31, 1999
$5.53 billion (for Investor Shares)
Suitable for IRAs
Yes
Minimum Initial Investment
$3,000; $1,000 for IRAs and custodial accounts for minors
Newspaper Abbreviation
STCor
Vanguard Fund Number
039
Cusip Number
922031406
Ticker Symbol
VFSTX
<PAGE>
8
Fund Profile--Vanguard Intermediate-Term Treasury Fund
The following profile summarizes key features of Vanguard Intermediate-Term
Treasury Fund.
INVESTMENT OBJECTIVE
The Fund is a bond fund that seeks to provide a high level of current income and
preserve investors' principal.
INVESTMENT STRATEGIES
The Fund invests at least 85% of its total assets in intermediate-term bonds
whose interest and principal payments are backed by the full faith and credit of
the U.S. government. In addition, at least 65% of the Fund's total assets will
always be invested in U.S. Treasury securities. The Fund will maintain a
dollar-weighted average maturity of between five and ten years. For more
information on investment strategies, see pages 22-23.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally moderate for
intermediate-term bonds.
. Interest rate risk, which is the chance that bond prices overall, including
the prices of bonds held by the Fund, will decline over short or even long
periods due to rising interest rates. Interest rate risk is generally moderate
for intermediate-term bonds.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual returns for one and
five calendar years and since inception compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
1992 7.78%
1993 11.43%
1994 -4.33%
1995 20.44%
1996 1.92%
1997 8.96%
1998 10.61%
- --------------------------------------------------------------------------------
The Fund's year-to-date return as of the quarter ended March 31, 1999 was
- -1.87%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 7.23% (quarter ended June 30, 1995) and the lowest return for a
quarter was -3.60% (quarter ended March 31, 1994).
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years Since Inception*
- --------------------------------------------------------------------------------
Vanguard Intermediate-Term Treasury Fund 10.61% 7.19% 8.53%
Lehman Brothers 5-10 Year U.S. Treasury
Bond Index 11.57 7.53 9.05
- --------------------------------------------------------------------------------
*October 28, 1991.
- --------------------------------------------------------------------------------
<PAGE>
9
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended January 31, 1999.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.23%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.27%
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$28 $87 $152 $343
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
Inception Date
October 28, 1991
Net Assets as of January 31, 1999
$1.88 billion
Suitable for IRAs
Yes
Minimum Initial Investment
$3,000; $1,000 for IRAs and custodial accounts for minors
Newspaper Abbreviation
ITTsry
Vanguard Fund Number
035
Cusip Number
922031802
Ticker Symbol
VFITX
<PAGE>
10
Fund Profile--Vanguard Intermediate-Term Corporate Fund
The following profile summarizes key features of Vanguard Intermediate-Term
Corporate Fund.
INVESTMENT OBJECTIVE
The Fund is a bond fund that seeks to provide a high level of current income and
preserve investors' principal.
INVESTMENT STRATEGIES
The Fund invests in a variety of high-quality and, to a lesser extent,
medium-quality fixed-income securities, primarily short-term and
intermediate-term corporate bonds. High-quality bonds are those rated the
equivalent of "A3" or better by Moody's Investors Service, Inc. or another
independent rating agency; medium-quality bonds are those rated the equivalent
of Moody's "Baa1", "Baa2" or "Baa3". The Fund's assets will normally be invested
in a combination of investment-grade corporate bonds and securities of the U.S.
government and its agencies. The Fund is permitted to invest in foreign bonds to
a limited extent, so long as they are denominated in U.S. dollars. The Fund will
maintain a dollar-weighted average maturity of between five and ten years. For
more information on investment strategies, see pages 22-23.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally moderate for
intermediate-term bonds.
. Interest rate risk, which is the chance that bond prices overall, including
the prices of bonds held by the Fund, will decline over short or even long
periods due to rising interest rates. Interest rate risk is generally moderate
for intermediate-term bonds.
. Call risk, which is the chance that during periods of falling interest rates,
a bond issuer will "call"--or repay-- a higher-yielding bond before its
maturity date. Forced to reinvest the unanticipated proceeds at lower rates,
the Fund would experience a decline in income and lose the opportunity for
additional price appreciation associated with falling rates. Call risk is
generally moderate for intermediate-term bonds.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner. Credit risk, which has the potential to hurt
the Fund's performance, should be low for the Fund.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual returns for one and
five calendar years and since inception compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
1994 -4.20%
1995 21.39%
1996 2.78%
1997 8.93%
1998 8.30%
- --------------------------------------------------------------------------------
The Fund's year-to-date return as of the quarter ended March 31, 1999 was
- -0.73%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 7.20% (quarter ended June 30, 1995) and the lowest return for a
quarter was -3.41% (quarter ended March 31, 1994).
<PAGE>
11
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years Since Inception*
- --------------------------------------------------------------------------------
Vanguard Intermediate-Term Corporate Fund 8.30% 7.11% 6.92%
Lehman Brothers 5-10 Year Investment Grade
Debt Index 9.00 7.61 7.46
- --------------------------------------------------------------------------------
*November 1, 1993.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended January 31, 1999.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.23%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.27%
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$28 $87 $152 $343
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
Inception Date
November 1, 1993
Net Assets as of January 31, 1999
$1.23 billion
Suitable for IRAs
Yes
Minimum Initial Investment
$3,000; $1,000 for IRAs and custodial accounts for minors
Newspaper Abbreviation
ITCorp
Vanguard Fund Number
071
Cusip Number
922031885
Ticker Symbol
VFICX
<PAGE>
12
Fund Profile--Vanguard GNMA Fund
The following profile summarizes key features of Vanguard GNMA Fund.
INVESTMENT OBJECTIVE
The Fund is a bond fund that seeks to provide a high level of current income and
preserve investors' principal.
INVESTMENT STRATEGIES
The Fund invests at least 80% of its total assets in Government National
Mortgage Association (GNMA or "Ginnie Mae") pass-through certificates, which are
fixed-income securities representing part ownership in a pool of mortgage loans
backed by the U.S. government. The balance of the Fund's assets may be invested
in U.S. Treasury or other U.S. government agency securities, as well as
repurchase agreements collateralized by such securities. The Fund's average
maturity depends on homeowner prepayments of the underlying mortgages. While the
Fund does not observe specific maturity guidelines, the Fund's dollar-weighted
average maturity will normally fall within an intermediate-term range (5-10
years). For more information on investment strategies, see pages 22-23.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
. Prepayment risk, which is the chance that mortgage-backed bonds will be paid
off early due to homeowners refinancing their mortgages during periods of
falling interest rates. Forced to reinvest the unanticipated proceeds at lower
rates, the Fund would experience a decline in income and lose the opportunity
for additional price appreciation associated with falling rates. Prepayment
risk is high for the Fund.
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally moderate for
intermediate-term bonds.
. Interest rate risk, which is the chance that bond prices overall will decline
over short or even long periods due to rising interest rates. Also, declining
interest rates typically will not lift GNMA prices as much as the prices of
comparable bonds. This is because the market tends to discount GNMA prices for
prepayment risk when interest rates fall. Interest rate risk is generally
moderate for intermediate-term bonds.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
1989 14.77%
1990 10.32%
1991 16.77%
1992 6.85%
1993 5.90%
1994 -0.95%
1995 17.04%
1996 5.24%
1997 9.47%
1998 7.14%
- --------------------------------------------------------------------------------
The Fund's year-to-date return as of the quarter ended March 31, 1999 was
0.63%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 7.82% (quarter ended June 30, 1989) and the lowest return for a
quarter was -2.28% (quarter ended March 31, 1994).
<PAGE>
13
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Vanguard GNMA Fund 7.14% 7.43% 9.12%
Lehman Brothers GNMA Bond Index 6.93 7.34 9.25
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended January 31, 1999.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.26%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.30%
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$31 $97 $169 $381
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Wellington Management Company, LLP, Boston, Mass., since inception
Inception Date
June 27, 1980
Net Assets as of January 31, 1999
$11.35 billion
Suitable for IRAs
Yes
Minimum Initial Investment
$3,000; $1,000 for IRAs and custodial accounts for minors
Newspaper Abbreviation
GNMA
Vanguard Fund Number
036
Cusip Number
922031307
Ticker Symbol
VFIIX
<PAGE>
14
Fund Profile--Vanguard Long-Term Treasury Fund
The following profile summarizes key features of Vanguard Long-Term Treasury
Fund.
INVESTMENT OBJECTIVE
The Fund is a bond fund that seeks to provide a high level of current income and
preserve investors' principal.
INVESTMENT STRATEGIES
The Fund invests at least 85% of its total assets in long-term bonds whose
principal and interest payments are backed by the full faith and credit of the
U.S. government. In addition, at least 65% of the Fund's total assets will
always be invested in U.S. Treasury securities. The Fund will maintain a
dollar-weighted average maturity of between 15 and 30 years. For more
information on investment strategies, see pages 22-23.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
. Interest rate risk, which is the chance that bond prices overall, including
the prices of bonds held by the Fund, will decline over short or even long
periods due to rising interest rates. Interest rate risk is generally high for
long-term bonds.
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally low for long-term bonds.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
1989 17.93%
1990 5.78%
1991 17.43%
1992 7.40%
1993 16.79%
1994 -7.03%
1995 30.11%
1996 -1.25%
1997 13.90%
1998 13.05%
- --------------------------------------------------------------------------------
The Fund's year-to-date return as of the quarter ended March 31, 1999 was
- -4.15%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 12.20% (quarter ended June 30, 1989) and the lowest return for a
quarter was -6.85% (quarter ended March 31, 1996).
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Vanguard Long-Term Treasury Fund 13.05% 8.99% 10.95%
Lehman Brothers Long U.S. Treasury Bond Index 13.52 9.35 11.48
- --------------------------------------------------------------------------------
<PAGE>
15
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended January 31, 1999.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.23%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.27%
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$28 $87 $152 $343
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
Inception Date
May 19, 1986
Net Assets as of January 31, 1999
$1.45 billion
Suitable for IRAs
Yes
Minimum Initial Investment
$3,000; $1,000 for IRAs and custodial accounts for minors
Newspaper Abbreviation
LTTsry
Vanguard Fund Number
083
Cusip Number
922031505
Ticker Symbol
VUSTX
<PAGE>
16
Fund Profile--Vanguard Long-Term Corporate Fund
The following profile summarizes key features of Vanguard Long-Term Corporate
Fund.
INVESTMENT OBJECTIVE
The Fund is a bond fund that seeks to provide a high level of current income and
preserve investors' principal.
INVESTMENT STRATEGIES
The Fund invests in a variety of high- or upper-medium-quality and, to a lesser
extent, medium-quality fixed-income securities, primarily long-term corporate
bonds. High quality bonds are those rated the equivalent of "A3" or better by
Moody's Investors Service, Inc.; medium quality bonds are those rated the
equivalent of Moody's "Baa1", "Baa2" or "Baa3". The Fund is permitted to invest
in foreign bonds to a limited extent, so long as they are denominated in U.S.
dollars. The Fund's dollar-weighted average maturity is expected to range
between 15 and 25 years. For more information on investment strategies, see
pages 22-23.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
. Interest rate risk, which is the chance that bond prices overall, including
the prices of bonds held by the Fund, will decline over short or even long
periods due to rising interest rates. Interest rate risk is generally high for
long-term bonds.
. Call risk, which is the chance that during periods of falling interest rates,
a bond issuer will "call"--or repay--a higher-yielding bond before its
maturity date. Forced to reinvest the unanticipated proceeds at lower rates,
the Fund would experience a decline in income and lose the opportunity for
additional price appreciation associated with falling rates. Call risk is
generally moderate for long-term bonds.
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally low for long-term bonds.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner. Credit risk, which has the potential to hurt
the Fund's performance, should be low for the Fund.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
1989 15.18%
1990 6.21%
1991 20.90%
1992 9.78%
1993 14.49%
1994 -5.30%
1995 26.40%
1996 1.20%
1997 13.79%
1998 9.21%
- --------------------------------------------------------------------------------
The Fund's year-to-date return as of the quarter ended March 31, 1999 was
- -2.12%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 9.56% (quarter ended June 30, 1989) and the lowest return for a
quarter was -4.68% (quarter ended March 31, 1996).
<PAGE>
17
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Vanguard Long-Term Corporate Fund 9.21% 8.53% 10.84%
Lehman Brothers Long Corporate AA or
Better Bond Index 10.52 8.73 10.72
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended January 31, 1999.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.27%
12b-1 Distribution Fees: None
Other Expenses: 0.03%
Total Annual Fund Operating Expenses: 0.30%
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$31 $97 $169 $381
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Wellington Management Company, LLP, Boston, Mass., since inception
Inception Date
July 9, 1973
Net Assets as of January 31, 1999
$4.23 billion
Suitable for IRAs
Yes
Minimum Initial Investment
$3,000; $1,000 for IRAs and custodial accounts for minors
Newspaper Abbreviation
LTCorp
Vanguard Fund Number
028
Cusip Number
922031109
Ticker Symbol
VWESX
<PAGE>
18
More on the Funds
The following sections discuss other important features of the Funds, including
additional risk information, investment strategies, costs and market timing, and
turnover rate. Note that the investment objective of each Fund is not
fundamental, and may be changed without a shareholder vote.
Additional Risk Information
Because the Funds invest primarily in bonds, they are subject to certain risks.
PLAIN TALK ABOUT
Bonds and Interest Rates
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--causing you to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you should be able to sell your 5% bond for more than you
paid.
The Difference with GNMAs: In general, declining interest rates will not lift
GNMA prices as much as the prices of comparable bonds. Why? Because when
interest rates fall, the bond market tends to discount GNMA prices for
prepayment risk--the possibility that homeowners will refinance their mortgages
at lower rates and cause GNMAs to be paid off prior to maturity. In part to
compensate for this "drag" on price, GNMAs tend to offer higher yields than
other bonds of comparable credit quality and maturity.
[GRAPHIC APPEARS HERE] The Funds are subject--in varying degrees--to interest
rate risk, which is the possibility that bond prices overall will decline over
short or even long periods due to rising interest rates. Interest rate risk
should be low for short-term bonds, moderate for intermediate-term bonds, and
high for long-term bonds.
Changes in interest rates will affect bond income as well as bond prices.
[GRAPHIC APPEARS HERE] The Funds are subject--in varying degrees--to income
risk, which is the possibility that a Fund's dividends (income) will decline due
to falling interest rates. Income risk is generally higher for short-term bonds
and lower for long-term bonds.
In the past, bond investors--even Treasury bond investors--have seen the
value of their investment rise and fall--sometimes significantly--with changes
in interest rates. Between December 1976 and September 1981, for instance,
rising interest rates caused long-term bond prices to fall by almost 48%.
Because each Fund invests mainly in bonds, changes in interest rates will
impact, to varying degrees, the value of the Funds' assets. To illustrate how
much of an impact, the following table shows the effect of a 2% change (both up
and down) in interest rates on three bonds with a face value of $1,000; each has
a different maturity.
- --------------------------------------------------------------------------------
How Interest Rate Changes Affect Bonds*
- --------------------------------------------------------------------------------
Value of a $1,000 Bond Value of a $1,000 Bond
After a 2% Increase After a 2% Decrease
Type of Bond (Maturity) in Interest Rates in Interest Rates
- --------------------------------------------------------------------------------
Short-Term (2.5 years) $956 $1,046
Intermediate-Term (10 years) 870 1,156
Long-Term (20 years) 816 1,251
- --------------------------------------------------------------------------------
*Assuming a 7% yield.
- --------------------------------------------------------------------------------
These figures are for illustration only; you should not regard them as an
indication of future returns from the bond market as a whole or any Fund in
particular.
<PAGE>
19
PLAIN TALK ABOUT
Bond Maturities
A bond is issued with a specific maturity date--the date when the bond's issuer,
or seller, must pay back the bond's initial value (known as its "face value").
Bond maturities generally range from less than one year (short-term) to 30 years
(long-term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise--but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks in hope of higher yields; short-term bond investors should be willing to
accept lower yields in return for less fluctuation in the value of their
investment.
While falling interest rates tend to strengthen bond prices, they can cause
other sorts of problems for bond fund investors--bond calls and prepayments.
[GRAPHIC APPEARS HERE] Because they invest in bonds that are callable, the
Funds are subject to call risk, which is the possibility that during
periods of falling interest rates, a bond issuer will "call"--or repay--a
higher-yielding bond before its maturity date. Forced to reinvest the
unanticipated proceeds at lower interest rates, a Fund would experience a
decline in income and lose the opportunity for additional price appreciation
associated with falling rates.
Call risk is generally moderate for longer-term bonds, and consequently for
the Intermediate-Term and Long-Term Corporate Funds. Call risk is low for the
short-term Funds.
PLAIN TALK ABOUT
Callable Bonds
Although bonds are issued with clearly defined maturities, a bond issuer may be
able to redeem, or call, a bond earlier than its maturity date. The bondholder
must now replace the called bond with a bond that may have a lower yield than
the original. One way for bond investors to protect themselves against call risk
is to purchase a bond early in its lifetime, long before its call date. The
other way is to buy bonds with low coupons, which makes them less likely to be
called.
[GRAPHIC APPEARS HERE] Because it invests in mortgage-backed securities, the
GNMA Fund is subject to prepayment risk, which is the possibility that mortgage-
backed bonds will be paid off early due to homeowners refinancing their
mortgages during periods of falling interest rates. Forced to reinvest the
unanticipated proceeds at lower rates, the Fund would experience a decline in
income and lose the opportunity for additional price appreciation associated
with falling rates.
Since the GNMA Fund invests most of its assets in mortgage-backed bonds, the
prepayment risk to the Fund is high.
[GRAPHIC APPEARS HERE] The Funds are subject--in varying degrees--to credit
risk, which is the possibility that a bond issuer will fail to pay interest and
principal in a timely manner.
PLAIN TALK ABOUT
Credit Quality
A bond's credit quality depends on the issuer's ability to pay interest on the
bond and, ultimately, to repay the debt. The lower the rating by one of the
independent bond-rating agencies (for example, Moody's or Standard & Poor's),
the greater the chance (in the rating agency's opinion) that the bond issuer
will default, or fail to meet its payment obligations. All things being equal,
the lower a bond's credit rating, the higher its yield should be to compensate
investors for assuming additional risk. Bonds rated in one of the four highest
rating categories are considered "investment grade." The Funds' Statement of
Additional Information includes a detailed description of the credit-rating
scales used by major, independent bond-rating agencies.
<PAGE>
20
The credit quality of each Fund depends on the quality of its investments. In
absolute terms, the average credit quality of each Fund's holdings is high or
upper-medium. In relative terms, the Short-Term Treasury, Intermediate-Term
Treasury, and Long-Term Treasury Funds (which invest primarily in securities
backed by the full faith and credit of the U.S. government) offer the lowest
credit risk--and generally the lowest yields--of the Funds. The dollar-weighted
average credit quality of each Fund's holdings as rated by Moody's Investors
Service, as of January 31, 1999, follow:
- --------------------------------------------------------------------------------
Fund Average Quality
- --------------------------------------------------------------------------------
Short-Term Treasury Treasury
Short-Term Federal Agency
Short-Term Corporate A1
Intermediate-Term Treasury Treasury
Intermediate-Term Corporate A1
GNMA Treasury
Long-Term Treasury Treasury
Long-Term Corporate Aa3
- --------------------------------------------------------------------------------
The following table details the Funds' credit quality policies, and
illustrates the comparative credit risk encountered by an investor in each Fund.
Note that the Funds apply these policies at the time of investment. The Funds
may continue to hold bonds that have been downgraded after purchase, even if
they are no longer eligible for purchase by a Fund.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Credit Ratings of the Funds' Investments (Percentage of Fund Assets)
- --------------------------------------------------------------------------------------------
Issued
or Backed High
by U.S. Gov't, or Highest Upper Speculative
its Agencies and Quality Medium Medium or Lower
Fund Instrumentalities (non-Gov't) Quality Quality Quality
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Short-Term Treasury 100% 0% 0% 0% 0%
- --------------------------------------------------------------------------------------------
Short-Term Federal 100% 0% 0% 0% 0%
- --------------------------------------------------------------------------------------------
Short-Term Corporate No more 0%
----At least 70%----
than 30%
- --------------------------------------------------------------------------------------------
Intermediate-Term Treasury 100% 0% 0% 0% 0%
- --------------------------------------------------------------------------------------------
Intermediate-Term Corporate No more 0%
----At least 70%----
than 30%
- --------------------------------------------------------------------------------------------
GNMA 100% 0% 0% 0% 0%
- --------------------------------------------------------------------------------------------
Long-Term Treasury 100% 0% 0% 0% 0%
- --------------------------------------------------------------------------------------------
Long-Term Corporate No more 0%
----At least 70%----
than 30%
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
21
PLAIN TALK ABOUT
Types of Bonds
Bonds are issued (sold) by many sources: Corporations issue corporate bonds; the
federal government issues U.S. Treasury bonds; agencies of the federal
government issue agency bonds; and mortgage holders issue "mortgage-backed"
pass-through certificates such as those of the Government National Mortgage
Association (GNMAs). Each issuer is responsible for paying back the bond's
initial value as well as making periodic interest payments.
Each of the Corporate Funds may invest no more than 30% of its assets in
medium-quality bonds, preferred stocks, and convertible securities.
To a limited extent, the Corporate Funds are also exposed to event risk, which
is the possibility that corporate fixed-income securities held by these Funds
may suffer a substantial decline in credit quality and market value due to a
corporate restructuring.
The Funds are generally managed without regard to tax ramifications.
[GRAPHIC The Funds are subject to manager risk, which is the possibility that
APPEARS a Fund's adviser will do a poor job of selecting securities.
HERE]
To help you distinguish between the Funds and their various risks, a summary
table is provided below.
- --------------------------------------------------------------------------------
Risks of the Funds
- --------------------------------------------------------------------------------
Prepayment/
Income Interest Call Credit
Fund Risk Rate Risk Risk Risk
- --------------------------------------------------------------------------------
Short-Term Treasury High Low Low Negligible
Short-Term Federal High Low Low Very Low
Short-Term Corporate High Low Low Low
Intermediate-Term Treasury Moderate Moderate Low Negligible
Intermediate-Term Corporate Moderate Moderate Moderate Low
GNMA Moderate Moderate High Negligible
Long-Term Treasury Low High Low Negligible
Long-Term Corporate Low High Moderate Low
- --------------------------------------------------------------------------------
<PAGE>
22
Investment Strategies
The grid below shows, at a glance, the types of financial instruments that may
be purchased by each Fund. Explanations of each type of financial instrument
follow the grid.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Short-, Intermediate-, Short-, Intermediate-,
and Long-Term Short-Term and Long-Term GNMA
Treasury Funds Federal Fund Corporate Funds Fund
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Debt .
- --------------------------------------------------------------------------------------
U.S. Government &
Agency Bonds . . . .
- --------------------------------------------------------------------------------------
State & Municipal Bonds .
- --------------------------------------------------------------------------------------
Cash Reserves .* .* . .*
- --------------------------------------------------------------------------------------
Futures, Options, and
Other Derivatives . . . .
- --------------------------------------------------------------------------------------
Asset-Backed Securities . .
- --------------------------------------------------------------------------------------
International
Dollar-Denominated Bonds .
- --------------------------------------------------------------------------------------
Preferred Stocks .
- --------------------------------------------------------------------------------------
Convertible Securities .
- --------------------------------------------------------------------------------------
Collateralized Mortgage
Obligations (CMOs) . . . .
- --------------------------------------------------------------------------------------
Restricted or Illiquid
Securities . . . .
- --------------------------------------------------------------------------------------
*Repurchase agreements only.
- --------------------------------------------------------------------------------------
</TABLE>
. Corporate debt. As the name implies, corporate debt obligations--usually
called bonds--represent loans by an investor to a corporation.
. U.S. government and agency bonds. These bonds represent loans by an investor
to the U.S. Treasury Department or a wide variety of governmental agencies and
instrumentalities. Timely payment of principal and interest on U.S. Treasury
bonds is always guaranteed by the full faith and credit of the U.S.
government; many (but not all) agency bonds have the same guarantee.
. State and municipal bonds. These bonds represent loans by an investor to a
state or municipal government, or one of their agencies or instrumentalities.
. Cash reserves. This blanket term describes a variety of short-term
fixed-income investments, including money market instruments, commercial
paper, bank certificates of deposit, banker's acceptances, and repurchase
agreements. Repurchase agreements represent short-term (normally overnight)
loans by a Fund to commercial banks or large securities dealers. The Treasury
Funds, the GNMA Fund, and the Short-Term Federal Fund may invest only in
repurchase agreements that are collateralized by U.S. Treasury or U.S.
government agency securities.
. Futures, options, and other derivatives. Each Fund may invest up to 20% of its
total assets in bond futures contracts, options, credit swaps, interest rate
swaps, and other types of derivatives. (As a practical matter, the limit is
15% for the Treasury Funds, because they must invest at least 85% of their
total assets in U.S. government securities.) Losses (or gains) involving
futures contracts can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. Similar
<PAGE>
23
risks exist for other types of derivatives. For this reason, the Funds will
not use futures, options, or other derivatives for speculative purposes or as
leveraged investments that magnify the gains or losses of an investment.
The reasons for which a Fund will invest in futures and options are:
-- To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in bonds.
-- To reduce the Fund's transaction costs, for hedging purposes, or to add
value when these instruments are favorably priced.
. Asset-backed securities. These bonds represent partial ownership
in pools of consumer or commercial loans--most often credit card, automobile,
or trade receivables. Asset-backed securities are issued by entities formed
solely for that purpose, but their value ultimately depends on repayments by
underlying borrowers. A primary risk of asset-backed securities is that their
maturity is difficult to predict and driven by borrowers' prepayments.
. International dollar-denominated bonds. The Corporate Funds may invest in
bonds of foreign issuers, so long as they are denominated in U.S. dollars. To
the extent that it owns foreign bonds, a Fund is subject to country risk,
which is the possibility that political events (such as war), financial
problems (such as government default), or natural disasters (such as an
earthquake) will weaken a country's economy and cause investments in that
country to lose money. Because the bond's value is designated in dollars
rather than the currency of the issuer's country, the investor is not exposed
to currency risk; rather, the issuer assumes that risk, usually in order to
attract U.S. investors.
. Preferred stocks. Holders of preferred stocks receive set dividends from
the issuer. Their claim on the issuer's income and assets ranks before that of
common stock holders, but after that of bond holders.
. Convertible securities. Bonds or preferred stocks that are convertible into,
or exchangeable for, common stocks are known as convertible securities.
. Collateralized mortgage obligations (CMOs). CMOs are special bonds that are
collateralized by mortgages or mortgage pass-through securities. In a CMO
deal, cash flow rights on underlying mortgages--the rights to receive
principal and interest payments--are divided up and prioritized to create
short-, intermediate-, and long-term bonds. CMOs rely on assumptions about the
timing of cash flows on the underlying mortgages, including expected
prepayment rates. The primary risk of a CMO is that these assumptions are
wrong, which would either shorten or lengthen the bond's maturity. Each Fund
will invest only in CMOs that are believed consistent with its maturity and
credit quality standards.
. Restricted or illiquid securities. Restricted securities are privately placed
securities that, pursuant to the rules of the Securities and Exchange
Commission, generally can only be sold to qualified institutional buyers.
Because these securities can in turn be resold only to qualified institutional
investors, they may be considered illiquid securities--that is, they could be
difficult for the Funds to convert to cash, if needed. A Fund will not invest
more than 15% of its net assets in illiquid securities. The Funds' Board of
Trustees may, from time to time, determine that certain restricted securities
are liquid; such securities would not be subject to the 15% limitation. In
other words, the Funds may invest in restricted securities that are deemed to
be liquid securities without limit.
The Funds may, from time to time, take temporary defensive measures--such as
holding cash reserves without limit--that are inconsistent with the Funds'
primary investment strategies, in response to adverse market, economic,
political, or other conditions. In taking such measures, a Fund may not achieve
its investment objective.
PLAIN TALK ABOUT
Derivatives
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some forms
of derivatives, such as exchange-traded futures and options on securities,
commodities, or indices, have been trading on regulated exchanges for more than
two decades. These types of derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. It is these characteristics that differentiate these futures and options
from other types of derivatives that may be more specialized or complex. If used
for speculation or as leveraged investments, derivatives can carry considerable
risks.
<PAGE>
24
PLAIN TALK ABOUT
The Costs of Investing
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the buying and selling of securities by the fund. These
costs can erode a substantial portion of the gross income or capital
appreciation a fund achieves. Even seemingly small differences in expenses can,
over time, have a dramatic effect on a fund's performance.
PLAIN TALK ABOUT
Turnover Rate
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes.
PLAIN TALK ABOUT
Vanguard's Unique Corporate Structure
The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
Costs and Market-Timing
Some investors try to profit from a strategy called market-timing-- switching
money into investments when they expect prices to rise, and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Although several of the Bond Funds are suitable for investors' short-term needs,
the Funds discourage market-timing, and therefore have adopted the following
policies, among others, to discourage short-term trading:
. Each Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected because
of the timing of the request or because of a history of excessive trading by
the investor.
. There is a limit on the number of times you can exchange into and out of a
Fund (see "Redeeming Shares" in the Investing with Vanguard section).
. Each Fund reserves the right to stop offering shares at any time.
The Vanguard funds do not permit market-timing. Do not invest in these Funds
if you are a market-timer.
Turnover Rate
Although the Funds generally seek to invest for the long term, each may sell
securities regardless of how long the securities have been held. A Fund may sell
securities based on the adviser's determination that securities with relatively
greater value are available for purchase by the Fund, or to raise cash.
Shorter-term bonds will mature or be sold, and need to be replaced, more
frequently than longer-term bonds. As a result, shorter-term bond funds may have
higher turnover rates than longer-term bond funds.
The Funds and Vanguard
The Funds are part of Vanguard Fixed Income Securities Funds, a member of The
Vanguard Group. Vanguard is a family of more than 35 investment companies with
more than 100 distinct investment portfolios holding assets worth more than $480
billion. All of the Vanguard funds share in the expenses associated with
business operations, such as personnel, office space, equipment, and
advertising.
<PAGE>
25
Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 distribution fees, each fund pays its
allocated share of The Vanguard Group's marketing costs.
Investment Advisers
Two investment advisers manage the Funds, subject to the control of the Funds'
Trustees and officers.
Wellington Management Company, LLP (WMC), 75 State Street, Boston, MA 02109,
manages the GNMA and Long-Term Corporate Funds for a quarterly fee, which is
based on certain annual percentage rates applied to the Funds' average month-end
assets for the quarter. WMC was founded in 1928, and currently manages more than
$214 billion in stock and bond portfolios, including 14 Vanguard Funds.
Vanguard Fixed Income Group (the Group), P.O. Box 2600, Valley Forge, PA
19482, manages the remaining Funds offered in this prospectus on an at-cost
basis. As of January 31, 1999, the Group managed more than $130 billion in total
assets.
For the fiscal year ended January 31, 1999, the Funds' investment advisory
expenses were as follows:
- --------------------------------------------------------------------------------
Effective Annual Rate
Fund as a Percentage of Average Net Assets
- --------------------------------------------------------------------------------
Short-Term Treasury 0.01%
Short-Term Federal 0.01
Short-Term Corporate 0.01
Intermediate-Term Treasury 0.01
Intermediate-Term Corporate 0.01
GNMA 0.01
Long-Term Treasury 0.01
Long-Term Corporate 0.03
- --------------------------------------------------------------------------------
The Funds have authorized their advisers to choose brokers or dealers to
handle the purchase and sale of securities for the Funds, and to get the best
available price and most favorable execution from these brokers or dealers with
respect to all transactions. Also, the Funds may direct the advisers to use a
particular broker for certain transactions in exchange for commission rebates or
research services provided to the Funds.
PLAIN TALK ABOUT
The Funds' Advisers
The individuals primarily responsible for the Short-Term Treasury, Short-Term
Federal, Short-Term Corporate, Intermediate-Term Treasury, Intermediate-Term
Corporate, and Long-Term Treasury Funds are:
Ian A. MacKinnon, Managing Director of Vanguard; has worked in investment
management since 1974; primary responsibility for Vanguard's internal
fixed-income policies and strategy since 1981; B.A., Lafayette College; M.B.A.,
Pennsylvania State University.
Robert F. Auwaerter, Principal of Vanguard and Fund Manager of the
Intermediate-Term Treasury, Intermediate-Term Corporate, and Long-Term Treasury
Funds since their inception and the Short-Term Corporate Fund since 1983; has
worked in investment management since 1978; has managed portfolio investments
since 1979; with Vanguard since 1981; B.S., University of Pennsylvania; M.B.A.,
Northwestern University.
John W. Hollyer, Principal of Vanguard and Fund Manager of the Short-Term
Treasury Fund since 1998 and Short-Term Federal Fund since 1996; has worked in
investment management since 1987; has managed portfolio investments since
joining Vanguard in 1989; B.S., University of Pennsylvania.
The individuals primarily responsible for managing the GNMA and Long-Term
Corporate Funds are:
Paul D. Kaplan, Senior Vice President and partner of WMC, and Fund Manager of
the GNMA Fund since 1994; has worked in investment management since 1974; with
WMC since 1978; B.A., Dickinson College; M.S., The Sloan School of Management,
Massachusetts Institute of Technology.
Earl E. McEvoy, Senior Vice President and partner of WMC, and Fund Manager of
the Long-Term Corporate Fund since 1994; has worked in investment management
since 1972; with WMC since 1978; B.A., Dartmouth College; M.B.A., Columbia
Business School.
<PAGE>
26
The Board of Trustees may, without prior approval from shareholders, change
the terms of the advisory agreements or hire new investment advisers, either as
replacements for WMC or the Group, or as additional advisers. However, any such
change will be communicated to shareholders in writing.
Year 2000 Challenge
The common practice in computer programming of using just two digits to identify
a year has resulted in the Year 2000 challenge throughout the information
technology industry. If unchanged, many computer applications and systems could
misinterpret dates occurring after December 31, 1999, leading to errors or
failure. Such failure could adversely affect a fund's operations, including
pricing, securities trading, and the servicing of shareholder accounts.
The Vanguard Group is dedicated to providing uninterrupted, high-quality
performance from our computer systems before, during, and after 2000. In July
1998, we completed the renovation and initial testing of our internal systems.
Vanguard is diligently working with external partners, suppliers, and vendors,
including fund managers and other service providers, to assure that the systems
with which we interact remain operational at all times.
In addition to taking every reasonable step to secure our internal systems and
external relationships, Vanguard is further developing contingency plans
intended to assure that unexpected systems failures will not adversely affect
the Funds' operations. Vanguard intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternate solutions if
necessary.
However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on a Fund's business,
operations, or financial condition. Additionally, a Fund's performance could be
hurt if a computer-system failure at a company or governmental unit affects the
price of securities the Fund owns.
PLAIN TALK ABOUT
Distributions
As a shareholder, you are entitled to your share of the fund's income from
interest, and gains from the sale of investments. You receive such earnings as
either an income dividend or a capital gains distribution. Income dividends come
from interest the fund earns from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term depending
on whether the fund held the securities for less than or more than one year.
Dividends, Capital Gains, and Taxes
As a shareholder, you are entitled to your share of a Fund's net income
(interest and gains less expenses). The Funds' income dividends accrue daily and
are distributed monthly; capital gains distributions, if any, generally occur in
December. In addition, the Funds may occasionally be required to make
supplemental capital gains distributions at some other time during the year. You
can receive distributions of income or capital gains in cash, or you can have
them automatically invested in more shares of the Funds. In either case, these
distributions are taxable to you. It is important to note that distributions of
dividends and capital gains that are declared in December--if paid to you by the
end of January--are taxed as if they had been paid to you in December.
Vanguard will send you a statement each year showing the tax status of all
your distributions. If you have chosen to receive dividend and/or capital gains
distributions in cash, and the postal or other delivery service is unable to
deliver checks to your address of record, we will change the distribution option
so that all dividends and other distributions are automatically invested in
additional shares. We will not pay interest on uncashed distribution checks.
. The dividends and short-term capital gains that you receive are taxable to you
as ordinary income for tax purposes.
. Any distributions of net long-term capital gains by a Fund are taxable to you
as long-term capital gains, no matter how long you've owned shares in the
Fund.
. Although the Funds do not seek to realize any particular amount of capital
gains during a year, such gains are realized from time to time as by-products
of their ordinary investment activities. Consequently, distributions may vary
considerably from year to year.
<PAGE>
27
PLAIN TALK ABOUT
"Buying a Capital Gain"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), it is not to your advantage to buy shares of a fund shortly before it
makes a capital gains distribution, because doing so can cost you money in
taxes. This is known as "buying a capital gain." For example: On January 15, you
invest $5,000, buying 250 shares for $20 each. If the fund pays a capital gains
distribution of $1 per share on January 16, its share price would drop to $19
(not counting market change). You still have only $5,000 (250 shares x $19 =
$4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you
owe tax on the $250 distribution you received--even if you reinvest it in more
shares. To avoid "buying a capital gain," check a fund's distribution schedule
before you invest.
. A sale or exchange of Fund shares is a taxable event. This means that you may
have a capital gain to report as income, or a capital loss to report as a
deduction, when you complete your federal income tax return.
. Distributions of dividends or capital gains, and capital gains or losses from
your sale or exchange of Fund shares, may be subject to state and local income
taxes as well. Many states, however, grant tax-free status to dividends paid
from interest earned on direct securities of the U.S. government, subject in
some states to minimum investment requirements that must be met by a Fund.
GNMA securities, repurchase agreements collateralized by U.S. government
securities, and certain other securities generally do not qualify for tax-free
treatment.
The tax information in this prospectus is provided as general information and
will not apply to you if you are investing through a tax-deferred account such
as an IRA or a qualified employee benefit plan. Non-U.S. investors may be
subject to U.S. withholding and estate tax. You should consult your tax adviser
about the tax consequences of an investment in any of the Funds.
Important Note: By law, each Fund must withhold 31% of your taxable
distributions and any redemption proceeds if you do not provide your correct
taxpayer identification number, or certify that it is correct, or if the IRS
instructs the Fund to do so.
Share Price
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of trading on the New York Stock Exchange (the NAV
is not calculated on holidays or other days the Exchange is closed). For each of
the Funds except the Short-Term Corporate Fund, net asset value per share is
computed by adding up the total value of the Fund's investments and other
assets, subtracting any of its liabilities (debts), and then dividing by the
number of Fund shares outstanding:
Total Assets - Liabilities
Net Asset Value = -------------------------------------------
Number of Shares Outstanding
Net asset value per share for the Short-Term Corporate Fund is computed in a
similar way, by dividing the net assets attributed to each class by the number
of Fund shares outstanding for each class.
Knowing the daily net asset value is useful to you as a shareholder because it
indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A Note on Pricing: Each Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Funds' Board of Trustees.
Each Fund's share price can be found daily in the mutual fund listings of most
major newspapers under the heading "Vanguard Funds." Different newspapers use
different abbreviations for each Fund, but the most common are STTsry, STFed,
STCor, ITTsry, ITCorp, GNMA, LTTsry, and LTCorp.
<PAGE>
28
PLAIN TALK ABOUT
How to Read the Financial Highlights Table
This explanation uses the Short-Term Treasury Fund as an example. The Fund
began fiscal 1999 with a net asset value (price) of $10.27 per share. During the
period, the Fund earned $.545 per share from investment income (interest) and
$.122 per share from investments that had appreciated in value or that were sold
for higher prices than the Fund paid for them.
Shareholders received $.567 per share in the form of dividend and capital
gains distributions. A portion of each year's capital gains distributions may
come from the prior year's capital gains.
The earnings ($.667 per share) minus the distributions ($.567 per share)
resulted in a share price of $10.37 at the end of the year. This was an increase
of $.10 per share (from $10.27 at the beginning of the year to $10.37 at the end
of the year). For a shareholder who reinvested the distributions in the purchase
of more shares, the total return from the Fund was 6.66% for the year.
As of January 31, 1999, the Fund had $1.20 billion in net assets. For the
year, its expense ratio was 0.27% ($2.70 per $1,000 of net assets); and its net
investment income amounted to 5.27% of its average net assets. It sold and
replaced securities valued at 132% of its net assets.
Financial Highlights
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years, and certain
information reflects financial results for a single Fund share in each case. The
total returns in each table represent the rate that an investor would have
earned or lost each year on an investment in the Fund (assuming reinvestment of
all dividends and capital gains distributions). This information has been
derived from the financial statements audited by PricewaterhouseCoopers LLP,
independent accountants, whose report-- along with each Fund's financial
statements--is included in the Funds' most recent annual report to shareholders.
You may have the annual report sent to you without charge by contacting
Vanguard.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Vanguard Short-Term Treasury Fund
Year Ended January 31,
-------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.27 $10.16 $10.36 $ 9.89 $10.41
- ----------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .545 .590 .586 .625 .532
Net Realized and Unrealized Gain
(Loss) on Investments .122 .110 (.200) .470 (.500)
-------------------------------------------------
Total from Investment Operations .667 .700 .386 1.095 .032
-------------------------------------------------
Distributions
Dividends from Net Investment Income (.545) (.590) (.586) (.625) (.532)
Distributions from Realized Capital Gains (.022) -- -- -- (.020)
-------------------------------------------------
Total Distributions (.567) (.590) (.586) (.625) (.552)
- ----------------------------------------------------------------------------------------------
Net Asset Value, End of Year $10.37 $10.27 $10.16 $10.36 $ 9.89
==============================================================================================
Total Return 6.66% 7.11% 3.89% 11.37% 0.40%
==============================================================================================
Ratios/Supplemental Data
Net Assets, End of Year (Millions) $1,197 $1,009 $ 970 $ 919 $ 754
Ratio of Total Expenses to
Average Net Assets 0.27% 0.27% 0.25% 0.27% 0.28%
Ratio of Net Investment Income to
Average Net Assets 5.27% 5.80% 5.77% 6.14% 5.33%
Turnover Rate 132% 83% 86% 93% 126%
==============================================================================================
</TABLE>
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a measure of past dividend income. Total return includes both
past dividend income (assuming that it has been reinvested) plus realized and
unrealized capital appreciation (or depreciation). Neither yield nor total
return should be used to predict the future performance of a fund.
<PAGE>
29
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Vanguard Short-Term Federal Fund
Year Ended January 31,
----------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.19 $10.11 $10.28 $ 9.79 $ 10.38
- ---------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .581 .611 .615 .601 .550
Net Realized and Unrealized Gain (Loss) on Investments .070 .080 (.170) .490 (.580)
----------------------------------------------------
Total from Investment Operations .651 .691 .445 1.091 (.030)
----------------------------------------------------
Distributions
Dividends from Net Investment Income (.581) (.611) (.615) (.601) (.550)
Distributions from Realized Capital Gains -- -- -- -- (.010)
----------------------------------------------------
Total Distributions (.581) (.611) (.615) (.601) (.560)
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $10.26 $10.19 $10.11 $10.28 $ 9.79
===============================================================================================================
Total Return 6.57% 7.06% 4.51% 11.43% -0.21%
===============================================================================================================
Ratios/Supplemental Data
Net Assets, End of Year (Millions) $1,644 $1,460 $1,348 $1,402 $ 1,474
Ratio of Total Expenses to Average Net Assets 0.27% 0.27% 0.25% 0.27% 0.28%
Ratio of Net Investment Income to Average Net Assets 5.68% 6.04% 6.09% 5.93% 5.53%
Turnover Rate 107% 94% 57% 74% 57%
===============================================================================================================
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Vanguard Short-Term Corporate Fund
Year Ended January 31,
----------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $10.87 $10.75 $10.94 $10.40 $ 10.94
- ---------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .660 .664 .663 .671 .596
Net Realized and Unrealized Gain (Loss) on Investments (.010) .120 (.190) .540 (.540)
----------------------------------------------------
Total from Investment Operations .650 .784 .473 1.211 .056
----------------------------------------------------
Distributions
Dividends from Net Investment Income (.660) (.664) (.663) (.671) (.596)
Distributions from Realized Capital Gains -- -- -- -- --
----------------------------------------------------
Total Distributions (.660) (.664) (.663) (.671) (.596)
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $10.86 $10.87 $10.75 $10.94 $ 10.40
===============================================================================================================
Total Return 6.16% 7.53% 4.52% 11.95% 0.60%
===============================================================================================================
Ratios/Supplemental Data
Net Assets, End of Year (Millions) $5,529 $4,709 $4,531 $3,873 $ 2,924
Ratio of Total Expenses to Average Net Assets 0.27% 0.28% 0.25% 0.27% 0.28%
Ratio of Net Investment Income to Average Net Assets 6.08% 6.17% 6.18% 6.23% 5.66%
Turnover Rate 46% 45% 45% 62% 69%
===============================================================================================================
</TABLE>
<PAGE>
30
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Vanguard Intermediate-Term Treasury Fund
Year Ended January 31,
----------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.80 $10.37 $10.90 $ 9.76 $ 10.82
- ---------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .630 .647 .649 .662 .603
Net Realized and Unrealized Gain (Loss) on Investments .360 .430 (.530) 1.140 (1.033)
----------------------------------------------------
Total from Investment Operations .990 1.077 .119 1.802 (.430)
----------------------------------------------------
Distributions
Dividends from Net Investment Income (.630) (.647) (.649) (.662) (.603)
Distributions from Realized Capital Gains -- -- -- -- (.027)
----------------------------------------------------
Total Distributions (.630) (.647) (.649) (.662) (.630)
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $11.16 $10.80 $10.37 $10.90 $ 9.76
===============================================================================================================
Total Return 9.44% 10.78% 1.28% 18.96% -3.90%
===============================================================================================================
Ratios/Supplemental Data
Net Assets, End of Year (Millions) $1,876 $1,595 $1,279 $1,226 $ 848
Ratio of Total Expenses to Average Net Assets 0.27% 0.27% 0.25% 0.28% 0.28%
Ratio of Net Investment Income to Average Net Assets 5.76% 6.19% 6.26% 6.34% 6.05%
Turnover Rate 63% 30% 42% 56% 128%
===============================================================================================================
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Vanguard Intermediate-Term Corporate Fund
Year Ended January 31,
----------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.03 $ 9.72 $10.17 $ 9.07 $ 10.04
- ---------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .627 .638 .639 .658 .587
Net Realized and Unrealized Gain (Loss) on Investments .122 .321 (.430) 1.100 (.970)
----------------------------------------------------
Total from Investment Operations .749 .959 .209 1.758 (.383)
----------------------------------------------------
Distributions
Dividends from Net Investment Income (.627) (.638) (.639) (.658) (.587)
Distributions from Realized Capital Gains (.082) (.011) (.020) -- --
----------------------------------------------------
Total Distributions (.709) (.649) (.659) (.658) (.587)
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $10.07 $10.03 $ 9.72 $10.17 $ 9.07
===============================================================================================================
Total Return 7.73% 10.24% 2.29% 19.94% -3.73%
===============================================================================================================
Ratios/Supplemental Data
Net Assets, End of Year (Millions) $1,234 $ 899 $ 592 $ 424 $ 163
Ratio of Total Expenses to Average Net Assets 0.27% 0.26% 0.25% 0.28% 0.28%
Ratio of Net Investment Income to Average Net Assets 6.25% 6.51% 6.61% 6.70% 6.46%
Turnover Rate 71% 69% 85% 78% 97%
===============================================================================================================
</TABLE>
<PAGE>
31
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Vanguard GNMA Fund
Year Ended January 31,
---------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 10.48 $10.23 $ 10.45 $ 9.71 $ 10.39
- --------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .687 .718 .727 .734 .693
Net Realized and Unrealized Gain (Loss) on Investments .002 .253 (.220) .740 (.673)
---------------------------------------------------
Total from Investment Operations .689 .971 .507 1.474 .020
---------------------------------------------------
Distributions
Dividends from Net Investment Income (.687) (.718) (.727) (.734) (.693)
Distributions from Realized Capital Gains (.012) (.003) -- -- (.007)
---------------------------------------------------
Total Distributions (.699) (.721) (.727) (.734) (.700)
- --------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 10.47 $10.48 $ 10.23 $10.45 $ 9.71
==============================================================================================================
Total Return 6.79% 9.86% 5.15% 15.64% 0.36%
==============================================================================================================
Ratios/Supplemental Data
Net Assets, End of Year (Millions) $11,354 $8,894 $ 7,400 $6,998 $ 5,851
Ratio of Total Expenses to Average Net Assets 0.30% 0.31% 0.27% 0.29% 0.30%
Ratio of Net Investment Income to Average Net Assets 6.56% 6.97% 7.16% 7.22% 7.04%
Turnover Rate 7% 3% 12% 7% 35%
==============================================================================================================
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Vanguard Long-Term Treasury Fund
Year Ended January 31,
---------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 10.79 $ 9.84 $ 10.73 $ 9.23 $ 10.75
- --------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .629 .643 .655 .669 .665
Net Realized and Unrealized Gain (Loss) on Investments .630 .950 (.877) 1.725 (1.401)
---------------------------------------------------
Total from Investment Operations 1.259 1.593 (.222) 2.394 (.736)
---------------------------------------------------
Distributions
Dividends from Net Investment Income (.629) (.643) (.655) (.669) (.665)
Distributions from Realized Capital Gains -- -- (.013) (.225) (.119)
---------------------------------------------------
Total Distributions (.629) (.643) (.668) (.894) (.784)
- --------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 11.42 $10.79 $ 9.84 $10.73 $ 9.23
==============================================================================================================
Total Return 12.02% 16.85% -1.85% 26.72% -6.68%
==============================================================================================================
Ratios/Supplemental Data
Net Assets, End of Year (Millions) $ 1,450 $1,061 $ 898 $ 916 $ 671
Ratio of Total Expenses to Average Net Assets 0.27% 0.27% 0.25% 0.27% 0.28%
Ratio of Net Investment Income to Average Net Assets 5.69% 6.38% 6.66% 6.57% 7.02%
Turnover Rate 22% 18% 31% 105% 85%
==============================================================================================================
</TABLE>
<PAGE>
32
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Vanguard Long-Term Corporate Fund
Year Ended January 31,
----------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 9.32 $ 8.71 $ 9.43 $ 8.18 $ 9.36
- --------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .582 .613 .619 .627 .617
Net Realized and Unrealized Gain (Loss) on Investments .266 .685 (.566) 1.250 (1.108)
----------------------------------------------------
Total from Investment Operations .848 1.298 .053 1.877 (.491)
----------------------------------------------------
Distributions
Dividends from Net Investment Income (.582) (.613) (.619) (.627) (.617)
Distributions from Realized Capital Gains (.206) (.075) (.154) -- (.072)
----------------------------------------------------
Total Distributions (.788) (.688) (.773) (.627) (.689)
- --------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.38 $ 9.32 $ 8.71 $ 9.43 $ 8.18
==============================================================================================================
Total Return 9.52% 15.52% 0.86% 23.64% -5.12%
==============================================================================================================
Ratios/Supplemental Data
Net Assets, End of Year (Millions) $4,232 $3,720 $3,324 $3,376 $ 2,607
Ratio of Total Expenses to Average Net Assets 0.30% 0.32% 0.28% 0.31% 0.32%
Ratio of Net Investment Income to Average Net Assets 6.26% 6.87% 7.06% 7.03% 7.37%
Turnover Rate 43% 33% 30% 49% 43%
==============================================================================================================
</TABLE>
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500,"
and "500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE>
33
Investing with Vanguard
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services we
offer. Booklets providing detailed information are available on the services
marked with a [GRAPHIC APPEARS HERE]. Please call us to request copies.
Services and Account Features
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
Telephone Redemptions (Sales and Exchanges)
Automatically set up for these Funds unless you notify us otherwise.
- --------------------------------------------------------------------------------
Checkwriting [GRAPHIC APPEARS HERE]
Method for drawing money from your account by writing a check for
$250 or more.
- --------------------------------------------------------------------------------
Vanguard Direct Deposit Service(TM) [GRAPHIC APPEARS HERE]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
Vanguard Automatic Exchange Service(TM) [GRAPHIC APPEARS HERE]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
Vanguard Fund Express(R) [GRAPHIC APPEARS HERE]
Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule or whenever you wish.
- --------------------------------------------------------------------------------
Vanguard Dividend Express(TM) [GRAPHIC APPEARS HERE]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
- --------------------------------------------------------------------------------
Vanguard Tele-Account(R) 1-800-662-6273 (ON-BOARD) [GRAPHIC APPEARS HERE]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange fund shares.
- --------------------------------------------------------------------------------
Access Vanguard(TM) www.vanguard.com [GRAPHIC APPEARS HERE]
You can use your personal computer to perform
certain transactions for most Vanguard funds by accessing our website. To
establish this service, you must register through the website. We will then send
to you, by mail, an account access password that allows you to process the
following financial and administrative transactions online:
. Open a new account.*
. Buy, sell, or exchange shares of most funds.
. Change your name/address.
. Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
. Only current Vanguard shareholders can open a new account online, by
exchanging shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
Investor Information Department: 1-800-662-7447 (SHIP) Text Telephone:
1-800-952-3335
Call Vanguard for information on our funds, fund services, and retirement
accounts, and to request literature.
- --------------------------------------------------------------------------------
Client Services Department: 1-800-662-2739 (CREW) Text Telephone: 1-800-662-2738
Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------
Services for Clients of Vanguard's Institutional Division: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------
<PAGE>
34
Types of Accounts
Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
For One or More People
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
For Holding Personal Trust Assets [GRAPHIC APPEARS HERE]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
For Individual Retirement Accounts [GRAPHIC APPEARS HERE]
Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).
- --------------------------------------------------------------------------------
For an Organization [GRAPHIC APPEARS HERE]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
For Third-Party Trustee Retirement Investments
Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.
- --------------------------------------------------------------------------------
Vanguard Prototype Plans
Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A Note on Investing with Vanguard Through Other Firms
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees, or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------
Buying Shares
You buy your shares at a Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value. You may convert Investor Shares
of the Short-Term Corporate Fund into Institutional Shares provided that you
meet the minimum initial requirements for Institutional Shares.
- --------------------------------------------------------------------------------
Minimum Investment to . . .
open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A Note on Low Balances
Each Fund reserves the right to close any nonretirement account whose balance
falls below the minimum initial investment. The Fund will deduct a $10
annual fee in June if your nonretirement account balance at that time is below
$2,500. The fee is waived if your total Vanguard account assets are $50,000 or
more.
- --------------------------------------------------------------------------------
By Mail to . . . [GRAPHIC APPEARS HERE]
open a new account
Complete and sign the application form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form.
<PAGE>
35
Make your check payable to: The Vanguard Group-(insert appropriate Fund number;
see below)
Vanguard Short-Term Treasury Fund-32
Vanguard Short-Term Federal Fund-49
Vanguard Short-Term Corporate Fund-39
Vanguard Intermediate-Term Treasury Fund-35
Vanguard Intermediate-Term Corporate Fund-71
Vanguard GNMA Fund-36
Vanguard Long-Term Treasury Fund-83
Vanguard Long-Term Corporate Fund-28
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2600 455 Devon Park Drive
Valley Forge, PA 19482-2600 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division...
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
By Telephone to . . . [GRAPHIC APPEARS HERE]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type).
add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). Use Vanguard
Fund Express (see "Services and Account Features") to transfer assets from your
bank account. Call Client Services before your first use to verify that this
option is in place.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
* You must obtain a Personal Identification Number through Tele-Account at
least seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you've requested a telephone transaction and a confirmation
number has been assigned, the transaction cannot be revoked. We reserve the
right to refuse any purchase request .
- --------------------------------------------------------------------------------
By Wire to Open a New Account or Add to an Existing Account [GRAPHIC APPEARS
HERE]
Call Client Services to arrange your wire transaction. Wire transactions are not
available for retirement accounts, except for asset transfers and direct
rollovers.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
<PAGE>
36
Buying Shares (continued)
In favor of:
Vanguard Short-Term Treasury Fund-32
Vanguard Short-Term Federal Fund-49
Vanguard Short-Term Corporate Fund-39
Vanguard Intermediate-Term Treasury Fund-35
Vanguard Intermediate-Term Corporate Fund-71
Vanguard GNMA Fund-36
Vanguard Long-Term Treasury Fund-83
Vanguard Long-Term Corporate Fund-28
[Account number, or temporary number for a new account]
[Registered account owner/s]
[Registered address]
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check or
Vanguard Fund Express at any time. However, while your redemption request will
be processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
- --------------------------------------------------------------------------------
A Note on Large Purchases
It is important that you call Vanguard before you invest a large dollar amount.
We must consider the interests of all Fund shareholders and so reserve the right
to refuse any purchase that will disrupt the Fund's operation or performance.
- --------------------------------------------------------------------------------
Redeeming Shares
This section describes how you can redeem--that is, sell or exchange--a Fund's
shares.
When Selling Shares:
. Vanguard sends the redemption proceeds to you or a designated third party.*
. You can sell all or part of your Fund shares at any time.
* May require a signature guarantee; see footnote on page 39.
When Exchanging Shares:
. The redemption proceeds are used to purchase shares of a different Vanguard
fund.
. You must meet the receiving fund's minimum investment requirements.
. Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus. For
exchanges, the purchase side of the transaction will be based on the receiving
fund's next-determined share price, again subject to any special rules discussed
in this prospectus.
- --------------------------------------------------------------------------------
Note: Once a redemption is requested and a confirmation number given, the
transaction cannot be canceled.
- --------------------------------------------------------------------------------
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail. You can also sell shares by check.
- --------------------------------------------------------------------------------
<PAGE>
37
- --------------------------------------------------------------------------------
Online Requests [GRAPHIC APPEARS HERE]
Access Vanguard at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through the website. We will then send you, by mail, an account access password
that will enable you to sell or exchange shares online (as well as perform other
transactions).
Note: The Vanguard funds whose shares you cannot exchange online or by
telephone are Vanguard U.S. Stock Index Funds, Vanguard Balanced Index Fund,
Vanguard International Stock Index Funds, Vanguard REIT Index Fund, Vanguard
Total International Stock Index Fund, and Vanguard Growth and Income Fund. These
funds do, however, permit online and telephone exchanges within IRAs and other
retirement accounts. If you sell shares of these funds online, you will receive
a redemption check at your address of record.
- --------------------------------------------------------------------------------
Telephone Requests [GRAPHIC APPEARS HERE]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours--to sell or exchange shares. You can exchange shares from a Fund to open
an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.
Retirement Accounts:
You can exchange--but not sell--shares by calling Tele-Account or Client
Services.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
. The ten-digit account number.
. The name and address exactly as registered on the account.
. The primary Social Security or employer identification number as registered
on the account.
. The Personal Identification Number, if applicable.
Please note that Vanguard will not be responsible for any account losses due to
telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A Note on Unusual Circumstances
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.
- --------------------------------------------------------------------------------
Mail Requests [GRAPHIC APPEARS HERE]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
<PAGE>
38
Redeeming Shares (continued)
Vanguard Retirement Accounts:
For information on how to request distributions from:
. Traditional IRAs and Roth IRAs--call Client Services.
. SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans--call Individual Retirement Plans at
1-800-662-2003.
Depending on your account registration type, additional documentation may be
required.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1120 455 Devon Park Drive
Valley Forge, PA 19482-1120 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division ...
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
Check Requests [GRAPHIC APPEARS HERE]
You can sell shares by writing a check for $250 or more.
- --------------------------------------------------------------------------------
A Note on Large Redemptions
It is important that you call Vanguard before you redeem a large dollar amount.
We must consider the interests of all fund shareholders and so reserve the right
to delay delivery of your redemption proceeds--up to seven days--if the amount
will disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day period,
the Fund reserves the right to pay part or all of the redemption proceeds above
$250,000 in kind, i.e., in securities, rather than in cash. If payment is made
in kind, you may incur brokerage commissions if you elect to sell the securities
for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check, wire
(money market funds and other daily dividend funds only), or exchange to another
Vanguard fund.
- --------------------------------------------------------------------------------
Check Redemptions
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
Wire Redemptions [GRAPHIC APPEARS HERE]
The wire redemption option is not automatic; you must establish it by completing
a special form or the appropriate section of your account application. Wire
redemptions can be initiated by mail or by telephone during Vanguard's business
hours, but not online.
For Money Market Funds:
For telephone requests made by 10:30 a.m. EST, the wire will arrive at your bank
by the close of business that same day. Requests made by 4 p.m. EST will arrive
at your bank by the close of business on the following business day.
For Other Daily Dividend Funds:
For telephone requests made by 4 p.m. EST, the wire will arrive at your bank by
the close of business on the following business day.
- --------------------------------------------------------------------------------
Note: Wire redemptions of less than $5,000 are subject to a $5 processing fee.
Exchange Redemptions
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
<PAGE>
39
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
Request in "Good Order"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
. The Fund name and account number.
. The amount of the transaction (in dollars or shares).
. Signatures of all owners exactly as registered on the account (for mail
requests).
. Signature guarantees (if required).*
. Any supporting legal documentation that may be required.
. Any outstanding certificates representing shares to be redeemed.
* For instance, a signature guarantee must be provided by all registered
account shareholders when redemption proceeds are to be sent to a different
person or address. A signature guarantee can be obtained from most banks,
credit unions, and licensed brokers.
Transactions are processed at the next-determined share price after Vanguard has
received all required information.
- --------------------------------------------------------------------------------
Limits on Account Activity
Because excessive account transactions can disrupt the management of a Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
. You may make no more than two substantive "round trips" through the Fund
during any 12-month period.
. Your round trips through the Fund must be at least 30 days apart.
. The Fund may refuse a share purchase at any time, for any reason.
. Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also, "round trip" covers transactions accomplished by any combination
of methods, including transactions conducted by check, wire, or exchange to/from
another Vanguard fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
- --------------------------------------------------------------------------------
Return Your Share Certificates
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
All Trades Final
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been received
and a confirmation number assigned.
- --------------------------------------------------------------------------------
Transferring Registration
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
<PAGE>
40
Transferring Registration (continued)
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
Fund and Account Updates
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about the Fund twice a year.
These comprehensive reports include an assessment of the Fund's performance (and
a comparison to its industry benchmark), an overview of the markets, a report
from the advisers, and the Fund's financial statements which include a listing
of the Fund's holdings.
To keep each Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When we find that two or
more Fund shareholders have the same last name and address, we send just one
Fund report to that address--instead of mailing separate reports to each
shareholder. If you want us to send separate reports, however, you may notify
our Client Services Department at 1-800-662-2739.
- --------------------------------------------------------------------------------
Confirmation Statement
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
Portfolio Summary [GRAPHIC APPEARS HERE]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
Fund Financial Reports
Mailed in March and September for these Funds.
- --------------------------------------------------------------------------------
Tax Statements
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------
Average Cost Review Statement [GRAPHIC APPEARS HERE]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using the average cost single category method.
- --------------------------------------------------------------------------------
Checkwriting Statement
Sent monthly to shareholders using Vanguard's checkwriting option. Our statement
provides images of the front and back of each checkwriting draft paid in the
previous month. This consolidated statement is sent instead of the original
canceled drafts, which will not be returned.
- --------------------------------------------------------------------------------
<PAGE>
Glossary of Investment Terms
Average Maturity
The average length of time until bonds held by a fund reach maturity (or are
called) and are repaid. In general, the longer the average maturity, the more a
fund's share price will fluctuate in response to changes in market interest
rates.
Bond
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and make regular interest payments until
that date.
Capital Gains Distribution
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit, minus any realized losses.
Cash Reserves
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
Dividend Income
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
Dollar-Cost Averaging
Investing equal amounts of money at regular intervals on an ongoing basis. This
technique ensures that an investor buys fewer shares when prices are high and
more shares when prices are low.
Expense Ratio
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
Face Value
The amount to be paid at maturity of a bond; also known as the par value or
principal.
Fixed-Income Securities
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
Investment Adviser
An organization that makes the day-to-day decisions regarding a fund's
investments.
Investment-Grade
A bond whose credit quality is considered by independent bond-rating agencies to
be sufficient to ensure timely payment of principal and interest under current
economic circumstances.
Maturity
The date when a bond issuer agrees to repay the bond's principal, or face value,
to the bond's buyer.
Net Asset Value (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
Price/Earnings (P/E) Ratio
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
Principal
The amount of your own money you put into an investment.
Securities
Stocks, bonds, money market instruments, and other investment vehicles.
Total Return
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
Volatility
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
Yield
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[LOGO OF THE VANGUARD GROUP APPEARS HERE]
Post Office Box 2600
Valley Forge, PA 19482-2600
For More Information
If you'd like more information about Vanguard Bond Funds, the following
documents are available free upon request:
Annual/Semiannual Report to Shareholders
Additional information about the Funds' investments is available in the Funds'
annual and semiannual reports to shareholders. In these reports, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Funds' performance during the most recent fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about the Funds.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Funds or other Vanguard funds,
please contact us as follows:
The Vanguard Group Investor Information Department
P.O. Box 2600
Valley Forge, PA 19482-2600
Telephone: 1-800-662-7447 (SHIP)
Text Telephone: 1-800-952-3335
World Wide Web: www.vanguard.com
If you are a current Fund shareholder and would like information about your
account, account transactions, and/or account statements, please call:
Client Services Department
Telephone: 1-800-662-2739 (CREW)
Text Telephone: 1-800-662-2738
Information provided by the Securities and Exchange Commission (SEC)
You can review and copy information about the Funds (including the SAI) at the
SEC's Public Reference Room in Washington, D.C. To find out more about this
public service, call the SEC at 1-800-SEC-0330. Reports and other information
about the Funds are also available on the SEC's website (www.sec.gov), or you
can receive copies of this information, for a fee, by writing the Public
Reference Section, Securities and Exchange Commission, Washington, DC 20549-
6009.
Funds' Investment Company Act file number: 811-2368
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P028N-06/01/1999
<PAGE>
Vanguard Bond Funds
Participant Prospectus
June 1, 1999
A Group of Bond Mutual Funds
Contents
1 An Introduction to Vanguard Bond Funds
2 Fund Profiles
2 Vanguard Short-Term Treasury Fund
4 Vanguard Short-Term Federal Fund
6 Vanguard Short-Term Corporate Fund
8 Vanguard Intermediate-Term Treasury Fund
10 Vanguard Intermediate-Term Corporate Fund
12 Vanguard GNMA Fund
14 Vanguard Long-Term Treasury Fund
16 Vanguard Long-Term Corporate Fund
18 More on the Funds
24 The Funds and Vanguard
25 Investment Advisers
26 Year 2000 Challenge
26 Dividends, Capital Gains, and Taxes
27 Share Price
28 Financial Highlights
33 Investing with Vanguard
33 Accessing Fund Information by Computer
Glossary (inside back cover)
- --------------------------------------------------------------------------------
Why Reading This Prospectus Is Important
This prospectus explains the objective, risks, and strategies of each of the
Vanguard Bond Funds (except Vanguard High-Yield Corporate Fund, which is offered
through a separate prospectus). To highlight terms and concepts important to
mutual fund investors, we have provided "Plain Talk(R)" explanations along the
way. Reading the prospectus will help you to decide which Funds, if any, are the
right investment for you. We suggest that you keep it for future reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Important Note
This prospectus is intended for participants in employer-sponsored retirement or
savings plans. Another version--for investors who would like to open a personal
investment account--can be obtained by calling Vanguard at 1-800-662-7447.
- --------------------------------------------------------------------------------
Important Note on the Short-Term Corporate Fund
The Short-Term Corporate Fund features two separate classes of shares: Investor
and Institutional. Investor Shares are offered through this prospectus.
Institutional Shares have an investment minimum of $10 million and are available
through a separate prospectus. Investor Shares and Institutional Shares do not
have the same expenses; as a result, the performance of these separate classes
will differ.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
<PAGE>
1
An Introduction to Vanguard Bond Funds
Vanguard Bond Funds consist of nine separate bond funds, eight of which are
offered through this prospectus (Vanguard High-Yield Corporate Fund is offered
through a separate prospectus). Each of these Funds seeks to provide a high
level of current income and preserve investors' principal. To achieve this
objective, each Fund invests in fixed-income securities meeting defined credit
quality and dollar-weighted average maturity standards. These standards vary, as
shown in the following table. As a result, the relative levels of income
provided by the Funds will vary to some extent, with the Short-Term Treasury
Fund generally providing the lowest level and the Long-Term Corporate Fund
providing the highest.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Dollar-Weighted
Fund Primary Investments Average Maturity
- -----------------------------------------------------------------------------------
<S> <C> <C>
Short-Term Treasury U.S. Treasury bonds 1-3 years
Short-Term Federal U.S. government agency bonds 1-3 years
Short-Term Corporate Investment-grade corporate bonds 1-3 years
Intermediate-Term Treasury U.S. Treasury bonds 5-10 years
Intermediate-Term Corporate Investment-grade corporate bonds 5-10 years
GNMA GNMA mortgage certificates Generally 5-10 years
Long-Term Treasury U.S. Treasury bonds 15-30 years
Long-Term Corporate Investment-grade corporate bonds 15-25 years
- -----------------------------------------------------------------------------------
</TABLE>
On the following pages, you'll find profiles that summarize key features of
each Fund. Following the profiles, there is important additional information
common to all of the Funds.
<PAGE>
2
Fund Profile--Vanguard Short-Term Treasury Fund
The following profile summarizes key features of Vanguard Short-Term Treasury
Fund.
INVESTMENT OBJECTIVE
The Fund is a bond fund that seeks to provide a high level of current income and
preserve investors' principal.
INVESTMENT STRATEGIES
The Fund invests at least 85% of its total assets in short-term bonds whose
interest and principal payments are backed by the full faith and credit of the
U.S. government. In addition, at least 65% of the Fund's total assets will
always be invested in U.S. Treasury securities. The Fund will maintain a
dollar-weighted average maturity of between one and three years. For more
information on investment strategies, see pages 22-23.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally high for short-term bonds.
. Interest rate risk, which is the chance that bond prices overall, including
the prices of bonds held by the Fund, will decline over short or even long
periods due to rising interest rates. Interest rate risk is generally low for
short-term bonds.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual returns for one and
five calendar years and since inception compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
[BAR GRAPH APPEARS HERE]
1992 6.75%
1993 6.41%
1994 -0.58%
1995 12.11%
1996 4.39%
1997 6.39%
1998 7.36%
- --------------------------------------------------------------------------------
The Fund's year-to-date return as of the quarter ended March 31, 1999 was
0.22%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 3.86% (quarter ended September 30, 1992) and the lowest return for a
quarter was -1.19% (quarter ended March 31, 1994).
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years Since Inception*
- --------------------------------------------------------------------------------
Vanguard Short-Term Treasury Fund 7.36% 5.85% 6.36%
Lehman Brothers 1-5 Year U.S. Treasury
Bond Index 7.76 6.17 6.71
- --------------------------------------------------------------------------------
*October 28, 1991.
- --------------------------------------------------------------------------------
<PAGE>
3
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended January 31, 1999.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.23%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.27%
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$28 $87 $152 $343
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
Inception Date
October 28, 1991
Net Assets as of January 31, 1999
$1.20 billion
Newspaper Abbreviation
STTsry
Vanguard Fund Number
032
Cusip Number
922031703
Ticker Symbol
VFISX
<PAGE>
4
Fund Profile--Vanguard Short-Term Federal Fund
The following profile summarizes key features of Vanguard Short-Term Federal
Fund.
INVESTMENT OBJECTIVE
The Fund is a bond fund that seeks to provide a high level of current income and
preserve investors' principal.
INVESTMENT STRATEGIES
The Fund invests primarily in short-term bonds issued by U.S. government
agencies, most of which are not backed by the full faith and credit of the U.S.
government. The Fund will maintain a dollar-weighted average maturity of between
one and three years. For more information on investment strategies, see pages
22-23.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally high for short-term bonds.
. Interest rate risk, which is the chance that bond prices overall, including
the prices of bonds held by the Fund, will decline over short or even long
periods due to rising interest rates. Interest rate risk is generally low for
short-term bonds.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner. Credit risk, which has the potential to hurt
the Fund's performance, should be very low for the Fund.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
1989 11.34%
1990 9.31%
1991 12.24%
1992 6.19%
1993 7.00%
1994 -0.94%
1995 12.26%
1996 4.78%
1997 6.46%
1998 7.22%
- --------------------------------------------------------------------------------
The Fund's year-to-date return as of the quarter ended March 31, 1999 was
0.38%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 5.48% (quarter ended June 30, 1989) and the lowest return for a
quarter was -0.98% (quarter ended March 31, 1994).
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Vanguard Short-Term Federal Fund 7.22% 5.87% 7.52%
Lehman Brothers 1-5 Year U.S. Government Bond Index 7.65 6.16 7.85
- --------------------------------------------------------------------------------
<PAGE>
5
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended January 31, 1999.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.23%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.27%
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$28 $87 $152 $343
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
Inception Date
December 31, 1987
Net Assets as of January 31, 1999
$1.64 billion
Newspaper Abbreviation
STFed
Vanguard Fund Number
049
Cusip Number
922031604
Ticker Symbol
VSGBX
<PAGE>
6
Fund Profile--Vanguard Short-Term Corporate Fund
The following profile summarizes key features of Vanguard Short-Term Corporate
Fund.
INVESTMENT OBJECTIVE
The Fund is a bond fund that seeks to provide a high level of current income and
preserve investors' principal.
INVESTMENT STRATEGIES
The Fund invests in a variety of high-quality and, to a lesser extent, medium-
quality fixed-income securities, primarily short-term and intermediate-term
corporate bonds. High-quality bonds are those rated the equivalent of "A3" or
better by Moody's Investors Service, Inc. or another independent rating agency;
medium-quality bonds are those rated the equivalent of Moody's "Baa1", "Baa2",
or "Baa3". The Fund is permitted to invest in foreign bonds to a limited extent,
so long as they are denominated in U.S. dollars. The Fund will maintain a
dollar-weighted average maturity of between one and three years. For more
information on investment strategies, see pages 22-23.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally high for short-term bonds.
. Interest rate risk, which is the chance that bond prices overall, including
the prices of bonds held by the Fund, will decline over short or even long
periods due to rising interest rates. Interest rate risk is generally low for
short-term bonds.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner. Credit risk, which has the potential to hurt
the Fund's performance, should be low for the Fund.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
1989 11.45%
1990 9.23%
1991 13.08%
1992 7.20%
1993 7.07%
1994 -0.08%
1995 12.74%
1996 4.79%
1997 6.95%
1998 6.57%
- --------------------------------------------------------------------------------
The Fund's year-to-date return as of the quarter ended March 31, 1999 was
0.93%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 5.01% (quarter ended June 30, 1989) and the lowest return for a
quarter was -1.00% (quarter ended March 31, 1994).
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Vanguard Short-Term Corporate Fund 6.57% 6.11% 7.83%
Lehman Brothers 1-5 Year Investment Grade Debt Index 7.55 6.70 8.45
- --------------------------------------------------------------------------------
<PAGE>
7
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended January 31, 1999.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.23%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.27%
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$28 $87 $152 $343
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
Inception Date
October 29, 1982
Net Assets as of January 31, 1999
$5.53 billion (for Investor Shares)
Newspaper Abbreviation
STCor
Vanguard Fund Number
039
Cusip Number
922031406
Ticker Symbol
VFSTX
<PAGE>
8
Fund Profile--Vanguard Intermediate-Term Treasury Fund
The following profile summarizes key features of Vanguard Intermediate-Term
Treasury Fund.
INVESTMENT OBJECTIVE
The Fund is a bond fund that seeks to provide a high level of current income and
preserve investors' principal.
INVESTMENT STRATEGIES
The Fund invests at least 85% of its total assets in intermediate-term bonds
whose interest and principal payments are backed by the full faith and credit of
the U.S. government. In addition, at least 65% of the Fund's total assets will
always be invested in U.S. Treasury securities. The Fund will maintain a
dollar-weighted average maturity of between five and ten years. For more
information on investment strategies, see pages 22-23.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally moderate for
intermediate-term bonds.
. Interest rate risk, which is the chance that bond prices overall, including
the prices of bonds held by the Fund, will decline over short or even long
periods due to rising interest rates. Interest rate risk is generally moderate
for intermediate-term bonds.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual returns for one and
five calendar years and since inception compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
1992 7.78%
1993 11.43%
1994 -4.33%
1995 20.44%
1996 1.92%
1997 8.96%
1998 10.61%
- --------------------------------------------------------------------------------
The Fund's year-to-date return as of the quarter ended March 31, 1999 was
- -1.87%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 7.23% (quarter ended June 30, 1995) and the lowest return for a
quarter was -3.60% (quarter ended March 31, 1994).
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years Since Inception*
- --------------------------------------------------------------------------------
Vanguard Intermediate-Term Treasury Fund 10.61% 7.19% 8.53%
Lehman Brothers 5-10 Year U.S. Treasury
Bond Index 11.57 7.53 9.05
- --------------------------------------------------------------------------------
*October 28, 1991.
- --------------------------------------------------------------------------------
<PAGE>
9
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended January 31, 1999.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.23%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.27%
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$28 $87 $152 $343
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
Inception Date
October 28, 1991
Net Assets as of January 31, 1999
$1.88 billion
Newspaper Abbreviation
ITTsry
Vanguard Fund Number
035
Cusip Number
922031802
Ticker Symbol
VFITX
<PAGE>
10
Fund Profile--Vanguard Intermediate-Term Corporate Fund
The following profile summarizes key features of Vanguard Intermediate-Term
Corporate Fund.
INVESTMENT OBJECTIVE
The Fund is a bond fund that seeks to provide a high level of current income and
preserve investors' principal.
INVESTMENT STRATEGIES
The Fund invests in a variety of high-quality and, to a lesser extent, medium-
quality fixed-income securities, primarily short-term and intermediate-term
corporate bonds. High-quality bonds are those rated the equivalent of "A3" or
better by Moody's Investors Service, Inc. or another independent rating agency;
medium-quality bonds are those rated the equivalent of Moody's "Baa1", "Baa2" or
"Baa3". The Fund is permitted to invest in foreign bonds to a limited extent, so
long as they are denominated in U.S. dollars. The Fund will maintain a dollar-
weighted average maturity of between five and ten years. For more information on
investment strategies, see pages 22-23.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally moderate for
intermediate-term bonds.
. Interest rate risk, which is the chance that bond prices overall, including
the prices of bonds held by the Fund, will decline over short or even long
periods due to rising interest rates. Interest rate risk is generally moderate
for intermediate-term bonds.
. Call risk, which is the chance that during periods of falling interest rates,
a bond issuer will "call"--or repay--a higher-yielding bond before its
maturity date. Forced to reinvest the unanticipated proceeds at lower rates,
the Fund would experience a decline in income and lose the opportunity for
additional price appreciation associated with falling rates. Call risk is
generally moderate for intermediate-term bonds.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner. Credit risk, which has the potential to hurt
the Fund's performance, should be low for the Fund.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual returns for one and
five calendar years and since inception compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
1994 -4.20%
1995 21.39%
1996 2.78%
1997 8.93%
1998 8.30%
- --------------------------------------------------------------------------------
The Fund's year-to-date return as of the quarter ended March 31, 1999 was
- -0.73%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 7.20% (quarter ended June 30, 1995) and the lowest return for a
quarter was -3.41% (quarter ended March 31, 1994).
<PAGE>
11
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years Since Inception*
- --------------------------------------------------------------------------------
Vanguard Intermediate-Term Corporate Fund 8.30% 7.11% 6.92%
Lehman Brothers 5-10 Year Investment Grade
Debt Index 9.00 7.61 7.46
- --------------------------------------------------------------------------------
*November 1, 1993.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended January 31, 1999.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.23%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.27%
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$28 $87 $152 $343
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
Inception Date
November 1, 1993
Net Assets as of January 31, 1999
$1.23 billion
Newspaper Abbreviation
ITCorp
Vanguard Fund Number
071
Cusip Number
922031885
Ticker Symbol
VFICX
<PAGE>
12
Fund Profile--Vanguard GNMA Fund
The following profile summarizes key features of Vanguard GNMA Fund.
INVESTMENT OBJECTIVE
The Fund is a bond fund that seeks to provide a high level of current income and
preserve investors' principal.
INVESTMENT STRATEGIES
The Fund invests at least 80% of its total assets in Government National
Mortgage Association (GNMA or "Ginnie Mae") pass-through certificates, which are
fixed-income securities representing part ownership in a pool of mortgage loans
backed by the U.S. government. The balance of the Fund's assets may be invested
in U.S. Treasury or other U.S. government agency securities, as well as
repurchase agreements collateralized by such securities. The Fund's average
maturity depends on homeowner prepayments of the underlying mortgages. While the
Fund does not observe specific maturity guidelines, the Fund's dollar-weighted
average maturity will normally fall within an intermediate-term range (5-10
years). For more information on investment strategies, see pages 22-23.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
. Prepayment risk, which is the chance that mortgage-backed bonds will be paid
off early due to homeowners refinancing their mortgages during periods of
falling interest rates. Forced to reinvest the unanticipated proceeds at lower
rates, the Fund would experience a decline in income and lose the opportunity
for additional price appreciation associated with falling rates. Prepayment
risk is high for the Fund.
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally moderate for
intermediate-term bonds.
. Interest rate risk, which is the chance that bond prices overall will decline
over short or even long periods due to rising interest rates. Also, declining
interest rates typically will not lift GNMA prices as much as the prices of
comparable bonds. This is because the market tends to discount GNMA prices for
prepayment risk when interest rates fall. Interest rate risk is generally
moderate for intermediate-term bonds.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
1989 14.77%
1990 10.32%
1991 16.77%
1992 6.85%
1993 5.90%
1994 -0.95%
1995 17.04%
1996 5.24%
1997 9.47%
1998 7.14%
- --------------------------------------------------------------------------------
The Fund's year-to-date return as of the quarter ended March 31, 1999 was
0.63%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 7.82% (quarter ended June 30, 1989) and the lowest return for a
quarter was -2.28% (quarter ended March 31, 1994).
<PAGE>
13
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Vanguard GNMA Fund 7.14% 7.43% 9.12%
Lehman Brothers GNMA Bond Index 6.93 7.34 9.25
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended January 31, 1999.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.26%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.30%
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$31 $97 $169 $381
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Wellington Management Company, LLP, Boston, Mass., since inception
Inception Date
June 27, 1980
Net Assets as of January 31, 1999
$11.35 billion
Newspaper Abbreviation
GNMA
Vanguard Fund Number
036
Cusip Number
922031307
Ticker Symbol
VFIIX
<PAGE>
14
Fund Profile--Vanguard Long-Term Treasury Fund
The following profile summarizes key features of Vanguard Long-Term Treasury
Fund.
INVESTMENT OBJECTIVE
The Fund is a bond fund that seeks to provide a high level of current income and
preserve investors' principal.
INVESTMENT STRATEGIES
The Fund invests at least 85% of its total assets in long-term bonds whose
principal and interest payments are backed by the full faith and credit of the
U.S. government. In addition, at least 65% of the Fund's total assets will
always be invested in U.S. Treasury securities. The Fund will maintain a
dollar-weighted average maturity of between 15 and 30 years. For more
information on investment strategies, see pages 22-23.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
. Interest rate risk, which is the chance that bond prices overall, including
the prices of bonds held by the Fund, will decline over short or even long
periods due to rising interest rates. Interest rate risk is generally high for
long-term bonds.
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally low for long-term bonds.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
1989 17.93%
1990 5.78%
1991 17.43%
1992 7.40%
1993 16.79%
1994 -7.03%
1995 30.11%
1996 -1.25%
1997 13.90%
1998 13.05%
- --------------------------------------------------------------------------------
The Fund's year-to-date return as of the quarter ended March 31, 1999 was
- -4.15%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 12.20% (quarter ended June 30, 1989) and the lowest return for a
quarter was -6.85% (quarter ended March 31, 1996).
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Vanguard Long-Term Treasury Fund 13.05% 8.99% 10.95%
Lehman Brothers Long U.S. Treasury Bond Index 13.52 9.35 11.48
- --------------------------------------------------------------------------------
<PAGE>
15
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended January 31, 1999.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.23%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.27%
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$28 $87 $152 $343
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
Inception Date
May 19, 1986
Net Assets as of January 31, 1999
$1.45 billion
Newspaper Abbreviation
LTTsry
Vanguard Fund Number
083
Cusip Number
922031505
Ticker Symbol
VUSTX
<PAGE>
16
Fund Profile--Vanguard Long-Term Corporate Fund
The following profile summarizes key features of Vanguard Long-Term Corporate
Fund.
INVESTMENT OBJECTIVE
The Fund is a bond fund that seeks to provide a high level of current income and
preserve investors' principal.
INVESTMENT STRATEGIES
The Fund invests in a variety of high- or upper-medium-quality and, to a lesser
extent, medium-quality fixed-income securities, primarily long-term corporate
bonds. High quality bonds are those rated the equivalent of "A3" or better by
Moody's Investors Service, Inc.; medium quality bonds are those rated the
equivalent of Moody's "Baa1", "Baa2", or "Baa3". The Fund is permitted to invest
in foreign bonds to a limited extent, so long as they are denominated in U.S.
dollars. The Fund's dollar-weighted average maturity is expected to range
between 15 and 25 years. For more information on investment strategies, see
pages 22-23.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
. Interest rate risk, which is the chance that bond prices overall, including
the prices of bonds held by the Fund, will decline over short or even long
periods due to rising interest rates. Interest rate risk is generally high for
long-term bonds.
. Call risk, which is the chance that during periods of falling interest rates,
a bond issuer will "call"--or repay--a higher-yielding bond before its
maturity date. Forced to reinvest the unanticipated proceeds at lower rates,
the Fund would experience a decline in income and lose the opportunity for
additional price appreciation associated with falling rates. Call risk is
generally moderate for long-term bonds.
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally low for long-term bonds.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner. Credit risk, which has the potential to hurt
the Fund's performance, should be low for the Fund.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
1989 15.18%
1990 6.21%
1991 20.90%
1992 9.78%
1993 14.49%
1994 -5.30%
1995 26.40%
1996 1.20%
1997 13.79%
1998 9.21%
- --------------------------------------------------------------------------------
The Fund's year-to-date return as of the quarter ended March 31, 1999 was
- -2.12%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 9.56% (quarter ended June 30, 1989) and the lowest return for a
quarter was -4.68% (quarter ended March 31, 1996).
<PAGE>
17
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Vanguard Long-Term Corporate Fund 9.21% 8.53% 10.84%
Lehman Brothers Long Corporate AA or
Better Bond Index 10.52 8.73 10.72
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended January 31, 1999.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.27%
12b-1 Distribution Fees: None
Other Expenses: 0.03%
Total Annual Fund Operating Expenses: 0.30%
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$31 $97 $169 $381
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Wellington Management Company, LLP, Boston, Mass., since inception
Inception Date
July 9, 1973
Net Assets as of January 31, 1999
$4.23 billion
Newspaper Abbreviation
LTCorp
Vanguard Fund Number
028
Cusip Number
922031109
Ticker Symbol
VWESX
<PAGE>
18
More on the Funds
The following sections discuss other important features of the Funds, including
additional risk information, investment strategies, costs and market timing, and
turnover rate. Note that the investment objective of each Fund is not
fundamental, and may be changed without a shareholder vote.
Additional Risk Information
Because the Funds invest primarily in bonds, they are subject to certain risks.
PLAIN TALK ABOUT
Bonds and Interest Rates
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--causing you to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you should be able to sell your 5% bond for more than you
paid.
The Difference with GNMAs: In general, declining interest rates will not lift
GNMA prices as much as the prices of comparable bonds. Why? Because when
interest rates fall, the bond market tends to discount GNMA prices for
prepayment risk--the possibility that homeowners will refinance their mortgages
at lower rates and cause GNMAs to be paid off prior to maturity. In part to
compensate for this "drag" on price, GNMAs tend to offer higher yields than
other bonds of comparable credit quality and maturity.
[GRAPHIC APPEARS HERE] The Funds are subject--in varying degrees--to interest
rate risk, which is the possibility that bond prices overall will decline over
short or even long periods due to rising interest rates. Interest rate risk
should be low for short-term bonds, moderate for intermediate-term bonds, and
high for long-term bonds.
Changes in interest rates will affect bond income as well as bond prices.
[GRAPHIC APPEARS HERE] The Funds are subject--in varying degrees--to income
risk, which is the possibility that a Fund's dividends (income) will decline due
to falling interest rates. Income risk is generally higher for short-term bonds
and lower for long-term bonds.
In the past, bond investors --even Treasury bond investors--have seen the
value of their investment rise and fall--sometimes significantly--with changes
in interest rates. Between December 1976 and September 1981, for instance,
rising interest rates caused long-term bond prices to fall by almost 48%.
Because each Fund invests mainly in bonds, changes in interest rates will
impact, to varying degrees, the value of the Funds' assets. To illustrate how
much of an impact, the following table shows the effect of a 2% change (both up
and down) in interest rates on three bonds with a face value of $1,000; each has
a different maturity.
- --------------------------------------------------------------------------------
How Interest Rate Changes Affect Bonds*
- --------------------------------------------------------------------------------
Value of a $1,000 Bond Value of a $1,000 Bond
After a 2% Increase After a 2% Decrease
Type of Bond (Maturity) in Interest Rates in Interest Rates
- --------------------------------------------------------------------------------
Short-Term (2.5 years) $956 $1,046
Intermediate-Term (10 years) 870 1,156
Long-Term (20 years) 816 1,251
- --------------------------------------------------------------------------------
*Assuming a 7% yield.
- --------------------------------------------------------------------------------
These figures are for illustration only; you should not regard them as an
indication of future returns from the bond market as a whole or any Fund in
particular.
<PAGE>
19
PLAIN TALK ABOUT
Bond Maturities
A bond is issued with a specific maturity date--the date when the bond's issuer,
or seller, must pay back the bond's initial value (known as its "face value").
Bond maturities generally range from less than one year (short-term) to 30 years
(long-term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise--but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks in hope of higher yields; short-term bond investors should be willing to
accept lower yields in return for less fluctuation in the value of their
investment.
While falling interest rates tend to strengthen bond prices, they can cause
other sorts of problems for bond fund investors--bond calls and prepayments.
PLAIN TALK ABOUT
Callable Bonds
Although bonds are issued with clearly defined maturities, a bond issuer may be
able to redeem, or call, a bond earlier than its maturity date. The bondholder
must now replace the called bond with a bond that may have a lower yield than
the original. One way for bond investors to protect themselves against call risk
is to purchase a bond early in its lifetime, long before its call date. The
other way is to buy bonds with low coupons, which makes them less likely to be
called.
[GRAPHIC APPEARS HERE] Because they invest in bonds that are callable, the
Short-Term Federal Fund and the Short-Term, Intermediate-Term, and Long-Term
Corporate Funds are subject to call risk, which is the possibility that during
periods of falling interest rates, a bond issuer will "call"--or repay--a
higher-yielding bond before its maturity date. Forced to reinvest the
unanticipated proceeds at lower interest rates, a Fund would experience a
decline in income and lose the opportunity for additional price appreciation
associated with falling rates.
Call risk is generally moderate for longer-term bonds, and consequently for
the Intermediate-Term and Long-Term Corporate Funds. Call risk is low for the
Short-Term and Treasury Funds.
[GRAPHIC APPEARS HERE] Because it invests in mortgage-backed securities, the
GNMA Fund is subject to prepayment risk, which is the possibility that mortgage-
backed bonds will be paid off early due to homeowners refinancing their
mortgages during periods of falling interest rates. Forced to reinvest the
unanticipated proceeds at lower rates, the Fund would experience a decline in
income and lose the opportunity for additional price appreciation associated
with falling rates.
Since the GNMA Fund invests most of its assets in mortgage-backed bonds, the
prepayment risk to the Fund is high.
[GRAPHIC APPEARS HERE] The Funds are subject--in varying degrees--to credit
risk, which is the possibility that a bond issuer will fail to pay interest and
principal in a timely manner.
PLAIN TALK ABOUT
Credit Quality
A bond's credit quality depends on the issuer's ability to pay interest on the
bond and, ultimately, to repay the debt. The lower the rating by one of the
independent bond-rating agencies (for example, Moody's or Standard & Poor's),
the greater the chance (in the rating agency's opinion) that the bond issuer
will default, or fail to meet its payment obligations. All things being equal,
the lower a bond's credit rating, the higher its yield should be to compensate
investors for assuming additional risk. Bonds rated in one of the four highest
rating categories are considered "investment grade." The Funds' Statement of
Additional Information includes a detailed description of the credit-rating
scales used by major, independent bond-rating agencies.
<PAGE>
20
The credit quality of each Fund depends on the quality of its investments. In
absolute terms, the average credit quality of each Fund's holdings is high or
upper-medium. In relative terms, the Short-Term Treasury, Intermediate-Term
Treasury, and Long-Term Treasury Funds (which invest primarily in securities
backed by the full faith and credit of the U.S. government) offer the lowest
credit risk--and generally the lowest yields--of the Funds. The dollar-weighted
average credit quality of each Fund's holdings as rated by Moody's Investors
Service, as of January 31, 1999, follow:
---------------------------------------------------------------------
Fund Average Quality
---------------------------------------------------------------------
Short-Term Treasury Treasury
Short-Term Federal Agency
Short-Term Corporate A1
Intermediate-Term Treasury Treasury
Intermediate-Term Corporate A1
GNMA Treasury
Long-Term Treasury Treasury
Long-Term Corporate Aa3
---------------------------------------------------------------------
The following table details the Funds' credit quality policies, and
illustrates the comparative credit risk encountered by an investor in each Fund.
Note that the Funds apply these policies at the time of investment. The Funds
may continue to hold bonds that have been downgraded after purchase, even if
they are no longer eligible for purchase by a Fund.
- --------------------------------------------------------------------------------
Credit Ratings of the Funds' Investments (Percentage of Fund Assets)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Issued
or Backed High
by U.S. Gov't, or Highest Upper Speculative
its Agencies and Quality Medium Medium or Lower
Fund Instrumentalities (non-Gov't) Quality Quality Quality
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Short-Term Treasury 100% 0% 0% 0% 0%
- -------------------------------------------------------------------------------------------
Short-Term Federal 100% 0% 0% 0% 0%
- -------------------------------------------------------------------------------------------
Short-Term Corporate No more 0%
----At least 70%----
than 30%
- -------------------------------------------------------------------------------------------
Intermediate-Term Treasury 100% 0% 0% 0% 0%
- -------------------------------------------------------------------------------------------
Intermediate-Term Corporate No more 0%
----At least 70%----
than 30%
- -------------------------------------------------------------------------------------------
GNMA 100% 0% 0% 0% 0%
- -------------------------------------------------------------------------------------------
Long-Term Treasury 100% 0% 0% 0% 0%
- -------------------------------------------------------------------------------------------
Long-Term Corporate No more 0%
----At least 70%----
than 30%
- -------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
21
PLAIN TALK ABOUT
Types of Bonds
Bonds are issued (sold) by many sources: Corporations issue corporate bonds; the
federal government issues U.S. Treasury bonds; agencies of the federal
government issue agency bonds; and mortgage holders issue "mortgage-backed"
pass-through certificates such as those of the Government National Mortgage
Association (GNMAs). Each issuer is responsible for paying back the bond's
initial value as well as making periodic interest payments.
Each of the Corporate Funds may invest no more than 30% of its assets in
medium-quality bonds, preferred stocks, and convertible securities.
To a limited extent, the Corporate Funds are also exposed to event risk, which
is the possibility that corporate fixed-income securities held by these Funds
may suffer a substantial decline in credit quality and market value due to a
corporate restructuring.
The Funds are generally managed without regard to tax ramifications.
[GRAPHIC APPEARS HERE]The Funds are subject to manager risk, which is the
possibility that a Fund's adviser will do a poor job of selecting securities.
To help you distinguish between the Funds and their various risks, a summary
table is provided below.
- --------------------------------------------------------------------------------
Risks of the Funds
- --------------------------------------------------------------------------------
Prepayment/
Income Interest Call Credit
Fund Risk Rate Risk Risk Risk
- --------------------------------------------------------------------------------
Short-Term Treasury High Low Low Negligible
Short-Term Federal High Low Low Very Low
Short-Term Corporate High Low Low Low
Intermediate-Term Treasury Moderate Moderate Low Negligible
Intermediate-Term Corporate Moderate Moderate Moderate Low
GNMA Moderate Moderate High Negligible
Long-Term Treasury Low High Low Negligible
Long-Term Corporate Low High Moderate Low
- --------------------------------------------------------------------------------
<PAGE>
22
Investment Strategies
The grid below shows, at a glance, the types of financial instruments that may
be purchased by each Fund. Explanations of each type of financial instrument
follow the grid.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Short-, Intermediate-, Short-, Intermediate-,
and Long-Term Short-Term and Long-Term GNMA
Treasury Funds Federal Fund Corporate Funds Fund
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Debt .
- ---------------------------------------------------------------------------------------
U.S. Government &
Agency Bonds . . . .
- ---------------------------------------------------------------------------------------
State & Municipal Bonds .
- ---------------------------------------------------------------------------------------
Cash Reserves .* .* . .*
- ---------------------------------------------------------------------------------------
Futures, Options, and
Other Derivatives . . . .
- ---------------------------------------------------------------------------------------
Asset-Backed Securities . .
- ---------------------------------------------------------------------------------------
International
Dollar-Denominated Bonds .
- ---------------------------------------------------------------------------------------
Preferred Stocks .
- ---------------------------------------------------------------------------------------
Convertible Securities .
- ---------------------------------------------------------------------------------------
Collateralized Mortgage
Obligations (CMOs) . . . .
- ---------------------------------------------------------------------------------------
Restricted or Illiquid
Securities . . . .
- ---------------------------------------------------------------------------------------
*Repurchase agreements only.
- ---------------------------------------------------------------------------------------
</TABLE>
. Corporate debt. As the name implies, corporate debt obligations--usually
called bonds--represent loans by an investor to a corporation.
. U.S. government and agency bonds. These bonds represent loans by an investor
to the U.S. Treasury Department or a wide variety of governmental agencies and
instrumentalities. Timely payment of principal and interest on U.S. Treasury
bonds is always guaranteed by the full faith and credit of the U.S.
government; many (but not all) agency bonds have the same guarantee.
. State and municipal bonds. These bonds represent loans by an investor to a
state or municipal government, or one of their agencies or instrumentalities.
. Cash reserves. This blanket term describes a variety of short-term
fixed-income investments, including money market instruments, commercial
paper, bank certificates of deposit, banker's acceptances, and repurchase
agreements. Repurchase agreements represent short-term (normally overnight)
loans by a Fund to commercial banks or large securities dealers. The Treasury
Funds, the GNMA Fund, and the Short-Term Federal Fund may invest only in
repurchase agreements that are collateralized by U.S. Treasury or U.S.
government agency securities.
. Futures, options, and other derivatives. Each Fund may invest up to 20% of its
total assets in bond futures contracts, options, credit swaps, interest rate
swaps, and other types of derivatives. (As a practical matter, the limit is
15% for the Treasury Funds, because they must invest at least 85% of their
total assets in U.S. government securities.) Losses (or gains) involving
futures contracts can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. Similar
<PAGE>
23
risks exist for other types of derivatives. For this reason, the Funds will
not use futures, options, or other derivatives for speculative purposes or as
leveraged investments that magnify the gains or losses of an investment.
The reasons for which a Fund will invest in futures and options are:
-- To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in bonds.
-- To reduce the Fund's transaction costs, for hedging purposes, or to add
value when these instruments are favorably priced.
. Asset-backed securities. These bonds represent partial ownership
in pools of consumer or commercial loans--most often credit card, automobile,
or trade receivables. Asset-backed securities are issued by entities formed
solely for that purpose, but their value ultimately depends on repayments by
underlying borrowers. A primary risk of asset-backed securities is that their
maturity is difficult to predict and driven by borrowers' prepayments.
. International dollar-denominated bonds. The Corporate Funds may invest in
bonds of foreign issuers, so long as they are denominated in U.S. dollars. To
the extent that it owns foreign bonds, a Fund is subject to country risk,
which is the possibility that political events (such as war), financial
problems (such as government default), or natural disasters (such as an
earthquake) will weaken a country's economy and cause investments in that
country to lose money. Because the bond's value is designated in dollars
rather than the currency of the issuer's country, the investor is not exposed
to currency risk; rather, the issuer assumes that risk, usually in order to
attract U.S. investors.
PLAIN TALK ABOUT
Derivatives
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some forms
of derivatives, such as exchange-traded futures and options on securities,
commodities, or indices, have been trading on regulated exchanges for more than
two decades. These types of derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. It is these characteristics that differentiate these futures and options
from other types of derivatives that may be more specialized or complex. If used
for speculation or as leveraged investments, derivatives can carry considerable
risks.
. Preferred stocks. Holders of preferred stocks receive set dividends from
the issuer. Their claim on the issuer's income and assets ranks before that of
common stock holders, but after that of bond holders.
. Convertible securities. Bonds or preferred stocks that are convertible into,
or exchangeable for, common stocks are known as convertible securities.
. Collateralized mortgage obligations (CMOs). CMOs are special bonds that are
collateralized by mortgages or mortgage pass-through securities. In a CMO
deal, cash flow rights on underlying mortgages--the rights to receive
principal and interest payments--are divided up and prioritized to create
short-, intermediate-, and long-term bonds. CMOs rely on assumptions about the
timing of cash flows on the underlying mortgages, including expected
prepayment rates. The primary risk of a CMO is that these assumptions are
wrong, which would either shorten or lengthen the bond's maturity. Each Fund
will invest only in CMOs that are believed consistent with its maturity and
credit quality standards.
. Restricted or illiquid securities. Restricted securities are privately placed
securities that, pursuant to the rules of the Securities and Exchange
Commission, generally can only be sold to qualified institutional buyers.
Because these securities can in turn be resold only to qualified institutional
investors, they may be considered illiquid securities--that is, they could be
difficult for the Funds to convert to cash, if needed. A Fund will not invest
more than 15% of its net assets in illiquid securities. The Funds' Board of
Trustees may, from time to time, determine that certain restricted securities
are liquid; such securities would not be subject to the 15% limitation. In
other words, the Funds may invest in restricted securities that are deemed to
be liquid securities without limit.
The Funds may, from time to time, take temporary defensive measures--such as
holding cash reserves without limit--that are inconsistent with the Funds'
primary investment strategies, in response to adverse market, economic,
political, or other conditions. In taking such measures, a Fund may not achieve
its investment objective.
<PAGE>
24
PLAIN TALK ABOUT
The Costs of Investing
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the buying and selling of securities by the fund. These
costs can erode a substantial portion of the gross income or capital
appreciation a fund achieves. Even seemingly small differences in expenses can,
over time, have a dramatic effect on a fund's performance.
PLAIN TALK ABOUT
Turnover Rate
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes.
PLAIN TALK ABOUT
Vanguard's Unique Corporate Structure
The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
Costs and Market-Timing
Some investors try to profit from a strategy called market-timing--switching
money into investments when they expect prices to rise, and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Although several of the Bond Funds are suitable for investors' short-term needs,
the Funds discourage market-timing, and therefore have adopted the following
policies, among others, to discourage short-term trading:
. Each Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected because
of the timing of the request or because of a history of excessive trading by
the investor.
. There is a limit on the number of times you can exchange into and out of a
Fund (see "Exchanges" in the Investing with Vanguard section).
. Each Fund reserves the right to stop offering shares at any time.
The Vanguard funds do not permit market-timing. Do not invest in these Funds
if you are a market-timer.
Turnover Rate
Although the Funds generally seek to invest for the long term, each may sell
securities regardless of how long the securities have been held. A Fund may sell
securities based on the adviser's determination that securities with relatively
greater value are available for purchase by the Fund, or to raise cash.
Shorter-term bonds will mature or be sold, and need to be replaced, more
frequently than longer-term bonds. As a result, shorter-term bond funds may have
higher turnover rates than longer-term bond funds.
The Funds and Vanguard
The Funds are part of Vanguard Fixed Income Securities Funds, a member of The
Vanguard Group. Vanguard is a family of more than 35 investment companies with
more than 100 distinct investment portfolios holding assets worth more than $480
billion. All of the Vanguard funds share in the expenses associated with
business operations, such as personnel, office space, equipment, and
advertising.
<PAGE>
25
Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 distribution fees, each fund pays its
allocated share of The Vanguard Group's marketing costs.
Investment Advisers
Two investment advisers manage the Funds, subject to the control of the Funds'
Trustees and officers.
Wellington Management Company, LLP (WMC), 75 State Street, Boston, MA 02109,
manages the GNMA and Long-Term Corporate Funds for a quarterly fee, which is
based on certain annual percentage rates applied to the Funds' average month-end
assets for the quarter. WMC was founded in 1928, and currently manages more than
$214 billion in stock and bond portfolios, including 14 Vanguard Funds.
Vanguard Fixed Income Group (the Group), P.O. Box 2600, Valley Forge, PA
19482, manages the remaining Funds offered in this prospectus on an at-cost
basis. As of January 31, 1999, the Group managed more than $130 billion in total
assets.
For the fiscal year ended January 31, 1999, the Funds' investment advisory
expenses were as follows:
-------------------------------------------------------------------------
Effective Annual Rate
Fund as a Percentage of Average Net Assets
-------------------------------------------------------------------------
Short-Term Treasury 0.01%
Short-Term Federal 0.01
Short-Term Corporate 0.01
Intermediate-Term Treasury 0.01
Intermediate-Term Corporate 0.01
GNMA 0.01
Long-Term Treasury 0.01
Long-Term Corporate 0.03
-------------------------------------------------------------------------
The Funds have authorized their advisers to choose brokers or dealers to
handle the purchase and sale of securities for the Funds, and to get the best
available price and most favorable execution from these brokers or dealers with
respect to all transactions. Also, the Funds may direct the advisers to use a
particular broker for certain transactions in exchange for commission rebates or
research services provided to the Funds.
PLAIN TALK ABOUT
The Funds' Advisers
The individuals primarily responsible for the Short-Term Treasury, Short-Term
Federal, Short-Term Corporate, Intermediate-Term Treasury, Intermediate-Term
Corporate, and Long-Term Treasury Funds are:
Ian A. MacKinnon, Managing Director of Vanguard; has worked in investment
management since 1974; primary responsibility for Vanguard's internal
fixed-income policies and strategy since 1981; B.A., Lafayette College; M.B.A.,
Pennsylvania State University.
Robert F. Auwaerter, Principal of Vanguard and Fund Manager of the
Intermediate-Term Treasury, Intermediate-Term Corporate, and Long-Term Treasury
Funds since their inception and the Short-Term Corporate Fund since 1983; has
worked in investment management since 1978; has managed portfolio investments
since 1979; with Vanguard since 1981; B.S., University of Pennsylvania; M.B.A.,
Northwestern University.
John W. Hollyer, Principal of Vanguard and Fund Manager of the Short-Term
Treasury Fund since 1998 and Short-Term Federal Fund since 1996; has worked in
investment management since 1987; has managed portfolio investments since
joining Vanguard in 1989; B.S., University of Pennsylvania.
The individuals primarily responsible for managing the GNMA and Long-Term
Corporate Funds are:
Paul D. Kaplan, Senior Vice President and partner of WMC, and Fund Manager of
the GNMA Fund since 1994; has worked in investment management since 1974; with
WMC since 1978; B.A., Dickinson College; M.S., The Sloan School of Management,
Massachusetts Institute of Technology.
Earl E. McEvoy, Senior Vice President and partner of WMC, and Fund Manager of
the Long-Term Corporate Fund since 1994; has worked in investment management
since 1972; with WMC since 1978; B.A., Dartmouth College; M.B.A., Columbia
Business School.
<PAGE>
26
The Board of Trustees may, without prior approval from shareholders, change
the terms of the advisory agreements or hire new investment advisers, either as
replacements for WMC or the Group, or as additional advisers.
However, any such change will be communicated to shareholders in writing.
Year 2000 Challenge
The common practice in computer programming of using just two digits to identify
a year has resulted in the Year 2000 challenge throughout the information
technology industry. If unchanged, many computer applications and systems could
misinterpret dates occurring after December 31, 1999, leading to errors or
failure. Such failure could adversely affect a fund's operations, including
pricing, securities trading, and the servicing of shareholder accounts.
The Vanguard Group is dedicated to providing uninterrupted, high-quality
performance from our computer systems before, during, and after 2000. In July
1998, we completed the renovation and initial testing of our internal systems.
Vanguard is diligently working with external partners, suppliers, and vendors,
including fund managers and other service providers, to assure that the systems
with which we interact remain operational at all times.
In addition to taking every reasonable step to secure our internal systems and
external relationships, Vanguard is further developing contingency plans
intended to assure that unexpected systems failures will not adversely affect
the Funds' operations. Vanguard intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternate solutions if
necessary.
However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on a Fund's business,
operations, or financial condition. Additionally, a Fund's performance could be
hurt if a computer-system failure at a company or governmental unit affects the
price of securities the Fund owns.
PLAIN TALK ABOUT
Distributions
As a shareholder, you are entitled to your share of the funds' income from
interest, and gains from the sale of investments. You receive such earnings as
either an income dividend or a capital gains distribution. Income dividends come
from interest the fund earns from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term depending
on whether the fund held the securities for less than or more than one year.
Dividends, Capital Gains, and Taxes
As a shareholder, you are entitled to your share of a Fund's net income
(interest and gains less expenses). The Funds' income dividends accrue daily and
are distributed monthly; capital gains distributions, if any, generally occur in
December. In addition, the Funds may occasionally be required to make
supplemental capital gains distributions at some other time during the
year.
Dividend and capital gains distributions of Fund shares that are held as an
investment option in an employer-sponsored retirement or savings plan will be
reinvested in additional Fund shares and accumulate on a tax-deferred basis. You
will not owe taxes on these distributions until you begin withdrawals. You
should consult your plan administrator, your plan's Summary Plan Description or
your tax adviser about the tax consequences of an investment in any of the Funds
and of any plan withdrawals.
<PAGE>
27
Share Price
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of trading on the New York Stock Exchange (the NAV
is not calculated on holidays or other days the Exchange is closed). For each of
the Funds except the Short-Term Corporate Fund, net asset value per share is
computed by adding up the total value of the Fund's investments and other
assets, subtracting any of its liabilities (debts), and then dividing by the
number of Fund shares outstanding:
Total Assets - Liabilities
Net Asset Value = ---------------------------------
Number of Shares Outstanding
Net asset value per share for the Short-Term Corporate Fund is computed in a
similar way, by dividing the net assets attributed to each class by the number
of Fund shares outstanding for each class.
Knowing the daily net asset value is useful to you as a shareholder because it
indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A Note on Pricing: Each Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Funds' Board of Trustees.
Each Fund's share price can be found daily in the mutual fund listings of most
major newspapers under the heading "Vanguard Funds." Different newspapers use
different abbreviations for each Fund, but the most common are STTsry, STFed,
STCor, ITTsry, ITCorp, GNMA, LTTsry, and LTCorp.
<PAGE>
28
PLAIN TALK ABOUT
How to Read the Financial Highlights Tables
This explanation uses the Short-Term Treasury Fund as an example. The Fund
began fiscal 1999 with a net asset value (price) of $10.27 per share. During the
period, the Fund earned $.545 per share from investment income (interest) and
$.122 per share from investments that had appreciated in value or that were sold
for higher prices than the Fund paid for them.
Shareholders received $.567 per share in the form of dividend and capital
gains distributions. A portion of each year's capital gains distributions may
come from the prior year's capital gains.
The earnings ($.667 per share) minus the distributions ($.567 per share)
resulted in a share price of $10.37 at the end of the year. This was an increase
of $.10 per share (from $10.27 at the beginning of the year to $10.37 at the end
of the year). For a shareholder who reinvested the distributions in the purchase
of more shares, the total return from the Fund was 6.66% for the year.
As of January 31, 1999, the Fund had $1.20 billion in net assets. For the
year, its expense ratio was 0.27% ($2.70 per $1,000 of net assets); and its net
investment income amounted to 5.27% of its average net assets. It sold and
replaced securities valued at 132% of its net assets.
Financial Highlights
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years, and certain
information reflects financial results for a single Fund share in each case. The
total returns in each table represent the rate that an investor would have
earned or lost each year on an investment in the Fund (assuming reinvestment of
all dividends and capital gains distributions). This information has been
derived from the financial statements audited by PricewaterhouseCoopers LLP,
independent accountants, whose report--along with each Fund's financial
statements--is included in the Funds' most recent annual report to shareholders.
You may have the annual report sent to you without charge by contacting
Vanguard.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Vanguard Short-Term Treasury Fund
Year Ended January 31,
-------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.27 $10.16 $10.36 $ 9.89 $10.41
- ----------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .545 .590 .586 .625 .532
Net Realized and Unrealized Gain
(Loss) on Investments .122 .110 (.200) .470 (.500)
-------------------------------------------------
Total from Investment Operations .667 .700 .386 1.095 .032
-------------------------------------------------
Distributions
Dividends from Net Investment Income (.545) (.590) (.586) (.625) (.532)
Distributions from Realized Capital Gains (.022) -- -- -- (.020)
-------------------------------------------------
Total Distributions (.567) (.590) (.586) (.625) (.552)
- ----------------------------------------------------------------------------------------------
Net Asset Value, End of Year $10.37 $10.27 $10.16 $10.36 $ 9.89
==============================================================================================
Total Return 6.66% 7.11% 3.89% 11.37% 0.40%
==============================================================================================
Ratios/Supplemental Data
Net Assets, End of Year (Millions) $1,197 $1,009 $ 970 $ 919 $ 754
Ratio of Total Expenses to
Average Net Assets 0.27% 0.27% 0.25% 0.27% 0.28%
Ratio of Net Investment Income to
Average Net Assets 5.27% 5.80% 5.77% 6.14% 5.33%
Turnover Rate 132% 83% 86% 93% 126%
==============================================================================================
</TABLE>
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a measure of past dividend income. Total return includes both
past dividend income (assuming that it has been reinvested) plus realized and
unrealized capital appreciation (or depreciation). Neither yield nor total
return should be used to predict the future performance of a fund.
<PAGE>
29
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Vanguard Short-Term Federal Fund
Year Ended January 31,
----------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.19 $10.11 $10.28 $ 9.79 $ 10.38
- ---------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .581 .611 .615 .601 .550
Net Realized and Unrealized Gain (Loss) on Investments .070 .080 (.170) .490 (.580)
----------------------------------------------------
Total from Investment Operations .651 .691 .445 1.091 (.030)
----------------------------------------------------
Distributions
Dividends from Net Investment Income (.581) (.611) (.615) (.601) (.550)
Distributions from Realized Capital Gains -- -- -- -- (.010)
----------------------------------------------------
Total Distributions (.581) (.611) (.615) (.601) (.560)
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $10.26 $10.19 $10.11 $10.28 $ 9.79
===============================================================================================================
Total Return 6.57% 7.06% 4.51% 11.43% -0.21%
===============================================================================================================
Ratios/Supplemental Data
Net Assets, End of Year (Millions) $1,644 $1,460 $1,348 $1,402 $ 1,474
Ratio of Total Expenses to Average Net Assets 0.27% 0.27% 0.25% 0.27% 0.28%
Ratio of Net Investment Income to Average Net Assets 5.68% 6.04% 6.09% 5.93% 5.53%
Turnover Rate 107% 94% 57% 74% 57%
===============================================================================================================
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Vanguard Short-Term Corporate Fund
Year Ended January 31,
----------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.87 $10.75 $10.94 $10.40 $ 10.94
- ---------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .660 .664 .663 .671 .596
Net Realized and Unrealized Gain (Loss) on Investments (.010) .120 (.190) .540 (.540)
----------------------------------------------------
Total from Investment Operations .650 .784 .473 1.211 .056
----------------------------------------------------
Distributions
Dividends from Net Investment Income (.660) (.664) (.663) (.671) (.596)
Distributions from Realized Capital Gains -- -- -- -- --
----------------------------------------------------
Total Distributions (.660) (.664) (.663) (.671) (.596)
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $10.86 $10.87 $10.75 $10.94 $ 10.40
===============================================================================================================
Total Return 6.16% 7.53% 4.52% 11.95% 0.60%
===============================================================================================================
Ratios/Supplemental Data
Net Assets, End of Year (Millions) $5,529 $4,709 $4,531 $3,873 $ 2,924
Ratio of Total Expenses to Average Net Assets 0.27% 0.28% 0.25% 0.27% 0.28%
Ratio of Net Investment Income to Average Net Assets 6.08% 6.17% 6.18% 6.23% 5.66%
Turnover Rate 46% 45% 45% 62% 69%
===============================================================================================================
</TABLE>
<PAGE>
30
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Vanguard Intermediate-Term Treasury Fund
Year Ended January 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.80 $10.37 $10.90 $ 9.76 $ 10.82
- ---------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .630 .647 .649 .662 .603
Net Realized and Unrealized Gain (Loss) on Investments .360 .430 (.530) 1.140 (1.033)
-----------------------------------------------------
Total from Investment Operations .990 1.077 .119 1.802 (.430)
-----------------------------------------------------
Distributions
Dividends from Net Investment Income (.630) (.647) (.649) (.662) (.603)
Distributions from Realized Capital Gains -- -- -- -- (.027)
-----------------------------------------------------
Total Distributions (.630) (.647) (.649) (.662) (.630)
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $11.16 $10.80 $10.37 $10.90 $ 9.76
===============================================================================================================
Total Return 9.44% 10.78% 1.28% 18.96% -3.90%
===============================================================================================================
Ratios/Supplemental Data
Net Assets, End of Year (Millions) $1,876 $1,595 $1,279 $1,226 $ 848
Ratio of Total Expenses to Average Net Assets 0.27% 0.27% 0.25% 0.28% 0.28%
Ratio of Net Investment Income to Average Net Assets 5.76% 6.19% 6.26% 6.34% 6.05%
Turnover Rate 63% 30% 42% 56% 128%
===============================================================================================================
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Vanguard Intermediate-Term Corporate Fund
Year Ended January 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.03 $ 9.72 $10.17 $ 9.07 $ 10.04
- ---------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .627 .638 .639 .658 .587
Net Realized and Unrealized Gain (Loss) on Investments .122 .321 (.430) 1.100 (.970)
-----------------------------------------------------
Total from Investment Operations .749 .959 .209 1.758 (.383)
-----------------------------------------------------
Distributions
Dividends from Net Investment Income (.627) (.638) (.639) (.658) (.587)
Distributions from Realized Capital Gains (.082) (.011) (.020) -- --
-----------------------------------------------------
Total Distributions (.709) (.649) (.659) (.658) (.587)
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $10.07 $10.03 $ 9.72 $10.17 $ 9.07
===============================================================================================================
Total Return 7.73% 10.24% 2.29% 19.94% -3.73%
===============================================================================================================
Ratios/Supplemental Data
Net Assets, End of Year (Millions) $1,234 $ 899 $ 592 $ 424 $ 163
Ratio of Total Expenses to Average Net Assets 0.27% 0.26% 0.25% 0.28% 0.28%
Ratio of Net Investment Income to Average Net Assets 6.25% 6.51% 6.61% 6.70% 6.46%
Turnover Rate 71% 69% 85% 78% 97%
===============================================================================================================
</TABLE>
<PAGE>
31
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Vanguard GNMA Fund
Year Ended January 31,
------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 10.48 $10.23 $ 10.45 $ 9.71 $ 10.39
- ---------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .687 .718 .727 .734 .693
Net Realized and Unrealized Gain (Loss) on Investments .002 .253 (.220) .740 (.673)
------------------------------------------------------
Total from Investment Operations .689 .971 .507 1.474 .020
------------------------------------------------------
Distributions
Dividends from Net Investment Income (.687) (.718) (.727) (.734) (.693)
Distributions from Realized Capital Gains (.012) (.003) -- -- (.007)
------------------------------------------------------
Total Distributions (.699) (.721) (.727) (.734) (.700)
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 10.47 $10.48 $ 10.23 $10.45 $ 9.71
===============================================================================================================
Total Return 6.79% 9.86% 5.15% 15.64% 0.36%
===============================================================================================================
Ratios/Supplemental Data
Net Assets, End of Year (Millions) $11,354 $8,894 $ 7,400 $6,998 $ 5,851
Ratio of Total Expenses to Average Net Assets 0.30% 0.31% 0.27% 0.29% 0.30%
Ratio of Net Investment Income to Average Net Assets 6.56% 6.97% 7.16% 7.22% 7.04%
Turnover Rate 7% 3% 12% 7% 35%
===============================================================================================================
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Vanguard Long-Term Treasury Fund
Year Ended January 31,
------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 10.79 $ 9.84 $ 10.73 $ 9.23 $ 10.75
- ---------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .629 .643 .655 .669 .665
Net Realized and Unrealized Gain (Loss) on Investments .630 .950 (.877) 1.725 (1.401)
------------------------------------------------------
Total from Investment Operations 1.259 1.593 (.222) 2.394 (.736)
------------------------------------------------------
Distributions
Dividends from Net Investment Income (.629) (.643) (.655) (.669) (.665)
Distributions from Realized Capital Gains -- -- (.013) (.225) (.119)
------------------------------------------------------
Total Distributions (.629) (.643) (.668) (.894) (.784)
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 11.42 $10.79 $ 9.84 $10.73 $ 9.23
===============================================================================================================
Total Return 12.02% 16.85% -1.85% 26.72% -6.68%
===============================================================================================================
Ratios/Supplemental Data
Net Assets, End of Year (Millions) $ 1,450 $1,061 $ 898 $ 916 $ 671
Ratio of Total Expenses to Average Net Assets 0.27% 0.27% 0.25% 0.27% 0.28%
Ratio of Net Investment Income to Average Net Assets 5.69% 6.38% 6.66% 6.57% 7.02%
Turnover Rate 22% 18% 31% 105% 85%
===============================================================================================================
</TABLE>
<PAGE>
32
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Vanguard Long-Term Corporate Fund
Year Ended January 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 9.32 $ 8.71 $ 9.43 $ 8.18 $ 9.36
- -----------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .582 .613 .619 .627 .617
Net Realized and Unrealized Gain (Loss) on Investments .266 .685 (.566) 1.250 (1.108)
----------------------------------------------------------
Total from Investment Operations .848 1.298 .053 1.877 (.491)
----------------------------------------------------------
Distributions
Dividends from Net Investment Income (.582) (.613) (.619) (.627) (.617)
Distributions from Realized Capital Gains (.206) (.075) (.154) -- (.072)
----------------------------------------------------------
Total Distributions (.788) (.688) (.773) (.627) (.689)
- -----------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.38 $ 9.32 $ 8.71 $ 9.43 $ 8.18
=================================================================================================================
Total Return 9.52% 15.52% 0.86% 23.64% -5.12%
=================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Year (Millions) $4,232 $3,720 $3,324 $3,376 $ 2,607
Ratio of Total Expenses to Average Net Assets 0.30% 0.32% 0.28% 0.31% 0.32%
Ratio of Net Investment Income to Average Net Assets 6.26% 6.87% 7.06% 7.03% 7.37%
Turnover Rate 43% 33% 30% 49% 43%
=================================================================================================================
</TABLE>
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500,"
and "500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE>
33
Investing with Vanguard
One or more of the Funds is an investment option in your retirement or savings
plan. Your plan administrator or your employee benefits office can provide you
with detailed information on how to participate in your plan and how to elect a
Fund as an investment option.
. If you have any questions about a Fund or Vanguard, including a Fund's
investment objective, strategies, or risks, contact Vanguard's Participant
Services Center, toll-free, at 1-800-523-1188.
. If you have questions about your account, contact your plan administrator or
the organization that provides record-keeping services for your plan.
Investment Options and Allocations
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
Transactions
Contributions, exchanges, or redemptions of a Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the Fund's next-determined net
asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of trading on the New York Stock Exchange, generally 4 p.m. Eastern
time, you will receive that day's net asset value.
Exchanges
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of a Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than four
substantive "round trips" through the Fund (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
. Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
. Make sure to read that fund's prospectus. Contact Participant Services,
toll-free, at 1-800-523-1188 for a copy.
. Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
Accessing Fund Information by Computer
- --------------------------------------------------------------------------------
Vanguard on the World Wide Web www.vanguard.com
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
- --------------------------------------------------------------------------------
<PAGE>
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<PAGE>
Glossary of Investment Terms
Average Maturity
The average length of time until bonds held by a fund reach maturity (or are
called) and are repaid. In general, the longer the average maturity, the more a
fund's share price will fluctuate in response to changes in market interest
rates.
Bond
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and make regular interest payments until
that date.
Capital Gains Distribution
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit, minus any realized losses.
Cash Reserves
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
Dividend Income
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
Dollar-Cost Averaging
Investing equal amounts of money at regular intervals on an ongoing basis. This
technique ensures that an investor buys fewer shares when prices are high and
more shares when prices are low.
Expense Ratio
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
Face Value
The amount to be paid at maturity of a bond; also known as the par value or
principal.
Fixed-Income Securities
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
Investment Adviser
An organization that makes the day-to-day decisions regarding a fund's
investments.
Investment-Grade
A bond whose credit quality is considered by independent bond-rating agencies to
be sufficient to ensure timely payment of principal and interest under current
economic circumstances.
Maturity
The date when a bond issuer agrees to repay the bond's principal, or face value,
to the bond's buyer.
Net Asset Value (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
Price/Earnings (P/E) Ratio
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
Principal
The amount of your own money you put into an investment.
Securities
Stocks, bonds, money market instruments, and other investment vehicles.
Total Return
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
Volatility
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
Yield
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[LOGO OF THEVANGUARDGROUP APPEARS HERE]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
For More Information
If you'd like more information about Vanguard Bond Funds,
the following documents are available
free upon request:
Annual/Semiannual Report to Shareholders
Additional information about the Funds' investments is available in the Funds'
annual and semiannual reports to shareholders. In these reports, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Funds' performance during the most recent fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about the Funds.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Funds or other Vanguard funds,
please contact us as follows:
The Vanguard Group
Participant Services Center
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone:
1-800-523-1188
Text Telephone:
1-800-523-8004
World Wide Web:
www.vanguard.com
Information provided by the Securities and Exchange Commission (SEC)
You can review and copy information about the Funds (including the SAI) at the
SEC's Public Reference Room in Washington, D.C. To find out more about this
public service, call the SEC at 1-800-SEC-0330. Reports and other information
about the Funds are also available on the SEC's website (www.sec.gov), or you
can receive copies of this information, for a fee, by writing the Public
Reference Section, Securities and Exchange Commission, Washington, DC
20549-6009.
Funds' Investment Company Act
file number: 811-2368
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
I028N-06/01/1999
<PAGE>
Vanguard Short-Term Corporate Fund
Institutional Shares
Prospectus
June 1, 1999
A Bond Mutual Fund
Contents
1 Fund Profile
2 Additional Information
3 More on the Fund
7 The Fund and Vanguard
7 Investment Adviser
8 Year 2000 Challenge
8 Dividends, Capital Gains, and Taxes
10 Share Price
11 Financial Highlights
12 Investing with Vanguard
12 Services and Account Features
12 Types of Accounts
13 Buying Shares
14 Redeeming Shares
17 Transferring Registration
17 Fund and Account Updates
18 Mandatory Conversion to Investor Shares
Glossary (inside back cover)
- --------------------------------------------------------------------------------
Why Reading This Prospectus Is Important
This prospectus explains the objective, risks, and strategies of Vanguard Short-
Term Corporate Fund Institutional Shares (a part of Vanguard Bond Funds). To
highlight terms and concepts important to mutual fund investors, we have
provided "Plain Talk(R)" explanations along the way. Reading the prospectus will
help you to decide whether the Fund is the right investment for you. We suggest
that you keep it for future reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Important Note
The Short-Term Corporate Fund features two separate classes of shares: Investor
Shares and Institutional Shares. Short-Term Corporate Fund Institutional Shares
have an investment minimum of $10 million and are available through this
prospectus. Short-Term Corporate Fund Investor Shares have an investment minimum
of $3,000, and are available through separate prospectuses (one for individual
investors and one for participants in employer-sponsored retirement or savings
plans).
Investor Shares and Institutional Shares do not have the same expenses; as a
result, the performance of these separate classes will differ.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
<PAGE>
1
Fund Profile
The following profile summarizes key features of Vanguard Short-Term Corporate
Fund.
INVESTMENT OBJECTIVE
The Fund is a bond fund that seeks to provide a high level of current income and
preserve investors' principal.
INVESTMENT STRATEGIES
The Fund invests in a variety of high-quality and, to a lesser extent, medium-
quality fixed income securities, primarily short-term and intermediate-term
corporate bonds. High-quality bonds are those rated the equivalent of "A3" or
better by Moody's Investors Service, Inc. or another independent rating agency;
medium quality bonds are those rated the equivalent of Moody's "Baa1", "Baa2",
or "Baa3". The Fund is permitted to invest in foreign bonds to a limited extent,
so long as they are denominated in U.S. dollars. The Fund will maintain a
dollar-weighted average maturity of between one and three years. For more
information on investment strategies, see pages 5-6.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally high for short-term bonds.
. Interest rate risk, which is the chance that bond prices overall, including
the prices of bonds held by the Fund, will decline over short or even long
periods due to rising interest rates. Interest rate risk is generally low for
short-term bonds.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner. Credit risk, which has the potential to
hurt the Fund's performance, should be low for the Fund.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance for Institutional Shares in
the one calendar year since inception. The table shows how the average annual
returns for one calendar year and since inception compare with those of a broad-
based securities market index. Keep in mind that the Fund's past performance
does not indicate how it will perform in the future.
[BAR GRAPH APPEARS HERE]
- --------------------------------------------------------------------------------
Annual Total Returns Institutional Shares
- --------------------------------------------------------------------------------
1998 6.69%
- --------------------------------------------------------------------------------
The Fund's year-to-date return as of the quarter ended March 31, 1999 was 0.96%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 2.87% (quarter ended September 30, 1998) and the lowest return for a
quarter was 0.44% (quarter ended December 31, 1998).
<PAGE>
2
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 Year Since Inception*
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Vanguard Short-Term Corporate Fund Institutional Shares 6.69% 6.73%
Lehman Brothers 1-5 Year Investment Grade
Debt Index 7.55 7.96
- ------------------------------------------------------------------------------------------------------
*September 30, 1997.
- ------------------------------------------------------------------------------------------------------
</TABLE>
PLAIN TALK ABOUT
The Costs of Investing
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
PLAIN TALK ABOUT
Fund Expenses
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Short-Term Corporate Fund Institutional Shares' expense ratio
in fiscal year 1999 was 0.15%, or $1.50 per $1,000 of average net assets. The
average short-term domestic bond fund had expenses in 1998 of 0.85%, or $8.50
per $1,000 of average net assets, according to Lipper Inc., which reports on the
mutual fund industry.
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold Institutional Shares of the Fund. The expenses shown under Annual Fund
Operating Expenses are based upon those incurred in the fiscal year ended
January 31, 1999.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from
the Fund's assets)
Management Expenses: 0.14%
12b-1 Distribution Fees: None
Other Expenses: 0.01%
Total Annual Fund Operating Expenses: 0.15%
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's Institutional Shares. This example assumes that the Fund
provides a return of 5% a year, and that operating expenses remain the same. The
results apply whether or not you redeem your investment at the end of each
period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$15 $48 $85 $192
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
<PAGE>
3
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa, since inception
Inception Date
September 30, 1997
Net Assets as of January 31, 1999
$421 million (for Institutional Shares)
Suitable for IRAs
Yes
Minimum Initial Investment
$10 million
Newspaper Abbreviation
STCorIst
Vanguard Fund Number
858
Cusip Number
922031877
Ticker Symbol
VFSIX
More on the Fund
The following sections discuss other important features of the Fund, including
additional risk information, investment strategies, costs and market timing, and
turnover rate. Note that the Fund's investment objective is not fundamental, and
may be changed without a shareholder vote.
Additional Risk Information
Because the Fund invests primarily in bonds, it is subject to certain risks.
[GRAPHIC The Fund is subject to income risk, which is the possibility
APPEARS HERE] that the Fund's dividends (income) will decline due to falling
interest rates. Income risk is generally high for short-term
bonds.
Changes in interest rates will affect bond prices as well as bond income.
[GRAPHIC The Fund is subject to interest rate risk, which is the
APPEARS HERE] possibility that bond prices overall will decline over short or
even long periods due to rising interest rates. Interest rate
risk should be low for short-term bonds.
In the past, bond investors have seen the value of their investment rise and
fall--sometimes significantly--with changes in interest rates. Between December
1976 and September 1981, for instance, rising interest rates caused long-term
bond prices to fall by almost 48%.
Because the Fund invests mainly in bonds, changes in interest rates will
impact, to varying degrees, the value of the Fund's assets. To illustrate how
much of an impact, the following table shows the effect of a 2% change (both up
and down) in interest rates on three bonds with a face value of $1,000; each has
a different maturity.
PLAIN TALK ABOUT
Bonds and Interest Rates
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--causing you to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you should be able to sell your 5% bond for more than you
paid.
<PAGE>
4
PLAIN TALK ABOUT
Credit Quality
A bond's credit quality depends on the issuer's ability to pay interest on the
bond and, ultimately, to repay the debt. The lower the rating by one of the
independent bond-rating agencies (for example, Moody's or Standard & Poor's),
the greater the chance (in the rating agency's opinion) that the bond issuer
will default, or fail to meet its payment obligations. All things being equal,
the lower a bond's credit rating, the higher its yield should be to compensate
investors for assuming additional risk. Bonds rated in one of the four highest
rating categories are considered "investment grade." The Fund's Statement of
Additional Information includes a detailed description of the credit rating
scales used by major, independent bond-rating agencies.
- --------------------------------------------------------------------------------
How Interest Rate Changes Affect Bonds*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value of a $1,000 Bond Value of a $1,000 Bond
After a 2% Increase After a 2% Decrease
Type of Bond (Maturity) in Interest Rates in Interest Rates
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-Term (2.5 years) $956 $1,046
Intermediate-Term (10 years) 870 1,156
Long-Term (20 years) 816 1,251
- --------------------------------------------------------------------------------------------------
*Assuming a 7% yield.
- --------------------------------------------------------------------------------------------------
</TABLE>
These figures are for illustration only; you should not regard them as an
indication of future returns from the bond market as a whole or the Fund in
particular.
[GRAPHIC The Fund is subject to credit risk, which is the possibility
APPEARS HERE] that a bond issuer will fail to pay interest and principal in a
timely manner.
Since the Fund invests primarily in high-quality bonds, credit risk should be
low for the Fund. The dollar-weighted average credit quality of the Fund's
holdings as rated by Moody's Investors Service, as of January 31, 1999, was A1.
The following table details the Fund's credit quality policies. Note that the
Fund applies these policies at the time of investment. The Fund may hold onto
bonds that have been downgraded, even if they are no longer eligible for
purchase by the Fund.
- --------------------------------------------------------------------------------
Credit Ratings of the Fund's Investments (Percentage of Fund Assets)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Issued or
Backed by High
U.S. Gov't, and or Highest Upper Speculative
its Agencies Quality Medium Medium or Lower
Instrumentalities (non-Gov't) Quality Quality Quality
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
--At least 70%-- No more 0%
than 30%
- -------------------------------------------------------------------------------------------------
</TABLE>
The Fund may invest no more than 30% of its assets in medium-quality bonds,
preferred stocks, and convertible securities.
To a limited extent, the Fund is also exposed to event risk, which is the
possibility that corporate fixed-income securities held by the Fund may suffer a
substantial decline in credit quality and market value due to a corporate
restructuring.
PLAIN TALK ABOUT
Bond Maturities
A bond is issued with a specific maturity date--the date when the bond's issuer,
or seller, must pay back the bond's initial value (known as its "face value").
Bond maturities generally range from less than one year (short term) to 30 years
(long term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise--but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks in hope of higher yields; short-term bond investors should be willing to
accept lower yields in return for less fluctuation in the value of their
investment.
<PAGE>
5
PLAIN TALK ABOUT
Types of Bonds
Bonds are issued (sold) by many sources: Corporations issue corporate bonds; the
federal government issues U.S. Treasury bonds; agencies of the federal
government issue agency bonds; and mortgage holders issue "mortgage-backed"
pass-through certificates such as those of the Government National Mortgage
Association (GNMAs). Each issuer is responsible for paying back the bond's
initial value as well as making periodic interest payments.
The Fund is generally managed without regard to tax ramifications.
[GRAPHIC The Fund is subject to manager risk, which is the possibility
APPEARS HERE] that the Fund's adviser will do a poor job of selecting
securities.
Investment Strategies
The grid below shows, at a glance, the types of financial instruments that may
be purchased by the Fund. Explanations of each type of financial instrument
follow the grid.
---------------------------------------------------------------------
Short-Term Corporate Fund
---------------------------------------------------------------------
Corporate Debt .
U.S. Government & Agency Bonds .
State & Municipal Bonds .
Cash Reserves .
Futures, Options, and Other Derivatives .
Asset-Backed Securities .
International Dollar-Denominated Bonds .
Preferred Stocks .
Convertible Securities .
Collateralized Mortgage Obligations (CMOs) .
Restricted or Illiquid Securities .
---------------------------------------------------------------------
. Corporate debt. As the name implies, corporate debt obligations--usually
called bonds--represent loans by an investor to a corporation.
. U.S. government and agency bonds. These bonds represent loans by an investor
to the U.S. Treasury Department or a wide variety of governmental agencies
and instrumentalities. Timely payment of principal and interest on U.S.
Treasury bonds is always guaranteed by the full faith and credit of the U.S.
government; many (but not all) agency bonds have the same guarantee.
. State and municipal bonds. These bonds represent loans by an investor to a
state or municipal government, or one of their agencies or instrumentalities.
. Cash reserves. This blanket term describes a variety of short-term fixed-
income investments, including money market instruments, commercial paper,
bank certificates of deposit, banker's acceptances, and repurchase
agreements. Repurchase agreements represent short-term (normally overnight)
loans by the Fund to commercial banks or large securities dealers.
. Futures, options, and other derivatives.
The Fund may invest up to 20% of its total assets in bond futures contracts,
options, credit swaps, and interest rate swaps, and other types of
derivatives. Losses (or gains) involving futures contracts can sometimes be
substantial--in part because a relatively small price movement in a futures
contract may result in an immediate and substantial loss (or gain) for a
fund. Similar risks exist for other types of derivatives. For this reason,
the Fund will not use futures, options, or other derivatives for speculative
purposes or as leveraged investments that magnify the gains or losses of an
investment.
<PAGE>
6
PLAIN TALK ABOUT
Derivatives
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
The reasons for which the Fund will invest in futures and options are:
--To keep cash on hand to meet shareholder redemptions or other needs
while simulating full investment in bonds.
--To reduce the Fund's transaction costs or add value when these
instruments are favorably priced.
. Asset-backed securities. These bonds represent partial ownership in pools of
consumer or commercial loans most often credit card, automobile, or trade
receivables. Asset-backed securities are issued by entities formed solely for
that purpose, but their value ultimately depends on repayments by underlying
borrowers. A primary risk of asset-backed securities is that their maturity
is difficult to predict and driven by borrowers' prepayments.
. International dollar-denominated bonds. The Fund may invest in bonds of
foreign issuers, so long as they are denominated in U.S. dollars. To the
extent that it owns foreign bonds, the Fund is subject to country risk, which
is the possibility that political events (such as war), financial problems
(such as government default), or natural disasters (such as an earthquake)
will weaken a country's economy and cause investments in that country to lose
money. Because the bond's value is designated in dollars rather than the
currency of the issuer's country, the investor is not exposed to currency
risk; rather, the issuer assumes that risk, usually in order to attract U.S.
investors.
. Preferred stock. Holders of preferred stock receive set dividends from the
issuer. Their claim on the issuer's income and assets rank before that of
common stock holders, but after that of bond holders.
. Convertible securities. Bonds or preferred stocks that are convertible into,
or exchangeable for, common stocks are known as convertible securities.
. Collateralized mortgage obligations (CMOs). CMOs are special bonds that are
collateralized by mortgages or mortgage pass-through securities. In a CMO
deal, cash flow rights on underlying mortgages-the rights to receive
principal and interest payments-are divided up and prioritized to create
short-, intermediate-, and long-term bonds. CMOs rely on assumptions about
the timing of cash flows on the underlying mortgages, including expected
prepayment rates. The primary risk of a CMO is that these assumptions are
wrong, which would either shorten or lengthen the bond's maturity. The Fund
will invest only in CMOs that are believed consistent with its maturity and
credit quality standards.
. Restricted or illiquid securities. Restricted securities are privately placed
securities that, pursuant to the rules of the Securities and Exchange
Commission, generally can only be sold to qualified institutional buyers.
Because these securities can in turn be resold only to qualified
institutional investors, they may be considered illiquid securities-that is,
they could be difficult for the Fund to convert to cash, if needed. The Fund
will not invest more than 15% of its net assets in illiquid securities. The
Fund's Board of Trustees may, from time to time, determine that certain
restricted securities are liquid; such securities would not be subject to the
15% limitation. In other words, the Fund may invest in restricted securities
that are deemed to be liquid securities without limit.
The Fund may, from time to time, take temporary defensive measures-such as
holding cash reserves without limit-that are inconsistent with the Fund's
primary investment strategies, in response to adverse market, economic,
political, or other conditions. In taking such measures, the Fund may not
achieve its investment objective.
Costs and Market-Timing
Some investors try to profit from a strategy called market-timing-switching
money into investments when they expect prices to rise, and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the
<PAGE>
7
PLAIN TALK ABOUT
Turnover Rate
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes.
investors who do not generate the costs. Although the Short-Term Corporate Fund
Institutional Shares is suitable for investors' short-term needs, the Fund
discourages market-timing, and therefore has adopted the following policies,
among others, to discourage short-term trading:
. The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the request or because of a history of excessive
trading by the investor.
. There is a limit on the number of times you can exchange into and out of the
Fund (see "Redeeming Shares" in the Investing with Vanguard section).
. The Fund reserves the right to stop offering shares at any time.
The Vanguard funds do not permit market-timing. Do not invest in this Fund if
you are a market-timer.
Turnover Rate
The Fund may sell securities regardless of how long the securities have been
held. The Fund may sell securities based on the adviser's determination that
securities with relatively greater value are available for purchase by the Fund,
or to raise cash. Shorter-term bonds will mature or be sold--and need to be
replaced--more frequently than longer-term bonds. As a result, shorter-term bond
funds may have higher turnover rates than longer-term bond funds.
The Fund and Vanguard
Vanguard Short-Term Corporate Fund is part of Vanguard Fixed Income Securities
Funds, a member of The Vanguard Group. Vanguard is a family of more than 35
investment companies with more than 100 distinct investment portfolios holding
assets worth more than $480 billion. All of the Vanguard funds share in the
expenses associated with business operations, such as personnel, office space,
equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 distribution fees, each fund pays its
allocated share of The Vanguard Group's marketing costs.
Investment Adviser
Vanguard Fixed Income Group (the Group), P.O. Box 2600, Valley Forge, PA, 19482,
provides advisory services on an at-cost basis to the Fund. For the fiscal year
ended January 31, 1999, the Fund's investment advisory expenses represented an
effective annual rate of 0.01% of the Fund's average net assets.
PLAIN TALK ABOUT
Vanguard's Unique
Corporate Structure
The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
<PAGE>
8
PLAIN TALK ABOUT
The Fund's Adviser
Vanguard Fixed Income Group provides investment advisory services to many
Vanguard funds; as of January 31, 1999, the Group managed more than $130
billion. The individuals responsible for overseeing the Fund's investments are:
Ian MacKinnon, Managing Director of Vanguard; has worked in investment
management since 1974; primary responsibility for Vanguard's internal fixed
income policies and strategy since 1981; B.A., Lafayette College; M.B.A.,
Pennsylvania State University.
Robert F. Auwaerter, Principal of Vanguard and Fund Manager of the Short-Term
Corporate Fund since 1983; has worked in investment management since 1978; has
managed portfolio investments since 1979; B.S., University of Pennsylvania;
M.B.A., Northwestern University.
The Fund has authorized the Group to choose brokers or dealers to handle the
purchase and sale of securities for the Funds, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions. Also, the Fund may direct the Group to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Fund.
Year 2000 Challenge
The common practice in computer programming of using just two digits to identify
a year has resulted in the Year 2000 challenge throughout the information
technology industry. If unchanged, many computer applications and systems could
misinterpret dates occurring after December 31, 1999, leading to errors or
failure. Such failure could adversely affect a fund's operations, including
pricing, securities trading, and the servicing of shareholder accounts.
The Vanguard Group is dedicated to providing uninterrupted, high-quality
performance from our computer systems before, during, and after 2000. In July
1998, we completed the renovation and initial testing of our internal systems.
Vanguard is diligently working with external partners, suppliers, and vendors,
including fund managers and other service providers, to assure that the systems
with which we interact remain operational at all times.
In addition to taking every reasonable step to secure our internal systems
and external relationships, Vanguard is further developing contingency plans
intended to assure that unexpected systems failures will not adversely affect
the Fund's operations. Vanguard intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternate solutions if
necessary.
However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on the Fund's business,
operations, or financial condition. Additionally, the Fund's performance could
be hurt if a computer-system failure at a company or governmental unit affects
the price of securities the Fund owns.
Dividends, Capital Gains, and Taxes
As a shareholder, you are entitled to your share of the Fund's net income
(interest and gains less expenses).The Fund's income dividends accrue daily and
are distributed monthly; capital gains distributions, if any, generally occur in
December. In addition, the Fund may occasionally be required to make
supplemental capital gains distributions at some other time during the year. You
can receive distributions of income or capital gains in cash, or you can have
PLAIN TALK ABOUT
Distributions
As a shareholder, you are entitled to your share of the fund's income from
interest, and gains from the sale of investments. You receive such earnings as
either an income dividend or a capital gains distribution. Income dividends come
from interest the fund earns from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term depending
on whether the fund held the securities for less than or more than one year.
<PAGE>
9
PLAIN TALK ABOUT
"Buying a Capital Gain"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), it is not to your advantage to buy shares of a fund shortly before it
makes a capital gains distribution, because doing so can cost you money in
taxes. This is known as "buying a capital gain." For example: On January 15, you
invest $5,000, buying 250 shares for $20 each. If the fund pays a capital gains
distribution of $1 per share on January 16, its share price would drop to $19
(not counting market change). You still have only $5,000 (250 shares x $19 =
$4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you
owe tax on the $250 distribution you received--even if you had reinvested it in
more shares. To avoid "buying a capital gain," check a fund's distribution
schedule before you invest.
them automatically invested in more shares of the Fund. In either case, these
distributions are taxable to you. It is important to note that distributions of
dividends and capital gains that are declared in December--if paid to you by the
end of January--are taxed as if they had been paid to you in December.
Vanguard will send you a statement each year showing the tax status of all
your distributions. If you have chosen to receive dividend and/or capital gains
distributions in cash, and the postal or other delivery service is unable to
deliver checks to your address of record, we will change the distribution option
so that all dividends and other distributions are automatically invested in
additional shares. We will not pay interest on uncashed distribution checks.
. The dividends and short-term capital gains that you receive are taxable to
you as ordinary income.
. Any distributions of net long-term capital gains by the Fund are taxable to
you as long-term capital gains, no matter how long you've owned shares in
the Fund.
. Although the Fund does not seek to realize any particular amount of capital
gains during a year, such gains are realized from time to time as by-
products of its ordinary investment activities. Consequently, distributions
may vary considerably from year to year.
. A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
. Distributions of dividends or capital gains, and capital gains or losses
from your sale or exchange of Fund shares, may be subject to state and local
income taxes as well. Many states, however, grant tax-free status to
dividends paid from interest earned on direct securities of the U.S.
government, subject in some states to minimum investment requirements that
must be met by the Fund. GNMA securities, repurchase agreements
collateralized by U.S. government securities, and certain other securities
generally do not qualify for tax-free treatment.
The tax information in this prospectus is provided as general information and
will not apply to you if you are investing through a tax-deferred account
such as an IRA or a qualified employee benefit plan. (Non-U.S. investors may
be subject to U.S. withholding and estate tax.) You should consult your tax
adviser about the tax consequences of an investment in the Fund.
Important Note: By law, the Fund must withhold 31% of your taxable
distributions and any redemption proceeds if you do not provide your correct
taxpayer identification number, or certify that it is correct, or if the IRS
instructs the Fund to do so.
<PAGE>
10
Share Price
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of trading on the New York Stock Exchange (the NAV
is not calculated on holidays or other days the Exchange is closed). Net asset
value per share, for each class of Fund shares, is computed by dividing the net
assets attributed to each class by the number of Fund shares outstanding for
that class.
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A Note on Pricing: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of most
major newspapers under the heading "Vanguard Funds." Different newspapers use
different abbreviations for the Fund, but the most common is STCorIst.
<PAGE>
11
Financial Highlights
The following financial highlights table is intended to help you understand the
Fund's financial performance since inception, and certain information reflects
financial results for a single Fund share. The total returns in each table
represent the rate that an investor would have earned or lost each year on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been derived from the financial statements
audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in Vanguard Bond
Funds' most recent annual report to shareholders. You may have the annual report
sent to you without charge by contacting Vanguard.
PLAIN TALK ABOUT
How to Read the
Financial Highlights Table
The Fund began fiscal 1999 with a net asset value (price) of $10.87 per share.
During the period, the Fund earned $.673 per share from investment income
(interest). There was a decline of $.010 per share from investments that had
depreciated in value or that were sold for lower prices than the fund paid for
them.
Shareholders received $.673 per share in the form of dividend distributions.
The earnings ($.663 per share) minus the distributions ($.673 per
share) resulted in a share price of $10.86 at the end of the year. This was a
decrease of $.01 per share (from $10.87 at the beginning of the year to $10.86
at the end of the year). For a shareholder who reinvested the distributions in
the purchase of more shares, the total return from the Fund's Institutional
Shares was 6.28% for the year.
As of January 31, 1999, the Fund's Institutional Shares had $421 million in
net assets. For the year, its expense ratio was 0.15% ($1.50 per $1,000 of net
assets); and its net investment income amounted to 6.19% of its average net
assets. It sold and replaced securities valued at 46% of its net assets.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Vanguard Short-Term Corporate Fund
Institutional Shares
Year Ended Sep. 30, 1997*, to
January 31, 1999 Jan. 31, 1998
- -----------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.87 $10.80
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Operations
Net Investment Income .673 .229
Net Realized and Unrealized Gain (Loss) on Investments (.010) .070
-------------------------------------
Total from Investment Operations .663 .299
-------------------------------------
Distributions
Dividends from Net Investment Income (.673) (.229)
Distributions from Realized Capital Gains -- --
-------------------------------------
Total Distributions (.673) (.229)
- -----------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.86 $10.87
===============================================================================================
Total Return 6.28% 2.79%
===============================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) $421 $263
Ratio of Total Expenses to Average Net Assets 0.15% 0.15%**
Ratio of Net Investment Income to Average Net Assets 6.19% 6.28%**
Turnover Rate 46% 45%
===============================================================================================
</TABLE>
*Inception.
**Annualized.
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a measure of past dividend income. Total return includes both
past dividend income (assuming that it has been reinvested) plus realized and
unrealized capital appreciation (or depreciation). Neither yield nor total
return should be used to predict the future performance of a fund.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500,"
and "500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE>
12
Investing with Vanguard
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services we
offer. Booklets providing detailed information are available on the services
marked with a [GRAPHIC APPEARS HERE]. Please call us to request copies.
Services and Account Features
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
Telephone Redemptions (Sales and Exchanges)
Automatically set up for this Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
Checkwriting [GRAPHIC APPEARS HERE]
Method for drawing money from your account by writing a check for $250 or more.
- --------------------------------------------------------------------------------
Vanguard Automatic Exchange Service(TM) [GRAPHIC APPEARS HERE]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
Vanguard Tele-Account(R) 1-800-662-6273 (ON-BOARD) [GRAPHIC APPEARS HERE]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange fund shares.
- --------------------------------------------------------------------------------
Access Vanguard(TM) www.vanguard.com [GRAPHIC APPEARS HERE]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through the website. We will then send to you, by mail, an account
access password that allows you to process the following financial and
administrative transactions online:
. Open a new account.*
. Buy, sell, or exchange shares of most funds.
. Change your name/address.
. Add/change fund options (including dividend options, bank instructions,
checkwriting, and Vanguard Automatic Exchange Service).
*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
Services for Clients of Vanguard's Institutional Division: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks.
- --------------------------------------------------------------------------------
Types of Accounts
Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
For One or More People
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
For Holding Personal Trust Assets [GRAPHIC APPEARS HERE]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
For an Organization [GRAPHIC APPEARS HERE]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
A Note on Investing with Vanguard Through Other Firms
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------
Buying Shares
You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value. You may convert Investor Shares
of the Fund into Institutional Shares provided that you meet the minimum initial
investment requirements for Institutional Shares.
- --------------------------------------------------------------------------------
Minimum Investment to . . .
open a new account
$10 million
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
By Wire to Open a New Account or Add to an Existing Account [GRAPHIC APPEARS
HERE]
Call your assigned Service Associate to arrange your wire transaction.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
Vanguard Short-Term Corporate Fund Institutional Shares-858
[Account number, or temporary number for a new account]
[Registered account owner/s]
[Registered address]
- --------------------------------------------------------------------------------
By Mail to . . . [GRAPHIC APPEARS HERE]
open a new account
Complete and sign the application form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form.
Make your check payable to: The Vanguard Group-858
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 100 Vanguard Boulevard
Valley Forge, PA 19482-2900 Malvern, PA 19355
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
<PAGE>
14
Buying Shares (continued)
- --------------------------------------------------------------------------------
By Telephone to . . . [GRAPHIC APPEARS HERE]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or your assigned Service Associate
during business hours--to exchange from another Vanguard fund account with the
same registration (name, address, taxpayer identification number, and account
type).
add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or your assigned Service Associate
during business hours--to exchange from another Vanguard fund account with the
same registration (name, address, taxpayer identification number, and account
type).
Vanguard Tele-Account
1-800-662-6273
*You must obtain a Personal Identification Number through Tele-Account at least
seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you've requested a telephone transaction and a confirmation
number has been assigned, the transaction cannot be revoked. We reserve the
right to refuse any purchase request.
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check at any
time. However, while your redemption request will be processed at the next-
determined net asset value after it is received, your redemption proceeds will
not be available until payment for your purchase is collected, which may take up
to ten calendar days.
- --------------------------------------------------------------------------------
A Note on Large Purchases
It is important that you call Vanguard before you invest a large dollar amount.
We must consider the interests of all Fund shareholders and so reserve the right
to refuse any purchase that will disrupt the Fund's operation or performance.
- --------------------------------------------------------------------------------
Redeeming Shares
This section describes how you can redeem--that is, sell or exchange--the Fund's
shares.
When Selling Shares:
. Vanguard sends the redemption proceeds to you or a designated third party.*
. You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 16.
When Exchanging Shares:
. The redemption proceeds are used to purchase shares of a different Vanguard
fund.
. You must meet the receiving fund's minimum investment requirements.
. Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus. For
exchanges, the purchase side of the transaction will be based on the receiving
fund's next-determined share price, again subject to any special rules discussed
in this prospectus.
- --------------------------------------------------------------------------------
Note: Once a redemption is requested and a confirmation number given, the
transaction cannot be canceled.
- --------------------------------------------------------------------------------
How to Request a Redemption
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail. You can also sell shares by check.
- --------------------------------------------------------------------------------
<PAGE>
15
- --------------------------------------------------------------------------------
Online Requests [GRAPHIC APPEARS HERE]
Access Vanguard at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through the website. We will then send you, by mail, an account access password
that will enable you to sell or exchange shares online (as well as perform other
transactions).
Note: The Vanguard funds whose shares you cannot exchange online or by
telephone are Vanguard U.S. Stock Index Funds, Vanguard Balanced Index Fund,
Vanguard International Stock Index Funds, Vanguard REIT Index Fund, Vanguard
Total International Stock Index Fund, and Vanguard Growth and Income Fund. These
funds do, however, permit online and telephone exchanges within IRAs and other
retirement accounts. If you sell shares of these funds online, you will receive
a redemption check at your address of record.
- --------------------------------------------------------------------------------
Telephone Requests [GRAPHIC APPEARS HERE]
Call Vanguard Tele-Account 24 hours a day--or your assigned Service Associate
during business hours--to sell or exchange shares. You can exchange shares from
this Fund to open an account in another Vanguard fund or to add to an existing
Vanguard fund account with an identical registration.
- --------------------------------------------------------------------------------
Special information: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
[X] The ten-digit account number.
[X] The name and address exactly as registered on the account.
[X] The primary Social Security or employer identification number as registered
on the account.
[X] The Personal Identification Number, if applicable.
Please note that Vanguard will not be responsible for any account losses due
to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A Note on Unusual Circumstances
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.
- --------------------------------------------------------------------------------
Mail Requests [GRAPHIC APPEARS HERE]
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
- --------------------------------------------------------------------------------
Check Requests [GRAPHIC APPEARS HERE]
You can sell shares by writing a check for $250 or more.
- --------------------------------------------------------------------------------
<PAGE>
16
Redeeming Shares (continued)
- --------------------------------------------------------------------------------
A Note on Large Redemptions
It is important that you call Vanguard before you redeem a large dollar amount.
We must consider the interests of all fund shareholders and so reserve the right
to delay delivery of your redemption proceeds--up to seven days--if the amount
will disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in kind, i.e., in securities, rather than in cash. If
payment is made in kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------
Options for Redemption Proceeds
You may receive your redemption proceeds in one of three ways: check, wire
(money market funds and other daily dividend funds only), or exchange to another
Vanguard fund.
- --------------------------------------------------------------------------------
Check Redemptions
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
Wire Redemptions [GRAPHIC APPEARS HERE]
The wire redemption option is not automatic; you must establish it by completing
a special form or the appropriate section of your account application. Wire
redemptions can be initiated by mail or by telephone during Vanguard's business
hours, but not online.
For Money Market Funds:
For telephone requests made by 10:30 a.m. EST, the wire will arrive at your bank
by the close of business that same day. Requests made by 4 p.m. EST will arrive
at your bank by the close of business on the following business day.
For Other Daily Dividend Funds:
For telephone requests made by 4 p.m. EST, the wire will arrive at your bank by
the close of business on the following business day.
- --------------------------------------------------------------------------------
NOTE: Wire redemptions of less than $5,000 are subject to a $5 processing fee.
- --------------------------------------------------------------------------------
Exchange Redemptions
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
For Our Mutual Protection
For your best interests and ours, Vanguard applies these additional requirements
to redemptions.
Request in "Good Order"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
[X] The Fund name and account number.
[X] The amount of the transaction (in dollars or shares).
[X] Signatures of all owners exactly as registered on the account (for mail
requests).
[X] Signature guarantees (if required).*
[X] Any supporting legal documentation that may be required.
[X] Any outstanding certificates representing shares to be redeemed.
*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most banks, credit unions,
and licensed brokers.
Transactions are processed at the next-determined share price after Vanguard has
received all required information.
- --------------------------------------------------------------------------------
<PAGE>
17
- --------------------------------------------------------------------------------
Limits on Account Activity
Because excessive account transactions can disrupt management of the Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
. You may make no more than two substantive "round trips" through the Fund
during any 12-month period.
. Your round trips through the Fund must be at least 30 days apart.
. The Fund may refuse a share purchase at any time, for any reason.
. Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also, "round trip" covers transactions accomplished by any combination
of methods, including transactions conducted by check, wire, or exchange to/from
another Vanguard fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
- --------------------------------------------------------------------------------
All Trades Final
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been received
and a confirmation number assigned.
- --------------------------------------------------------------------------------
Transferring Registration
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 100 Vanguard Boulevard
Valley Forge, PA 19482-2900 Malvern, PA 19355
- --------------------------------------------------------------------------------
Fund and Account Updates
Statements and Reports
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about the Fund twice a year.
These comprehensive reports include an assessment of the Fund's performance (and
a comparison to its industry benchmark), an overview of the markets, a report
from the advisers, and the Fund's financial statements which include a listing
of the Fund's holdings.
To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When we find that two or
more Fund shareholders have the same last name and address, we send just one
Fund report to that address--instead of mailing separate reports to each
shareholder. If you want us to send separate reports, however, you may notify
our Institutional Division at 1-888-809-8102.
- --------------------------------------------------------------------------------
Confirmation Statement
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
Portfolio Summary [GRAPHIC APPEARS HERE]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
Fund Financial Reports
Mailed in March and September for this Fund.
- --------------------------------------------------------------------------------
<PAGE>
18
Fund and Account Updates (continued)
- --------------------------------------------------------------------------------
Tax Statements
Generally mailed in January; report previous year's dividend and capital gains
distributions, and proceeds from the sale of shares.
- --------------------------------------------------------------------------------
Average Cost Review Statement [GRAPHIC APPEARS HERE]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using the average cost single category method.
- --------------------------------------------------------------------------------
Checkwriting Statement
Sent monthly to shareholders using Vanguard's checkwriting option. Our statement
provides images of the front and back of each checkwriting draft paid in the
previous month. This consolidated statement is sent instead of the original
canceled drafts, which will not be returned.
- --------------------------------------------------------------------------------
Mandatory Conversion to Investor Shares
The Fund reserves the right to convert an investor's Institutional Shares into
Investor Shares of the Fund if the investor's account balance falls below $10
million. Any such conversion will be preceded by written notice to the investor.
<PAGE>
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<PAGE>
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<PAGE>
Glossary of Investment Terms
Average Maturity
The average length of time until bonds held by a fund reach maturity (or are
called) and are repaid. In general, the longer the average maturity, the more a
fund's share price will fluctuate in response to changes in market interest
rates.
Bond
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and to make regular interest payments until
that date.
Capital Gains Distribution
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit, minus any realized losses.
Cash Reserves
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
Dividend Income
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
Dollar-Cost Averaging
Investing equal amounts of money at regular intervals on an ongoing basis. This
technique ensures that an investor buys fewer shares when prices are high and
more shares when prices are low.
Expense Ratio
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
Face Value
The amount to be paid at maturity of a bond; also known as the par value or
principal.
Fixed-Income Securities
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
Investment Adviser
An organization that makes the day-to-day decisions regarding a fund's
investments.
Investment-Grade
A bond whose credit quality is considered by independent bond-rating agencies to
be sufficient to ensure timely payment of principal and interest under current
economic circumstances.
Maturity
The date when a bond issuer agrees to repay the bond's principal, or face value,
to the bond's buyer.
Net Asset Value (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
Price/Earnings (P/E) Ratio
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
Principal
The amount of your own money you put into an investment.
Securities
Stocks, bonds, money market instruments, and other investment vehicles.
Total Return
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
Volatility
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
Yield
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[LOGO OF VANGUARD GROUP(R) APPEARS HERE]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
For More Information
If you'd like more information about Vanguard Short-Term Corporate Fund
Institutional Shares, the following documents are available free upon request:
Annual/Semiannual Report to Shareholders
Additional information about the Fund's investments is available in Vanguard
Bond Funds' annual and semiannual reports to shareholders. In these reports, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the most recent fiscal
year.
Statement of Additional Information (SAI)
The SAI for Vanguard Bond Funds provides more detailed information about the
Fund.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Fund or other Vanguard funds, please
contact us as follows:
If you are an Individual Investor:
The Vanguard Group Investor Information Department
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone:
1-800-662-7447 (SHIP)
Text Telephone:
1-800-952-3335
If you are a client of Vanguard's Institutional Division:
The Vanguard Group Institutional Investor Information
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone:
1-888-809-8102
World Wide Web:
www.vanguard.com
If you are a current Fund shareholder and would like information about your
account, account transactions, and/or account statements, please call:
Client Services Department
Telephone:
1-800-662-2739 (CREW)
Text Telephone:
1-800-662-2738
Information provided by the Securities and Exchange Commission (SEC)
You can review and copy information about the Fund (including the SAI) at the
SEC's Public Reference Room in Washington, D.C. To find out more about this
public service, call the SEC at 1-800-SEC-0330. Reports and other information
about the Fund are also available on the SEC's website (www.sec.gov), or you can
receive copies of this information, for a fee, by writing the Public Reference
Section, Securities and Exchange Commission, Washington, DC 20549-6009.
Fund's Investment Company Act file number: 811-2368
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation, Distributor.
I858N-06/01/1999
<PAGE>
1
Fund Profile
The following profile summarizes key features of Vanguard High-Yield Corporate
Fund.
INVESTMENT OBJECTIVE
The Fund is a bond fund that seeks to provide a high level of current income.
INVESTMENT STRATEGIES
The Fund invests primarily in a diversified group of low-quality, high-risk
corporate bonds, commonly referred to as "junk bonds." Under normal
circumstances, at least 80% of the Fund's assets will be invested in high-yield
corporate bonds rated B or better by Moody's Investors Service or Standard &
Poor's Corporation. Not more than 20% of the Fund's assets may be invested in
any of the following, taken as a whole: bonds that are rated less than B or that
are unrated; convertible securities; and preferred stocks. For more information
on security selection, see pages 5-6.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
. Credit risk, which is the chance that a bond issuer will fail to pay principal
and interest in a timely manner, reducing the Fund's return. Credit risk will
be substantial for the Fund.
. Interest rate risk, which is the chance that bond prices overall, including
prices of bonds held by the Fund, will decline over short or even long periods
due to rising interest rates. Bonds with longer maturities tend to be more
sensitive to interest rates than bonds with shorter maturities.
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline.
. Manager risk, which is the chance that poor security selection will cause the
Fund to underperform other funds with similar investment objectives.
Because of the speculative nature of junk bonds, you should carefully consider
the risks associated with this Fund before you purchase shares.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based securities
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
1989 1.89%
1990 -5.85%
1991 29.01%
1992 14.24%
1993 18.24%
1994 -1.71%
1995 19.15%
1996 9.54%
1997 11.91%
1998 5.62%
- --------------------------------------------------------------------------------
The Fund's year-to-date return as of the quarter ended March 31, 1999 was
1.75%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 9.78% (quarter ended March 31, 1991) and the lowest return for a
quarter was -9.03% (quarter ended September 30, 1990).
<PAGE>
2
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Vanguard High-Yield Corporate Fund 5.62% 8.68% 9.75%
Lehman Brothers High Yield Bond Index 1.60 8.52 10.52
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
The Costs of Investing
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
PLAIN TALK ABOUT
Fund Expenses
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard High-Yield Corporate Fund's expense ratio in fiscal year 1999
was 0.29%, or $2.90 per $1,000 of average net assets. The average high-yield
bond fund had expenses in 1998 of 1.31%, or $13.10 per $1,000 of average net
assets, according to Lipper Inc., which reports on the mutual fund industry.
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended January 31, 1999.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: 1%*
Annual Fund Operating Expenses (expenses deducted from the
Fund's assets)
Management Expenses: 0.26%
12b-1 Distribution Fees: None
Other Expenses: 0.03%
Total Annual Fund Operating Expenses: 0.29%
* The 1% fee applies to shares redeemed (either by selling or exchanging to
another fund) within one year of purchase. The fee is withheld from redemption
proceeds and retained by the Fund. Shares held for one year or more are not
subject to the 1% fee.
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$30 $93 $163 $368
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
<PAGE>
3
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Wellington Management Company, LLP, Boston, Mass., since inception
Inception Date
December 27, 1978
Net Assets as of January 31, 1999
$5.55 billion
Suitable for IRAs
Yes
Minimum Initial Investment
$3,000; $1,000 for IRAs and custodial accounts for minors
Newspaper Abbreviation
HYCor
Vanguard Fund Number
029
Cusip Number
922031208
Ticker Symbol
VWEHX
- --------------------------------------------------------------------------------
A Word About Risk
This prospectus describes the risks you would face as an investor in Vanguard
High-Yield Corporate Fund. It is important to keep in mind one of the main
axioms of investing: The higher the risk of losing money, the higher the
potential reward. The reverse, also, is generally true: The lower the risk, the
lower the potential reward. As you consider an investment in Vanguard High-Yield
Corporate Fund, you should also take into account your personal tolerance for
the daily fluctuations of the bond market.
Look for this [GRAPHIC APPEARS HERE] symbol throughout the prospectus. It is
used to mark detailed information about each type of risk that you would
confront as a shareholder of the Fund.
- --------------------------------------------------------------------------------
Who Should Invest
The Fund may be a suitable investment for you if:
. You wish to add a high-yield bond fund to your existing holdings, which could
include other bond investments as well as stock, money market, and tax-exempt
investments.
. You are seeking a high level of current income.
. You characterize your investment temperament as "aggressive."
. You are willing to accept substantial investment risk.
PLAIN TALK ABOUT
Costs and Market-Timing
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
The Vanguard funds do not permit market-timing. Do not invest in this Fund if
you are a market-timer.
<PAGE>
4
The Fund has adopted the following policies, among others, to discourage
short-term trading:
. The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of the
investment or because of a history of excessive trading by the investor.
. There is a limit on the number of times you can exchange into and out of the
Fund (see "Redeeming Shares" in the Investing with Vanguard section).
. The Fund imposes a 1% redemption fee on shares that are redeemed by any method
within one year of purchase.
. The Fund reserves the right to stop offering shares at any time.
Primary Investment Strategies
This section explains the strategies that the investment adviser uses in pursuit
of the Fund's objective, a high level of current income. It also explains how
the adviser implements these strategies. In addition, this section discusses
several important risks--credit risk, interest rate risk, income risk, and
manager risk--faced by investors in the Fund. The Fund's Board of Trustees
oversees the management of the Fund, and may change the investment strategies in
the interest of shareholders. The Fund's objective is not fundamental, and so
may be changed without a shareholder vote.
PLAIN TALK ABOUT
Junk Bonds
Junk bonds are low-quality, high-risk corporate bonds that generally offer a
high level of current income. Considered speculative by the major rating
agencies, these bonds are rated less than Baa by Moody's Investors Service or
BBB by Standard & Poor's Corporation (these ratings are typical for bonds that
provide the highest income return). Junk bonds are often issued as a result of
corporate restructurings--such as leveraged buyouts, mergers, acquisitions, or
other similar events. They also may be issued by smaller, less creditworthy
companies or by highly leveraged firms, which are generally less able than more
financially stable firms to make scheduled payments of interest and principal.
Because of their low credit quality, junk bonds must pay higher interest to
compensate investors for the substantial credit risk they assume. In order to
minimize credit risk, high-yield corporate funds often diversify their holdings
among many bond issuers.
Market Exposure
The Fund's primary strategy is to invest in a diversified group of
high-yielding, low-quality corporate bonds, commonly known as "junk bonds."
[GRAPHIC APPEARS HERE] Because of its investment in junk bonds, the Fund is
subject to substantial credit risk, which is the possibility that a bond issuer
will fail to pay interest and principal in a timely manner.
For more information about credit risk, see "Security Selection" on pages 5-6.
The Fund is also subject to other risks generally associated with bonds.
[GRAPHIC APPEARS HERE] The Fund is subject to interest rate risk, which is the
possibility that bond prices overall will decline over short or even long
periods due to rising interest rates. Longer-term bonds tend to be more
sensitive to interest rates than shorter-term bonds.
Changes in interest rates will affect bond income as well as bond prices.
[GRAPHIC APPEARS HERE] The Fund is subject to income risk, which is the
possibility that the Fund's dividends (income) will decline due to falling
interest rates.
In the past, bond investors have seen the value of their investment rise and
fall--sometimes significantly--with changes in interest rates. Between December
1976 and September 1981, for instance, rising interest rates caused long-term
bond prices to fall by almost 48%.
Because the Fund invests mainly in bonds, changes in interest rates will
<PAGE>
5
PLAIN TALK ABOUT
Bonds and Interest Rates
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds
are offered with a 6% yield. With higher-yielding bonds available, you would
have trouble selling your 5% bond for the price you paid--causing you to lower
your asking price. On the other hand, if interest rates were falling and 4%
bonds were being offered, you should be able to sell your 5% bond for more
than you paid.
PLAIN TALK ABOUT
Bond Maturities
A bond is issued with a specific maturity date--the date when the bond's issuer,
or seller, must pay back the bond's initial value (known as its "face value").
Bond maturities generally range from less than one year (short-term) to 30 years
(long-term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise-- but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks in hope of higher yields; short-term bond investors should be willing to
accept lower yields in return for less fluctuation in the value of their
investment.
impact, the value of the Fund's assets. To illustrate how much of an impact, the
following table shows the effect of a 2% change (both up and down) in interest
rates on three bonds with a face value of $1,000; each has a different maturity.
- --------------------------------------------------------------------------------
How Interest Rate Changes Affect Bonds*
- --------------------------------------------------------------------------------
Value of a $1,000 Bond Value of a $1,000 Bond
After a 2% Increase After a 2% Decrease
Type of Bond (Maturity) in Interest Rates in Interest Rates
- --------------------------------------------------------------------------------
Short-Term (2.5 years) $956 $1,046
Intermediate-Term (10 years) 870 1,156
Long-Term (20 years) 816 1,251
- --------------------------------------------------------------------------------
* Assuming a 7% yield.
- --------------------------------------------------------------------------------
These figures are for illustration only; you should not regard them as an
indication of future returns from the bond market as a whole or the Fund in
particular.
Security Selection
Wellington Management Company, LLP (WMC), adviser to the Fund, seeks to minimize
the substantial investment risk posed by junk bonds primarily through solid
credit research and broad diversification among issuers.
[GRAPHIC APPEARS HERE] The Fund is subject to manager risk, which is the
possibility that the adviser may do a poor job of selecting securities.
At least 80% of the Fund's assets will be invested in high-yield corporate
bonds rated B or better by Moody's Investors Service or Standard & Poor's
Corporation. Not more than 20% of the Fund's assets may be invested in any of
the following, taken as a whole: bonds that are rated less than B or that are
unrated; convertible securities; and preferred stocks.
If unrated, a bond must be, in the adviser's opinion, at least equivalent to a
Caa rating by Moody's or a CCC rating by Standard & Poor's. The Fund will not
invest in bonds that, at the time of initial investment, are rated less than Caa
by Moody's or CCC by Standard & Poor's. However, the Fund may continue to hold
bonds that have been downgraded, even if they are no longer eligible for
purchase by the Fund.
In the past, the Fund has not invested in non-income-producing high-yield
bonds, such as zero coupon bonds-- which pay interest only at maturity--or
payment-in-kind bonds--which pay interest in the form of additional securities.
Although it has no present plans to do so, the Fund may invest up to 5% of its
assets in such bonds in the future.
<PAGE>
6
PLAIN TALK ABOUT
Credit Quality
A bond's credit quality depends on the issuer's ability to pay interest on the
bond and, ultimately, to repay the debt. The lower the rating by one of the
independent bond-rating agencies (for example, Moody's or Standard & Poor's),
the greater the chance (in the rating agency's opinion) that the bond issuer
will default, or fail to meet its payment obligations. All things being equal,
the lower a bond's credit rating, the higher its yield should be to compensate
investors for assuming additional risk. Bonds rated in one of the four highest
rating categories are considered "investment grade."
Bonds rated less than Baa by Moody's or BBB by Standard & Poor's, such as
those held by the Fund, are classified as non-investment grade. These bonds
carry a high degree of risk and are considered speculative by the major rating
agencies.
Credit quality in the high-yield bond market can change suddenly and
unexpectedly, and even recently-issued credit ratings may not fully reflect the
actual risks posed by a particular high-yield bond. For these reasons, it is the
Fund's policy not to rely primarily on ratings issued by established credit
rating agencies, but to utilize these ratings in conjunction with the adviser's
own independent and ongoing review of credit quality.
WMC selects bonds on a company-by-company basis, emphasizing fundamental
research and a long-term investment horizon. WMC's analysis focuses on the
nature of a company's business, its strategy, and the quality of its management.
Based on this analysis, the adviser looks for companies whose prospects are
stable or improving, and whose bonds offer an attractive yield. Companies with
improving prospects are normally more attractive because they offer better
assurance of debt repayment and greater potential for capital appreciation.
As of January 31, 1999, the Fund's holdings had the following credit quality
characteristics:
--------------------------------------------------------------------
Investment Percent of Fund's Net Assets
--------------------------------------------------------------------
Corporate bonds
A 0.3%
Baa/BBB 3.4
Ba/BB 45.2
B 45.5
Caa/CC 0.4
U.S. Treasury securities 5.2
--------------------------------------------------------------------
To minimize credit risk, the Fund normally diversifies its holdings among
bonds of at least 100 separate issuers representing many industries. As of
January 31, 1999, the Fund held bonds of 229 corporate issuers. As a result,
there should be less chance that the Fund will be hurt by a particular bond
issuer's failure to pay either principal or interest.
The Fund may, from time to time, take temporary defensive measures--such as
holding cash reserves without limit--that are inconsistent with the Fund's
primary investment strategies, in response to adverse market, economic,
political, or other conditions. In taking such measures, the Fund may not
achieve its investment objective.
<PAGE>
7
PLAIN TALK ABOUT
Turnover Rate
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more
likely to generate capital gains that must be distributed to shareholders as
income subject to taxes. The average turnover rate for all high-yield
corporate funds is approximately 126%, according to Morningstar, Inc.
Turnover Rate
Although the Fund seeks to invest for the long term, it may sell securities
regardless of how long the securities have been held. The Fund may sell
securities based on the adviser's determination that securities with relatively
greater value are available for purchase by the Fund, or to raise cash. The
Fund's average turnover rate for the past five years has been about 34%. (A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its net assets within a one-year period.)
The Fund and Vanguard
Vanguard High-Yield Corporate Fund is part of Vanguard Fixed Income Securities
Funds, a member of The Vanguard Group. Vanguard is a family of more than 35
investment companies with more than 100 distinct investment portfolios holding
assets worth more than $480 billion. All of the Vanguard funds share in the
expenses associated with business operations, such as personnel, office space,
equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 distribution fees, each fund pays its
allocated share of The Vanguard Group's marketing costs.
Investment Adviser
The Fund employs Wellington Management Company, LLP (WMC), 75 State Street,
Boston, MA 02109, as its investment adviser. WMC manages the Fund subject to the
control of the Trustees and officers of the Fund.
Under the advisory agreement, the High-Yield Corporate Fund is required to pay
WMC a quarterly fee based on certain annual percentage
PLAIN TALK ABOUT
Vanguard's Unique Corporate Structure
The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
PLAIN TALK ABOUT
The Fund's Adviser
Wellington Management Company, LLP (WMC), is an investment advisory firm founded
in 1928. As of January 31, 1999, WMC managed more than $214 billion in total
assets. The individual primarily responsible for overseeing the High-Yield
Corporate Fund's investments is:
Earl E. McEvoy, Senior Vice President and Partner of WMC, and Fund Manager of
the High-Yield Corporate Fund since 1984; has worked in investment management
since 1972; with WMC since 1978; B.A., Dartmouth College; M.B.A., Columbia
Business School.
<PAGE>
8
rates applied to the Fund's average month-end assets for the quarter. For the
fiscal year ended January 31, 1999, the advisory fees paid by the High-Yield
Corporate Fund represented an effective annual rate of 0.04% of the Fund's
average net assets.
The Fund has authorized WMC to choose brokers or dealers to handle the
purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions. Also, the Fund may direct WMC to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Fund.
The Board of Trustees may, without prior approval from shareholders, change
the terms of the advisory agreement or hire a new investment adviser, either as
a replacement for WMC or as an additional adviser. However, any such change will
be communicated to shareholders in writing.
Year 2000 Challenge
The common practice in computer programming of using just two digits to identify
a year has resulted in the Year 2000 challenge throughout the information
technology industry. If unchanged, many computer applications and systems could
misinterpret dates occurring after December 31, 1999, leading to errors or
failure. Such failure could adversely affect a fund's operations, including
pricing, securities trading, and the servicing of shareholder accounts.
The Vanguard Group is dedicated to providing uninterrupted, high-quality
performance from our computer systems before, during, and after 2000. In July
1998, we completed the renovation and initial testing of our internal systems.
Vanguard is diligently working with external partners, suppliers, and vendors,
including fund managers and other service providers, to assure that the systems
with which we interact remain operational at all times.
In addition to taking every reasonable step to secure our internal systems and
external relationships, Vanguard is further developing contingency plans
intended to assure that unexpected systems failures will not adversely affect
the Fund's operations. Vanguard intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternate solutions if
necessary.
However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on the Fund's business,
operations, or financial condition. Additionally, the Fund's performance could
be hurt if a computer-system failure at a company or governmental unit affects
the price of securities the Fund owns.
PLAIN TALK ABOUT
Distributions
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term depending
on whether the fund held the securities for less than or more than one year.
Dividends, Capital Gains, and Taxes
As a shareholder, you are entitled to your share of the Fund's net income
(interest and gains less expenses).The Fund's income dividends accrue daily and
are distributed monthly; capital gains distributions, if any, generally occur in
December. In addition, the Fund may occasionally be required to make
supplemental capital gains distributions at some other time during the year. You
can receive distributions of income or capital gains in cash, or you can have
them automatically invested in more shares of the Fund. In either case, these
distributions are taxable to you. It is important to note that distributions of
dividends and any capital gains that are declared in December--if paid to you by
the end of January--are taxed as if they had been paid to you in December.
Vanguard will send you a statement each year showing the tax status of all
your distributions. If you have chosen to receive dividend and/or capital gains
distributions in cash, and the postal or other delivery service is unable to
deliver checks to your address of record, we will change the
<PAGE>
9
PLAIN TALK ABOUT
"Buying a Capital Gain"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), it is not to your advantage to buy shares of a fund shortly before it
makes a capital gains distribution, because doing so can cost you money in
taxes. This is known as "buying a capital gain." For example: On January 15,
you invest $5,000, buying 250 shares for $20 each. If the fund pays a capital
gains distribution of $1 per share on January 16, its share price would drop
to $19 (not counting market change). You still have only $5,000 (250 shares x
$19 = $4,750 in share value, plus 250 shares x $1 = $250 in distributions),
but you owe tax on the $250 distribution you received--even if you had
reinvested it in more shares. To avoid "buying a capital gain," check a fund's
distribution schedule before you invest.
distribution option so that all dividends and other distributions are
automatically invested in additional shares. We will not pay interest on
uncashed distribution checks.
. The dividends and short-term capital gains that you receive are taxable to you
as ordinary income for tax purposes.
. Any distributions of net long-term capital gains by the Fund are taxable to
you as long-term capital gains, no matter how long you've owned shares in the
Fund.
. Although the Fund does not seek to realize any particular amount of capital
gains during a year, such gains are realized from time to time as by-products
of its ordinary investment activities. Consequently, distributions may vary
considerably from year to year.
. A sale or exchange of Fund shares is a taxable event. This means that you may
have a capital gain to report as income, or a capital loss to report as a
deduction, when you complete your federal income tax return.
. Distributions of dividends or capital gains, and capital gains or losses from
your sale or exchange of Fund shares, may be subject to state and local income
taxes as well. Many states, however, grant tax-free status to dividends paid
from interest earned on direct securities of the U.S. government, subject in
some states to minimum investment requirements that must be met by the Fund.
GNMA securities, repurchase agreements collateralized by U.S. government
securities, and certain other securities generally do not qualify for tax-free
treatment.
The tax information in this prospectus is provided as general information and
will not apply to you if you are investing through a tax-deferred account such
as an IRA or a qualified employee benefit plan. (Non-U.S. investors may be
subject to U.S. withholding and estate tax.) You should consult your tax adviser
about the tax consequences of an investment in the Fund.
Important Note: By law, the Fund must withhold 31% of your taxable
distributions and any redemption proceeds if you do not provide your correct
taxpayer identification number, or certify that it is correct, or if the IRS
instructs the Fund to do so.
Share Price
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of trading on the New York Stock Exchange (the NAV
is not calculated on holidays or other days the Exchange is closed). Net asset
value per share is computed by adding up the total value of the Fund's
investments and other assets, subtracting any of its liabilities (debts), and
then dividing by the number of Fund shares outstanding:
Total Assets - Liabilities
Net Asset Value = --------------------------------------
Number of Shares Outstanding
Knowing the daily net asset value is useful to you as a shareholder because it
indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
<PAGE>
10
PLAIN TALK ABOUT
How to Read the Financial Highlights Table
The Fund began fiscal 1999 with a net asset value (price) of $8.17 per share.
During the year, the Fund earned $.659 per share from investment income
(interest). There was a decline of $.245 per share from investments that had
depreciated in value or that were sold for lower prices than the Fund paid for
them.
Shareholders received $.684 per share in the form of dividend and capital
gains distributions. A portion of each year's capital gains distributions may
come from the prior year's capital gains.
The earnings ($.414 per share) minus the distributions ($.684 per share)
resulted in a share price of $7.90 at the end of the year. This was a decrease
of $.27 per share (from $8.17 at the beginning of the year to $7.90 at the end
of the year). For a shareholder who reinvested the distributions in the purchase
of more shares, the total return from the Fund was 5.34% for the year.
As of January 31, 1999, the Fund had $5.55 billion in net assets. For the
year, its expense ratio was 0.29% ($2.90 per $1,000 of net assets); and its net
investment income amounted to 8.26% of its average net assets. It sold and
replaced securities valued at 31% of its net assets.
A Note on Pricing: The Fund's investments will be priced at their market value
when market quotations are readily available. When these quotations are not
readily available, investments will be priced at their fair value, calculated
according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of most
major newspapers under the heading "Vanguard Funds." Different newspapers use
different abbreviations for the Fund, but the most common is HYCor.
Financial Highlights
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Vanguard High-Yield Corporate Fund
Year Ended January 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 8.17 $ 7.87 $ 7.89 $ 7.24 $ 8.14
- ---------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .659 .688 .688 .678 .679
Net Realized and Unrealized Gain
(Loss) on Investments (.245) .300 (.020) .650 (.900)
-----------------------------------------------------
Total from Investment Operations .414 .988 .668 1.328 (.221)
-----------------------------------------------------
Distributions
Dividends from Net Investment Income (.659) (.688) (.688) (.678) (.679)
Distributions from Realized Capital Gains (.025) -- -- -- --
-----------------------------------------------------
Total Distributions (.684) (.688) (.688) (.678) (.679)
- ---------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 7.90 $ 8.17 $ 7.87 $ 7.89 $ 7.24
===================================================================================================
Total Return* 5.34% 13.14% 9.01% 19.01% -2.52%
===================================================================================================
Ratios/Supplemental Data
Net Assets, End of Year (Millions) $5,549 $4,747 $3,674 $3,007 $ 2,162
Ratio of Total Expenses to
Average Net Assets 0.29% 0.28% 0.29% 0.34% 0.34%
Ratio of Net Investment Income to
Average Net Assets 8.26% 8.63% 8.92% 8.85% 9.13%
Turnover Rate 31% 45% 23% 38% 33%
===================================================================================================
</TABLE>
* Total returns do not reflect the 1% fee assessed on redemptions of shares held
for less than one year.
The total returns in the table represent the rate that an investor would have
earned or lost each year on an investment in the Fund (assuming reinvestment of
all dividends and distributions).
This information has been derived from the financial statements audited by
PricewaterhouseCoopers LLP, independent accountants, whose report--along with
the Fund's financial statements--is included in the Fund's most recent annual
report to shareholders. You may have the annual report sent to you without
charge by contacting Vanguard.
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a measure of past dividend income. Total return includes both
past dividend income (assuming that it has been reinvested) plus realized and
unrealized capital appreciation (or depreciation). Neither yield nor total
return should be used to predict the future performance of a fund.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500,"
and "500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE>
11
Investing with Vanguard
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services we
offer. Booklets providing detailed information are available on the services
marked with a [GRAPHIC APPEARS HERE]. Please call us to request copies.
Services and Account Features
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
Telephone Redemptions (Sales and Exchanges)
Automatically set up for this Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
Vanguard Direct Deposit Service(TM)[GRAPHIC APPEARS HERE]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
Vanguard Automatic Exchange Service(TM)[GRAPHIC APPEARS HERE]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
Vanguard Fund Express(R) [GRAPHIC APPEARS HERE]
Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule or whenever you wish.
- --------------------------------------------------------------------------------
Vanguard Dividend Express(TM)[GRAPHIC APPEARS HERE]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
- --------------------------------------------------------------------------------
Vanguard Tele-Account(R) 1-800-662-6273 (ON-BOARD)[GRAPHIC APPEARS HERE]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange fund shares.
- --------------------------------------------------------------------------------
Access Vanguard(TM) www.vanguard.com [GRAPHIC APPEARS HERE]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through the website. We will then send to you, by mail, an account
access password that allows you to process the following financial and
administrative transactions online:
. Open a new account.*
. Buy, sell, or exchange shares of most funds.
. Change your name/address.
. Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
* Only current Vanguard shareholders can open a new account online, by
exchanging shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
Investor Information Department: 1-800-662-7447 (SHIP)
Text Telephone: 1-800-952-3335
Call Vanguard for information on our funds, fund services, and retirement
accounts, and to request literature.
- --------------------------------------------------------------------------------
Client Services Department: 1-800-662-2739 (CREW) Text Telephone: 1-800-662-2738
Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------
Services for Clients of Vanguard's Institutional Division: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------
<PAGE>
12
Types of Accounts
Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
For One or More People
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
For Holding Personal Trust Assets [GRAPHIC APPEARS HERE]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
For Individual Retirement Accounts [GRAPHIC APPEARS HERE]
Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).
- --------------------------------------------------------------------------------
For an Organization [GRAPHIC APPEARS HERE]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
For Third-Party Trustee Retirement Investments
Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.
- --------------------------------------------------------------------------------
Vanguard Prototype Plans
Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.
- --------------------------------------------------------------------------------
A Note on Investing with Vanguard Through Other Firms
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees, or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------
Buying Shares
You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value.
- --------------------------------------------------------------------------------
Minimum Investment to . . .
open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A Note on Low Balances
The Fund reserves the right to close any nonretirement account whose balance at
that time is below the minimum initial investment. The Fund will deduct a $10
annual fee in June if your nonretirement account balance at that time is below
$2,500. The fee is waived if your total Vanguard account assets are $50,000 or
more.
- --------------------------------------------------------------------------------
By Mail to . . .[GRAPHIC APPEARS HERE]
open a new account
Complete and sign the application form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form.
<PAGE>
13
Make your check payable to: The Vanguard Group-29
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2600 455 Devon Park Drive
Valley Forge, PA 19482-2600 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
By Telephone to . . .[GRAPHIC APPEARS HERE]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type).
add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). Use Vanguard
Fund Express (see "Services and Account Features") to transfer assets from your
bank account. Call Client Services before your first use to verify that this
option is in place.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
* You must obtain a Personal Identification Number through Tele-Account at least
seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you've requested a telephone transaction and a confirmation
number has been assigned, the transaction cannot be revoked. We reserve the
right to refuse any purchase request.
- --------------------------------------------------------------------------------
By Wire to Open a New Account or Add to an Existing Account [GRAPHIC APPEARS
HERE] Call Client Services to arrange your wire transaction. Wire transactions
are not available for retirement accounts, except for asset transfers and direct
rollovers.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
Vanguard High-Yield Corporate Fund-29
[Account number, or temporary number for a new account]
[Registered account owner/s]
[Registered address]
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check or
Vanguard Fund Express at any time. However, while your redemption request will
be processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
<PAGE>
14
Buying Shares (continued)
- --------------------------------------------------------------------------------
A Note on Large Purchases
It is important that you call Vanguard before you invest a large dollar amount.
We must consider the interests of all Fund shareholders and so reserve the right
to refuse any purchase that will disrupt the Fund's operation or performance.
- --------------------------------------------------------------------------------
Redeeming Shares
This section describes how you can redeem--that is, sell or exchange--the Fund's
shares.
When Selling Shares:
. Vanguard sends the redemption proceeds to you or a designated third party.*
. You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 16.
When Exchanging Shares:
. The redemption proceeds are used to purchase shares of a different Vanguard
fund.
. You must meet the receiving fund's minimum investment requirements.
. Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus. For
exchanges, the purchase side of the transaction will be based on the receiving
fund's next-determined share price, again subject to any special rules discussed
in this prospectus.
- --------------------------------------------------------------------------------
A Note on Redemption Fees
The Fund imposes a 1% redemption fee on shares that are redeemed by any method
within one year of purchase. Currently, redemption fees do not apply to Fund
shares held through Vanguard's separate record-keeping system for employee
benefit plan accounts, due to certain economies associated with these accounts.
However, the Fund reserves the right to impose redemption fees on its shares at
any time if warranted by the Fund's future costs of processing redemptions from
these accounts.
- --------------------------------------------------------------------------------
Note: Once a redemption is requested and a confirmation number given, the
transaction cannot be canceled.
- --------------------------------------------------------------------------------
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.
- --------------------------------------------------------------------------------
Online Requests [GRAPHIC APPEARS HERE]
Access Vanguard at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through the website. We will then send you, by mail, an account access password
that will enable you to sell or exchange shares online (as well as perform other
transactions).
Note: The Vanguard funds whose shares you cannot exchange online or by
telephone are Vanguard U.S. Stock Index Funds, Vanguard Balanced Index Fund,
Vanguard International Stock Index Funds, Vanguard REIT Index Fund, Vanguard
Total International Stock Index Fund, and Vanguard Growth and Income Fund. These
funds do, however, permit online and telephone exchanges within IRAs and other
retirement accounts. If you sell shares of these funds online, you will receive
a redemption check at your address of record.
- --------------------------------------------------------------------------------
<PAGE>
15
- --------------------------------------------------------------------------------
Telephone Requests [GRAPHIC APPEARS HERE]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours--to sell or exchange shares. You can exchange shares from the Fund to open
an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.
Retirement Accounts:
You can exchange--but not sell--shares by calling Tele-Account or Client
Services.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
. The ten-digit account number.
. The name and address exactly as registered on the account.
. The primary Social Security or employer identification number as registered
on the account.
. The Personal Identification Number, if applicable.
Please note that Vanguard will not be responsible for any account losses due
to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A Note on Unusual Circumstances
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.
- --------------------------------------------------------------------------------
Mail Requests [GRAPHIC APPEARS HERE]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
Vanguard Retirement Accounts:
For information on how to request distributions from:
. Traditional IRAs and Roth IRAs--call Client Services.
. SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans--call Individual Retirement Plans at
1-800-662-2003.
Depending on your account registration type, additional documentation may be
required.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1120 455 Devon Park Drive
Valley Forge, PA 19482-1120 Wayne, PA 19087-1815
<PAGE>
16
Redeeming Shares (continued)
For clients of Vanguard's Institutional Division ...
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
A Note on Large Redemptions
It is important that you call Vanguard before you redeem a large dollar amount.
We must consider the interests of all fund shareholders and so reserve the right
to delay delivery of your redemption proceeds--up to seven days--if the amount
will disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in kind, i.e., in securities, rather than in cash. If
payment is made in kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check, wire
(money market funds and other daily dividend funds only), or exchange to another
Vanguard fund.
- --------------------------------------------------------------------------------
Check Redemptions
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
Wire Redemptions [GRAPHIC APPEARS HERE]
The wire redemption option is not automatic; you must establish it by completing
a special form or the appropriate section of your account application. Wire
redemptions can be initiated by mail or by telephone during Vanguard's business
hours, but not online.
For Money Market Funds:
For telephone requests made by 10:30 a.m. EST, the wire will arrive at your bank
by the close of business that same day. Requests made by 4 p.m. EST will arrive
at your bank by the close of business on the following business day.
For Other Daily Dividend Funds:
For telephone requests made by 4 p.m. EST, the wire will arrive at your bank by
the close of business on the following business day.
- --------------------------------------------------------------------------------
Exchange Redemptions
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
Request in "Good Order"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
. The Fund name and account number.
. The amount of the transaction (in dollars or shares).
. Signatures of all owners exactly as registered on the account (for mail
requests).
. Signature guarantees (if required).*
. Any supporting legal documentation that may be required.
. Any outstanding certificates representing shares to be redeemed.
*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most banks, credit unions,
and licensed brokers.
Transactions are processed at the next-determined share price after Vanguard has
received all required information.
- --------------------------------------------------------------------------------
<PAGE>
17
- --------------------------------------------------------------------------------
Limits on Account Activity
Because excessive account transactions can disrupt management of the Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
. You may make no more than two substantive "round trips" through the Fund
during any 12-month period.
. Your round trips through the Fund must be at least 30 days apart.
. The Fund may refuse a share purchase at any time, for any reason.
. Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also, "round trip" covers transactions accomplished by any combination
of methods, including transactions conducted by check, wire, or exchange to/from
another Vanguard fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
- --------------------------------------------------------------------------------
Return Your Share Certificates
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
All Trades Final
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been received
and a confirmation number assigned.
- --------------------------------------------------------------------------------
Transferring Registration
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
Fund and Account Updates
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about the Fund twice a year.
These comprehensive reports include an assessment of the Fund's performance (and
a comparison to its industry benchmark), an overview of the markets, a report
from the advisers, and the Fund's financial statements which include a listing
of the Fund's holdings.
<PAGE>
18
Fund and Account Updates (continued)
To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When we find that two or
more Fund shareholders have the same last name and address, we send just one
Fund report to that address--instead of mailing separate reports to each
shareholder. If you want us to send separate reports, however, you may notify
our Client Services Department at 1-800-662-2739.
- --------------------------------------------------------------------------------
Confirmation Statement
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
Portfolio Summary [GRAPHIC APPEARS HERE]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
Fund Financial Reports
Mailed in March and September for this Fund.
- --------------------------------------------------------------------------------
Tax Statements
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------
Average Cost Review Statement [GRAPHIC APPEARS HERE]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using the average cost single category method.
- --------------------------------------------------------------------------------
<PAGE>
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<PAGE>
(This page intentionally left blank.)
<PAGE>
Glossary of Investment Terms
Average Maturity
The average length of time until bonds held by a fund reach maturity (or are
called) and are repaid. In general, the longer the average maturity, the more a
fund's share price will fluctuate in response to changes in market interest
rates.
Bond
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and to make regular interest payments until
that date.
Capital Gains Distribution
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit, minus any realized losses.
Cash Reserves
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
Dividend Income
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
Dollar-Cost Averaging
Investing equal amounts of money at regular intervals on an ongoing basis. This
technique ensures that an investor buys fewer shares when prices are high and
more shares when prices are low.
Expense Ratio
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
Face Value
The amount to be paid at maturity of a bond; also known as the par value or
principal.
Fixed-Income Securities
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
Investment Adviser
An organization that makes the day-to-day decisions regarding a fund's
investments.
Investment-Grade
A bond whose credit quality is considered by independent bond-rating agencies to
be sufficient to ensure timely payment of principal and interest under current
economic circumstances.
Maturity
The date when a bond issuer agrees to repay the bond's principal, or face value,
to the bond's buyer.
Net Asset Value (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
Price/Earnings (P/E) Ratio
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
Principal
The amount of your own money you put into an investment.
Securities
Stocks, bonds, money market instruments, and other investment vehicles.
Total Return
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
Volatility
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
Yield
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[LOGO OF THEVANGUARDGROUP APPEARS HERE]
Post Office Box 2600
Valley Forge, PA 19482-2600
For More Information
If you'd like more information about Vanguard High-Yield Corporate Fund, the
following documents are available free upon request:
Annual/Semiannual Report to Shareholders
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In these reports, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance during the most recent fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about the Fund.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Fund or other Vanguard funds, please
contact us as follows:
The Vanguard Group
Investor Information
Department
P.O. Box 2600
Valley Forge, PA 19482-2600
Telephone:
1-800-662-7447 (SHIP)
Text Telephone:
1-800-952-3335
World Wide Web:
www.vanguard.com
If you are a current Fund shareholder and would like information about your
account, account transactions, and/or account statements, please call:
Client Services Department
Telephone:
1-800-662-2739 (CREW)
Text Telephone:
1-800-662-2738
Information provided by the Securities and Exchange Commission (SEC)
You can review and copy information about the Fund (including the SAI) at the
SEC's Public Reference Room in Washington, D.C. To find out more about this
public service, call the SEC at 1-800-SEC-0330. Reports and other information
about the Fund are also available on the SEC's website (www.sec.gov), or you can
receive copies of this information, for a fee, by writing the Public Reference
Section, Securities and Exchange Commission, Washington, DC 20549-6009.
Fund's Investment Company Act
file number: 811-2368
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P029N-06/01/1999
<PAGE>
Vanguard High-Yield Corporate Fund
Prospectus
June 1, 1999
A Bond Mutual Fund
Contents
1 Fund Profile
3 Additional Information
3 A Word About Risk
3 Who Should Invest
4 Primary Investment Strategies
7 The Fund and Vanguard
7 Investment Adviser
8 Year 2000 Challenge
8 Dividends, Capital Gains, and Taxes
9 Share Price
10 Financial Highlights
11 Investing with Vanguard
11 Services and Account Features
12 Types of Accounts
12 Buying Shares
14 Redeeming Shares
17 Transferring Registration
17 Fund and Account Updates
Glossary (inside back cover)
- --------------------------------------------------------------------------------
Why Reading This Prospectus Is Important
This prospectus explains the objective, risks, and strategies of Vanguard
High-Yield Corporate Fund. To highlight terms and concepts important to mutual
fund investors, we have provided "Plain Talk(R)" explanations along the way.
Reading the prospectus will help you to decide whether the Fund is the right
investment for you. We suggest that you keep it for future reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note
Vanguard High-Yield Corporate Fund is one of the nine Vanguard Bond Funds. The
other eight Funds are offered through a separate prospectus; you can obtain a
copy of that prospectus by calling Vanguard.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
<PAGE>
Vanguard High-Yield Corporate Fund
Participant Prospectus
June 1, 1999
A Bond Mutual Fund
Contents
1 Fund Profile
3 Additional Information
3 A Word About Risk
3 Who Should Invest
4 Primary Investment Strategies
7 The Fund and Vanguard
7 Investment Adviser
8 Year 2000 Challenge
8 Dividends, Capital Gains, and Taxes
9 Share Price
10 Financial Highlights
11 Investing with Vanguard
11 Accessing Fund Information by Computer
Glossary (inside back cover)
- --------------------------------------------------------------------------------
Why Reading This Prospectus Is Important
This prospectus explains the objective, risks, and strategies of Vanguard
High-Yield Corporate Fund. To highlight terms and concepts important to
mutual fund investors, we have provided "Plain Talk((R))" explanations along
the way. Reading the prospectus will help you to decide whether the Fund is
the right investment for you. We suggest that you keep it for future
reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note
Vanguard High-Yield Corporate Fund is one of the nine Vanguard Bond Funds.
The other eight Funds are offered through a separate prospectus; you can
obtain a copy of that prospectus by calling Vanguard.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Important Note
This prospectus is intended for participants in employer-sponsored retirement
or savings plans. Another version--for investors who would like to open a
personal investment account--can be obtained by calling Vanguard at
1-800-662-7447.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
<PAGE>
1
Fund Profile
The following profile summarizes key features of Vanguard High-Yield Corporate
Fund.
INVESTMENT OBJECTIVE
The Fund is a bond fund that seeks to provide a high level of current income.
INVESTMENT STRATEGIES
The Fund invests primarily in a diversified group of low-quality, high-risk
corporate bonds, commonly referred to as "junk bonds." Under normal
circumstances, at least 80% of the Fund's assets will be invested in high-yield
corporate bonds rated B or better by Moody's Investors Service or Standard &
Poor's Corporation. Not more than 20% of the Fund's assets may be invested in
any of the following, taken as a whole: bonds that are rated less than B or that
are unrated; convertible securities; and preferred stocks. For more information
on security selection, see pages 5-6.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
. Credit risk, which is the chance that a bond issuer will fail to pay principal
and interest in a timely manner, reducing the Fund's return. Credit risk will
be substantial for the Fund.
. Interest rate risk, which is the chance that bond prices overall, including
prices of bonds held by the Fund, will decline over short or even long periods
due to rising interest rates. Bonds with longer maturities tend to be more
sensitive to interest rates than bonds with shorter maturities.
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline.
. Manager risk, which is the chance that poor security selection will cause the
Fund to underperform other funds with similar investment objectives.
Because of the speculative nature of junk bonds, you should carefully consider
the risks associated with this Fund before you purchase shares.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based securities
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
[BAR GRAPH APPEARS HERE]
1989 1.89%
1990 -5.85%
1991 29.01%
1992 14.24%
1993 18.24%
1994 -1.71%
1995 19.15%
1996 9.54%
1997 11.91%
1998 5.62%
- --------------------------------------------------------------------------------
The Fund's year-to-date return as of the quarter ended March 31, 1999
was 1.75%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 9.78% (quarter ended March 31, 1991) and the lowest return for a
quarter was -9.03% (quarter ended September 30, 1990).
<PAGE>
2
PLAIN TALK ABOUT
The Costs of Investing
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
PLAIN TALK ABOUT
Fund Expenses
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard High-Yield Corporate Fund's expense ratio in fiscal year 1999
was 0.29%, or $2.90 per $1,000 of average net assets. The average high-yield
bond fund had expenses in 1998 of 1.31%, or $13.10 per $1,000 of average net
assets, according to Lipper Inc., which reports on the mutual fund industry.
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Vanguard High-Yield Corporate Fund 5.62% 8.68% 9.75%
Lehman Brothers High Yield Bond Index 1.60 8.52 10.52
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended January 31, 1999.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: 1%*
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.26%
12b-1 Distribution Fees: None
Other Expenses: 0.03%
Total Annual Fund Operating Expenses: 0.29%
*The 1% fee applies to shares redeemed (either by selling or exchanging to
another fund) within one year of purchase. The fee is withheld from redemption
proceeds and retained by the Fund. Shares held one year or more are not subject
to the 1% fee.
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$30 $93 $163 $368
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
<PAGE>
3
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Wellington Management Company, LLP, Boston, Mass., since inception
Inception Date
December 27, 1978
Net Assets as of January 31, 1999
$5.55 billion
Newspaper Abbreviation
HYCor
Vanguard Fund Number
029
Cusip Number
922031208
Ticker Symbol
VWEHX
- --------------------------------------------------------------------------------
A Word About Risk
This prospectus describes the risks you would face as an investor in Vanguard
High-Yield Corporate Fund. It is important to keep in mind one of the main
axioms of investing: The higher the risk of losing money, the higher the
potential reward. The reverse, also, is generally true: The lower the risk, the
lower the potential reward. As you consider an investment in Vanguard High-Yield
Corporate Fund, you should also take into account your personal tolerance for
the daily fluctuations of the bond market.
Look for this [GRAPHIC APPEARS HERE] symbol throughout the prospectus. It is
used to mark detailed information about each type of risk that you would
confront as a shareholder of the Fund.
- --------------------------------------------------------------------------------
Who Should Invest
The Fund may be a suitable investment for you if:
. You wish to add a high-yield bond fund to your existing holdings, which could
include other bond investments as well as stock, money market, and tax-exempt
investments.
. You are seeking a high level of current income.
. You characterize your investment temperament as "aggressive."
. You are willing to accept substantial investment risk.
PLAIN TALK ABOUT
Costs and Market-Timing
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the
costs. Therefore, the Fund discourages short-term trading by, among other
things, limiting the number of exchanges it permits.
The Vanguard funds do not permit market-timing. Do not invest in this Fund if
you are a market-timer.
<PAGE>
4
The Fund has adopted the following policies, among others, to discourage
short-term trading:
. The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of the
investment or because of a history of excessive trading by the investor.
. There is a limit on the number of times you can exchange into and out of the
Fund (see "Exchanges" in the Investing with Vanguard section).
. The Fund imposes a 1% redemption fee on shares that are redeemed by any method
within one year of purchase.
. The Fund reserves the right to stop offering shares at any time.
Primary Investment Strategies
This section explains the strategies that the investment adviser uses in pursuit
of the Fund's objective, a high level of current income. It also explains how
the adviser implements these strategies. In addition, this section discusses
several important risks--credit risk, interest rate risk, income risk, and
manager risk--faced by investors in the Fund. The Fund's Board of Trustees
oversees the management of the Fund, and may change the investment strategies in
the interest of shareholders. The Fund's objective is not fundamental, and so
may be changed without a shareholder vote.
PLAIN TALK ABOUT
Junk Bonds
Junk bonds are low-quality, high-risk corporate bonds that generally offer a
high level of current income. Considered speculative by the major rating
agencies, these bonds are rated less than Baa by Moody's Investors Service or
BBB by Standard & Poor's Corporation (these ratings are typical for bonds that
provide the highest income return). Junk bonds are often issued as a result of
corporate restructurings--such as leveraged buyouts, mergers, acquisitions, or
other similar events. They also may be issued by smaller, less creditworthy
companies or by highly leveraged firms, which are generally less able than more
financially stable firms to make scheduled payments of interest and principal.
Because of their low credit quality, junk bonds must pay higher interest to
compensate investors for the substantial credit risk they assume. In order to
minimize credit risk, high-yield corporate funds often diversify their holdings
among many bond issuers.
Market Exposure
The Fund's primary strategy is to invest in a diversified group of
high-yielding, low-quality corporate bonds, commonly known as "junk bonds."
[GRAPHIC APPEARS HERE] Because of its investment in junk bonds, the Fund is
subject to substantial credit risk, which is the possibility that a bond issuer
will fail to pay interest and principal in a timely manner.
For more information about credit risk, see "Security Selection" on pages 5-6.
The Fund is also subject to other risks generally associated with bonds.
[GRAPHIC APPEARS HERE] The Fund is subject to interest rate risk, which is the
possibility that bond prices overall will decline over short or even long
periods due to rising interest rates. Longer- term bonds tend to be more
sensitive to interest rates than shorter-term bonds.
Changes in interest rates will affect bond income as well as bond prices.
[GRAPHIC APPEARS HERE] The Fund is subject to income risk, which is the
possibility that the Fund's dividends (income) will decline due to falling
interest rates.
In the past, bond investors have seen the value of their investment rise and
fall--sometimes significantly--with changes in interest rates. Between December
1976 and September 1981, for instance, rising interest rates caused long-term
bond prices to fall by almost 48%.
<PAGE>
5
PLAIN TALK ABOUT
Bonds and Interest Rates
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--causing you to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you should be able to sell your 5% bond for more than you
paid.
PLAIN TALK ABOUT
Bond Maturities
A bond is issued with a specific maturity date--the date when the bond's issuer,
or seller, must pay back the bond's initial value (known as its "face value").
Bond maturities generally range from less than one year (short-term) to 30 years
(long-term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise-but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks in hope of higher yields; short-term bond investors should be willing to
accept lower yields in return for less fluctuation in the value of their
investment.
Because the Fund invests mainly in bonds, changes in interest rates will
impact, the value of the Fund's assets. To illustrate how much of an impact, the
following table shows the effect of a 2% change (both up and down) in interest
rates on three bonds with a face value of $1,000; each has a different maturity.
- --------------------------------------------------------------------------------
How Interest Rate Changes Affect Bonds*
- --------------------------------------------------------------------------------
Value of a $1,000 Bond Value of a $1,000 Bond
After a 2% Increase After a 2% Decrease
Type of Bond (Maturity) in Interest Rates in Interest Rates
- --------------------------------------------------------------------------------
Short-Term (2.5 years) $956 $1,046
Intermediate-Term (10 years) 870 1,156
Long-Term (20 years) 816 1,251
- --------------------------------------------------------------------------------
*Assuming a 7% yield.
- --------------------------------------------------------------------------------
These figures are for illustration only; you should not regard them as an
indication of future returns from the bond market as a whole or the Fund in
particular.
Security Selection
Wellington Management Company, LLP (WMC), adviser to the Fund, seeks
to minimize the substantial investment risk posed by junk bonds primarily
through solid credit research and broad diversification among issuers.
[GRAPHIC APPEARS HERE] The Fund is subject to manager risk, which is the
possibility that the adviser may do a poor job of selecting securities.
At least 80% of the Fund's assets will be invested in high-yield corporate
bonds rated B or better by Moody's Investors Service or Standard & Poor's
Corporation. Not more than 20% of the Fund's assets may be invested in any of
the following, taken as a whole: bonds that are rated less than B or that are
unrated; convertible securities; and preferred stocks.
If unrated, a bond must be, in the adviser's opinion, at least equivalent to a
Caa rating by Moody's or a CCC rating by Standard & Poor's. The Fund will not
invest in bonds that, at the time of initial investment, are rated less than Caa
by Moody's or CCC by Standard & Poor's. However, the Fund may continue to hold
bonds that have been downgraded, even if they are no longer eligible for
purchase by the Fund.
In the past, the Fund has not invested in non-income-producing high-yield
bonds, such as zero coupon bonds-- which pay interest only at maturity--or
payment-in-kind bonds--which pay interest in the form of additional securities.
Although it has no present plans to do so, the Fund may invest up to 5% of its
assets in such bonds in the future.
<PAGE>
6
PLAIN TALK ABOUT
Credit Quality
A bond's credit quality depends on the issuer's ability to pay interest on
the bond and, ultimately, to repay the debt. The lower the rating by one of
the independent bond-rating agencies (for example, Moody's or Standard &
Poor's), the greater the chance (in the rating agency's opinion) that the
bond issuer will default, or fail to meet its payment obligations. All things
being equal, the lower a bond's credit rating, the higher its yield should be
to compensate investors for assuming additional risk. Bonds rated in one of
the four highest rating categories are considered "investment grade."
Bonds rated less than Baa by Moody's or BBB by Standard & Poor's, such as
those held by the Fund, are classified as non-investment grade. These bonds
carry a high degree of risk and are considered speculative by the major rating
agencies.
Credit quality in the high-yield bond market can change suddenly and
unexpectedly, and even recently-issued credit ratings may not fully reflect the
actual risks posed by a particular high-yield bond. For these reasons, it is the
Fund's policy not to rely primarily on ratings issued by established credit
rating agencies, but to utilize these ratings in conjunction with the adviser's
own independent and ongoing review of credit quality.
WMC selects bonds on a company-by-company basis, emphasizing fundamental
research and a long-term investment horizon. WMC's analysis focuses on the
nature of a company's business, its strategy, and the quality of its management.
Based on this analysis, the adviser looks for companies whose prospects are
stable or improving, and whose bonds offer an attractive yield. Companies with
improving prospects are normally more attractive because they offer better
assurance of debt repayment and greater potential for capital appreciation.
As of January 31, 1999, the Fund's holdings had the following credit quality
characteristics:
-------------------------------------------------------------
Investment Percent of Fund's Net Assets
-------------------------------------------------------------
Corporate bonds
A 0.3%
Baa/BBB 3.4
Ba/BB 45.2
B 45.5
Caa/CC 0.4
U.S. Treasury securities 5.2
-------------------------------------------------------------
To minimize credit risk, the Fund normally diversifies its holdings among
bonds of at least 100 separate issuers, representing many industries. As of
January 31, 1999, the Fund held bonds of 229 corporate issuers. As a result,
there should be less chance that the Fund will be hurt by a particular bond
issuer's failure to pay either principal or interest.
The Fund may, from time to time, take temporary defensive measures--such as
holding cash reserves without limit--that are inconsistent with the Fund's
primary investment strategies, in response to adverse market, economic,
political, or other conditions. In taking such measures, the Fund may not
achieve its investment objective.
<PAGE>
7
PLAIN TALK ABOUT
Turnover Rate
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the
fund, the greater the impact that brokerage commissions and other transaction
costs will have on its return. Also, funds with high turnover rates may be
more likely to generate capital gains that must be distributed to
shareholders as income subject to taxes. The average turnover rate for all
high-yield corporate funds is approximately 126%, according to Morningstar,
Inc.
Turnover Rate
Although the Fund seeks to invest for the long term, it may sell securities
regardless of how long the securities have been held. The Fund may sell
securities based on the adviser's determination that securities with relatively
greater value are available for purchase by the Fund, or to raise cash. The
Fund's average turnover rate for the past five years has been about 34%. (A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its net assets within a one-year period.)
PLAIN TALK ABOUT
Vanguard's Unique
Corporate Structure
The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
The Fund and Vanguard
Vanguard High-Yield Corporate Fund is part of Vanguard Fixed Income Securities
Funds, a member of The Vanguard Group. Vanguard is a family of more than 35
investment companies with more than 100 distinct investment portfolios holding
assets worth more than $480 billion. All of the Vanguard funds share in the
expenses associated with business operations, such as personnel, office space,
equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 distribution fees, each fund pays its
allocated share of The Vanguard Group's marketing costs.
Investment Adviser
The Fund employs Wellington Management Company, LLP (WMC), 75 State Street,
Boston, MA 02109, as its investment adviser. WMC manages the Fund subject to the
control of the Trustees and officers of the Fund.
Under the advisory agreement, the High-Yield Corporate Fund is required to pay
WMC a quarterly fee based on certain annual percentage rates applied to the
Fund's average month-end assets for the quarter. For the fiscal year ended
January 31, 1999, the advisory fees paid by the High-Yield Corporate Fund
represented an effective annual rate of 0.04%
PLAIN TALK ABOUT
The Fund's Adviser
Wellington Management Company, LLP(WMC), is an investment advisory firm founded
in 1928. As of January 31, 1999, WMC managed more than $214 billion in total
assets. The individual primarily responsible for overseeing the High-Yield
Corporate Fund's investments is:
Earl E. McEvoy, Senior Vice President and Partner of WMC, and Fund Manager of
the High-Yield Corporate Fund since 1984; has worked in investment management
since 1972; with WMC since 1978; B.A., Dartmouth College; M.B.A., Columbia
Business School.
<PAGE>
8
of the Fund's average net assets.
The Fund has authorized WMC to choose brokers or dealers to handle the
purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions. Also, the Fund may direct WMC to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Fund.
The Board of Trustees may, without prior approval from shareholders, change
the terms of the advisory agreement or hire a new investment adviser, either as
a replacement for WMC or as an additional adviser. However, any such change will
be communicated to shareholders in writing.
Year 2000 Challenge
The common practice in computer programming of using just two digits to identify
a year has resulted in the Year 2000 challenge throughout the information
technology industry. If unchanged, many computer applications and systems could
misinterpret dates occurring after December 31, 1999, leading to errors or
failure. Such failure could adversely affect a fund's operations, including
pricing, securities trading, and the servicing of shareholder accounts.
The Vanguard Group is dedicated to providing uninterrupted, high-quality
performance from our computer systems before, during, and after 2000. In July
1998, we completed the renovation and initial testing of our internal systems.
Vanguard is diligently working with external partners, suppliers, and vendors,
including fund managers and other service providers, to assure that the systems
with which we interact remain operational at all times.
In addition to taking every reasonable step to secure our internal systems and
external relationships, Vanguard is further developing contingency plans
intended to assure that unexpected systems failures will not adversely affect
the Fund's operations. Vanguard intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternate solutions if
necessary.
However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on the Fund's business,
operations, or financial condition. Additionally, the Fund's performance could
be hurt if a computer-system failure at a company or governmental unit affects
the price of securities the Fund owns.
Dividends, Capital Gains, and Taxes
As a shareholder, you are entitled to your share of the Fund's net income
(interest and gains less expenses). The Fund's income dividends accrue daily and
are distributed monthly; distributions of capital gains generally occur in
December. In addition, the Fund may occasionally be required to make
supplemental capital gains distributions at some other time during the year.
Dividend and capital gains distributions of Fund shares that are held as an
investment option in an employer-sponsored retirement or savings plan will be
reinvested in additional Fund shares and accumulate on a tax-deferred basis. You
will not owe taxes on these distributions until you begin withdrawals. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of an investment in the Fund and of
any plan withdrawals.
PLAIN TALK ABOUT
Distributions
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive
such earnings as either an income dividend or a capital gains distribution.
Income dividends come from both the dividends that the fund earns from its
holdings and the interest it receives from its money market and bond
investments. Capital gains are realized whenever the fund sells securities
for higher prices than it paid for them. These capital gains are either
short-term or long-term depending on whether the fund held the securities for
less than or more than one year.
<PAGE>
9
Share Price
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of trading on the New York Stock Exchange (the NAV
is not calculated on holidays or other days the Exchange is closed). Net asset
value per share is computed by adding up the total value of the Fund's
investments and other assets, subtracting any of its liabilities (debts), and
then dividing by the number of Fund shares outstanding:
Total Assets - Liabilities
Net Asset Value = -----------------------------------
Number of Shares Outstanding
Knowing the daily net asset value is useful to you as a shareholder because it
indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A Note on Pricing: The Fund's investments will be priced at their market value
when market quotations are readily available. When these quotations are not
readily available, investments will be priced at their fair value, calculated
according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of most
major newspapers under the heading "Vanguard Funds." Different newspapers use
different abbreviations for the Fund, but the most common is HYCor.
<PAGE>
10
PLAIN TALK ABOUT
How to Read the Financial
Highlights Table
The Fund began fiscal 1999 with a net asset value (price) of $8.17 per share.
During the year, the Fund earned $.659 per share from investment income
(interest). There was a decline of $.245 per share from investments that had
depreciated in value or that were sold for lower prices than the Fund paid
for them.
Shareholders received $.684 per share in the form of dividend and capital
gains distributions. A portion of each year's capital gains distributions may
come from the prior year's capital gains.
The earnings ($.414 per share) minus the distributions ($.684 per share)
resulted in a share price of $7.90 at the end of the year. This was a
decrease of $.27 per share (from $8.17 at the beginning of the year to $7.90
at the end of the year). For a shareholder who reinvested the distributions
in the purchase of more shares, the total return from the Fund was 5.34% for
the year.
As of January 31, 1999, the Fund had $5.55 billion in net assets. For the
year, its expense ratio was 0.29% ($2.90 per $1,000 of net assets); and its
net investment income amounted to 8.26% of its average net assets. It sold
and replaced securities valued at 31% of its net assets.
Financial Highlights
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been derived from the financial statements
audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
- --------------------------------------------------------------------------------
Vanguard High-Yield Corporate Fund
Year Ended January 31,
------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $8.17 $7.87 $7.89 $7.24 $8.14
- --------------------------------------------------------------------------------
Investment Operations
Net Investment Income .659 .688 .688 .678 .679
Net Realized and Unrealized Gain
(Loss) on Investments (.245) .300 (.020) .650 (.900)
------------------------------------------
Total from Investment Operations .414 .988 .668 1.328 (.221)
------------------------------------------
Distribution
Dividends from Net Investment Income (.659) (.688) (.688) (.678) (.679)
Distributions from
Realized Capital Gains (.025) -- -- -- --
------------------------------------------
Total Distributions (.684) (.688) (.688) (.678) (.679)
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $7.90 $8.17 $7.87 $7.89 $7.24
================================================================================
Total Return* 5.34% 13.14% 9.01% 19.01% -2.52%
================================================================================
Ratios/Supplemental Data
Net Assets, End of Year (Millions) $5,549 $4,747 $3,674 $3,007 $2,162
Ratio of Total Expenses to
Average Net Assets 0.29% 0.28% 0.29% 0.34% 0.34%
Ratio of Net Investment Income to
Average Net Assets 8.26% 8.63% 8.92% 8.85% 9.13%
Turnover Rate 31% 45% 23% 38% 33%
================================================================================
*Total returns do not reflect the 1% fee assessed on redemptions of shares
held for less than one year.
From time to time, the Vanguard funds advertise yield and total return figures.
Yield is a measure of past dividend income. Total return includes both past
dividend income (assuming that it has been reinvested) plus realized and
unrealized capital appreciation (or depreciation). Neither yield nor total
return should be used to predict the future performance of a fund.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE>
11
Investing with Vanguard
The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
. If you have any questions about the Fund or Vanguard, including the Fund's
investment objective, strategies, or risks, contact Vanguard's Participant
Services Center, toll-free, at 1-800-523-1188.
. If you have questions about your account, contact your plan administrator or
the organization that provides record-keeping services for your plan.
Investment Options and Allocations
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
Transactions
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the Fund's next-determined net
asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of trading on the New York Stock Exchange, generally 4 p.m. Eastern
time, you will receive that day's net asset value.
Exchanges
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange, or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of the Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than four
substantive "round trips" through the Fund (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
. Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
. Make sure to read that fund's prospectus. Contact Participant Services, toll-
free, at 1-800-523-1188 for a copy.
. Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
Accessing Fund Information by Computer
- --------------------------------------------------------------------------------
Vanguard on the World Wide Web www.vanguard.com
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
- --------------------------------------------------------------------------------
<PAGE>
(This page intentionally left blank.)
<PAGE>
Glossary of Investment Terms
Average Maturity
The average length of time until bonds held by a fund reach maturity (or are
called) and are repaid. In general, the longer the average maturity, the more a
fund's share price will fluctuate in response to changes in market interest
rates.
Bond
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and to make regular interest payments until
that date.
Capital Gains Distribution
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit, minus any realized losses.
Cash Reserves
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
Dividend Income
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
Dollar-Cost Averaging
Investing equal amounts of money at regular intervals on an ongoing basis. This
technique ensures that an investor buys fewer shares when prices are high and
more shares when prices are low.
Expense Ratio
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
Face Value
The amount to be paid at maturity of a bond; also known as the par value or
principal.
Fixed-Income Securities
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
Investment Adviser
An organization that makes the day-to-day decisions regarding a fund's
investments.
Investment-Grade
A bond whose credit quality is considered by independent bond-rating agencies to
be sufficient to ensure timely payment of principal and interest under current
economic circumstances.
Maturity
The date when a bond issuer agrees to repay the bond's principal, or face value,
to the bond's buyer.
Net Asset Value (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
Price/Earnings (P/E) Ratio
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
Principal
The amount of your own money you put into an investment.
Securities
Stocks, bonds, money market instruments, and other investment vehicles.
Total Return
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
Volatility
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
Yield
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[LOGO OF THE VANGUARD GROUP(R) APPEARS HERE]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
For More Information
If you'd like more information about Vanguard High-Yield Corporate Fund, the
following documents are available free upon request:
Annual/Semiannual Report to Shareholders
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In these reports, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance during the most recent fiscal year.
Statement of Additional
Information (SAI)
The SAI provides more detailed information about the Fund.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Fund or other Vanguard funds, please
contact us as follows:
The Vanguard Group
Participant Services Center
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone:
1-800-523-1188
Text Telephone:
1-800-523-8004
World Wide Web:
www.vanguard.com
Information provided by the Securities and Exchange Commission (SEC)
You can review and copy information about the Fund (including the SAI) at the
SEC's Public Reference Room in Washington, D.C. To find out more about this
public service, call the SEC at 1-800-SEC-0330. Reports and other information
about the Fund are also available on the SEC's website (www.sec.gov), or you can
receive copies of this information, for a fee, by writing the Public Reference
Section, Securities and Exchange Commission, Washington, DC 20549-6009.
Fund's Investment Company Act
file number: 811-2368
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I029N-06/01/1999
<PAGE>
PART B
VANGUARD FIXED INCOME SECURITIES FUND
(the Trust)
STATEMENT OF ADDITIONAL INFORMATION
June 1, 1999
This Statement is not a prospectus but should be read in conjunction with
the Trust's current Prospectuses dated June 1, 1999. To obtain a Prospectus or
an additional 1999 Annual Report to Shareholders, which contains the Funds'
Financial Statements as hereby incorporated by reference, please call:
Vanguard Investor Information Department
1-800-662-7447 (SHIP)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Description of the Trust................................................... B-1
Investment Policies........................................................ B-3
Purchase of Shares......................................................... B-9
Share Price................................................................ B-9
Redemption of Shares....................................................... B-9
Fundamental Investment Limitations......................................... B-10
Management of the Trust.................................................... B-12
Investment Advisory Services............................................... B-16
Portfolio Transactions..................................................... B-17
Yield and Total Return..................................................... B-19
Financial Statements....................................................... B-20
Performance Measures....................................................... B-21
Other Definitions.......................................................... B-23
Appendix--Description of Securities and Ratings............................ B-24
</TABLE>
DESCRIPTION OF THE TRUST
Organization
The Trust was organized as Westminster Fixed Income Securities Fund, a Mary-
land corporation, in 1972. It was reorganized as a Pennsylvania business trust
in 1984, then reorganized as a Maryland corporation in 1985 and, finally, re-
organized as a Delaware business trust in May, 1998. Prior to its reorganiza-
tion as a Delaware business trust, the Trust was known as Vanguard Fixed In-
come Securities Fund, Inc. The Trust is registered with the United States
Securities and Exchange Commission (the Commission) under the Investment Com-
pany Act of 1940 (the 1940 Act) as an open-end diversified management invest-
ment company. It currently offers the following funds:
GNMA Fund Short-Term Treasury Fund Short-Term Federal Fund
Short-Term Corporate Intermediate-Term Treasury Fund Intermediate-Term
Fund* Long-Term Corporate Fund Corporate Fund
Long-Term Treasury Fund High-Yield Corporate
Fund
(individually, the Fund; collectively, the Funds)
* The Short-Term Corporate Fund offers two classes of shares, Investor Shares
and Institutional Shares.
B-1
<PAGE>
The Trust has the ability to offer additional funds or classes of shares.
There is no limit on the number of full and fractional shares that the Trust
may issue for a single fund or class of shares.
Service Providers
Custodian. State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, The Chase Manhattan Bank, N.A., 4 Chase MetroTech Center,
Brooklyn, New York 11245, and First Union, PA4943, 530 Walnut Street, Phila-
delphia, Pennsylvania 19106, serve as the Trust's custodians. The custodians
are responsible for maintaining the Trust's assets and keeping all necessary
accounts and records.
Independent Accountants. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania, 19103, serves as the Trust's independent accoun-
tants. The accountants audit financial statements for the Trust and provide
other related services.
Transfer and Dividend-Paying Agent. The Fund's transfer agent and dividend-
paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern,
Pennsylvania 19355.
Characteristics of the Trust's Shares
Restrictions on Holding or Disposing of Shares. There are no restrictions on
the right of shareholders to retain or dispose of the Trust's shares, other
than the possible future termination of the Trust or any of its funds. The
Trust or any of its Funds may be terminated by reorganization into another mu-
tual fund or by liquidation and distribution of the assets of the affected
fund. Unless terminated by reorganization or liquidation, the Trust and its
funds will continue indefinitely.
Shareholder Liability. The Trust is organized under Delaware law, which pro-
vides that shareholders of a business trust are entitled to the same limita-
tions of personal liability as shareholders of a corporation organized under
Delaware law. Effectively, this means that a shareholder of the Trust will not
be personally liable for payment of the Trust's debts except by reason of his
or her own conduct or acts. In addition, a shareholder could incur a financial
loss on account of a Trust obligation only if the Trust itself had no remain-
ing assets with which to meet such obligation. We believe that the possibility
of such a situation arising is extremely remote.
Dividend Rights. The shareholders of a Fund are entitled to receive any div-
idends or other distributions declared for such Fund. No shares have priority
or preference over any other shares of the same Fund with respect to distribu-
tions. Distributions will be made from the assets of a series, and will be
paid ratably to all shareholders of the fund (or class) according to the num-
ber of shares of such fund (or class) held by shareholders on the record date.
The amount of income dividends per share may vary between separate share clas-
ses of the same series based upon differences in the way that expenses are al-
located between share classes pursuant to a multiple class plan.
Voting Rights. Shareholders are entitled to vote on a matter if: (i) a
shareholder vote is required under the 1940 Act; (ii) the matter concerns an
amendment to the Declaration of Trust that would adversely affect to a mate-
rial degree the rights and preferences of the shares of any class or fund; or
(iii) the Trustees determine that it is necessary or desirable to obtain a
shareholder vote. The 1940 Act requires a shareholder vote under various cir-
cumstances, including to elect or remove Trustees upon the written request of
shareholders representing 10% or more of the Trust's net assets, and to change
any fundamental policy of the Trust. Shareholders of the Trust receive one
vote for each dollar of net asset value owned on the record date, and a frac-
tional vote for each fractional dollar of net asset value owned on the record
date. However, only the shares of the fund affected by a particular matter are
entitled to vote on that matter. Voting rights are non-cumulative and cannot
be modified without a majority vote.
B-2
<PAGE>
Liquidation Rights. In the event of liquidation, shareholders will be enti-
tled to receive a pro rata share of the net assets of applicable Funds of the
Trust.
Preemptive Rights. There are no preemptive rights associated with shares of
the Funds.
Conversion Rights. Shareholders of the Short-Term Corporate Fund may convert
their Individual (or Institutional) Shares into Institutional (or Individual)
Shares upon the satisfaction of any then applicable eligibility requirements.
Redemption Provisions. The Trust's redemption provisions are described in
its current prospectuses and elsewhere in this Statement of Additional infor-
mation.
Sinking Fund Provisions. The Trust has no sinking fund provisions.
Calls or Assessment. The Trust's shares, when issued, are fully paid and
non-assessable.
Tax Status of the Trust
Each Fund of the Trust intends to qualify as a "regulated investment compa-
ny" under Subchapter M of the Internal Revenue Code. This special tax status
means that a Fund will not be liable for federal tax on income and capital
gains distributed to shareholders. In order to preserve its tax status, each
fund of the Trust must comply with certain requirements. If a Fund fails to
meet these requirements in any taxable year, it will be subject to tax on its
taxable income at corporate rates, and all distributions from earnings and
profits, including any distributions of net tax-exempt income and net long-
term capital gains, will be taxable to shareholders as ordinary income. In ad-
dition, the Fund could be required to recognize unrealized gains, pay substan-
tial taxes and interest, and make substantial distributions before regaining
its tax status as a regulated investment company.
INVESTMENT POLICIES
The following policies supplement the investment policies set forth in the
Trust's Prospectuses:
Repurchase Agreements. Each Fund may invest in repurchase agreements with
commercial banks, brokers or dealers either for defensive purposes due to mar-
ket conditions or to generate income from its excess cash balances. A repur-
chase agreement is an agreement under which a Fund acquires a fixed-income se-
curity (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 Fund and is unrelated to the interest rate on the underlying instru-
ment. In these transactions, the securities acquired by the Fund (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 re-
purchased. In addition, the Fund's Board of Trustees will monitor a Fund's re-
purchase 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 a Fund.
The use of repurchase agreements involves certain risks. For example, if the
other party to the agreement defaults on its obligation to repurchase the un-
derlying security at a time when the value of the security has declined, a
Fund 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 under-
lying security is collateral for a loan by a Fund
B-3
<PAGE>
not within the control of the Fund and therefore the realization by the Fund
on such collateral may be automatically stayed. Finally, it is possible that a
Fund 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 Fund's management acknowledges these risks, it is expected that
they can be controlled through careful monitoring procedures.
Lending of Securities. Each Fund may lend its investment securities to qual-
ified institutional investors (typically brokers, dealers, banks or other fi-
nancial institutions) who need to borrow securities in order to complete cer-
tain transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment secu-
rities, a Fund attempts to increase its net investment income through the re-
ceipt of interest on the loan. Any gain or loss in the market price of the se-
curities loaned that might occur during the term of the loan would be for the
account of the Fund. The terms and the structure and the aggregate amount of
such loans must be consistent with the 1940 Act, and the Rules and Regulations
or interpretations of the Commission thereunder. These provisions limit the
amount of securities a Fund may lend to 33 1/3% of the Fund's total assets,
and require that (a) the borrower pledge and maintain with the Fund collateral
consisting of cash, an irrevocable letter of credit or securities issued or
guaranteed by the United States Government having at all times not less than
100% of the value of the securities loaned, (b) the borrower add to such col-
lateral 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 ter-
mination by the Fund at any time, and (d) the Fund receive reasonable interest
on the loan (which may include the Fund's investing any cash collateral in in-
terest bearing short-term investments), any distribution on the loaned securi-
ties and any increase in their market value. Loan arrangements made by each
Fund will comply with all other applicable regulatory requirements, including
the rules of the New York Stock Exchange, which presently require the borrow-
er, after notice, to redeliver the securities within the normal settlement
time of three business days. All relevant facts and circumstances, including
the creditworthiness of the broker, dealer or institution, will be considered
in making decisions with respect to the lending of securities, subject to re-
view by the Trust's Board of Trustees.
At the present time, the Staff of the Commission does not object if an in-
vestment company pays reasonable negotiated fees in connection with loaned se-
curities, so long as such fees are set forth in a written contract and ap-
proved by the investment company's Trustees. In addition, voting rights pass
with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
Vanguard Interfund Lending Program. The Commission has issued an exemptive
order permitting the Funds to participate in Vanguard's interfund lending pro-
gram. This program allows the Vanguard funds to borrow money from and loan
money to each other for temporary or emergency purposes. The program is sub-
ject to a number of conditions, including the requirement that no fund may
borrow or lend money through the program unless it receives a more favorable
interest rate than is available from a typical bank for a comparable transac-
tion. In addition, a fund may participate in the program only if and to the
extent that such participation is consistent with the fund's investment objec-
tive and other investment policies. The Boards of Trustees of the Vanguard
funds are responsible for ensuring that the interfund lending program operates
in compliance with all conditions of the Commission's exemptive order.
Temporary Investments. The Funds may take temporary defensive measures that
are inconsistent with the Funds' normal fundamental or non-fundamental invest-
ment policies and strategies in response to adverse market, economic, politi-
cal, or other conditions. Such measures could include investments in (a)
highly liquid short-term fixed income securities issued by or on behalf of mu-
nicipal or corporate issuers, obligations of the U.S. Government and its agen-
cies, commercial paper, and bank certificates of deposit; (b) shares of other
investment companies which have
B-4
<PAGE>
investment objectives consistent with those of the Fund; (c) repurchase agree-
ments involving any such securities; and (d) other money market instruments.
There is no limit on the extent to which the Funds may take temporary defen-
sive measures. In taking such measures, the Fund may fail to achieve its in-
vestment objective.
Illiquid and Restricted Securities. Each Fund may invest up to 15% of its
net assets in 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
the Fund's books.
Each Fund may invest in restricted, privately placed securities that, under
Commission rules, may be sold only to qualified institutional buyers. Because
these securities can be resold only to qualified institutional buyers, they
may be considered illiquid securities--meaning that they could be difficult
for the Fund to convert to cash if needed.
If a substantial market develops for a restricted security held by the Fund,
it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the Fund's Board of Trustees. This generally includes
securities that are unregistered that can be sold to qualified institutional
buyers in accordance with Rule 144A under the 1933 Act. While the Fund's in-
vestment adviser determines the liquidity of restricted securities on a daily
basis, the Board oversees and retains ultimate responsibility for the advis-
er's decisions. Several factors the Board considers in monitoring these deci-
sions include the valuation of a security, the availability of qualified in-
stitutional buyers, and the availability of information about the security's
issuer.
Foreign Investments. As indicated in the prospectuses, the Trust may include
foreign securities to a certain extent. Investors should recognize that in-
vesting in foreign companies involves certain special considerations which are
not typically associated with investing in U.S. companies.
Federal Tax Treatment of Non-U.S. Transactions. Special rules govern the
Federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing
of certain trade receivables and payables; and (iii) the entering into or ac-
quisition of any forward contract, futures contract, option and similar finan-
cial instrument if such instrument is not marked to market. The disposition of
a currency other than the U.S. dollar by a U.S. taxpayer is also treated as a
transaction subject to the special currency rules. However, foreign currency-
related regulated futures contracts and nonequity options are generally not
subject to the special currency rules if they are or would be treated as sold
for their fair market value at year-end under the marking-to-market rules ap-
plicable to other futures contracts unless an election is made to have such
currency rules apply. With respect to transactions covered by the special
rules, foreign currency gain or loss is calculated separately from any gain or
loss on the underlying transaction and is normally taxable as ordinary gain or
loss. A taxpayer may elect to treat as capital gain or loss foreign currency
gain or loss arising from certain identified forward contracts, futures con-
tracts and options that are capital assets in the hands of the taxpayer and
which are not part of a straddle. The Treasury Department issued regulations
under which certain transactions subject to the special currency rules that
are part of a "section 988 hedging transaction" (as defined in the Internal
Revenue Code of 1986, as amended, and the Treasury regulations) will be inte-
grated and treated as a single transaction or otherwise treated consistently
for purposes of the Code. Any gain or loss attributable to the foreign cur-
rency component of a transaction engaged in by a Fund which is not subject to
the special currency rules (such as foreign equity investments other than cer-
tain preferred stocks) will be treated as capital gain or loss and will not be
segregated from the gain or loss on the underlying transaction. It is antici-
pated
B-5
<PAGE>
that some of the non-U.S. dollar-denominated investments and foreign currency
contracts the Vanguard Fixed Income Securities Funds may make or enter into
will be subject to the special currency rules described above.
Country Risk. As foreign companies are not generally subject to uniform ac-
counting, auditing and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly avail-
able information about certain foreign companies than about domestic compa-
nies. 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 Trust 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 in-
terest income. Although in some countries a portion of these taxes is recover-
able, the non-recovered portion of foreign withholding taxes will reduce the
income the Fund receives from its foreign investments.
Futures Contracts and Options. Each Fund 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 con-
tracts 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 ex-
changes. Futures exchanges and trading are regulated under the Commodity Ex-
change Act by the Commodity Futures Trading Commission (CFTC), a U.S. Govern-
ment agency. Assets committed to futures contracts will be segregated to the
extent required by law.
Although futures contracts by their terms call for actual delivery or ac-
ceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Clos-
ing out an open futures position is done by taking an opposite position (buy-
ing a contract which has previously been sold, or selling a contract previ-
ously 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 comple-
tion 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. Bro-
kers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin de-
posits 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 con-
tract value may reduce the required margin, resulting in a repayment of excess
margin to the con-
B-6
<PAGE>
tract holder. Variation margin payments are made to and from the futures bro-
ker for as long as the contract remains open. The Funds expect to earn inter-
est 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 unfavor-
able 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 Funds 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 except to the
extent that the aggregate initial margins and premiums required to establish
any non-hedging positions do not exceed five percent of the value of the
Fund's portfolio. A Fund will only sell futures contracts to protect securi-
ties 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 each Fund's exposure to market fluctuations, the use
of futures contracts may be a more effective means of hedging this exposure.
While a Fund 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 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 the Fund's total assets. In addition, a 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 Fund'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 Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin require-
ments at a time when it may be disadvantageous to do so. In addition, the Fund
may be required to make delivery of the instruments underlying futures con-
tracts it holds. The inability to close options and futures positions also
could have an adverse impact on the ability to hedge it effectively.
Each Fund 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 sub-
stantial, 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 sub-
stantial 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 Fund incurs the
risk that its adviser will incorrectly predict future interest rate trends.
However, because the futures strategies of the Funds are engaged in only for
hedging purposes, the Advisers do not believe that the Funds are subject
B-7
<PAGE>
to the risks of loss frequently associated with futures transactions. The
Funds would presumably have sustained comparable losses if, instead of the
futures contract, they had invested in the underlying financial instrument and
sold it after the decline.
Utilization of futures transactions by a Fund does involve the risk of im-
perfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is
also possible that a Fund 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 a Fund of margin deposits in the event of bankruptcy of a bro-
ker with whom a Fund has an open position in a futures contract or related op-
tion.
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 unfa-
vorable 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. Each Fund is required for Fed-
eral 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 a Fund may affect the holding period of such securities
and, consequently, the nature of the gain or loss on such securities upon dis-
position. A Fund 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 Fund.
In order for each Fund to continue to qualify for Federal income tax treat-
ment as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income; i.e., dividends, inter-
est, income derived from loans of securities, gains from the sale of securi-
ties or of foreign currencies or other income derived with respect to the
Fund's business of investing in securities or currencies. It is anticipated
that any net gain realized from the closing out of futures contracts will be
considered qualifying income for purposes of the 90% requirement.
A Fund 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 Fund's fiscal year) on futures transactions. Such dis-
tributions will be combined with distributions of capital gains realized on
the Fund's other investments and shareholders will be advised on the nature of
the transactions.
Other Types of Derivatives. In addition to bond futures contracts and op-
tions, each Fund may invest in other types of derivatives, including swap
agreements. Swap agreements can be structured in a variety of ways and are
known by many different names. In a typical swap agreement, the Fund negoti-
ates with a counterparty to trade off investment exposure to a particular mar-
ket factor, such as interest rate movements or the credit quality of a bond
issuer. Based on the terms of the swap, the Fund may either receive from or
make payments to the counterparty on a regular basis.
Depending on how they are used, swap agreements have the potential to in-
crease or decrease the Funds' investment risk. The Funds will invest in swap
agreements only to the extent consistent with their respective investment ob-
jectives and policies.
B-8
<PAGE>
PURCHASE OF SHARES
Each Trust reserves the right in its sole discretion: (i) to suspend the of-
fering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Trust, and (iii) to
reduce or waive the minimum investment for or any other restrictions on ini-
tial and subsequent investments for certain fiduciary accounts such as em-
ployee benefit plans or under circumstances where certain economies can be
achieved in sales of the Trust's shares.
SHARE PRICE
The Trust's share price, or "net asset value" per share, is calculated by
dividing the total assets of the Trust, less all liabilities, by the total
number of shares outstanding. The net asset value is determined as of the
close of the New York Stock Exchange (the Exchange, generally 4:00 p.m. East-
ern time) on each day that the exchange is open for trading.
Trust securities for which market quotations are readily available (includes
those securities listed on national securities exchanges, as well as those
quoted on the NASDAQ Stock Market) will be valued at the last quoted sales
price on the day the valuation is made. Such securities which are not traded
on the valuation date are valued at the mean of the bid and ask prices. Price
information on exchange-listed securities is taken from the exchange where the
security is primarily traded. 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.
Short term instruments (those acquired with remaining maturities of 60 days
or less) may be valued at cost, plus or minus any amortized discount or premi-
um, which approximates market value.
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 of each security,
but take into account institutional-size transactions in similar groups of se-
curities as well as any developments related to specific securities.
Other assets and securities for which no quotations are readily available or
which are restricted as to sale (or resale) are valued by such methods as the
Board of Trustees deems in good faith to reflect fair value.
The share price for the Trust can be found daily in the mutual fund listings
of most major newspapers under the heading of "Vanguard Funds".
REDEMPTION OF SHARES
Each Trust may suspend redemption privileges or postpone the date of pay-
ment: (i) during any period that the New York Stock Exchange is closed, or
trading on the Exchange is restricted as determined by the Commission, (ii)
during any period when an emergency exists as defined by the rules of the Com-
mission as a result of which it is not reasonably practicable for a Fund to
dispose of securities owned by it, or fairly to determine the value of its as-
sets, and (iii) for such other periods as the Commission may permit.
The Trust has made an election with the Commission to pay in cash all re-
demptions 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
B-9
<PAGE>
or in part, in readily marketable investment securities or in cash, as the
Trustees may deem advisable; however, payment will be made wholly in cash un-
less the Trustees believe that economic or market conditions exist which would
make such a practice detrimental to the best interests of the Fund. If redemp-
tions are paid in investment securities, such securities will be valued as set
forth in the Prospectuses under "Share Price" and a redeeming shareholder
would normally incur brokerage expenses if he converted these securities to
cash.
No charge is made by a Fund for redemptions. Any redemption may be more or
less than the shareholder's cost depending on the market value of the securi-
ties held by the Fund.
FUNDAMENTAL INVESTMENT LIMITATIONS
Each Fund is subject to the following fundamental investment limitations,
which cannot be changed in any material way without the approval of the hold-
ers of a majority of the affected series' shares. For these purposes, a "ma-
jority" of shares means shares representing the lesser of: (i) 67% or more of
the votes cast to approve a change, so long as shares representing more than
50% of the series' net asset value are present or represented by proxy; or
(ii) more than 50% of the series' net asset value.
Borrowing. A Fund may not borrow money, except for temporary or emergency
purposes in an amount not exceeding 15% of the Fund's net assets. The Fund may
borrow money through banks, reverse repurchase agreements, or Vanguard's
interfund lending program only, and must comply with all applicable regulatory
conditions. The Fund may not make any additional investments whenever its out-
standing borrowings exceed 5% of net assets.
Commodities. A Fund may not invest in commodities, except that it may invest
in bond (stock) futures contracts, bond (stock) options and options on bond
(stock) futures contracts. No more than 5% of the Fund's total assets may be
used as initial margin deposit for futures contracts, and no more than 20% of
the Fund's total assets may be invested in futures contracts or options at any
time.
Diversification. With respect to 75% of its total assets, a Fund may not:
(i) purchase more than 10% of the outstanding voting securities of any one is-
suer; or (ii) purchase securities of any issuer if, as a result, more than 5%
of the Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the United States Government, its
agencies, or instrumentalities.
Illiquid or Restricted Securities. A Fund may not acquire any security if,
as a result, more than 15% of its net assets would be invested in securities
that are illiquid.
Industry Concentration. A Fund may not invest more that 25% of its total as-
sets in any one industry.
Investing for Control. A Fund may not invest in a company for purposes of
controlling its management.
Investment Companies. A Fund may not invest in any other investment company,
except through a merger, consolidation or acquisition of assets, or to the ex-
tent permitted by Section 12 of the 1940 Act. Investment companies whose
shares a Fund acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.
Loans. A Fund may not lend money to any person except (i) by purchasing
bonds or other debt securities or by entering into repurchase agreements; (ii)
by lending its portfolio securities; and (iii) to another Vanguard fund
through Vanguard's interfund lending program.
Margin. A Fund may not purchase securities on margin or sell securities
short, except as permitted by the Fund's investment policies relating to com-
modities.
B-10
<PAGE>
Oil, gas, minerals. A Fund may not invest in interests in oil, gas or other
mineral exploration or development programs.
Pledging assets. A Fund may not pledge, mortgage or hypothecate more than
15% of its net assets.
Underwriting. A Fund may not engage in the business of underwriting securi-
ties issued by other persons. A Fund will not be considered an underwriter
when disposing of its investment securities.
Unseasoned companies. A Fund may not invest more than 5% of its total assets
in companies that have less than three years operating history (including the
operating history of any predecessors).
Warrants. A Fund may not purchase or sell warrants, put options or call op-
tions.
The investment limitations set forth above are considered at the time that
investment securities are purchased. If a percentage restriction is adhered to
at the time of purchase, a later increase in percentage resulting from a
change in the market value of assets will not constitute a violation of such
restriction.
None of these limitations prevents a Fund from participating in The Vanguard
Group, Inc. (Vanguard). As a member of The Vanguard Group of Investment Compa-
nies, the Trust may own securities issued by Vanguard, make loans to Vanguard,
and contribute to Vanguard's costs or other financial requirement. See "Man-
agement of the Trust" for more information.
B-11
<PAGE>
MANAGEMENT OF THE TRUST
Officers and Trustees
The Officers of the Trust manage its day-to-day operations and are responsi-
ble to the Trust's Board of Trustees. The Trustees set broad policies for the
Trust and choose its officers. The following is a list of the Trustees and Of-
ficers of the Trust and a statement of their present positions and principal
occupations during the past five years. As a group, the Trust's Trustees and
Officers own less than 1% of the outstanding shares of each Fund of the Trust.
Each Trustee also serves as a Director of The Vanguard Group, Inc., and as a
Trustee of each of the 36 investment companies administered by Vanguard (35 in
the case of Mr. Malkiel and 28 in the case of Mr. MacLaury). The mailing ad-
dress of the Trustees and Officers of the Trust is Post Office Box 876, Valley
Forge, PA 19482.
JOHN C. BOGLE, (DOB: 5/8/1929) Senior Chairman and Trustee*
Senior Chairman and Director of The Vanguard Group, Inc. and Trustee of each
of the investment companies in The Vanguard Group; Director of The Mead Corp.
(Paper Products), General Accident Insurance, and Chris-Craft Industries, Inc.
(Broadcasting & Plastics Manufacturer).
JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer, and
Trustee
Chairman, Chief Executive Officer and Director of The Vanguard Group, Inc.,
and Trustee of each of the investment companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee
Vice President, Chief Information Officer, and member of the Executive Commit-
tee of Johnson and Johnson (Pharmaceuticals/Consumer Products), Director of
Johnson & Johnson*MERCK Consumer Pharmaceuticals Co., Women First HealthCare,
Inc. (Research and Education Institution), Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.
BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee
President Emeritus of The Brookings Institution (Independent Non-Partisan Re-
search Organization); Director of American Express Bank, Ltd., The St. Paul
Companies, Inc. (Insurance and Financial Services), and National Steel Corp.
BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University; Direc-
tor of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker
Fentress & Co. (Investment Management), The Jeffrey Co. (Holding Company), and
Southern New England Telecommunications Co.
ALFRED M. RANKIN, Jr. (DOB: 10/8/1941) Trustee
Chairman, President, Chief Executive Officer, and Director of NACCO Industries
(Machinery/ Coal/Appliances), Director of the BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals), and The Standard Products Co. (Rubber Prod-
ucts Company).
JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee
President and Chief Executive Officer of The Nature Conservancy (Non-Profit
Conservation Group), Director of Pacific Gas and Electric Co., Procter & Gam-
ble Co., NACCO Industries (Machinery/ Coal/Appliances), and Newfield Explora-
tion Co. (Energy); formerly, Director and Senior Partner of McKinsey & Co.,
and President of New York University.
JAMER O. WELCH, Jr., (DOB: 5/13/1931) Trustee
Retired Chairman of Nabisco Brands, Inc. (Food Products); retired Vice Chair-
man and Director of RJR Nabisco (Food and Tobacco Products); Director of TECO
Energy, Inc., and Kmart Corp.
B-12
<PAGE>
J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee
Chairman and Chief Executive Officer of Rohm & Haas Co. (Chemicals); Director
of Cummins Engine Co. (Diesel Engine Company), and The Mead Corp. (Paper Prod-
ucts); and Trustee of Vanderbilt University.
RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary*
Managing Director of The Vanguard Group, Inc.; Secretary of The Vanguard
Group, Inc. and of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS, (DOB: 5/21/1957) Treasurer*
Principal of The Vanguard Group, Inc.; Treasurer of each of the investment
companies in The Vanguard Group.
ROBERT SNOWDEN, (DOB: 9/4/1961) Controller*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.
- --------
*Officers of the Trust are "interested persons" as defined in the 1940 Act.
The Vanguard Group. Vanguard Fixed Income Securities Funds is a member of
The Vanguard Group of Investment Companies which consists of more than 35 in-
vestment companies (the Trusts). Through their jointly-owned subsidiary, The
Vanguard Group, Inc. (Vanguard), the Fund and the other funds in the Group ob-
tain 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 person-
nel 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 Trustees of each fund. In addition,
each fund bears its own direct expenses, such as legal, auditing, and custo-
dian fees.
Vanguard adheres to a Code of Ethics established pursuant to Rule 17j-1 un-
der the 1940 Act. The Code is designed to prevent unlawful practices in con-
nection 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. However, such transactions are subject to procedures
and guidelines similar to, and in many cases more restrictive than, those rec-
ommended by a blue ribbon panel of mutual fund industry executives.
Vanguard was established and operates under an Amended and Restated 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 capital. At January 31,
1999, each Fund had contributed capital representing 0.02% of each Fund's net
assets. The total amount contributed by the Trust was $5,782,000, which repre-
sented 8.2% of Vanguard's capitalization. The Funds' Service Agreement pro-
vides for the following arrangement: (1) each Vanguard Fund may be called upon
to 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 rela-
tionships; (6) shareholder reporting; and (7) review and evaluation of advi-
sory and other services provided to the Funds by third parties.
B-13
<PAGE>
Distribution. Vanguard Marketing Corporation, a wholly-owned subsidiary of
The Vanguard Group, Inc. provides all distribution and marketing activities
for the Trusts in the Group. The principal distribution expenses are for ad-
vertising, promotional materials and marketing personnel. Distribution serv-
ices 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
Vanguard Group. The Trustees 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 remain-
ing 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 na-
ture shall exceed 125% of the average distribution expense rate for The Van-
guard Group, and that no fund shall incur annual distribution expenses in ex-
cess of 20/100 of 1% of its average month-end net assets.
During the last three fiscal years, the Funds incurred the following approx-
imate amounts of The Vanguard Group's management (including transfer agency),
distribution, and marketing expenses.
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal year ended
Fund January 31 1997 January 31, 1998 January 31, 1999
<S> <C> <C> <C>
Vanguard GNMA Fund $16,069,000 $12,822,000 $16,285,000
Vanguard High-Yield
Corporate Fund $ 7,634,000 $ 5,431,000 $ 7,817,000
Vanguard Intermediate-
Term Treasury Fund $ 2,761,000 $ 1,675,000 $ 2,292,000
Vanguard Intermediate-
Term Corporate Fund $ 1,156,000 $ 1,175,000 $ 1,890,000
Vanguard Long-Term
Treasury Fund $ 1,984,000 $ 885,000 $ 1,378,000
Vanguard Long-Term
Corporate Fund $ 7,821,000 $ 5,262,000 $ 5,628,000
Vanguard Short-Term
Treasury Fund $ 2,127,000 $ 1,103,000 $ 1,271,000
Vanguard Short-Term
Corporate Fund $ 9,349,000 $ 7,823,000 $ 7,287,000
Vanguard Short-Term
Federal Fund $ 2,981,000 $ 1,448,000 $ 1,889,000
</TABLE>
Investment Advisory Services. Vanguard provides investment advisory services
to several Vanguard Trusts, including this Trust. These services are provided
on an at-cost basis from a money management staff employed directly by Van-
guard. The compensation and other expenses of this staff are paid by the funds
and Trusts utilizing these services. WMC and its predecessor organizations
have provided investment advisory services to investment companies since 1928
and to investment counseling clients since 1960.
Trustee Compensation
The same individuals serve as Trustees of all Vanguard Trusts (with two ex-
ceptions, which are noted in the table appearing on the following page), and
each trust pays a proportionate share of the Trustees' compensation. The
Trusts employ their officers on a shared basis, as well. However, officers are
compensated by The Vanguard Group, Inc., not the Trusts.
Independent Trustees. The trusts compensate their independent Trustees--that
is, the ones who are not also officers of the trust--in three ways:
. The independent Trustees receive an annual fee for their service to the
trusts, which is subject to reduction based on absences from scheduled
Board meetings.
. The independent Trustees are reimbursed for the travel and other
expenses that they incur in attending Board meetings.
B-14
<PAGE>
. Upon retirement, the independent Trustees receive an aggregate annual
fee of $1,000 for each year served on the Board, up to fifteen years of
service. This annual fee is paid for ten years following retirement, or
until each Trustee's death.
"Interested" Trustees. The trusts' interested Trustees--Messrs. Bogle and
Brennan--receive no compensation for their service in that capacity. However,
they are paid in their role as officers of The Vanguard Group, Inc.
Compensation Table. The following table provides compensation details for
each of the Trustees. We list the amounts paid as compensation and accrued as
retirement benefits by the Trust for each Trustee. In addition, the table
shows the total amount of benefits that we expect each Trustee to receive from
all Vanguard Trusts upon retirement, and the total amount of compensation paid
to each Trustee by all Vanguard Trusts. All information shown is for the fis-
cal year ended January 31, 1999.
VANGUARD FIXED INCOME SECURITIES FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement From
Aggregate Benefits Accrued Estimated All Vanguard
Compensation As Part of Annual Benefits Funds Paid to
Name of Directors From Trust Trust Expenses Upon Retirement Trustees(1)
- ----------------- ------------ ---------------- --------------- -------------
<S> <C> <C> <C> <C>
John C. Bogle........... None None None None
John J. Brennan......... None None None None
Barbara Barnes
Hauptfuhrer(2)......... $6,342 $858 $15,000 $75,000
JoAnn Heffernan Heisen.. $3,700 $373 $15,000 $43,750
Robert E. Cawthorn(2)... $2,114 $572 $ 6,000 $25,000
Bruce K. MacLaury....... $6,637 $640 $12,000 $70,000
Burton G. Malkiel....... $6,386 $617 $15,000 $75,000
Alfred M. Rankin, Jr. .. $6,342 $451 $15,000 $75,000
John C. Sawhill......... $6,342 $572 $15,000 $75,000
James O. Welch, Jr. .... $6,342 $660 $15,000 $75,000
J. Lawrence Wilson...... $6,342 $477 $15,000 $75,000
</TABLE>
- --------
(1) The amounts reported in this column reflect the total compensation paid
to each Trustee for his or her service as Trustee of 36 Vanguard Trusts
(35 in the case of Mr. Malkiel; 28 in the case of Mr. MacLaury).
(2) Mr. Cawthorn and Mrs. Hauptfuhrer have retired from the Trust's Board,
effective May 31, 1998 and December 31, 1998, respectively.).
B-15
<PAGE>
INVESTMENT ADVISORY SERVICES
GNMA, LONG-TERM CORPORATE AND HIGH-YIELD CORPORATE
FUNDS
The Trust employs Wellington Management Company, LLP (Wellington) under an
investment advisory agreement to manage the investment and reinvestment of the
assets of the Trust's GNMA, Long-Term Corporate and High-Yield Corporate Funds
and to continuously review, supervise and administer the investment program
for each of these three Funds. Wellington discharges its responsibilities sub-
ject to the control of the Officers and Trustees of the Trust.
The GNMA, Long-Term Corporate and High-Yield Corporate Funds pay Wellington
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 aggre-
gate average month-end net assets of the three Funds for the quarter:
GNMA Fund
<TABLE>
<CAPTION>
Net Assets Rate
---------- -----
<S> <C>
First $3 billion....................................................... .020%
Next $3 billion........................................................ .010%
Over $6 billion........................................................ .008%
Long-Term Corporate Fund
<CAPTION>
Net Assets Rate
---------- -----
<S> <C>
First $1 billion....................................................... .040%
Next $1 billion........................................................ .030%
Next $1 billion........................................................ .020%
Over $3 billion........................................................ .015%
High-Yield Corporate Fund
<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 Fund based on the rela-
tive net assets of each.
During the fiscal years ended January 31, 1997, 1998 and 1999, the three
Funds incurred the following advisory fees:
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
--------------------------------
Fund 1997 1998 1999
- ---- ---------- ---------- ----------
<S> <C> <C> <C>
GNMA........................................... $ 992,000 $1,067,000 $1,229,000
Long-Term Corporate............................ $ 951,000 $ 963,000 $1,048,000
High-Yield Corporate........................... $1,370,000 $1,593,000 $1,831,000
</TABLE>
Prior to May 1, 1996, these fees were paid under the terms of a previous in-
vestment advisory agreement which called for a higher rate of fees. The pres-
ent agreement may be continued for successive one-year periods, as long as
such continuance is specifically approved by a vote of the Trust's Board of
Trustees, including the affirmative votes of a majority of those members of
the Board of Trustees who are not parties to the agreement or interested per-
sons of any such party, cast in person at a meeting called for the purpose of
considering such approval. The agreement may be terminated by any Fund at any
time, without penalty, by vote of the Board of Trustees of the Trust on 60
days' written
B-16
<PAGE>
notice to Wellington, or by Wellington on 90 days' written notice to the
Trust. The agreement will automatically terminate in the event of its assign-
ment.
The Fund's Board of Trustees may, without the approval of shareholders, pro-
vide 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 be communicated to shareholders in writing.
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 FUNDS
The Short-Term Corporate, Short-Term Federal, Short-Term U.S. Treasury, In-
termediate-Term Corporate, Intermediate-Term U.S. Treasury, and Long-Term U.S.
Treasury Funds receive all investment advisory services from Vanguard's Fixed
Income Group. These services are provided on an at-cost basis from an experi-
enced investment management staff employed directly by Vanguard. The compensa-
tion and other expenses of the staff are allocated among the Funds of the
Trusts utilizing these services. During the fiscal years ended January 31,
1997, 1998 and 1999, the Funds incurred the following advisory expenses:
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal year ended
Fund January 31, 1997 January 31, 1998 January 31, 1999
---- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Vanguard Intermediate-
Term Treasury Fund $165,000 $199,000 $212,000
Vanguard Intermediate-
Term Corporate Fund $ 63,000 $102,000 $128,000
Vanguard Long-Term
Treasury Fund $122,000 $136,000 $147,000
Vanguard Short-Term
Treasury Fund $123,000 $147,000 $133,000
Vanguard Short-Term
Corporate Fund $543,000 $698,000 $671,000
Vanguard Short-Term
Federal Fund $185,000 $205,000 $191,000
</TABLE>
The investment management staff is supervised by the senior Officers of the
Funds. The senior Officers are directly responsible to the Board of Trustees
of the Trust. The Board of Trustees, elected annually by shareholders, sets
broad policies for the Trusts and chooses its Officers.
PORTFOLIO TRANSACTIONS
GNMA, LONG-TERM CORPORATE AND HIGH-YIELD CORPORATE FUNDS
The investment advisory agreement authorizes Wellington to select the bro-
kers or dealers that will execute the purchases and sales of portfolio securi-
ties for the Funds and directs Wellington to use its best efforts to obtain
the best available price and most favorable execution as to all transactions
for the Funds. Wellington has undertaken to execute each investment transac-
tion at a price and commission which provides the most favorable total cost or
proceeds reasonably obtainable under the circumstances.
B-17
<PAGE>
In placing portfolio transactions, Wellington 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 Funds and/or
Wellington. Wellington 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.
Currently, it is the Trust's policy that Wellington may at times pay higher
commissions in recognition of brokerage services felt necessary for the
achievement of better execution of certain securities transactions that other-
wise might not be available. Wellington will only pay such higher commissions
if it believes this to be in the best interest of the Funds. 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 Wellington and/or the Funds. However, Wellington has
informed the Trust that it generally will not pay higher commission rates spe-
cifically for the purpose of obtaining research services.
Some securities considered for investment by the Funds may also be appropri-
ate for other Funds and/or clients served by Wellington. If purchase or sale
of securities consistent with the investment policies of the Funds and one or
more of these other Funds or clients served by Wellington 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 Wellington.
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 FUNDS
Brokers or dealers who execute transactions for the Short-Term Corporate,
Short-Term Federal, Short-Term U.S. Treasury, Intermediate-Term Corporate, In-
termediate-Term U.S. Treasury, and Long-Term U.S. Treasury Portfolios are se-
lected by Vanguard's investment management staff, which is responsible for us-
ing 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 in-
volved. 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 Funds. As a result, the demand for securi-
ties being purchased or the supply of securities being sold may increase, and
this could have an adverse effect on the price of those securities. It is the
staff's policy not to favor one client over another in making recommendations
or placing an order. If two or more clients are purchasing a given security on
the same day from the same broker-dealer, such transactions may be averaged as
to price.
ALL FUNDS
The Funds did not incur any brokerage commissions for the fiscal years ended
January 31, 1997, January 31, 1998 and January 31, 1999.
B-18
<PAGE>
YIELD AND TOTAL RETURN
SEC Yields
Yield is the net annualized yield based on a specified 30-day (or one month)
period assuming semiannual compounding of income. Yield is calculated by di-
viding the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to
the following formula:
YIELD = 2[((a-b)/cd+1)/6/-1]
Where:
a =dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c=the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
The yield* of each Fund for the 30-day period ended January 31, 1999 is set
forth below:
<TABLE>
<S> <C>
Short-Term U.S. Treasury Fund....................................... 4.65%
Short-Term Federal Fund............................................. 5.06%
Short-Term Corporate Fund--Investor Shares.......................... 5.74%
Short-Term Corporate Fund--Institutional Shares..................... 5.86%
Intermediate-Term U.S. Treasury Fund................................ 4.89%
GNMA Fund........................................................... 6.24%
Long-Term U.S. Treasury Fund........................................ 5.20%
Long-Term Corporate Fund............................................ 5.95%
High-Yield Corporate Fund........................................... 8.27%(1)
Intermediate-Term Corporate Fund.................................... 6.02%
</TABLE>
- --------
* The yield for each Fund is calculated daily. In calculating the yield, the
premiums and discounts on asset-backed securities are not amortized.
(1) Yield for the High-Yield Corporate Fund 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.
Average Annual Total Return
Average annual total return is the average annual compounded rate of return
for the periods of one year, five years, ten years or the life of the Fund,
all ended on the last day of a recent month. Average annual total return quo-
tations will reflect changes in the price of the Fund's shares and assume that
all dividends and capital gains distributions during the respective periods
were reinvested in Fund shares.
Average annual total return is calculated by finding the average annual com-
pounded rates of return of a hypothetical investment over such periods accord-
ing to the following formula (average annual total return is then expressed as
a percentage):
T = (ERV/P)/1//n-1
Where:
T =average annual total return
P =a hypothetical initial investment of $1,000
n = number of years
ERV =ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at the
beginning of the applicable period.
B-19
<PAGE>
The average annual total return of each Fund for the one-, five-, and ten-
year periods ended January 31, 1999 is set forth below:
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
Ended Ended Ended
1/31/1999 1/31/1999 1/31/1999
--------- --------- ---------
<S> <C> <C> <C>
Short-Term U.S. Treasury Fund..................... 6.66% 5.82% 6.34%*
Short-Term Federal Fund........................... 6.57% 5.80% 7.47%*
Short-Term Corporate Fund--Investor Shares........ 6.16% 6.09% 7.80%
Short-Term Corporate Fund--Institutional Shares... 6.28% 6.84%*
GNMA Fund......................................... 6.79% 7.44% 9.03%
Intermediate-Term U.S. Treasury Fund.............. 9.44% 7.02% 8.53%*
Intermediate-Term Corporate Fund.................. 7.73% 7.00% 6.99%*
Long-Term U.S. Treasury Fund...................... 12.02% 8.72% 10.83%
Long-Term Corporate Fund.......................... 9.52% 8.40% 10.80%
High-Yield Corporate Fund......................... 5.34% 8.55% 9.74%
</TABLE>
- --------
*Since inception:
Short-Term Federal Fund--December 31, 1987
Short-Term U.S. Treasury and Intermediate-Term
U.S. Treasury Funds--October 28, 1991
Intermediate-Term Corporate Fund--November 1, 1993
Short-Term Corporate Fund--Institutional Shares--September 30,
1997
Cumulative Total Return
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that
all dividends and capital gains distributions during the period were rein-
vested in Fund shares. Cumulative total return is calculated by finding the
cumulative rates of a return of a hypothetical investment over such periods,
according to the following formula (cumulative total return is then expressed
as a percentage):
C = (ERV/P) -1
Where:
C =cumulative total return
P = a hypothetical initial investment of $1,000
ERV =ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at the
beginning of the applicable period
FINANCIAL STATEMENTS
The Trust's financial statements as of and for the fiscal year ended January
31, 1999, appearing in the Trust's 1999 Annual Report to Shareholders, and the
reports thereon of PricewaterhouseCoopers LLP, independent accountants, also
appearing therein, are incorporated by reference in this Statement of Addi-
tional Information. For a more complete discussion of the Fund's performance,
please see the Trust's 1999 Annual Report to Shareholders, which may be ob-
tained without charge.
B-20
<PAGE>
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member trusts of The Vanguard Group of Investment Companies.
Each of the investment company members of The Vanguard Group, including each
Fund of Vanguard Fixed Income Securities Fund, may, from time to time, use one
or more of the following unmanaged indices for comparative performance purpos-
es.
Standard and Poor's 500 Composite Stock Price Index--includes stocks se-
lected by Standard and Poor's Index Committee to include leading companies in
leading industries and to reflect the U.S. stock market.
Standard & Poor's MidCap 400 Index--is composed of 400 medium sized domestic
stocks.
Standard & Poor's 500/BARRA Value Index--consists of the stocks in the Stan-
dard and Poor's 500 Composite Stock Price Index ("S&P 500") with the lowest
price-to-book ratios, comprising 50% of the market capitalization of the S&P
500.
Standard & Poor's SmallCap 600/BARRA Value Index--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
Standard & Poor's SmallCap 600/BARRA Growth Index--contains stocks of the
S&P SmallCap 600 Index which have a higher than average price-to-book ratio.
Russell 1000 Value Index--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
Wilshire 5000 Equity Index--consists of more than 7,000 common equity secu-
rities, 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 ex-
cept 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, Australasia 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 convert-
ible issues of $100 million or greater in market capitalization. The index is
priced monthly.
Lehman Brothers GNMA Index--includes pools of mortgages originated by pri-
vate lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
Lehman Long-Term Treasury Bond Index--is a market weighted index that con-
tains individually priced U.S. Treasury securities with maturities of ten
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, noncon-
vertible domestic corporate bonds rated Baa by Moody's, with a maturity longer
than one year and with more than $100 million outstanding. This index includes
over 1,500 issues.
B-21
<PAGE>
Lehman Brothers Long-Term Corporate Bond Index--is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate, non-
convertible U.S. debt issues rated at least Baa, with at least $100 million
principal outstanding and maturity greater than ten years.
Merrill Lynch DRD--Eligible Index--includes preferred stock issues which are
eligible for the corporate dividends-received deduction.
Lehman Brothers High Yield Index--includes all fixed income securities hav-
ing a maximum quality rating of Ba1 (including defaulted issues; a minimum
outstanding of $100mm, and at least one year to maturity; payment-in-kind
bonds and Eurobonds are excluded.
Bond Buyer Municipal Bond Index--is a yield index on current coupon high-
grade general obligation municipal bonds.
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 in-
clude 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, 12.5% Standard & Poor's Utilities Index and 12.5% Standard &
Poor's Telephone 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 con-
tains 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 $5 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 be-
tween one and five years. The index has a market value of over $1.6 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
five and ten years. The index has a market value of over $800 billion.
Lehman Brothers 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 ten years. The
index has a market value of over $900 billion.
Lehman Brothers Intermediate-Term Corporate Bond Index--consists of all in-
vestment grade corporate debt with maturities of five to ten years.
Lipper General Equity Fund Average--an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Inc.
Lipper Fixed Income Fund Average--an industry benchmark of average fixed in-
come funds with similar investment objectives and policies, as measured by
Lipper Inc.
B-22
<PAGE>
OTHER DEFINITIONS
Marketing literature for the Funds of Vanguard Fixed Income Securities Fund,
may from time to time refer to or discuss a Fund's DURATION. Duration is the
weighted average life of a Fund's debt instruments measured on a present-value
basis; it is generally superior to average weighted maturity as a measure of a
Fund's potential volatility due to changes in interest rates.
Unlike a Fund's average weighted maturity, which takes into account only the
stated maturity date of the Fund'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 princi-
pal), has both a maturity and duration of four years. However, a four-year
bond priced at par with an 8% coupon has a maturity of four years but a dura-
tion of 3.6 years (at an 8% yield), reflecting the bond's earlier payment of
interest.
In general, a bond with a longer duration will fluctuate more in price than
a bond with a shorter duration. Also, for small changes in interest rates, du-
ration serves to approximate the resulting change in a bond's price. For exam-
ple, a 1% change in interest rates will cause roughly a 4% move in the price
of a zero-coupon bond with a four-year duration, while an 8% coupon bond (with
a 3.6 year duration) will change by approximately 3.6%.
B-23
<PAGE>
APPENDIX--DESCRIPTION OF SECURITIES AND RATINGS
I. Description of Bond Ratings
Excerpts from Moody's Investors Service, Inc., (Moody's) description of its
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 me-
dium grade obligations, i.e., they are neither highly protected nor poorly se-
cured. Interest payments and principal security appear adequate for the pres-
ent 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 de-
gree; often in default; C--lowest rated class of bonds; regarded as having ex-
tremely 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 obli-
gations. A very strong capacity to pay interest and repay principal and dif-
fers 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 obliga-
tion; 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 mort-
gage 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 nec-
essary to make any payments required under its guarantee.
B-24
<PAGE>
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 in-
vestment.) As prepayment rates of individual mortgage pools will vary widely,
it is not possible to accurately predict the average life of a particular is-
sue of GNMA Certificates. However, statistics published by the FHA are nor-
mally 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 se-
curities 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 tradi-
tional 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 prepay-
ment experience of the mortgage pool underlying the Certificate. That is,
if mortgagors pay off their mortgages early, the principal returned to Cer-
tificate 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 0.25 of 1% more than high-grade
corporate bonds and 0.50 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 sec-
ondary market by securities dealers and many types of investors make the GNMA
Certificates a highly liquid instrument. Prices of GNMA Certificates are read-
ily available from securities dealers and depend on, among other things, the
level of market rates, the Certificate's coupon rate and the prepayment expe-
rience 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 transac-
tions arise when securities are purchased or sold by a Fund 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 Fund at the time of entering into
the transaction. When a Fund engages in "when issued" and delayed delivery
transactions, the Fund relies on the buyer or seller, as the case may be, to
consummate the sale. Failure to do so may result in the Fund missing the op-
portunity of obtaining a price or yield considered to be advantageous. When
issued and
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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 Fund until it
receives payment or delivery from the other party to the transaction. A sepa-
rate account of liquid assets equal to the value of such purchase commitments
will be maintained until payment is made. To the extent a Fund engages in
"when issued" and delayed delivery transactions, it will do so for the purpose
of acquiring securities consistent with its investment objective and policies
and not for the purpose of investment leverage.
III. Commercial Paper
A Fund may invest in commercial paper (including variable amount master de-
mand 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 fi-
nance 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 in-
vestment 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 trad-
ed, and there is no secondary market for these notes, although they are re-
deemable (and thus immediately repayable by the borrower) at face value, plus
accrued interest, at any time. In connection with a Fund's investment in vari-
able 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 character-
istics: (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; and (6) the reliability and quality of management are un-
questioned. 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 in-
dustry 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) fi-
nancial 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 agen-
cies 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 princi-
pally to the agency or
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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 in-
clude the Export-Import Bank of the United States, Farmers Home Administra-
tion, Federal Housing Administration, Maritime Administration, Small Business
Administration, and The Tennessee Valley Authority.
An instrumentality of the U.S. Government is a government agency organized
under Federal charter with government supervision. Instrumentalities issuing
or guaranteeing securities include, among others, Federal Home Loan Banks, the
Federal Land Banks, Central Bank for Cooperatives, Federal Intermediate Credit
Banks, and the Federal National Mortgage Association.
V. Bank Obligations
Time deposits are non-negotiable deposits maintained in a banking institu-
tion 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 Fund will agree to
repurchase such instruments, at the Fund's option, at par on or near the cou-
pon dates. The dealers' obligations to repurchase these instruments are sub-
ject 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. A Fund is also able to sell variable rate certifi-
cates of deposit in the secondary market. Variable rate certificates of de-
posit normally carry a higher interest rate than comparable fixed-rate certif-
icates of deposit. A banker's 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 ac-
ceptances have maturities of six months or less and are traded in the second-
ary markets prior to maturity.
VI. Short and Intermediate Term Corporate Debt Securities
Outstanding non-convertible corporate debt securities (e.g. bonds and deben-
tures) which are rated Baa3 or better either by Moody's or BBB- or better by
Standard & Poor's are considered investment grade.
VII. Foreign Investments
The Short-Term Corporate, Intermediate-Term Corporate, High Yield Corporate
and Long-Term Corporate Funds 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 these
Funds invest in such securities, investment in these Funds 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 fu-
ture political and economic developments, the possible imposition of withhold-
ing 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 Funds, 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.
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<PAGE>
VIII. Zero Coupon Treasury Bonds
All Funds 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 in-
terest 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 sub-
stantial discount to its "face value"--what it will be worth at maturity. The
difference between a security's issue or purchase price and its face value
represents the imputed interest an investor will earn if the security is held
until maturity. For tax purposes, a portion of this imputed interest is deemed
as income received by zero coupon bondholders each year. The Trust, which ex-
pects to qualify as a regulated investment company, intends to pass along such
interest as a component of a Fund's distributions of net investment income.
Zero coupon bonds may offer investors the opportunity to earn higher yields
than those available on U.S. Treasury bonds of similar maturity. However, zero
coupon bond prices may also exhibit greater price volatility than ordinary
debt securities because of the manner in which their principal and interest is
returned to the investor.
IX. Collateralized Mortgage Obligations
The Short-Term Federal, Short-Term Corporate, Intermediate-Term Corporate
and the Short-, Intermediate- and Long-Term U.S. Treasury Funds 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 mort-
gages 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. Sub-
ject to the various provisions of individual CMO issues, the cash flow gener-
ated by the underlying collateral (to the extent it exceeds the amount re-
quired 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 issu-
ance, 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 re-
tired. 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 for-
mulate securities with short, intermediate and long final maturities and ex-
pected 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 com-
pensated in the form of higher yield. In order to provide security, in addi-
tion to the underlying collateral, many CMO issues also include minimum rein-
vestment rate and minimum sinking-fund guarantees. Typically, the Funds will
invest in those CMOs that most appropriately reflect their average maturities
and market risk profiles. Consequently, the Short-Term Funds invest only in
CMOs with highly predictable short-term average maturities. Similarly, the In-
termediate- and Long-Term Treasury Funds will invest in those CMOs that carry
market risks consistent with intermediate- and long-term bonds.
X. Real Estate
All Funds may invest in real estate investment conduits (REMICs), to the ex-
tent consistent with the Funds' respective maturity and credit quality stan-
dards. REMICs, which were authorized under the Tax
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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. 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 certif-
icates. For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of
interest, and also guarantees the payment of principal as payments are re-
quired 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.
SAI28-06/01/1999
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