<PAGE> 1
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-52698) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 57 [X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 59 [X]
VANGUARD MONEY MARKET RESERVES
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS AMENDMENT BECOME EFFECTIVE:
on March 19, 1999, pursuant to Rule 485(b) of the Securities Act of 1933.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
WE HAVE ELECTED TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24f-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. WE FILED OUR RULE
24f-2 NOTICE FOR THE PERIOD ENDED NOVEMBER 30, 1998 ON FEBRUARY 23, 1999.
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<PAGE> 2
VANGUARD MONEY MARKET RESERVES
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
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 Risks........................ A Word About Risk; Who Should Invest;
Primary Investment Strategies
Item 5. Management's Discussion of Fund Performance.......... Herein incorporated by reference to
Registrant's Annual Report to
Shareholders dated November 30, 1998
filed with the Securities & Exchange
Commission's EDGAR system on January
27, 1999
Item 6. Management, Organization, and Capital Structure...... The Fund and Vanguard; Investment
Adviser
Item 7. Shareholder Information.............................. Share Price; Dividends and Taxes;
Investing with Vanguard
Item 8. Distribution Arrangements............................ Inside Front Cover Page
Item 9. Financial Highlights Information..................... Financial Highlights
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
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................................................ Description of the Trust; Investment
Policies; 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 Services............... Investment Advisory Services
Item 16. Brokerage Allocation and Other Practices............. Not Applicable
Item 17. Capital Stock and Other Securities................... Description of the Trust
Item 18. Purchase, Redemption and Pricing of Shares........... Purchase of Shares; Redemption of
Shares; Share Price
Item 19. Taxation of the Fund................................. Description of the Trust
Item 20. Underwriters......................................... Not Applicable
Item 21. Calculations of Performance Data..................... Yield and Total Return; Calculation
of Yield
Item 22. Financial Statements................................. Financial Statements
</TABLE>
<PAGE> 3
VANGUARD PRIME MONEY MARKET FUND
VANGUARD FEDERAL MONEY MARKET FUND
VANGUARD TREASURY MONEY MARKET FUND
Prospectus
March 19, 1999
A Group of Money Market Mutual Funds
CONTENTS
<TABLE>
<S> <C>
1 FUND PROFILES
1 Vanguard Prime Money Market Fund
4 Vanguard Federal Money Market Fund
6 Vanguard Treasury Money Market Fund
8 MORE ON THE FUNDS
11 THE FUNDS AND VANGUARD
11 INVESTMENT ADVISER
12 YEAR 2000 CHALLENGE
12 DIVIDENDS AND TAXES
13 SHARE PRICE
13 FINANCIAL HIGHLIGHTS
15 INVESTING WITH VANGUARD
15 SERVICES AND ACCOUNT FEATURES
16 TYPES OF ACCOUNTS
16 BUYING SHARES
18 REDEEMING SHARES
21 TRANSFERRING REGISTRATION
22 FUND AND ACCOUNT UPDATES
GLOSSARY (inside back cover)
</TABLE>
- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and policies of Vanguard Prime
Money Market Fund, Vanguard Federal Money Market Fund, and Vanguard Treasury
Money Market 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 which Fund, if any, is the right
investment for you. We suggest that you keep it for future reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT NOTE
The Prime Money Market Fund features two separate classes of shares: Investor
Shares and Institutional Shares. Prime Money Market Fund Investor Shares has an
investment minimum of $3,000, and is available through this prospectus (for
individual investors) and through a separate prospectus (for participants in
employer-sponsored retirement or savings plans). Prime Money Market Fund
Institutional Shares has an investment minimum of $10 million, and is available
through a separate prospectus. Prime Money Market Fund Investor Shares and Prime
Money Market Fund Institutional Shares do not have the same expenses; as a
result, the performance of these two 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> 4
1
FUND PROFILE -- VANGUARD PRIME MONEY MARKET FUND
The following profile summarizes key features of Vanguard Prime Money Market
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide current income while maintaining liquidity and a
stable share price of $1.
INVESTMENT POLICIES
The Fund invests primarily in high-quality, short-term money market instruments,
including certificates of deposit, banker's acceptances, commercial paper, and
other money market securities. To be considered high quality, a security
generally must be rated in one of the two highest credit-quality categories for
short-term securities, by at least two nationally recognized rating services (or
by one, if only one rating service has rated the security). If unrated, the
security must be determined by Vanguard to be of quality equivalent to those in
the two highest credit-quality categories. The Fund will maintain an average
maturity of 90 days or less. For more information about security selection, see
pages 8-10.
PRIMARY RISKS
THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT FALLING SHORT-TERM
INTEREST RATES WILL CAUSE THE FUND'S INCOME -- AND THUS ITS TOTAL RETURN -- TO
DECLINE. INCOME RISK IS GENERALLY HIGH FOR SHORT-TERM SECURITIES. The Fund is
also subject to:
- - Manager risk, which is the chance that poor security selection will cause the
Fund to underperform other funds with similar investment objectives.
- - Credit risk, which is the chance that the issuer of a security 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.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN 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 money
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
[BAR GRAPH]
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS
-------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
9.39% 8.27% 6.14% 3.74% 3.01% 4.08% 5.82% 5.29% 5.44% 5.38%
-------------------------------------------------------------------------------
</TABLE>
During the period shown in the bar chart, the highest return for a calendar
quarter was 2.43% (quarter ended June 30, 1989) and the lowest return for a
quarter was 0.72% (quarter ended June 30, 1993).
<PAGE> 5
2
FUND PROFILE -- VANGUARD PRIME MONEY MARKET FUND (continued)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Vanguard Prime Money Market Fund 5.38% 5.20% 5.64%
Lipper Money Market Fund Average 4.84 4.71 5.16
--------------------------------------------------------------------------------
</TABLE>
If you would like to know the current seven-day yield for the Fund, call
Vanguard's Investor Information Department at 1-800-662-7447 (SHIP).
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 November 30, 1998.
<TABLE>
<S> <C>
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: 0.29%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.33%
</TABLE>
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.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$34 $106 $185 $418
--------------------------------------------------------------------------------
</TABLE>
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> 6
3
ADDITIONAL INFORMATION
DIVIDENDS
Declared daily and distributed on the first business day of each month
INVESTMENT ADVISER
Vanguard Fixed Income Group, Valley Forge, Pa., since 1981
INCEPTION DATE
June 4, 1975
NET ASSETS AS OF NOVEMBER 30, 1998
$33.7 billion
SUITABLE FOR IRAS
Yes
MINIMUM INITIAL INVESTMENT
$3,000; $1,000 for IRAs and custodial accounts for minors
NEWSPAPER ABBREVIATION*
VangPr
VANGUARD FUND NUMBER
030
CUSIP NUMBER
922906201
TICKER SYMBOL
VMMXX
*Money market funds are listed separately from other newspaper mutual fund
listings.
<PAGE> 7
4
FUND PROFILE -- VANGUARD FEDERAL MONEY MARKET FUND
The following profile summarizes key features of Vanguard Federal Money Market
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide current income while maintaining liquidity and a
stable share price of $1.
INVESTMENT POLICIES
The Fund invests primarily in high-quality, short-term money market instruments
issued by U.S. government agencies. Most of the securities held by the Fund are
not backed by the full faith and credit of the U.S. government. The Fund will
maintain an average maturity of 90 days or less. For more information about
security selection, see pages 8 - 10.
PRIMARY RISKS
THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT FALLING SHORT-TERM
INTEREST RATES WILL CAUSE THE FUND'S INCOME -- AND THUS ITS TOTAL RETURN -- TO
DECLINE. INCOME RISK IS GENERALLY HIGH FOR SHORT-TERM SECURITIES. The Fund is
also subject to:
- - Manager risk, which is the chance that poor security selection will cause the
Fund to underperform other funds with similar investment objectives.
- - Credit risk, which is the chance that the issuer of a security 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.
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks
to preserve the value of your investment at $1 per share, it is possible to lose
money by investing in 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 money
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
[BAR GRAPH]
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
9.15% 8.07% 5.96% 3.68% 2.98% 4.03% 5.77% 5.24% 5.38% 5.31%
----------------------------------------------------------------------------------------
</TABLE>
During the period shown in the bar chart, the highest return for a calendar
quarter was 2.37% (quarter ended June 30, 1989) and the lowest return for a
quarter was 0.72% (quarter ended June 30, 1993).
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Vanguard Federal Money Market Fund 5.31% 5.14% 5.54%
Lipper U.S. Government Money Market Fund Average 4.89 4.67 5.08
-------------------------------------------------------------------------------------
</TABLE>
<PAGE> 8
5
If you would like to know the current seven-day yield for the Fund, call
Vanguard's Investor Information Department at 1-800-662-7447 (SHIP).
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 November 30, 1998.
<TABLE>
<S> <C>
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: 0.29%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.33%
</TABLE>
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.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$34 $106 $185 $418
--------------------------------------------------------------------------------
</TABLE>
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
Declared daily and distributed on the first business day of each month
INVESTMENT ADVISER
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
INCEPTION DATE
July 13, 1981
NET ASSETS AS OF NOVEMBER 30, 1998
$4.3 billion
SUITABLE FOR IRAS
Yes
MINIMUM INITIAL INVESTMENT
$3,000; $1,000 for IRAs and custodial accounts for minors
NEWSPAPER ABBREVIATION*
VangFdl
VANGUARD FUND NUMBER
030
CUSIP NUMBER
922906300
TICKER SYMBOL
VMFXX
* Money market funds are listed separately from other newspaper mutual fund
listings.
<PAGE> 9
6
FUND PROFILE -- VANGUARD TREASURY MONEY MARKET FUND
The following profile summarizes key features of Vanguard Treasury Money Market
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide current income while maintaining liquidity and a
stable share price of $1.
INVESTMENT POLICIES
The Fund invests solely in high-quality, short-term money market securities
whose interest and principal payments are backed by the full faith and credit of
the U.S. government. At least 80% of the Fund's assets will always be invested
in U.S. Treasury securities; the remainder of the Fund's assets may be invested
in securities issued by U.S. government agencies. The Fund will maintain an
average maturity of 90 days or less. For more information about security
selection, see pages 8 - 10.
PRIMARY RISKS
THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT FALLING SHORT-TERM
INTEREST RATES WILL CAUSE THE FUND'S INCOME -- AND THUS ITS TOTAL RETURN -- TO
DECLINE. INCOME RISK IS GENERALLY HIGH FOR SHORT-TERM SECURITIES. The Fund is
also subject to:
- - Manager risk, which is the chance that poor security selection will cause the
Fund to underperform other funds with similar investment objectives.
- - Credit risk, which is the chance that the issuer of a security 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.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN 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 securities
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
[BAR GRAPH]
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8.87% 7.94% 5.73% 3.53% 2.86% 3.81% 5.49% 5.09% 5.12% 5.00%
----------------------------------------------------------------------------------------
</TABLE>
During the period shown in the bar chart, the highest return for a calendar
quarter was 2.26% (quarter ended June 30, 1989) and the lowest return for a
quarter was 0.69% (quarter ended June 30, 1993).
<PAGE> 10
7
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Vanguard Treasury Money Market Fund 5.00% 4.90% 5.33%
Lipper U.S. Treasury Money Market Fund Average 4.69 4.61 5.08
</TABLE>
If you would like to know the current seven-day yield for the Fund, call
Vanguard's Investor Information Department at 1-800-662-7447 (SHIP).
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 November 30, 1998.
<TABLE>
<S> <C>
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: 0.29%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.33%
</TABLE>
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.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
$34 $106 $185 $418
-----------------------------------------------------------------------
</TABLE>
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
Declared daily and distributed on the first business day of each month
INVESTMENT ADVISER
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
INCEPTION DATE
March 9, 1983
NET ASSETS AS OF NOVEMBER 30, 1998
$3.9 billion
SUITABLE FOR IRAS
Yes
MINIMUM INITIAL INVESTMENT
$3,000; $1,000 for IRAs and custodial accounts for minors
NEWSPAPER ABBREVIATION*
VangTrsy
VANGUARD FUND NUMBER
050
CUSIP NUMBER
921948105
TICKER SYMBOL
VMPXX
* Money market funds are listed separately from other newspaper mutual fund
listings.
<PAGE> 11
8
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
MONEY MARKET INSTRUMENTS
The term "money market instruments" refers to a variety of short-term
investments, usually with a maturity of 13 months or less. Some common types are
Treasury bills and notes, which are securities issued by the U.S. government;
commercial paper, which is a promissory note issued by a large company or
financial firm; banker's acceptances, which are credit instruments guaranteed by
a bank; and negotiable certificates of deposit, which are issued by banks in
large denominations.
- --------------------------------------------------------------------------------
MORE ON THE FUNDS
The following sections discuss other important features of Vanguard Money Market
Funds, including market exposure, security selection, and costs and
market-timing. You will also find detailed risk information about the Funds
throughout these sections.
MARKET EXPOSURE
Each Fund's primary policy is to invest in very high-quality money market
instruments -- also known as cash reserves -- that are considered short-term
(that is, they mature in 13 months or less). Each Fund will maintain an average
maturity of 90 days or less.
[FLAG GRAPHIC] Each Fund is subject to income risk, which is the possibility
that a Fund's dividends (that is, income) will decline because of
falling interest rates. Because the Funds' income is based on
short-term interest rates -- which can fluctuate significantly
over short periods -- income risk is expected to be high for all
three Funds.
To illustrate how the yields of short-term securities can fluctuate as
interest rates rise and fall, the following chart shows month-end yields for
short-term securities (as represented by 90-day Treasury bills) and long-term
securities (as represented by 30-year U.S. Treasury bonds) over the past five
years.
SHORT-TERM AND LONG-TERM MONTH-END YIELDS (1994-1998)
[LINE CHART]
-----------------------------------------------------------------------
These yields reflect past performance; you should not regard them as an
indication of future returns from either Treasury bills or bonds as a
whole, or any of the Funds in particular.
-----------------------------------------------------------------------
SECURITY SELECTION
Vanguard Fixed Income Group, adviser to the Funds, selects high-quality money
market instruments. Each Fund focuses on securities of a particular class of
issuer (the U.S. government, U.S. government agencies, or non-government
issuers). The Funds are managed without regard to tax ramifications.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
CREDIT QUALITY
A money market instrument's credit quality depends upon the issuer's ability to
pay interest on the security 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) the
security's issuer will default, or fail to meet its payment obligations. Direct
U.S. Treasury obligations (that is, securities backed by the U.S. government)
carry the highest credit ratings. All things being equal, money market
instruments with greater credit risk offer higher yields.
- --------------------------------------------------------------------------------
<PAGE> 12
9
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
CONVERSION PERIOD FOR MONEY MARKET FUNDS
Before the payment you make to Vanguard can be invested in a money market fund,
it must be converted to "federal funds," which are Federal Reserve deposits that
banks and other financial institutions draw upon to meet short-term cash needs
- -- and which fund advisers must use to pay for the securities they buy. Vanguard
converts your money market investment to federal funds, which usually takes one
business day. Because of this conversion period, your money market account will
be credited on the business day following the day your investment is received.
You will begin earning dividends on your investment on the next calendar day.
For example, if your check is received on a Thursday before the close of trading
on the New York Stock Exchange, your account will be credited the next business
day (Friday) and you will begin earning dividends on Saturday.
- --------------------------------------------------------------------------------
[FLAG GRAPHIC] EACH FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY
THAT THE ADVISER MAY DO A POOR JOB OF SELECTING SECURITIES.
The Prime Money Market Fund invests primarily in certificates of deposit,
banker's acceptances, commercial paper, and other money market securities.
Commercial paper must be rated Prime-1 by Moody's Investors Service or A-1 by
Standard & Poor's Corporation. Securities that are unrated must be issued by a
company with a debt rating of A3 or better by Moody's or A- or better by
Standard & Poor's. The Prime Money Market Fund also invests in short-term
corporate, state, and municipal obligations rated A3 or better by Moody's or A-
or better by Standard & Poor's, and in securities that are considered suitable
for the Federal Money Market Fund (see below).
Among the certificates of deposit typically held by the Prime Money Market
Fund are Eurodollar and Yankee obligations, which are primarily certificates of
deposit issued in U.S. dollars by foreign banks and foreign branches of U.S.
banks. Eurodollar and Yankee obligations have the same risks, such as income
risk and credit risk, as U.S. money market instruments. Other risks of
Eurodollar and Yankee obligations include the possibility that a foreign
government will not let U.S. dollar-denominated assets leave the country; the
possibility that the banks that issue Eurodollar obligations may not be subject
to the same regulations as U.S. banks; and the possibility that adverse
political or economic developments will affect investments in a foreign country.
Before the Fund's adviser selects a Eurodollar or Yankee obligation, however,
any foreign issuer undergoes the same credit-quality analysis and tests of
financial strength as the issuers of domestic securities.
The Federal Money Market Fund invests primarily in securities issued by U.S.
government agencies whose interest and principal payments are not backed by the
full faith and credit of the U.S. government. These agencies include, among
others, the Federal Home Loan Bank, the Federal National Mortgage Association,
and the Federal Home Loan Mortgage Corporation. The Fund also may invest in
securities issued by the U.S. Treasury and U.S. government agencies that are
backed by the full faith and credit of the U.S. government.
The Treasury Money Market Fund invests solely in securities whose interest
and principal payments are backed by the full faith and credit of the U.S.
government. At least 80% of the Fund's assets will always be invested in U.S.
Treasury securities. The remainder of the Fund's assets may include securities
issued by U.S. government agencies, such as the Government National Mortgage
Association, the Small Business Administration, and the Federal Financing Bank.
[FLAG GRAPHIC] EACH FUND IS SUBJECT, TO A LIMITED EXTENT, TO CREDIT RISK, WHICH
IS THE POSSIBILITY THAT THE ISSUER OF A SECURITY WILL FAIL TO PAY
INTEREST AND PRINCIPAL IN A TIMELY MANNER.
The three Funds differ mainly in terms of credit risk. In absolute terms,
each Fund's credit quality is very high.
In relative terms, the Treasury Money Market Fund, which invests in
securities backed by the full faith and credit of the U.S. government, offers
the lowest credit risk -- and generally the lowest yield -- of the three Funds.
Not all of the securities included in the Federal Money Market Fund are
backed by the full faith and credit of the U.S. government, and so the potential
credit risk and yield for the Fund are somewhat higher than for the Treasury
Money Market Fund.
<PAGE> 13
10
While the credit quality of its securities is very high, the Prime Money
Market Fund faces more risk because it invests in money market securities issued
by private companies. It is possible that one or more of these companies may
experience financial difficulties and, as a result, may fail to pay interest to
the Fund or return the Fund's principal when repayment is due. Therefore, the
Prime Money Market Fund offers the highest credit risk, and generally the
highest yield, of the three Funds.
Bear in mind that, while each Fund invests in high-quality money market
instruments, the three Funds are not insured or guaranteed by the FDIC or any
other agency of the U.S. government.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
REPURCHASE AGREEMENTS
A means of investing money for a short period, repurchase agreements are
contracts in which a U.S. commercial bank or securities dealer sells government
securities and agrees to repurchase the securities on a specific date (normally
the next business day) and at a specific price.
- --------------------------------------------------------------------------------
[FLAG GRAPHIC] THE PRIME AND FEDERAL MONEY MARKET FUNDS RESERVE THE RIGHT TO
INVEST IN REPURCHASE AGREEMENTS, WHICH ARE SUBJECT TO SPECIFIC
RISKS.
Repurchase agreements carry several risks. For instance, if the seller is
unable to repurchase the securities as promised, the Fund may experience a loss
when trying to sell the securities to another person. Or, if the seller becomes
insolvent, a bankruptcy court may determine that the securities do not belong to
the Fund and order that the securities be sold to pay off the seller's debts.
The Funds' adviser believes that these risks can be controlled through careful
security selection and monitoring.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value, or interest rate, is based on
(or "derived" from) a traditional security (such as a stock or bond), a money
market benchmark (such as U.S. Treasury bill rates or the Federal Funds
Effective Rate), an asset (such as a commodity like gold), or a market index
(such as the S&P 500 Index).
- --------------------------------------------------------------------------------
[FLAG GRAPHIC] THE FUNDS RESERVE THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN
FLOATING-RATE SECURITIES, WHICH ARE TRADITIONAL TYPES OF
DERIVATIVES.
A floating-rate security's interest rate, as the name implies, is not set;
instead, it fluctuates periodically. Generally, the security's yield is based on
a U.S. dollar-based interest-rate benchmark such as the Federal Funds Rate, the
90-day Treasury bill rate, or the London Interbank Offered Rate (LIBOR). These
securities reset their yields on a periodic basis (for example, daily, weekly,
or quarterly) and are closely correlated to changes in money market interest
rates.
The Funds will not use derivatives for speculative purposes or as leveraged
investments that magnify the risks of an investment.
In addition, each Fund may invest up to 10% of its net assets in illiquid
securities. Illiquid securities are securities that cannot be readily resold or
converted into cash.
COSTS AND MARKET-TIMING
The Vanguard Money Market Funds serve both short- and long-term investor needs;
however, other Vanguard funds are intended for long-term investors only.
Investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all of a fund's shareholders. To minimize
these costs, Vanguard's stock, bond, and balanced funds have adopted policies to
discourage short-term trading -- which includes switching back and forth from
the Vanguard Money Market Funds. Please check other Vanguard funds' prospectuses
for specifics on the trading limitations of those funds. Also, all Vanguard
funds, including the Money Market Funds, reserve the right to stop offering
shares at any time or to reject specific purchase requests.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THESE FUNDS
IF YOU ARE A MARKET-TIMER.
<PAGE> 14
11
- --------------------------------------------------------------------------------
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 FUNDS AND VANGUARD
The Funds are members of The Vanguard Group, a family of more than 35 investment
companies with more than 100 distinct investment portfolios holding assets worth
more than $450 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 Prime, Federal, and
Treasury Money Market Funds. For the fiscal year ended November 30, 1998, the
investment advisory expenses for each Fund represented an effective annual rate
of 0.01% of each Fund's average net assets.
The Group places all orders for purchases and sales of Fund securities, and
seeks to obtain the best available price and most favorable execution with
respect to all transactions.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
The Funds' Adviser
Vanguard Fixed Income Group provides investment advisory services to more than
40 Vanguard funds; as of November 30, 1998, the Group managed more than $125
billion in assets.
The managers responsible for the Funds' investments are:
IAN A. MACKINNON, Managing Director of Vanguard; has worked in investment
management since 1974; primary responsibility for Vanguard's internal
fixed-income policy and strategy since 1981; B.A., Lafayette College; M.B.A.,
Pennsylvania State University.
ROBERT F. AUWAERTER, Principal of Vanguard and Fund Manager; has worked in
investment management since 1978; has managed portfolio investments since 1979;
B.S., University of Pennsylvania; M.B.A., Northwestern University.
JOHN HOLLYER, Principal of Vanguard and Fund Manager; has worked in
investment management since 1987; has managed portfolio investments since 1989;
B.S., University of Pennsylvania.
DAVID R. GLOCKE, Principal of Vanguard and Fund Manager; has worked in
investment management since 1991; has managed portfolio investments since 1997;
B.S., University of Wisconsin.
Mr. Auwaerter, Mr. Hollyer, and Mr. Glocke manage the Funds on a day-to-day
basis. Mr. MacKinnon is responsible for setting the Funds' broad investment
policies and for overseeing the Fund Managers.
- --------------------------------------------------------------------------------
<PAGE> 15
12
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 the year 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 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 AND TAXES
As a shareholder, you are entitled to your share of a Fund's net income
(interest less expenses). The Funds' income dividends accrue daily and are
distributed monthly. You can choose to receive your income distributions in
cash, or you can have them automatically reinvested in more shares of the Fund.
In either case, these distributions are taxable to you. It is important to note
that distributions that are declared in December -- if paid to you by the end of
January -- are taxed as if they had been paid in December. Vanguard will send
you a statement each year showing the tax status of all of your distributions.
- - Distributions of dividends may be subject to state and local taxes as well.
However, depending on your state's tax rules, the portion of a Fund's
dividends that come from U.S. Treasury securities and other "direct" U.S.
Treasury obligations may be exempt from state and local income taxes. The
Funds will notify you each year how much, if any, of your distribution may
qualify for this exemption.
- - As a Delaware business trust and a fund made up of direct U.S. government
obligations, the Treasury Money Market Fund should be exempt from any
intangibles taxes to the extent that its securities are direct U.S.
government obligations. The Fund will notify you each year how much, if any,
of the Fund's assets qualify for this exemption.
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 one or more 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 Funds to do so.
<PAGE> 16
13
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). Each Fund's
NAV is expected to remain at a constant $1. Although the stable share price is
not guaranteed, the Funds are managed and securities are purchased to maintain
that price.
The instruments held by the Funds are valued on the basis of amortized cost,
which does not take into account unrealized capital gains or losses.
Newspapers typically list money market fund yields weekly, separately from
listings for other mutual funds. Different newspapers use different
abbreviations for the Funds, but the most common are VangPr, VangFdl, and
VangTrsy.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
This explanation uses the Prime Money Market Fund as an example. The Fund began
fiscal 1998 with a net asset value (price) of $1 per share. During the year, the
Fund earned $.053 per share from investment income (interest and dividends).
Shareholders received $.053 per share in the form of dividend distributions.
A portion of each year's distributions may come from the prior year's income.
The earnings ($.053 per share) minus the distributions ($.053 per share)
resulted in a share price of $1 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 5.42% for the year.
As of November 30, 1998, the Fund had $33.7 billion in net assets. For the
year, its expense ratio was 0.33% ($3.30 per $1,000 of net assets); and its net
investment income amounted to 5.28% of its average 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). 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 PRIME MONEY MARKET FUND
YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .053 .053 .052 .057 .038
Net Realized and Unrealized Gain (Loss)
on Investments -- -- -- -- --
---------------------------------------------------------------
Total from Investment Operations .053 .053 .052 .057 .038
---------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.053) (.053) (.052) (.057) (.038)
Distributions from Realized Capital Gains -- -- -- -- --
---------------------------------------------------------------
Total Distributions (.053) (.053) (.052) (.057) (.038)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
===============================================================================================================
TOTAL RETURN 5.42% 5.41% 5.31% 5.82% 3.87%
===============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $33,732 $26,480 $22,218 $18,764 $15,109
Ratio of Total Expenses to
Average Net Assets 0.33% 0.32% 0.32% 0.32% 0.32%
Ratio of Net Investment Income to
Average Net Assets 5.28% 5.28% 5.18% 5.64% 3.84%
===============================================================================================================
</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> 17
14
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
VANGUARD FEDERAL MONEY MARKET FUND
YEAR ENDED NOVEMBER 30,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .052 .052 .051 .056 .038
Net Realized and Unrealized Gain (Loss) on Investments -- -- -- -- --
---------------------------------------------------------------------
Total from Investment Operations .052 .052 .051 .056 .038
---------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.052) (.052) (.051) (.056) (.038)
Distributions from Realized Capital Gains -- -- -- -- --
---------------------------------------------------------------------
Total Distributions (.052) (.052) (.051) (.056) (.038)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
==================================================================================================================================
TOTAL RETURN 5.35% 5.35% 5.26% 5.77% 3.82%
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $ 4,263 $ 3,495 $ 3,100 $ 2,637 $ 2,196
Ratio of Total Expenses to Average Net Assets 0.33% 0.32% 0.32% 0.32% 0.32%
Ratio of Net Investment Income to Average Net Assets 5.21% 5.22% 5.13% 5.61% 3.78%
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
VANGUARD TREASURY MONEY MARKET FUND
YEAR ENDED NOVEMBER 30,
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .050 .050 .050 .053 .036
Net Realized and Unrealized Gain (Loss) on Investments -- -- -- -- --
--------------------------------------------------------------------
Total from Investment Operations .050 .050 .050 .053 .036
--------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.050) (.050) (.050) (.053) (.036)
Distributions from Realized Capital Gains -- -- -- -- --
--------------------------------------------------------------------
Total Distributions (.050) (.050) (.050) (.053) (.036)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=================================================================================================================================
TOTAL RETURN 5.06% 5.10% 5.11% 5.47% 3.63%
=================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $ 3,942 $ 3,237 $ 2,917 $ 2,527 $ 2,056
Ratio of Total Expenses to Average Net Assets 0.33% 0.32% 0.32% 0.32% 0.32%
Ratio of Net Investment Income to Average Net Assets 4.94% 4.98% 4.99% 5.33% 3.59%
=================================================================================================================================
</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> 18
15
- --------------------------------------------------------------------------------
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 [BOOK GRAPHIC]. 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 each Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
CHECKWRITING [Check icon]
Method for drawing money from your account by writing a check for $250 or more.
- --------------------------------------------------------------------------------
VANGUARD DIRECT DEPOSIT SERVICE(TM) [BOOK GRAPHIC]
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) [BOOK GRAPHIC]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
VANGUARD FUND EXPRESS(R) [BOOK GRAPHIC]
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) [BOOK GRAPHIC]
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) [BOOK GRAPHIC]
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 [COMPUTER GRAPHIC]
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> 19
16
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 [BOOK GRAPHIC]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR INDIVIDUAL RETIREMENT ACCOUNTS [BOOK GRAPHIC]
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 [BOOK GRAPHIC]
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 share price (net asset value)
after Vanguard receives your request, which should be $1 per share. Before your
payment can be used to purchase Fund shares, it must be converted to federal
funds, which usually takes one business day. ("Federal funds" are Federal
Reserve deposits that banks and other financial institutions draw upon to meet
short-term cash needs; fund advisers must use federal funds to pay for the
securities they buy.) Because of this conversion period, your fund account will
be credited on the business day following the day we receive your check. You
will begin earning dividends on your investment on the next calendar day. For
example, if we receive your check before the close of trading on the New York
Stock Exchange (generally 4 p.m. Eastern time) on a Thursday, your account will
be credited the next business day (Friday) and you will begin earning dividends
on Saturday.
Each of the Funds is offered on a no-load basis, meaning that you do not pay
sales commissions or 12b-1 distribution fees.
- --------------------------------------------------------------------------------
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 falls below $2,500. The fee is
waived if your total Vanguard account assets are $50,000 or more.
- --------------------------------------------------------------------------------
<PAGE> 20
17
- --------------------------------------------------------------------------------
BY MAIL TO . . .[ENVELOPE GRAPHIC]
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 -- (insert appropriate Fund
number; see below)
Vanguard Prime Money Market Fund -- 30
Vanguard Federal Money Market Fund -- 33
Vanguard Treasury Money Market Fund -- 50
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
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . . [PHONE GRAPHIC]
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 [WIRE GRAPHIC]
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
Marine Midland Bank, New York
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
<PAGE> 21
18
Buying Shares (continued)
In favor of:
Vanguard Prime Money Market Fund -- 30
Vanguard Federal Money Market Fund -- 33
Vanguard Treasury Money Market Fund -- 50
[Account number, or temporary number for a new account]
[Registered account owner/s]
[Registered address]
If you buy fund shares through a federal funds wire, your investment begins
earning dividends the next calendar day. You can begin earning dividends
immediately if you notify Vanguard by 10:45 a.m. Eastern time that you intend to
make a wire purchase that day.
- --------------------------------------------------------------------------------
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 21.
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 processed 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.
- --------------------------------------------------------------------------------
ONLINE REQUESTS [COMPUTER GRAPHIC]
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).
<PAGE> 22
19
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 [PHONE]
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:
[CHECKMARK] The ten-digit account number.
[CHECKMARK] The name and address exactly as registered on the account.
[CHECKMARK] The primary Social Security or employer identification number as
registered on the account.
[CHECKMARK] 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 [ENVELOPE GRAPHIC]
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> 23
20
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 [CHECK GRAPHIC]
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 a 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 [WIRE GRAPHIC]
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.
- --------------------------------------------------------------------------------
<PAGE> 24
21
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:
[CHECKMARK] The Fund name and account number.
[CHECKMARK] The amount of the transaction (in dollars or shares).
[CHECKMARK] Signatures of all owners exactly as registered on the
account (for mail requests).
[CHECKMARK] Signature guarantees (if required).*
[CHECKMARK] Any supporting legal documentation that may be required.
[CHECKMARK] 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.
- --------------------------------------------------------------------------------
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> 25
22
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 your 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 Funds' 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 Investor Information Department at 1-800-662-7447.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares;
confirms the trade date and the amount of your transaction.
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOK GRAPHIC]
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 January and July for these Funds.
- --------------------------------------------------------------------------------
TAX STATEMENTS
Generally mailed in January; report previous year's dividend distributions,
proceeds from the sale of shares, and distributions from IRAs or other
retirement accounts.
- --------------------------------------------------------------------------------
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> 26
(This page intentionally left blank.)
<PAGE> 27
(This page intentionally left blank.)
<PAGE> 28
GLOSSARY OF INVESTMENT TERMS
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
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.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
LIQUIDITY
The degree of a security's marketability (that is, how quickly the security can
be sold at a fair price and converted to cash).
MONEY MARKET FUND
A mutual fund that seeks to provide income, liquidity, and a stable share price
by investing in very short-term, liquid investments.
MONEY MARKET INSTRUMENTS
Short-term, liquid investments (usually with a maturity of 13 months or less)
which include U.S. Treasury bills, bank certificates of deposit (CDs),
repurchase agreements, commercial paper, and banker's acceptances.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
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.
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> 29
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about Vanguard Money Market 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.
Vanguard Prime and Federal Money Market Funds' Investment Company Act file
number: 811-2554
Vanguard Treasury Money Market Fund's Investment Company Act file number:
811-7803
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P030N-03/19/1999
<PAGE> 30
VANGUARD PRIME MONEY MARKET FUND
VANGUARD FEDERAL MONEY MARKET FUND
VANGUARD TREASURY MONEY MARKET FUND
Participant Prospectus
March 19, 1999
A Group of Money Market Mutual Funds
CONTENTS
1 FUND PROFILES
1 Vanguard Prime Money Market Fund
4 Vanguard Federal Money Market Fund
6 Vanguard Treasury Money Market Fund
8 MORE ON THE FUNDS
11 THE FUNDS AND VANGUARD
11 INVESTMENT ADVISER
12 YEAR 2000 CHALLENGE
12 DIVIDENDS AND TAXES
12 SHARE PRICE
13 FINANCIAL HIGHLIGHTS
15 INVESTING WITH VANGUARD
15 ACCESSING FUND INFORMATION BY COMPUTER
GLOSSARY (inside back cover)
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and policies of Vanguard Prime
Money Market Fund, Vanguard Federal Money Market Fund, and Vanguard Treasury
Money Market 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 which Fund, if any, is the right
investment for you. We suggest that you keep it for future reference.
IMPORTANT NOTE
The Prime Money Market Fund features two separate classes of shares: Investor
Shares and Institutional Shares. Prime Money Market Fund Investor Shares has an
investment minimum of $3,000, and is available through this prospectus (for
participants in employer-sponsored retirement or savings plans) and through a
separate prospectus (for individual investors). Prime Money Market Fund
Institutional Shares has an investment minimum of $10 million, and is available
through a separate prospectus. Prime Money Market Fund Investor Shares and Prime
Money Market Fund Institutional Shares do not have the same expenses; as a
result, the performance of these two 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> 31
1
FUND PROFILE--VANGUARD PRIME MONEY MARKET FUND
The following profile summarizes key features of Vanguard Prime Money Market
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide current income while maintaining liquidity and a
stable share price of $1.
INVESTMENT POLICIES
The Fund invests primarily in high-quality, short-term money market instruments,
including certificates of deposit, banker's acceptances, commercial paper, and
other money market securities. To be considered high quality, a security
generally must be rated in one of the two highest credit-quality categories for
short-term securities, by at least two nationally recognized rating services (or
by one, if only one rating service has rated the security). If unrated, the
security must be determined by Vanguard to be of quality equivalent to those in
the two highest credit-quality categories. The Fund will maintain an average
maturity of 90 days or less. For more information about security selection, see
pages 8-10.
PRIMARY RISKS
THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT FALLING SHORT-TERM
INTEREST RATES WILL CAUSE THE FUND'S INCOME--AND THUS ITS TOTAL RETURN--TO
DECLINE. INCOME RISK IS GENERALLY HIGH FOR SHORT-TERM SECURITIES. The Fund is
also subject to:
- - Manager risk, which is the chance that poor security selection will
cause the Fund to underperform other funds with similar investment
objectives.
- - Credit risk, which is the chance that the issuer of a security 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.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN 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 money
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------
9.39% 8.27% 6.14% 3.74% 3.01% 4.08% 5.82% 5.29% 5.44% 5.38%
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 2.43% (quarter ended June 30, 1989 ) and the lowest return for a
quarter was 0.72% (quarter ended June 30, 1993).
<PAGE> 32
2
FUND PROFILE--VANGUARD PRIME MONEY MARKET FUND (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Vanguard Prime Money Market Fund 5.38% 5.20% 5.64%
Lipper Money Market Fund Average 4.84 4.71 5.16
- --------------------------------------------------------------------------------
</TABLE>
If you would like to know the current seven-day yield for the Fund, call
Vanguard's Investor Information Department at 1-800-662-7447 (SHIP).
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 November 30, 1998.
<TABLE>
<CAPTION>
<S> <C>
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: 0.29%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.33%
</TABLE>
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
- --------------------------------------------------------------------------------
$34 $106 $185 $418
- --------------------------------------------------------------------------------
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> 33
3
ADDITIONAL INFORMATION
DIVIDENDS
Declared daily and distributed on the first business day of each month
INVESTMENT ADVISER
Vanguard Fixed Income Group, Valley Forge, Pa., since
1981
INCEPTION DATE
June 4, 1975
NET ASSETS AS OF NOVEMBER 30, 1998
$33.7 billion
NEWSPAPER ABBREVIATION*
VangPr
VANGUARD FUND NUMBER
030
CUSIP NUMBER
922906201
Ticker Symbol
VMMXX
*Money market funds are listed separately from other newspaper mutual fund
listings.
<PAGE> 34
4
FUND PROFILE--VANGUARD FEDERAL MONEY MARKET FUND
The following profile summarizes key features of Vanguard Federal Money Market
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide current income while maintaining liquidity and a
stable share price of $1.
INVESTMENT POLICIES
The Fund invests primarily in high-quality, short-term money market instruments
issued by U.S. government agencies. Most of the securities held by the Fund are
not backed by the full faith and credit of the U.S. government. The Fund will
maintain an average maturity of 90 days or less. For more information about
security selection, see pages 8-10.
PRIMARY RISKS
THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT FALLING SHORT-TERM
INTEREST RATES WILL CAUSE THE FUND'S INCOME--AND THUS ITS TOTAL RETURN--TO
DECLINE. INCOME RISK IS GENERALLY HIGH FOR SHORT-TERM SECURITIES. The Fund is
also subject to:
- - Manager risk, which is the chance that poor security selection will
cause the Fund to underperform other funds with similar investment
objectives.
- - Credit risk, which is the chance that the issuer of a security 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.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN 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 money
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------
9.15% 8.07% 5.96% 3.68% 2.98% 4.03% 5.77% 5.24% 5.38% 5.31%
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 2.37% (quarter ended June 30, 1989) and the lowest return for a
quarter was 0.72% (quarter ended June 30, 1993).
<PAGE> 35
5
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Vanguard Federal Money Market Fund 5.31% 5.14% 5.54%
Lipper U.S. Government Money Market Fund Average 4.89 4.67 5.08
- --------------------------------------------------------------------------------
If you would like to know the current seven-day yield for the Fund, call
Vanguard's Investor Information Department at 1-800-662-7447 (SHIP).
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 November 30, 1998.
<TABLE>
<S> <C>
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: 0.29%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.33%
</TABLE>
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
- --------------------------------------------------------------------------------
$34 $106 $185 $418
- --------------------------------------------------------------------------------
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
Declared daily and distributed on the first business day of each month
INVESTMENT ADVISER
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
INCEPTION DATE
July 13, 1981
NET ASSETS AS OF NOVEMBER 30, 1998
$4.3 billion
NEWSPAPER ABBREVIATION*
VangFdl
VANGUARD FUND NUMBER
033
CUSIP NUMBER
922906300
TICKER SYMBOL
VMFXX
*Money market funds are listed separately from other newspaper mutual fund
listings.
<PAGE> 36
6
FUND PROFILE--VANGUARD TREASURY MONEY MARKET FUND
The following profile summarizes key features of Vanguard Treasury Money Market
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide current income while maintaining liquidity and a
stable share price of $1.
INVESTMENT POLICIES
The Fund invests solely in high-quality, short-term money market securities
whose interest and principal payments are backed by the full faith and credit of
the U.S. government. At least 80% of the Fund's assets will always be invested
in U.S. Treasury securities; the remainder of the Fund's assets may be invested
in securities issued by U.S. government agencies. The Fund will maintain an
average maturity of 90 days or less. For more information about security
selection, see pages 8-10.
PRIMARY RISKS
THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT FALLING SHORT-TERM
INTEREST RATES WILL CAUSE THE FUND'S INCOME--AND THUS ITS TOTAL RETURN--TO
DECLINE. INCOME RISK IS GENERALLY HIGH FOR SHORT-TERM SECURITIES. The Fund is
also subject to:
- - Manager risk, which is the chance that poor security selection will
cause the Fund to underperform other funds with similar investment
objectives.
- - Credit risk, which is the chance that the issuer of a security 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.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN 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 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
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------
8.87% 7.94% 5.73% 3.53% 2.86% 3.81% 5.49% 5.09% 5.12% 5.00%
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 2.26% (quarter ended June 30, 1989) and the lowest return for a
quarter was 0.69% (quarter ended June 30, 1993).
<PAGE> 37
7
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Vanguard Treasury Money Market Fund 5.00% 4.90% 5.33%
Lipper U.S. Treasury Money Market Fund Average 4.69 4.61 5.08
- --------------------------------------------------------------------------------
If you would like to know the current seven-day yield for the Fund, call
Vanguard's Investor Information Department at 1-800-662-7447 (SHIP).
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 November 30, 1998.
<TABLE>
<S> <C>
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: 0.29%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.33%
</TABLE>
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
- --------------------------------------------------------------------------------
$34 $106 $185 $418
- --------------------------------------------------------------------------------
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
Declared daily and distributed on the first business day of each month
INVESTMENT ADVISER
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
INCEPTION DATE
March 9, 1983
NET ASSETS AS OF NOVEMBER 30, 1998
$3.9 billion
NEWSPAPER ABBREVIATION*
VangTrsy
VANGUARD FUND NUMBER
050
CUSIP NUMBER
921948105
TICKER SYMBOL
VMPXX
*Money market funds are listed separately from other newspaper mutual fund
listings.
<PAGE> 38
8
PLAIN TALK ABOUT
MONEY MARKET INSTRUMENTS
The term "money market instruments" refers to a variety of short-term
investments, usually with a maturity of 13 months or less. Some common types are
Treasury bills and notes, which are securities issued by the U.S. government;
commercial paper, which is a promissory note issued by a large company or
financial firm; banker's acceptances, which are credit instruments guaranteed by
a bank; and negotiable certificates of deposit, which are issued by banks in
large denominations.
MORE ON THE FUNDS
The following sections discuss other important features of Vanguard Money Market
Funds, including market exposure, security selection, and costs and
market-timing. You will also find detailed risk information about the Funds
throughout these sections.
MARKET EXPOSURE
Each Fund's primary policy is to invest in very high-quality money market
instruments--also known as cash reserves--that are considered short-term (that
is, they mature in 13 months or less). Each Fund will maintain an average
maturity of 90 days or less.
[FLAG] EACH FUND IS SUBJECT TO INCOME RISK, WHICH IS THE POSSIBILITY THAT A
FUND'S DIVIDENDS (THAT IS, INCOME) WILL DECLINE BECAUSE OF FALLING
INTEREST RATES. BECAUSE THE FUNDS' INCOME IS BASED ON SHORT-TERM
INTEREST RATES--WHICH CAN FLUCTUATE SIGNIFICANTLY OVER SHORT
PERIODS--INCOME RISK IS EXPECTED TO BE HIGH FOR ALL THREE FUNDS.
To illustrate how the yields of short-term securities can fluctuate as
interest rates rise and fall, the following chart shows month-end yields for
short-term securities (as represented by 90-day Treasury bills) and long-term
securities (as represented by 30-year U.S. Treasury bonds) over the past five
years.
- --------------------------------------------------------------------------------
SHORT-TERM AND LONG-TERM MONTH-END YIELDS (1994-1998)
- --------------------------------------------------------------------------------
[LINE GRAPH OMITTED]
- --------------------------------------------------------------------------------
These yields reflect past performance; you should not regard them as an
indication of future returns from either Treasury bills or bonds as a whole, or
any of the Funds in particular.
- --------------------------------------------------------------------------------
SECURITY SELECTION
Vanguard Fixed Income Group, adviser to the Funds, selects high-quality money
market instruments. Each Fund focuses on securities of a particular class of
issuer (the U.S. government, U.S. government agencies, or non-government
issuers). The Funds are managed without regard to tax ramifications.
PLAIN TALK ABOUT
CREDIT QUALITY
A money market instrument's credit quality depends upon the issuer's ability to
pay interest on the security 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) the
security's issuer will default, or fail to meet its payment obligations. Direct
U.S. Treasury obligations (that is, securities backed by the U.S. government)
carry the highest credit ratings. All things being equal, money market
instruments with greater credit risk offer higher yields.
<PAGE> 39
9
PLAIN TALK ABOUT
CONVERSION PERIOD FOR MONEY MARKET FUNDS
Before the payment you make to Vanguard can be invested in a money market
fund, it must be converted to "federal funds," which are Federal Reserve
deposits that banks and other financial institutions draw upon to meet
short-term cash needs--and which fund advisers must use to pay for the
securities they buy. Vanguard converts your money market investment to federal
funds, which usually takes one business day. Because of this conversion period,
your money market account will be credited on the business day following the day
your investment is received. You will begin earning dividends on your investment
on the next calendar day. For example, if your check is received on a Thursday
before the close of trading on the New York Stock Exchange, your account will be
credited the next business day (Friday) and you will begin earning dividends on
Saturday.
[FLAG GRAPHIC] EACH FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY
THAT THE ADVISER MAY DO A POOR JOB OF SELECTING SECURITIES.
The Prime Money Market Fund invests primarily in certificates of deposit,
banker's acceptances, commercial paper, and other money market securities.
Commercial paper must be rated Prime-1 by Moody's Investors Service or A-1 by
Standard & Poor's Corporation. Securities that are unrated must be issued by a
company with a debt rating of A3 or better by Moody's or A- or better by
Standard & Poor's. The Prime Money Market Fund also invests in short-term
corporate, state, and municipal obligations rated A3 or better by Moody's or A-
or better by Standard & Poor's, and in securities that are considered suitable
for the Federal Money Market Fund (see below).
Among the certificates of deposit typically held by the Prime Money Market
Fund are Eurodollar and Yankee obligations, which are primarily certificates of
deposit issued in U.S. dollars by foreign banks and foreign branches of U.S.
banks. Eurodollar and Yankee obligations have the same risks, such as income
risk and credit risk, as U.S. money market instruments. Other risks of
Eurodollar and Yankee obligations include the possibility that a foreign
government will not let U.S. dollar-denominated assets leave the country; the
possibility that the banks that issue Eurodollar obligations may not be subject
to the same regulations as U.S. banks; and the possibility that adverse
political or economic developments will affect investments in a foreign country.
Before the Fund's adviser selects a Eurodollar or Yankee obligation, however,
any foreign issuer undergoes the same credit-quality analysis and tests of
financial strength as the issuers of domestic securities.
The Federal Money Market Fund invests primarily in securities issued by
U.S. government agencies whose interest and principal payments are not backed by
the full faith and credit of the U.S. government. These agencies include, among
others, the Federal Home Loan Bank, the Federal National Mortgage Association,
and the Federal Home Loan Mortgage Corporation. The Fund also may invest in
securities issued by the U.S. Treasury and U.S. government agencies that are
backed by the full faith and credit of the U.S. government.
The Treasury Money Market Fund invests solely in securities whose interest
and principal payments are backed by the full faith and credit of the U.S.
government. At least 80% of the Fund's assets will always be invested in U.S.
Treasury securities. The remainder of the Fund's assets may include securities
issued by U.S. government agencies, such as the Government National Mortgage
Association, the Small Business Administration, and the Federal Financing Bank.
[FLAG GRAPHIC] EACH FUND IS SUBJECT, TO A LIMITED EXTENT, TO CREDIT RISK,
WHICH IS THE POSSIBILITY THAT THE ISSUER OF A SECURITY WILL
FAIL TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER.
The three Funds differ mainly in terms of credit risk. In absolute terms,
each Fund's credit quality is very high.
In relative terms, the Treasury Money Market Fund, which invests in
securities backed by the full faith and credit of the U.S. government, offers
the lowest credit risk--and generally the lowest yield--of the three Funds.
Not all of the securities included in the Federal Money Market Fund are
backed by the full faith and credit of the U.S. government, and so the potential
credit risk and yield for the Fund are somewhat higher than for the Treasury
Money Market Fund.
<PAGE> 40
10
While the credit quality of its securities is very high, the Prime Money
Market Fund faces more risk because it invests in money market securities issued
by private companies. It is possible that one or more of these companies may
experience financial difficulties and, as a result, may fail to pay
interest to the Fund or return the Fund's principal when repayment is due.
Therefore, the Prime Money Market Fund offers the highest credit risk, and
generally the highest yield, of the three Funds.
Bear in mind that, while each Fund invests in high-quality money market
instruments, the three Funds are not insured or guaranteed by the FDIC or any
other agency of the U.S. government.
PLAIN TALK ABOUT
REPURCHASE AGREEMENTS
A means of investing money for a short period, repurchase agreements are
contracts in which a U.S. commercial bank or securities dealer sells government
securities and agrees to repurchase the securities on a specific date (normally
the next business day) and at a specific price.
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value, or interest rate, is based on
(or "derived" from) a traditional security (such as a stock or bond), a money
market benchmark (such as U.S. Treasury bill rates or the Federal Funds
Effective Rate), an asset (such as a commodity like gold), or a market index
(such as the S&P 500 Index).
[FLAG GRAPHIC] THE PRIME AND FEDERAL MONEY MARKET FUNDS RESERVE THE RIGHT TO
INVEST IN REPURCHASE AGREEMENTS, WHICH ARE SUBJECT TO SPECIFIC
RISKS.
Repurchase agreements carry several risks. For instance, if the seller is
unable to repurchase the securities as promised, the Fund may experience a loss
when trying to sell the securities to another person. Or, if the seller becomes
insolvent, a bankruptcy court may determine that the securities do not belong to
the Fund and order that the securities be sold to pay off the seller's debts.
The Funds' adviser believes that these risks can be controlled through careful
security selection and monitoring.
[FLAG GRAPHIC] THE FUNDS RESERVE THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN
FLOATING-RATE SECURITIES, WHICH ARE TRADITIONAL TYPES OF
DERIVATIVES.
A floating-rate security's interest rate, as the name implies, is not set;
instead, it fluctuates periodically. Generally, the security's yield is based on
a U.S. dollar-based interest-rate benchmark such as the Federal Funds Rate, the
90-day Treasury bill rate, or the London Interbank Offered Rate (LIBOR). These
securities reset their yields on a periodic basis (for example, daily, weekly,
or quarterly) and are closely correlated to changes in money market interest
rates.
The Funds will not use derivatives for speculative purposes or as leveraged
investments that magnify the risks of an investment.
In addition, each Fund may invest up to 10% of its net assets in illiquid
securities. Illiquid securities are securities that cannot be readily resold or
converted into cash.
COSTS AND MARKET-TIMING
The Vanguard Money Market Funds serve both short- and long-term investor needs;
however, other Vanguard funds are intended for long-term investors only.
Investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all of a fund's shareholders. To minimize
these costs, Vanguard's stock, bond, and balanced funds have adopted policies to
discourage short-term trading--which includes switching back and forth from the
Vanguard Money Market Funds. Please check other Vanguard funds' prospectuses for
specifics on the trading limitations of those funds. Also, all Vanguard funds,
including the Money Market Funds, reserve the right to stop offering shares at
any time or to reject specific purchase requests.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THESE FUNDS
IF YOU ARE A MARKET-TIMER.
<PAGE> 41
11
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 FUNDS AND VANGUARD
The Funds are members of The Vanguard Group, a family of more than 35
investment companies with more than 100 distinct investment portfolios holding
assets worth more than $450 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 Prime, Federal, and
Treasury Money Market Funds. For the fiscal year ended November 30, 1998, the
investment advisory expenses for each Fund represented an effective annual rate
of 0.01% of each Fund's average net assets.
The Group places all orders for purchases and sales of Fund securities, and
seeks to obtain the best available price and most favorable execution with
respect to all transactions.
PLAIN TALK ABOUT
THE FUNDS' ADVISER
Vanguard Fixed Income Group provides investment advisory services to more than
40 Vanguard funds; as of November 30, 1998, the Group managed more than $125
billion in assets.
The managers responsible for the Funds' investments are:
IAN A. MACKINNON, Managing Director of Vanguard; has worked in investment
management since 1974; primary responsibility for Vanguard's internal
fixed-income policy and strategy since 1981; B.A., Lafayette College; M.B.A.,
Pennsylvania State University.
ROBERT F. AUWAERTER, Principal of Vanguard and Fund Manager; has worked in
investment management since 1978; has managed portfolio investments since 1979;
B.S., University of Pennsylvania; M.B.A., Northwestern University.
JOHN HOLLYER, Principal of Vanguard and Fund Manager; has worked in
investment management since 1987; has managed portfolio investments since 1989;
B.S., University of Pennsylvania.
DAVID R. GLOCKE, Principal of Vanguard and Fund Manager; has worked in
investment management since 1991; has managed portfolio investments since 1997;
B.S., University of Wisconsin.
Mr. Auwaerter, Mr. Hollyer, and Mr. Glocke manage the Funds on a day-to-day
basis. Mr. MacKinnon is responsible for setting the Funds' broad investment
policies and for overseeing the Fund Managers.
<PAGE> 42
12
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 the year 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.
DIVIDENDS AND TAXES
As a shareholder, you are entitled to your share of a Fund's net income
(interest less expenses). The Funds' income dividends accrue daily and are
distributed monthly.
Dividend 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 Description, or your tax adviser
about the tax consequences of an investment in any of the Funds and of any plan
withdrawals.
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). Each
Fund's NAV is expected to remain at a constant $1. Although the stable share
price is not guaranteed, the Funds are managed and securities are purchased to
maintain that price.
The instruments held by the Funds are valued on the basis of amortized cost,
which does not take into account unrealized capital gains or losses.
Newspapers typically list money market fund yields weekly, separately from
listings for other mutual funds. Different newspapers use different
abbreviations for the Funds, but the most common are VANGPR, VANGFDL, and
VANGTRSY.
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 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> 43
13
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). 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 Prime Money Market Fund
YEAR ENDED NOVEMBER 30,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .053 .053 .052 .057 .038
Net Realized and Unrealized Gain (Loss)
on Investments -- -- -- -- --
-------------------------------------------------------------------------------
Total from Investment Operations .053 .053 .052 .057 .038
-------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.053) (.053) (.052) (.057) (.038)
Distributions from Realized Capital Gains -- -- -- -- --
-------------------------------------------------------------------------------
Total Distributions (.053) (.053) (.052) (.057) (.038)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
==============================================================================================================================
TOTAL RETURN 5.42% 5.41% 5.31% 5.82% 3.87%
==============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $ 33,732 $ 26,480 $ 22,218 $ 18,764 $ 15,109
Ratio of Total Expenses to
Average Net Assets 0.33% 0.32% 0.32% 0.32% 0.32%
Ratio of Net Investment Income to
Average Net Assets 5.28% 5.28% 5.18% 5.64% 3.84%
==============================================================================================================================
</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.
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
This explanation uses the Prime Money Market Fund as an example. The Fund began
fiscal 1998 with a net asset value (price) of $1 per share. During the year, the
Fund earned $.053 per share from investment income (interest and dividends).
Shareholders received $.053 per share in the form of dividend distributions.
A portion of each year's distributions may come from the prior year's income.
The earnings ($.053 per share) minus the distributions ($.053 per share)
resulted in a share price of $1 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 5.42% for the year.
As of November 30, 1998, the Fund had $33.7 billion in net assets. For the
year, its expense ratio was 0.33% ($3.30 per $1,000 of net assets); and its net
investment income amounted to 5.28% of its average net assets.
<PAGE> 44
14
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Vanguard Federal Money Market Fund
YEAR ENDED NOVEMBER 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .052 .052 .051 .056 .038
Net Realized and Unrealized Gain (Loss) on Investments -- -- -- -- --
----------------------------------------------------------------------
Total from Investment Operations .052 .052 .051 .056 .038
----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.052) (.052) (.051) (.056) (.038)
Distributions from Realized Capital Gains -- -- -- -- --
----------------------------------------------------------------------
Total Distributions (.052) (.052) (.051) (.056) (.038)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=================================================================================================================================
TOTAL RETURN 5.35% 5.35% 5.26% 5.77% 3.82%
=================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $ 4,263 $ 3,495 $ 3,100 $ 2,637 $ 2,196
Ratio of Total Expenses to Average Net Assets 0.33% 0.32% 0.32% 0.32% 0.32%
Ratio of Net Investment Income to Average Net Assets 5.21% 5.22% 5.13% 5.61% 3.78%
=================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Vanguard Treasury Money Market Fund
YEAR ENDED NOVEMBER 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .050 .050 .050 .053 .036
Net Realized and Unrealized Gain (Loss) on Investments -- -- -- -- --
----------------------------------------------------------------------
Total from Investment Operations .050 .050 .050 .053 .036
----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.050) (.050) (.050) (.053) (.036)
Distributions from Realized Capital Gains -- -- -- -- --
----------------------------------------------------------------------
Total Distributions (.050) (.050) (.050) (.053) (.036)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=================================================================================================================================
TOTAL RETURN 5.06% 5.10% 5.11% 5.47% 3.63%
=================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $ 3,942 $ 3,237 $ 2,917 $ 2,527 $ 2,056
Ratio of Total Expenses to Average Net Assets 0.33% 0.32% 0.32% 0.32% 0.32%
Ratio of Net Investment Income to Average Net Assets 4.94% 4.98% 4.99% 5.33% 3.59%
=================================================================================================================================
</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> 45
15
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 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 recordkeeping 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.
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.
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> 46
(This page intentionally left blank.)
<PAGE> 47
GLOSSARY OF INVESTMENT TERMS
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
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.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
LIQUIDITY
The degree of a security's marketability (that is, how quickly the security can
be sold at a fair price and converted to cash).
MONEY MARKET FUND
A mutual fund that seeks to provide income, liquidity, and a stable share price
by investing in very short-term, liquid investments.
MONEY MARKET INSTRUMENTS
Short-term, liquid investments (usually with a maturity of 13 months or less)
which include U.S. Treasury bills, bank certificates of deposit (CDs),
repurchase agreements, commercial paper, and banker's acceptances.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
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.
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> 48
[LOGO THE VANGUARD GROUP(R)]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about Vanguard Money Market 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.
Vanguard Prime and Federal Money Market Funds' Investment Company Act file
number: 811-2554
Vanguard Treasury Money Market Fund's Investment Company Act
file number: 811-7803
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation, Distributor.
I030N-03/19/1999
<PAGE> 49
VANGUARD PRIME MONEY MARKET FUND
INSTITUTIONAL SHARES
Prospectus
March 19, 1999
A Money Market Mutual Fund
CONTENTS
1 FUND PROFILE
3 ADDITIONAL INFORMATION
3 A WORD ABOUT RISK
3 WHO SHOULD INVEST
4 PRIMARY INVESTMENT POLICIES
6 THE FUND AND VANGUARD
7 INVESTMENT ADVISER
7 YEAR 2000 CHALLENGE
8 DIVIDENDS AND TAXES
8 SHARE PRICE
9 FINANCIAL HIGHLIGHTS
10 INVESTING WITH VANGUARD
10 SERVICES AND ACCOUNT FEATURES
10 TYPES OF ACCOUNTS
11 BUYING SHARES
12 REDEEMING SHARES
15 TRANSFERRING REGISTRATION
15 FUND AND ACCOUNT UPDATES
16 MANDATORY CONVERSION TO INVESTOR SHARES
GLOSSARY (INSIDE BACK COVER)
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and policies of Vanguard Prime
Money Market Fund Institutional Shares. 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 Prime Money Market Fund features two separate classes of shares: Investor
Shares and Institutional Shares. Prime Money Market Fund Institutional Shares
has an investment minimum of $10 million, and is available through this
prospectus. Prime Money Market Fund Investor Shares has an investment minimum of
$3,000, and is available through separate prospectuses (one for individual
investors and one for participants in employer-sponsored retirement or savings
plans). PRIME MONEY MARKET FUND INVESTOR SHARES AND PRIME MONEY MARKET FUND
INSTITUTIONAL SHARES DO NOT HAVE THE SAME EXPENSES; AS A RESULT, THE PERFORMANCE
OF THESE TWO CLASSES WILL DIFFER.
UNLESS OTHERWISE INDICATED, ALL REFERENCES IN THIS PROSPECTUS TO THE FEES,
EXPENSES, OR INVESTMENT PERFORMANCE OF THE FUND RELATE SPECIFICALLY TO THE
INSTITUTIONAL SHARES OF THE FUND.
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.
20
<PAGE> 50
1
FUND PROFILE
The following profile summarizes key features of Vanguard Prime Money Market
Fund Institutional Shares.
INVESTMENT OBJECTIVE
The Fund seeks to provide current income while maintaining liquidity and a
stable share price of $1.
INVESTMENT POLICIES The Fund invests primarily in high-quality, short-term money
market instruments, including certificates of deposit, banker's acceptances,
commercial paper, and other money market securities. To be considered high
quality, a security generally must be rated in one of the two highest
credit-quality categories for short-term securities, by at least two nationally
recognized rating services (or by one, if only one rating service has rated the
security). If unrated, the security must be determined by Vanguard to be of
quality equivalent to those in the two highest credit-quality categories. The
Fund will maintain an average maturity of 90 days or less. For more information
about security selection, see page 5.
PRIMARY RISKS
THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT FALLING SHORT-TERM
INTEREST RATES WILL CAUSE THE FUND'S INCOME -- AND THUS ITS TOTAL RETURN -- TO
DECLINE. INCOME RISK IS GENERALLY HIGH FOR SHORT-TERM SECURITIES. The Fund is
also subject to:
- - Manager risk, which is the chance that poor security selection will cause the
Fund to underperform other funds with similar investment objectives.
- - Credit risk, which is the chance that the issuer of a security 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.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN 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 years and since inception compare with those of a broad-based money market
index. Keep in mind that the Fund's past performance does not indicate how it
will perform in the future.
ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
8.43% 6.26% 3.88% 3.18% 4.27% 6.01% 5.46% 5.61% 5.57%
</TABLE>
NOTE: Prior to October 28, 1995, total returns are for Vanguard Institutional
Money Market Portfolio.
During the period shown in the bar chart, the highest return for a
calendar quarter was 2.08% (quarter ended June 30, 1990) and the lowest return
for a quarter was 0.77% (quarter ended June 30, 1993).
<PAGE> 51
2
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1998
-----------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-----------------------------------------------------------------------
<S> <C> <C> <C>
Vanguard Prime Money Market Fund
Institutional Shares 5.57% 5.38% 5.49%
Lipper Money Market Fund Average 5.30 5.11 5.23
-----------------------------------------------------------------------
*October 3, 1989.
-----------------------------------------------------------------------
</TABLE>
If you would like to know the current seven-day yield for the Fund, call
Vanguard's Investor Information Department at 1-800-662-7447 (SHIP).
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 Prime Money Market Fund Institutional Shares' expense ratio
in fiscal year 1998 was 0.15%, or $1.50 per $1,000 of average net assets. The
average taxable money market mutual fund had expenses in 1998 of 0.40%, or $4.00
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 November 30, 1998.
<TABLE>
<S> <C>
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: 0.11%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.15%
</TABLE>
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.
<TABLE>
<CAPTION>
-----------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------------
<S> <C> <C> <C> <C>
$15 $48 $85 $192
-----------------------------------------
</TABLE>
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> 52
3
ADDITIONAL INFORMATION
DIVIDENDS
Declared daily and distributed on the first business day of each month
INVESTMENT ADVISER
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
INCEPTION DATE*
October 3, 1989
NET ASSETS AS OF NOVEMBER 30, 1998
$1.1 billion (for Institutional Shares)
SUITABLE FOR IRAS
Yes
MINIMUM INITIAL INVESTMENT
$10 million
NEWSPAPER ABBREVIATION**
VangPrInst
VANGUARD FUND NUMBER
066
CUSIP NUMBER
922906508
TICKER SYMBOL
VMRXX
*The Institutional Shares originally were created as a separate fund. On October
28, 1995, they became a separate share class of the Prime Money Market Fund.
**Money market funds are listed separately from other newspaper mutual fund
listings.
================================================================================
A WORD ABOUT RISK
This prospectus describes the risks you would face as an investor in Vanguard
Prime Money Market 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.
Look for this [FLAG] 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 Vanguard Prime Money Market Fund may be a suitable investment for you if:
- - You wish to add a money market fund to your existing holdings, which could
include other cash -- as well as stock, bond, and tax-exempt -- investments.
- - You want an investment that does not fluctuate in value.
- - You want current income.
COSTS AND MARKET TIMING The Vanguard Prime Money Market Fund serves both
short- and long-term investor needs; however, other Vanguard funds are intended
for long-term investors only. Investors who engage in excessive in-and-out
trading activity generate additional costs that are borne by all of a fund's
shareholders. To minimize these costs, Vanguard's stock, bond, and balanced
funds have adopted policies to discourage short-term trading -- which includes
switching back and forth from the Prime Money Market Fund. Please check other
Vanguard funds' prospectuses for specifics on the trading limitations of those
funds. Also, all Vanguard funds, including this Fund, reserve the right to stop
offering shares at any time or to reject specific purchase requests.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.
<PAGE> 53
4
PRIMARY INVESTMENT POLICIES
This section explains the policies that the investment adviser uses in pursuit
of the Fund's objectives -- income, liquidity, and stability of principal. It
also explains how the adviser implements these policies. In addition, this
section discusses several important risks -- income risk, manager risk, and
credit 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.
PLAIN TALK ABOUT
MONEY MARKET INSTRUMENTS
The term "money market instruments" refers to a variety of short-term
investments, usually with a maturity of 13 months or less. Some common types are
Treasury bills and notes, which are securities issued by the U.S. government;
commercial paper, which is a promissory note issued by a large company or
financial firm; banker's acceptances, which are credit instruments guaranteed by
a bank; and negotiable certificates of deposit, which are issued by banks in
large denominations.
MARKET EXPOSURE
The Fund's primary policy is to invest in very high-quality money market
instruments -- also known as cash reserves -- that are considered short-term
(that is, they mature in 13 months or less). The Fund will maintain an average
maturity of 90 days or less.
[FLAG] THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE POSSIBILITY THAT THE
FUND'S DIVIDENDS (THAT IS, INCOME) WILL DECLINE BECAUSE OF FALLING
INTEREST RATES. BECAUSE THE FUND'S INCOME IS BASED ON SHORT-TERM
INTEREST RATES -- WHICH CAN FLUCTUATE SIGNIFICANTLY OVER SHORT PERIODS
-- INCOME RISK IS EXPECTED TO BE HIGH.
To illustrate how the yields of short-term securities can fluctuate as
interest rates rise and fall, the following chart shows month-end yields for
short-term securities (as represented by 90-day Treasury bills) and long-term
securities (as represented by 30-year U.S. Treasury bonds) over the past five
years.
SHORT-TERM AND LONG-TERM MONTH-END YIELDS (1994 - 1998)
[LINE CHART]
These yields reflect past performance; you should not regard them as an
indication of future returns from either Treasury bills or bonds as a whole, or
the Fund in particular.
PLAIN TALK ABOUT
CREDIT QUALITY
A money market instrument's credit quality depends upon the issuer's ability to
pay interest on the security 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) the
security's issuer will default, or fail to meet its payment obligations. Direct
U.S. Treasury obligations (that is, securities backed by the U.S. government)
carry the highest credit ratings. All things being equal, money market
instruments with greater credit risk offer higher yields.
<PAGE> 54
5
PLAIN TALK ABOUT
CONVERSION PERIOD FOR MONEY MARKET FUNDS
Before the payment you make to Vanguard can be invested in a money market fund,
it must be converted to "federal funds," which are Federal Reserve deposits that
banks and other financial institutions draw upon to meet short-term cash needs
- -- and which fund advisers must use to pay for the securities they buy. Vanguard
converts your money market investment to federal funds, which usually takes one
business day. Because of this conversion period, your money market account will
be credited on the business day following the day your investment is received.
You will begin earning dividends on your investment on the next calendar day.
For example, if your check is received on a Thursday before the close of trading
on the New York Stock Exchange, your account will be credited the next business
day (Friday) and you will begin earning dividends on Saturday.
SECURITY SELECTION
Vanguard Fixed Income Group, adviser to the Fund, selects high-quality money
market instruments. The Fund is managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT THE
ADVISER MAY DO A POOR JOB OF SELECTING SECURITIES.
The Prime Money Market Fund invests primarily in certificates of deposit,
banker's acceptances, commercial paper, and other money market securities.
Commercial paper must be rated Prime-1 by Moody's Investors Service or A-1 by
Standard & Poor's Corporation. Securities that are unrated must be issued by a
company with a debt rating of A3 or better by Moody's or A- or better by
Standard & Poor's. The Fund also invests in short-term corporate, state, and
municipal obligations rated A3 or better by Moody's or A- or better by Standard
& Poor's.
Among the certificates of deposit typically held by the Fund are Eurodollar
and Yankee obligations, which are primarily certificates of deposit issued in
U.S. dollars by foreign banks and foreign branches of U.S. banks. Eurodollar and
Yankee obligations have the same risks, such as income risk and credit risk, as
U.S. money market instruments. Other risks of Eurodollar and Yankee obligations
include the possibility that a foreign government will not let U.S.
dollar-denominated assets leave the country; the possibility that the banks that
issue Eurodollar obligations may not be subject to the same regulations as U.S.
banks; and the possibility that adverse political or economic developments will
affect investments in a foreign country. Before the Fund's adviser selects a
Eurodollar or Yankee obligation, however, any foreign issuer undergoes the same
credit-quality analysis and tests of financial strength as the issuers of
domestic securities.
The Fund also invests in securities issued by U.S. government agencies
whose interest and principal payments typically are not backed by the full faith
and credit of the U.S. government. These agencies include, among others, the
Federal Home Loan Bank, the Federal National Mortgage Association, and the
Federal Home Loan Mortgage Corporation.
[FLAG] THE FUND IS SUBJECT, TO A LIMITED EXTENT, TO CREDIT RISK, WHICH IS THE
POSSIBILITY THAT THE ISSUER OF A SECURITY WILL FAIL TO PAY INTEREST AND
PRINCIPAL IN A TIMELY MANNER.
While the credit quality of the Fund's portfolio securities is very high,
the Fund faces more risk because it invests in money market securities issued by
private companies. It is possible that one or more of these companies may
experience financial difficulties and, as a result, may fail to pay interest to
the Fund or return the Fund's principal when repayment is due.
Also, bear in mind that while the Fund invests in high-quality money market
instruments, the Fund is not insured or guaranteed by the FDIC or any other
agency of the U.S. government.
<PAGE> 55
6
PLAIN TALK ABOUT
REPURCHASE AGREEMENTS
A means of investing money for a short period, repurchase agreements are
contracts in which a U.S. commercial bank or securities dealer sells government
securities and agrees to repurchase the securities on a specific date (normally
the next business day) and at a specific price.
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value, or interest rate, is based on
(or "derived" from) a traditional security (such as a stock or bond), a money
market benchmark (such as U.S. Treasury bill rates or the Federal Funds
Effective Rate), an asset (such as a commodity like gold), or a market index
(such as the S&P 500 Index).
[FLAG] THE FUND RESERVES THE RIGHT TO INVEST IN REPURCHASE AGREEMENTS, WHICH
ARE SUBJECT TO SPECIFIC RISKS.
Repurchase agreements carry several risks. For instance, if the seller is
unable to repurchase the securities as promised, the Fund may experience a loss
when trying to sell the securities to another person. Or, if the seller becomes
insolvent, a bankruptcy court may determine that the securities do not belong to
the Fund and order that the securities be sold to pay off the seller's debts.
The Fund's adviser believes that these risks can be controlled through careful
security selection and monitoring.
[FLAG] THE FUND RESERVES THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN
FLOATING-RATE SECURITIES, WHICH ARE TRADITIONAL TYPES OF DERIVATIVES.
A floating-rate security's interest rate, as the name implies, is not set;
instead, it fluctuates periodically. Generally, the security's yield is based on
a U.S. dollar-based interest-rate benchmark such as the Federal Funds Rate, the
90-day Treasury bill rate, or the London Interbank Offered Rate (LIBOR). These
securities reset their yields on a periodic basis (for example, daily, weekly,
or quarterly) and are closely correlated to changes in money market interest
rates.
The Fund will not use derivatives for speculative purposes or as leveraged
investments that magnify the risks of an investment.
In addition, the Fund may invest up to 10% of its net assets in illiquid
securities. Illiquid securities are securities that cannot be readily resold or
converted into cash.
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 distinct investment portfolios holding assets worth
more than $450 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.
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> 56
7
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 Prime Money Market
Fund. For the fiscal year ended November 30, 1998, the investment advisory
expenses for the Fund represented an effective annual rate of 0.01% of its
average net assets.
The Group places all orders for purchases and sales of Fund securities, and
seeks to obtain the best available price and most favorable execution with
respect to all transactions.
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 the year 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
THE FUND'S ADVISER
Vanguard Fixed Income Group provides investment advisory services to more than
40 Vanguard funds; as of November 30, 1998, the Group managed more than $125
billion in assets.
The managers responsible for the Fund's investments are:
IAN A. MACKINNON, Managing Director of Vanguard; has worked in investment
management since 1974; primary responsibility for Vanguard's internal
fixed-income policy and strategy since 1981; B.A., Lafayette College; M.B.A.,
Pennsylvania State University.
ROBERT F. AUWAERTER, Principal of Vanguard and Fund Manager; has worked in
investment management since 1978; has managed portfolio investments since 1979;
B.S., University of Pennsylvania; M.B.A., Northwestern University.
JOHN HOLLYER, Principal of Vanguard and Fund Manager; has worked in
investment management since 1987; has managed portfolio investments since 1989;
B.S., University of Pennsylvania.
DAVID R. GLOCKE, Principal of Vanguard and Fund Manager; has worked in
investment management since 1991; has managed portfolio investments since 1997;
B.S., University of Wisconsin.
Mr. Auwaerter, Mr. Hollyer, and Mr. Glocke manage the Fund on a day-to-day
basis. Mr. MacKinnon is responsible for setting the Fund's broad investment
policies and for overseeing the Fund Managers.
<PAGE> 57
8
DIVIDENDS AND TAXES
As a shareholder, you are entitled to your share of the Fund's net income
(interest less expenses). The Fund's income dividends accrue daily and are
distributed monthly. You can choose to receive your income distributions in
cash, or you can have them automatically reinvested in more shares of the Fund.
In either case, these distributions are taxable to you. It is important to note
that distributions that are declared in December -- if paid to you by the end of
January -- are taxed as if they had been paid in December. Vanguard will send
you a statement each year showing the tax status of all of your distributions.
- - Distributions of dividends may be subject to state and local taxes as well.
However, depending on your state's tax rules, the portion of the Fund's
dividends that come from U.S. Treasury securities and other "direct" U.S.
Treasury obligations may be exempt from state and local income taxes. The
Fund will notify you each year how much, if any, of your distribution may
qualify for this exemption.
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 the interest the fund earns from its money market 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.
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 one or more of the Funds.
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). The Fund's
NAV is expected to remain at a constant $1. Although the stable share price is
not guaranteed, the Fund is managed and securities are purchased to maintain
that price.
The instruments held by the Fund are valued on the basis of amortized cost,
which does not take into account unrealized capital gains or losses.
Newspapers typically list money market fund yields weekly, separately from
other listings for mutual funds. Different newspapers use different
abbreviations for the Fund, but the most common is VangPrInst.
<PAGE> 58
9
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 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). 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.
<TABLE>
<CAPTION>
VANGUARD PRIME MONEY MARKET FUND
INSTITUTIONAL SHARES
------------------------------------------------
YEAR ENDED NOVEMBER 30,
-------------------------------- OCT. 28* TO
1998 1997 1996 NOV. 30, 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
INVESTMENT OPERATIONS
Net Investment Income .055 .054 .054 .005
Net Realized and Unrealized Gain (Loss)
on Investments -- -- -- --
------------------------------------------------
Total from Investment Operations .055 .054 .054 .005
------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.055) (.054) (.054) (.005)
Distributions from Realized Capital Gains -- -- -- --
------------------------------------------------
Total Distributions (.055) (.054) (.054) (.005)
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
==============================================================================================
TOTAL RETURN 5.61% 5.59% 5.49% 0.53%
==============================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 1,143 $ 951 $ 910 $ 793
Ratio of Total Expenses to
Average Net Assets 0.15% 0.15% 0.15% 0.15%**
Ratio of Net Investment Income to
Average Net Assets 5.46% 5.44% 5.35% 5.65%**
==============================================================================================
</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.
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1998 with a net asset value (price) of $1 per share.
During the year, the Fund earned $.055 per share from investment income
(interest and dividends).
Shareholders received $.055 per share in the form of dividend
distributions. A portion of each year's distributions may come from the prior
year's income.
The earnings ($.055 per share) minus the distributions ($.055 per share)
resulted in a share price of $1 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 5.61% for the year.
As of November 30, 1998, the Fund's Institutional Shares had $1.1 billion
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 5.46% of its average net
assets.
"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> 59
10
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 [book]. 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 [CHECK]
Method for drawing money from your account by writing a check for $250 or more.
VANGUARD AUTOMATIC EXCHANGE SERVICE(TM) [BOOK]
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) [BOOK]
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 [COMPUTER]
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 [BOOK]
Invest assets held in an existing personal trust.
FOR AN ORGANIZATION
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
<PAGE> 60
11
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 share price (net asset value)
after Vanguard receives your request, which should be $1 per share. Before your
payment can be used to purchase Fund shares, it must be converted to federal
funds, which usually takes one business day. ("Federal funds" are Federal
Reserve deposits that banks and other financial institutions draw upon to meet
short-term cash needs; fund advisers must use federal funds to pay for the
securities they buy.) Because of this conversion period, your fund account will
be credited on the business day following the day we receive your check. You
will begin earning dividends on your investment on the next calendar day. For
example, if we receive your check before the close of trading on the New York
Stock Exchange (generally 4 p.m. Eastern time) on a Thursday, your account will
be credited the next business day (Friday) and you will begin earning dividends
on Saturday.
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 [WIRE]
Call your assigned Service Associate to arrange your wire transaction.
Wire to:
FRB ABA 021001088
Marine Midland Bank, New York
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
Vanguard Prime Money Market Fund Institutional Shares - 66
[Account number, or temporary number for a new account]
[Registered account owner/s]
[Registered address]
If you buy fund shares through a federal funds wire, your investment begins
earning dividends the next calendar day. You can begin earning dividends
immediately if you notify Vanguard by 10:45 a.m. Eastern time that you intend to
make a wire purchase that day.
BY MAIL TO . . . [ENVELOPE]
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> 61
12
BUYING SHARES (continued)
Make your check payable to: The Vanguard Group - 66
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.
BY TELEPHONE TO [TELEPHONE]
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.
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 14.
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 processed and a confirmation number given, the
transaction CANNOT be canceled.
<PAGE> 62
13
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.
ONLINE REQUESTS [COMPUTER GRAPHIC]
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 [TELEPHONE GRAPHIC]
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:
[CHECKMARK] The ten-digit account number.
[CHECKMARK] The name and address exactly as registered on the account.
[CHECKMARK] The primary Social Security or employer identification number as
registered on the account.
[CHECKMARK] 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 [ENVELOPE GRAPHIC]
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 [CHECK GRAPHIC]
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.
<PAGE> 63
14
REDEEMING SHARES (continued)
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 [WIRE GRAPHIC]
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:
[CHECKMARK] The Fund name and account number.
[CHECKMARK] The amount of the transaction (in dollars or shares).
[CHECKMARK] Signatures of all owners exactly as registered on the account (for
mail requests).
[CHECKMARK] Signature guarantees (if required).*
[CHECKMARK] Any supporting legal documentation that may be required.
[CHECKMARK] 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> 64
15
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 [BOOK]
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 January and July for this Fund.
TAX STATEMENTS
Generally mailed in January; report previous year's dividend distributions, and
proceeds from the sale of shares.
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> 65
16
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> 66
GLOSSARY OF INVESTMENT TERMS
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
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.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
LIQUIDITY
The degree of a security's marketability (that is, how quickly the security can
be sold at a fair price and converted to cash).
MONEY MARKET FUND
A mutual fund that seeks to provide income, liquidity, and a stable share price
by investing in very short-term, liquid investments.
MONEY MARKET INSTRUMENTS
Short-term, liquid investments (usually with a maturity of 13 months or less)
which include U.S. Treasury bills, bank certificates of deposit (CDs),
repurchase agreements, commercial paper, and banker's acceptances.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
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.
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> 67
[The Vanguard Group Logo]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about Vanguard Prime Money Market 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 the Vanguard
Money Market 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 Money Market 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 2600
VALLEY FORGE, PA 19482-2600
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: 811-2554
(C) 1999 THE VANGUARD GROUP, INC.
ALL RIGHTS RESERVED.
VANGUARD MARKETING CORPORATION, DISTRIBUTOR.
I066N - 03/19/1999
<PAGE> 68
PART B
VANGUARD MONEY MARKET RESERVES
(THE "TRUST")
STATEMENT OF ADDITIONAL INFORMATION
MARCH 19, 1999
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated March 19, 1999). To obtain the Prospectus
or an additional Annual Report to Shareholders, which contains the Funds'
financial statements as hereby incorporated by reference, please call the
Investor Information Department:
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Description of the Trust.................................... B-1
Investment Policies......................................... B-3
Fundamental Investment Limitations.......................... B-4
Yield and Total Return...................................... B-6
Calculation of Yield........................................ B-7
Share Price................................................. B-8
Purchase of Shares.......................................... B-8
Redemption of Shares........................................ B-8
Performance Measures........................................ B-9
Management of the Trust..................................... B-11
Financial Statements........................................ B-14
Description of Securities and Ratings....................... B-15
</TABLE>
DESCRIPTION OF THE TRUST
ORGANIZATION
The Trust was organized as Whitehall Money Market Trust in 1974 before
becoming a Maryland corporation in 1985. It then reorganized as a Delaware
business trust in May, 1998. Prior to its reorganization as a Delaware business
trust, the Trust was known as Vanguard Money Market Reserves, Inc. The Trust is
registered with the United States Securities and Exchange Commission under the
Investment Company Act of 1940 (the "1940 Act") as an open-end, diversified
management investment company. It currently offers the following funds and
classes of shares:
Vanguard Federal Money Market Fund
Vanguard Prime Money Market Fund: Investor Shares and Institutional Shares
(individually, the "Fund"; collectively, the "Funds")
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. First Union National Bank, PA4943, 530 Walnut Street,
Philadelphia, Pennsylvania 19106, serves as the Trust's custodian. The custodian
is responsible for maintaining the Funds' 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 accountants.
The accountants audit the Trust's financial statements and provide other related
services.
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<PAGE> 69
TRANSFER AND DIVIDEND-PAYING AGENT. The Funds' 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 mutual 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
provides that shareholders of a business trust are entitled to the same
limitations 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
remaining 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
dividends or other distributions declared for such fund. No shares have priority
or preference over any other shares of the same fund with respect to
distributions. Distributions will be made from the assets of a fund, and will be
paid ratably to all shareholders of the fund (or class) according to the number
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 classes of
the same fund based upon differences in the way that expenses are allocated
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 material
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 circumstances,
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 fractional 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.
LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be
entitled to receive a pro rata share of the net assets of the applicable fund of
the Trust.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with shares
of the Trust.
CONVERSION RIGHTS. Shareholders of the Trust may convert their shares into
another class of shares of the same series upon the satisfaction of any then
applicable eligibility requirements.
REDEMPTION PROVISIONS. The Trust's redemption provisions are described in
its current prospectus and elsewhere in this Statement of Additional
Information.
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 qualifies as a "regulated investment company" 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, a fund must comply with
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<PAGE> 70
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 addition, a fund could be required to
recognize unrealized gains, pay substantial 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 objective and policies set
forth in the Trust's Prospectus:
REPURCHASE AGREEMENTS. The Prime and Federal Money Market Funds may invest
in repurchase agreements with commercial banks, brokers or dealers either for
defensive purposes due to market conditions or to generate income from their
excess cash balances. A repurchase agreement is an agreement under which the
Fund acquires a fixed-income security (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 instrument. 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 repurchased. In addition, the Trust's Board of Trustees will monitor a
Fund's repurchase agreement transactions generally and will establish guidelines
and standards for review by the investment adviser of the creditworthiness of
any bank, broker or dealer party to a repurchase agreement with the 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
underlying security at a time when the value of the security has declined, the
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
underlying security is collateral for a loan by the Fund 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 the 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
qualified institutional investors (typically brokers, dealers, banks or other
financial institutions) who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment
securities, a Fund attempts to increase its net investment income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities 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 Investment Company Act of 1940, and the
Rules and Regulations or interpretations of the Securities and Exchange
Commission (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 collateral whenever the
price of the securities loaned rises (i.e., the borrower "marks to the market"
on a daily basis), (c) the loan be made subject to termination by the 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 interest bearing short-term
investments), any distribution on the loaned securities and any increase in
their market value. Loan arrangements made by the Fund will comply with all
other applicable regulatory requirements, including the rules of
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<PAGE> 71
the New York Stock Exchange, which presently require the borrower, 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 review by the Trust's Board of
Trustees.
VANGUARD INTERFUND LENDING PROGRAM. The SEC has issued an exemptive order
permitting the Funds to participate in Vanguard's interfund lending program.
This program allows the Vanguard funds to borrow money from and loan money to
each other for temporary or emergency purposes. The program is subject 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 transaction. 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 objective 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 SEC's exemptive order.
ILLIQUID SECURITIES. Each Fund may invest up to 10% 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
SEC 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
investment adviser determines the liquidity of restricted securities on a daily
basis, the Board oversees and retains ultimate responsibility for the adviser's
decisions. Several factors the Board considers in monitoring these decisions
include the valuation of a security, the availability of qualified institutional
buyers, and the availability of information about the security's issuer.
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 holders
of a majority of the affected Fund's shares. For these purposes, a "majority" 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
Fund's net asset value are present or represented by proxy; or (ii) more than
50% of the Fund's net asset value.
BORROWING. The 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 borrow to increase income (leveraging),
but only to facilitate redemption requests which might otherwise require
untimely dispositions of portfolio securities. When borrowing exceeds 5% of the
Fund's net assets, the Fund will repay all borrowings before making additional
investments, and interest paid on such borrowings will reduce net income.
COMMODITIES. The Fund may not invest in commodities or commodity
contracts.
DIVERSIFICATION. The Fund may not 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. The Fund may, however,
invest in a single issuer as permitted by the Securities and Exchange Commission
(which currently permits a money market
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<PAGE> 72
fund to invest up to 25% of its total assets in the highest-quality securities
of a single issuer for a period of up to three business days).
ILLIQUID SECURITIES. The Fund may not acquire any security if, as a
result, more than 10% of its net assets would be invested in securities that are
illiquid.
INDUSTRY CONCENTRATION. The Fund may not invest more than 25% of its total
assets in any one industry, provided that there is no limitation with respect to
investments in United States Treasury Bills, other obligations issued or
guaranteed by the Federal Government, its agencies and instrumentalities or
certificates of deposit or banker's acceptances of domestic institutions.
INVESTING FOR CONTROL. The Fund may not invest in a company for purposes
of controlling its management.
INVESTMENT COMPANIES. The Fund may not invest in any other investment
company, except through a merger, consolidation or acquisition of assets, or to
the extent permitted by Section 12 of the 1940 Act. Investment companies whose
shares the Fund acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.
LOANS. The Fund may not make loans to other persons, except by the
purchase of obligations in which the Fund is authorized to invest, or through
Vanguard's interfund lending program; provided, however, that the Fund may not
enter into repurchase agreements if, as a result thereof, more than 10% of the
net assets of any Fund of the Trust (taken at current value) would be subject to
repurchase agreements maturing in more than seven days.
MARGIN. The Fund may not purchase securities on margin or sell securities
short.
OIL, GAS, MINERALS. The Fund may not invest in interests in oil, gas or
other mineral exploration or development programs.
PLEDGING ASSETS. The Fund may pledge, mortgage or hypothecate its assets
in an amount up to 15% of its net assets, but only to secure borrowings for
temporary or emergency purposes.
PUT, CALL, STRADDLE, SPREAD OPTIONS. The Fund may not write or invest in
put, call, straddle, or spread options.
REAL ESTATE. The Fund may not invest directly in real estate, or real
estate investment trust securities.
SENIOR SECURITIES. The Fund may not issue senior securities, except in
compliance with the 1940 Act.
UNDERWRITING. The Fund may not engage in the business of underwriting
securities issued by other persons. The Fund will not be considered an
underwriter when disposing of its investment securities.
The above-mentioned investment limitations are considered at the time
investment securities are purchased.
None of these limitations prevents a Fund from participating in The
Vanguard Group ("Vanguard"). Because the Trust is a member of the Group, the
Funds may own securities issued by Vanguard, make loans to Vanguard, and
contribute to Vanguard's costs or other financial requirement. See "Management
of the Trust" for more information.
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<PAGE> 73
YIELD AND TOTAL RETURN
The yield of each Fund of the Trust for the 7-day period ended November 30,
1998 is set forth below. Yields are calculated daily for each Fund.
<TABLE>
<S> <C>
Prime Money Market Fund Investor Shares..................... 4.98%
Prime Money Market Fund Institutional Shares................ 5.16%
Federal Money Market Fund................................... 4.91%
</TABLE>
The average annual total return of each Fund of the Trust for the one-,
five- and ten-year periods ended November 30, 1998 is set forth below:
<TABLE>
<CAPTION>
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
------------ ------------- --------------
11/30/1998 11/30/1998 11/30/1998
---------- ---------- ----------
<S> <C> <C> <C>
Prime Money Market Fund Investor Shares...... 5.42% 5.17% 5.67%
Prime Money Market Fund Institutional
Shares..................................... 5.61% 5.35% 5.50%*
Federal Money Market Fund.................... 5.35% 5.11% 5.57%
</TABLE>
- ---------------
*Since inception of Vanguard Institutional Money Market Portfolio on October 3,
1989. (This Portfolio became a separate share class of Prime Money Market Fund
on October 28, 1995.)
Total return is computed by finding the average compounded rates of return
over the periods set forth above that would equate an initial amount invested at
the beginning of the periods to the ending redeemable value of the investment.
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 quotations
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 compounded rates of return of a hypothetical investment over
such periods according to the following formula (average annual total return is
then expressed as a percentage):
T = (ERV/P)(1/n)-1
<TABLE>
<S> <C> <C>
Where:
T = average annual total return
P = a hypothetical initial investment of $1,000
n = number of years
= ending redeemable value: ERV is the value, at the end of the
ERV applicable period, of a hypothetical $1,000 investment made
at the beginning of the applicable period.
</TABLE>
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 reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment
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<PAGE> 74
over such periods, according to the following formula (cumulative total return
is then expressed as a percentage):
C = (ERV/P)-1
<TABLE>
<S> <C> <C>
Where:
C = cumulative total return
P = a hypothetical initial investment of $1,000
= ending redeemable value: ERV is the value, at the end of the
ERV applicable period, of a hypothetical $1,000 investment made
at the beginning of the applicable period.
</TABLE>
CALCULATION OF YIELD
The current yield of each Fund is calculated daily on a base period return
of a hypothetical account having a beginning balance of one share for a
particular period of time (generally 7 days). The return is determined by
dividing the net change (exclusive of any capital changes) in such account by
its average net asset value for the period, and then multiplying it by 365/7 to
get the annualized current yield. The calculation of net change reflects the
value of additional shares purchased with the dividends by the Fund, including
dividends on both the original share and on such additional shares. An effective
yield, which reflects the effects of compounding and represents an annualization
of the current yield with all dividends reinvested, may also be calculated for
the Fund by adding 1 to the net change, raising the sum to the 365/7 power, and
subtracting 1 from the result.
Set forth below is an example, for purposes of illustration only, of the
current and effective yield calculations for each of the Funds for the 7-day
base period ended November 30, 1998.
<TABLE>
<CAPTION>
PRIME MONEY PRIME MONEY
MARKET FUND MARKET FUND FEDERAL MONEY
INVESTOR SHARES INSTITUTIONAL SHARES MARKET FUND
--------------- -------------------- -------------
11/30/1998 11/30/1998 11/30/1998
---------- ---------- ----------
<S> <C> <C> <C>
Value of account at beginning of period.............. $1.00000 $1.00000 $1.00000
Value of same account at end of period*.............. 1.00096 1.00099 1.00094
-------- -------- --------
Net Change in account value.......................... $ .00096 $ .00099 $ .00094
Annualized Current Net Yield (Net
Change X 365/7) / average net asset value.......... 4.98% 5.16% 4.91%
Effective Yield [(Net Change)+1](365/7)-1............ 5.11% 5.30% 5.04%
Average Weighted Maturity of Investments............. 76 Days 76 Days 75 Days
</TABLE>
- ---------------
*Exclusive of any capital changes and income other than investment income.
Each Fund seeks to maintain, but does not guarantee, a constant net asset
value of $1.00. The yield of each Fund will fluctuate. The Trust has obtained
private insurance that partially protects the Prime Money Market Fund against
default of principal or interest payments on the instruments it holds, and
against bankruptcy by issuers and credit enhancers of these instruments.
Treasury and other U.S. Government securities held by the Fund are excluded from
this coverage. The annualization of a week's dividend is not a representation by
the Fund as to what an investment in the Fund will actually yield in the future.
Actual yields will depend on such variables as investment quality, average
maturity, the type of instruments the Fund invests in, changes in interest rates
on instruments, changes in the expenses of the Trust and other factors. Yields
are one basis investors may use to analyze the Funds of the Trust, and other
investment vehicles; however, yields of other investment vehicles may not be
comparable because of the factors set forth in the preceding sentence,
differences in the time periods compared, and differences in the methods used in
valuing portfolio instruments, computing net asset values and calculating
yields.
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<PAGE> 75
SHARE PRICE
Each Fund's share price, or "net asset value" per share, is calculated by
dividing the total assets of the Fund, less all liabilities, by the total number
of shares outstanding, except for the Prime Money Market Fund whereby net asset
value is calculated by dividing the net assets attributed to each share class by
the total number of shares outstanding for that share class. The net asset value
is determined as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Exchange is open for trading.
It is the policy of each Fund to attempt to maintain a net asset value of
$1.00 per share for sales and redemptions. The instruments held by the Fund are
valued on the basis of amortized cost, which does not take into account
unrealized capital gains or losses. This involves valuing an instrument at its
cost and thereafter assuming a constant amortization to maturity of any discount
or premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price which the Fund would receive if it sold the
instrument. Such procedures will include a review of the Funds' holdings by the
Trustees, at such intervals as they may deem appropriate, to determine whether
the Funds' net asset value calculated by using available market quotations
deviates from $1.00 per share based on amortized cost. The extent of any
deviation will be examined by the Trustees. If such deviation exceeds 1/2 of 1%,
the Trustees will promptly consider what action, if any, will be initiated. In
the event the Trustees determine that a deviation exists which may result in
material dilution or other unfair results to investors or existing shareholders,
they have agreed to take such corrective action as they regard as necessary and
appropriate, including the sale of fund instruments prior to maturity to realize
capital gains or losses or to shorten average fund maturity; withholding
dividends; making a special capital distribution; redemptions of shares in kind;
or establishing a net asset value per share by using available market
quotations.
The use of amortized cost and the maintenance of the Fund's net asset value
at $1.00 is based on its election to operate under Rule 2a-7 under the 1940 Act.
As a condition of operating under that rule, the Fund must maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of 397 days or less, and invest only in
securities that are determined by methods approved by the Trustees to present
minimal credit risks and that are of high quality as determined by the requisite
rating services, or in the case of an instrument not so rated, determined by
methods approved by the Trustees to be of comparable quality.
PURCHASE OF SHARES
The Trust reserves the right in its sole discretion (i) to suspend the
offerings 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 initial
and subsequent investments for certain fiduciary accounts or under circumstances
where certain economies can be achieved in sales of the Trust's shares.
REDEMPTION OF SHARES
The Trust may suspend redemption privileges for each Fund or postpone the
date of payment (i) during any period that the New York Stock Exchange is
closed, or trading on the Exchange is restricted as determined by the
Commission, (ii) during any period when an emergency exists as defined by the
rules of the Commission as a result of which it is not reasonably practicable
for a Fund to dispose of securities owned by it, or fairly to determine the
value of its assets, and (iii) for such other periods as the Commission may
permit.
No charge is made by a Fund for redemptions; except for wire withdrawals in
amounts less than $5,000 which will be subject to a maximum charge of $5.00. Any
redemption may be more or less than the shareholder's cost depending on the
market value of the securities held by each Fund.
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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.
Vanguard Money Market Reserves may use one or more of the following
unmanaged indexes for comparative performance purposes:
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- includes stocks selected
by Standard & 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 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.
WILSHIRE 5000 EQUITY INDEX -- consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
RUSSELL 1000 VALUE INDEX -- consists of the stocks in the Russell 1000 Index
(comprising the 1000 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.
RUSSELL 3000 STOCK INDEX -- a diversified portfolio of approximately 3,000
common stocks accounting for over 90% of the market value of publicly traded
stocks in the U.S.
RUSSELL 2000 STOCK INDEX -- composed of the 2,000 smallest stocks contained in
the Russell 3000, representing approximately 7% of the Russell 3000 total market
capitalization.
RUSSELL 2000(R) VALUE INDEX -- contains stocks from the Russell 2000 Index with
a less-than-average growth orientation.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia, Asia, and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
LEHMAN LONG-TERM TREASURY BOND INDEX -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX -- consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.
LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX -- is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
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<PAGE> 77
BOND BUYER MUNICIPAL BOND INDEX -- is a yield index on current coupon high-grade
general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield of four high-grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
COMPOSITE INDEX -- 65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index, 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 contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated Baa- or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.6 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 5 and 10
years. The index has a market value of over $700 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 10 years. The index
has a market value of over $900 billion.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of small
company growth funds as defined by Lipper, Inc. Lipper defines a small company
growth fund as a fund that by prospectus or portfolio practice, limits its
investments to companies on the basis of the size of the company. From time to
time, Vanguard may advertise using the average performance and/or the average
expense ratio of the small company growth funds. (This fund category was first
established in 1982. For years prior to 1982, the results of the Lipper Small
Company Growth category were estimated using the returns of the Trusts that
constituted the Group at its inception.)
LIPPER BALANCED FUND AVERAGE -- an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper, Inc.
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
income funds with similar investment objectives and policies, as measured by
Lipper, Inc.
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MANAGEMENT OF THE TRUST
OFFICERS AND TRUSTEES
The Officers of the Trust manage its day-to-day operations and are
responsible 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 Officers 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
address 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 & 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 Committee
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
Research 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; Director
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 Products
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 & Gamble
Co., NACCO Industries (Machinery/Coal/Appliances), and Newfield Exploration Co.
(Energy); formerly, Director and Senior Partner of McKinsey & Co., and President
of New York University.
JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee
Retired Chairman of Nabisco Brands, Inc. (Food Products); retired Vice Chairman
and Director of RJR Nabisco (Food and Tobacco Products); Director of TECO
Energy, Inc., and Kmart Corp.
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 Products);
and Trustee of Vanderbilt University.
- ---------------
*Officers of the Trust are "interested persons" as defined in the Investment
Company Act of 1940.
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<PAGE> 79
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 D. 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 Investment
Company Act of 1940.
THE VANGUARD GROUP
The Trust is a member of The Vanguard Group of Investment Companies, which
consists of more than 35 investment companies (the "Trusts"). Through their
jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"), the Trust and
the other Trusts in The Vanguard Group obtain at cost virtually all of their
corporate management, administrative and distribution services. Vanguard also
provides investment advisory services on an at-cost basis to certain of the
Vanguard Trusts.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Trusts and also
furnishes the Trusts with necessary office space, furnishings and equipment.
Each Trust pays its share of Vanguard's total expenses which are allocated among
the Trusts under methods approved by the Board of Trustees of each Trust. In
addition, each Trust bears its own direct expenses such as legal, auditing and
custodian fees.
The Trust's Officers are also Officers and employees of Vanguard. No
Officer or employee owns, or is permitted to own, any securities of any external
adviser for the Trusts.
Vanguard adheres to a Code of Ethics established pursuant to Rule 17j-1
under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines similar to, and in many
cases more restrictive than, those recommended 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 Trusts.
The amounts which each of the Trusts has invested are adjusted from time to time
in order to maintain the proportionate relationship between each Trust's
relative net assets and its contribution to Vanguard's capital. At November 30,
1998, each Fund had contributed capital to Vanguard representing 0.02% of each
Fund's net assets. The total amount contributed by the Trust was $7,219,000,
which represented 10.3% of Vanguard's capitalization. The Amended and Restated
Funds' Service Agreement provides as follows: (a) each Vanguard Trust may be
called upon to invest up to 0.40% of its current assets in Vanguard and (b)
there is no other limitation on the dollar amount that each Vanguard Trust may
contribute to Vanguard's capitalization.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Trusts by third parties.
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<PAGE> 80
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
advertising, promotional materials and marketing personnel. Distribution
services may also include organizing and offering to the public, from time to
time, one or more new investment companies which will become members of The
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 Trust, and whether to organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Trusts based upon relative net assets. The remaining one
half of those expenses is allocated among the Trusts based upon each Trust's
sales for the preceding 24 months relative to the total sales of the Trusts as a
Group, provided, however, that no Trust's aggregate quarterly rate of
contribution for distribution expenses of a marketing and promotional nature
shall exceed 125% of average distribution expense rate for The Vanguard Group,
and that no Trust shall incur annual distribution expenses in excess of 20/100
of 1% of its average month-end net assets.
During the fiscal years ended November 30, 1996, 1997, and 1998, the Funds
incurred the following approximate amounts of The Vanguard Group's management
(including transfer agency), distribution and marketing expenses.
<TABLE>
<CAPTION>
FUND 1996 1997 1998
---- ----------- ----------- -----------
<S> <C> <C> <C>
Prime Money Market Fund.............................. $60,107,000 $73,028,000 $92,226,000
Federal Money Market Fund............................ 8,264,000 9,567,000 11,651,000
</TABLE>
INVESTMENT ADVISORY SERVICES. Vanguard also provides the Trust and several
other Vanguard Trusts with investment advisory services. These services are
provided on an at-cost basis from a money management staff employed directly by
Vanguard. The compensation and other expenses of this staff are paid by the
Trusts utilizing these services.
During the fiscal years ended November 30, 1996, 1997, and 1998, the Funds
incurred the following approximate amounts of The Vanguard Group's expenses
relating to investment advisory services.
<TABLE>
<CAPTION>
FUND 1996 1997 1998
---- ---------- ---------- ----------
<S> <C> <C> <C>
Prime Money Market Fund................................. $2,557,000 $3,782,000 $3,811,000
Federal Money Market Fund............................... 343,000 489,000 475,000
</TABLE>
TRUSTEE COMPENSATION
The individuals in the following table serve as Trustees of all Vanguard
Trusts, 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.
- 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.
B-13
<PAGE> 81
COMPENSATION TABLE. The following table provides compensation details for
each of the Trustees. For the Trust, 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 fiscal year ended November 30, 1998.
VANGUARD MONEY MARKET RESERVES
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR RETIREMENT
AGGREGATE BENEFITS ACCRUED AS ESTIMATED TOTAL COMPENSATION
COMPENSATION PART OF TRUST ANNUAL BENEFITS FROM ALL VANGUARD TRUSTS
NAMES OF TRUSTEES FROM TRUST EXPENSES UPON RETIREMENT PAID TO 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) $7,486 $1,012 $15,000 $75,000
JoAnn Heffernan Heisen $3,119 $ 440 $15,000 $31,250
Robert E. Cawthorn(2) $3,743 $ 675 $ 6,000 $37,500
Bruce K. MacLaury $7,836 $ 757 $12,000 $70,000
Burton G. Malkiel $7,538 $ 728 $15,000 $75,000
Alfred M. Rankin, Jr. $7,486 $ 533 $15,000 $75,000
John C. Sawhill $7,486 $ 675 $15,000 $75,000
James O. Welch, Jr. $7,486 $ 779 $15,000 $75,000
J. Lawrence Wilson $7,486 $ 562 $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.
FINANCIAL STATEMENTS
The Trust's financial statements as of and for the year ended November 30,
1998, including the financial highlights for each of the five fiscal years in
the period ended November 30, 1998, appearing in the Trust's 1998 Annual Report
to Shareholders, and the report thereon of PricewaterhouseCoopers LLP,
independent accountants, also appearing therein, are incorporated by reference
in this Statement of Additional Information. For a more complete discussion of
the performance, please see the Trust's Annual Report to Shareholders, which may
be obtained without charge.
B-14
<PAGE> 82
DESCRIPTION OF SECURITIES AND RATINGS
A-1 AND PRIME-1 COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by Standard & Poor's has the following
characteristics: (1) liquidity ratios are adequate to meet cash requirements;
(2) long-term senior debt is rated "A" or better; (3) the issuer has access to
at least two additional channels of borrowing; (4) basic earnings and cash flow
have an upward trend with allowance made for unusual circumstances; (5)
typically, the issuer's industry is well established and the issuer has a strong
position within the industry; and (6) the reliability and quality of management
are unquestioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is A-1, A-2, or A-3. The rating Prime-1 is
the highest commercial paper rating assigned by Moody's. Among the factors
considered by Moody's in assigning ratings are the following: (1) evaluation of
the management of the issuer; (2) economic evaluation of the issuer's industry
or industries and the appraisal of speculative-type risks which may be inherent
in certain areas; (3) evaluation of the issuer's products in relation to
competition and customer acceptance; (4) liquidity; (5) amount and quality of
long-term debt; (6) trend of earnings over a period of ten years; (7) financial
strength of a parent company and the relationships which exist with the issuer;
and (8) recognition by the management of obligations which may be present or may
arise as a result of public interest questions and preparations to meet such
obligations.
BOND RATINGS
Bonds rated AA by Standard & Poor's are judged by S&P to be high-grade
obligations, and in the majority of instances differ only in small degrees from
issues rated AAA (the AA rating may be modified by the addition of a plus or
minus sign to show relative standing with the AA category). Bonds rated AAA are
considered by S&P to be the highest grade obligations and possess the ultimate
degree of protection as to principal and interest. Bonds rated Aa by Moody's are
judged by Moody's to be of high quality by all standards. Together with the Aaa
group, they comprise what are generally known as high-grade bonds. They are
rated lower than Aaa bonds because margins of protection may not be as large or
fluctuations of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger.
Moody's also supplies numerical indicators, 1, 2 and 3 to the Aa rating
category. 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.
VARIABLE AMOUNT MASTER DEMAND NOTES
Variable amount master demand notes are demand obligations that permit the
investment of fluctuating amounts at varying market rates of interest pursuant
to an arrangement between the issuer and a commercial bank acting as agent for
the payees of such notes, whereby both parties have the right to vary the amount
of the outstanding indebtedness on the notes. Because variable amount master
demand notes are direct lending arrangements between a lender and a borrower, it
is not generally contemplated that such instruments will be traded, and there is
no secondary market for these notes, although they are redeemable (and thus
immediately repayable by the borrower) at face value, plus accrued interest, at
any time. In connection with a Fund's investment in variable amount master
demand notes, Vanguard's investment management staff will monitor, on an ongoing
basis, the earning power, cash flow and other liquidity ratios of the issuer,
and the borrower's ability to pay principal and interest on demand.
DESCRIPTION OF U.S. GOVERNMENT SECURITIES
As used in the Trust's prospectus, the term "U.S. Government Securities"
refers to a variety of securities which are issued or guaranteed by the United
States Treasury, by various agencies of the United States Government, and by
various instrumentalities which have been established or sponsored by the United
States Government. The term also refers to "repurchase agreements"
collateralized by such securities.
U.S. Treasury Securities are backed by the "full faith and credit" of the
United States. Securities issued or guaranteed by Federal agencies and the 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
B-15
<PAGE> 83
and credit of the United States, the investor must look principally to the
agency or instrumentality issuing or guaranteeing the obligation for ultimate
repayment, and may not be able to assert a claim against the United States
itself in the event the agency or instrumentality does not meet its commitment.
Some of the U.S. Government agencies that issue or guarantee securities
include the Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Maritime Administration, Small
Business Administration, and The Tennessee Valley Authority.
An instrumentality of the U.S. Government is a government agency organized
under Federal charter with government supervision. Instrumentalities issuing or
guaranteeing securities include, among others, Federal Home Loan Banks, the
Federal Land Banks, Central Bank for Cooperatives, Federal Intermediate Credit
Banks, and the Federal National Mortgage Association.
DESCRIPTION OF REPURCHASE AGREEMENTS
Repurchase agreements are transactions by which a person purchases a
security and simultaneously commits to resell that security to the seller (a
member bank of the Federal Reserve System or recognized securities dealer) at an
agreed upon price on an agreed upon date within a number of days (usually not
more than seven) from the date of purchase. The resale price reflects the
purchase price plus an agreed upon market rate of interest which is unrelated to
the coupon rate or maturity of the purchased security. A repurchase agreement
involves the obligation of the seller to pay the agreed upon price, which
obligation is in effect secured by the value of the underlying security.
The use of repurchase agreements involves certain risks. For example, if
the seller of the agreement defaults on its obligation to repurchase the
underlying securities at a time when the value of these securities has declined,
the Fund may incur a loss upon disposition of them. If the seller of the
agreement becomes insolvent and subject to liquidation or reorganization under
the Bankruptcy Code or other laws, a bankruptcy court may determine that the
underlying securities are collateral not within the control of the Fund and
therefore subject to sale by the trustee in bankruptcy. Finally, it is possible
that the Fund may not be able to substantiate its interest in the underlying
securities. While the Trust's management acknowledges these risks, it is
expected that they can be controlled through stringent security selection
criteria and careful monitoring procedures.
EURODOLLAR AND YANKEE OBLIGATIONS
Eurodollar bank obligations are dollar-denominated certificates of deposit
and time deposits issued outside the U.S. capital markets by foreign branches of
banks and by foreign banks. Yankee bank obligations are dollar-denominated
obligations issued in the U.S. capital markets by foreign banks.
Eurodollar and Yankee obligations are subject to the same risks that
pertain to domestic issues, notably credit risk, market risk and liquidity risk.
Additionally, Eurodollar (and to a limited extent, Yankee) obligations are
subject to certain sovereign risks. One such risk is the possibility that a
sovereign country might prevent capital, in the form of dollars, from flowing
across their borders. Other risks include: adverse political and economic
developments; the extent and quality of government regulation of financial
markets and institutions; the imposition of foreign withholding taxes; and
expropriation or nationalization of foreign issuers. However, Eurodollar and
Yankee obligations will undergo the same credit analysis as domestic issues in
which the Prime Money Market Fund invests, and will have at least the same
financial strength as the domestic issuers approved for the Prime Money Market
Fund.
B-16
