- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-57689) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 39
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 43
VANGUARD MUNICIPAL BOND FUNDS
(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 filing become effective on February 26, 1999
pursuant to paragraph (a) of Rule 485.
Approximate Date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes effective.
We have elected to register an indefinite number of shares pursuant to Rule
24f-2 under the Investment Company Act of 1940. We filed our Rule 24f-2 Notice
for the year ended October 31, 1998 on o, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
VANGUARD MUNICIPAL BOND FUNDS
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<S> <C> <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 A Word About Risk; Who Should Invest;
Risks.................................. Primary Investment Strategies
Item 5. Management's Discussion of Fund
Performance............................ Herein incorporated by reference from
Registrant's Annual Report to
Shareholders Dated August 31, 1998
filed with the Securities & Exchange
Commission's EDGAR system on o.
Item 6. Management, Organization, and Capital
Structure.............................. The Trust and Vanguard: Investment
Adviser
Item 7. Shareholder Information................ Share Price; Dividends, Capital Gains,
and Taxes; Investing with Vanguard
Item 8. Distribution Arrangements.............. Not Applicable
Item 9. Financial Highlights Information....... Financial Highlights
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<S> <C> <C>
Item 10. Cover Page and Table of Contents....... Cover Page; Table of Contents
Item 11. Fund History........................... Description of the Trust
Item 12. Description of the Fund and Its
Investments and Risks.................. Investment Policies; Description of the
Trust; 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; Valuation of
Shares
Item 18. Purchase, Redemption, and Pricing of
Shares................................. Purchase of Shares; Redemption of
Shares; Valuation of Shares
Item 19. Taxation of the Fund................... Description of the Trust
Item 20. Underwriters........................... Not Applicable
Item 21. Calculations of Performance Data....... Calculation of Yield; Yield and Total
Return
Item 22. Financial Statements................... Financial Statements
</TABLE>
<PAGE>
Vanguard Municipal Bond Funds
Prospectus
February 26, 1999
A Group of Federal Tax-Exempt Mutual Funds
Contents
1 An Introduction to Tax-Exempt Investing
2 Fund Profiles
2 Vanguard Tax-Exempt Money Market Fund
5 Vanguard Short-Term Tax-Exempt Fund
7 Vanguard Limited-Term Tax-Exempt Fund
9 Vanguard Intermediate-Term Tax-Exempt Fund
11 Vanguard Long-Term Tax-Exempt Fund
13 Vanguard Insured Long-Term Tax-Exempt Fund
15 Vanguard High-Yield Tax-Exempt Fund
17 More on the Funds
17 Additional Risk Information
19 A Note About Insurance
20 Costs and Market-Timing
20 Turnover Rate
20 Other Investment Policies and Risks
21 The Funds and Vanguard
22 Investment Adviser
22 Year 2000 Challenge
23 Dividends, Capital Gains, and Taxes
23 Share Price
24 Financial Highlights
28 Investing with Vanguard
28 Services and Account Features
29 Types of Accounts
29 Buying Shares
31 Redeeming Shares
35 Transferring Registration
35 Fund and Account Updates
Glossary (inside back cover)
Why Reading This Prospectus Is Important
This prospectus explains the objective, risks, and strategies of each of the
Vanguard Municipal Bond Funds. To highlight terms and concepts important to
mutual fund investors, we have provided "Plain Talk(R)" explanations along the
way. Reading the prospectus will help you to decide which Fund, if any, is the
right investment for you. We suggest that you keep it for future reference.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
<PAGE>
1
This prospectus provides information about the seven Vanguard Municipal
Bond Funds. After the introduction below, you'll find profiles that summarize
key features of each Fund. Following the profiles, there is important additional
information common to all of the Funds.
An Introduction to Tax-Exempt Investing
What are municipal bond funds?
Municipal bond funds invest in interest-bearing securities issued by state and
local governments to support their financial needs or to finance public
projects. A municipal bond--like a bond issued by a corporation or the U.S.
government--obligates the issuer to pay the bondholder a fixed amount of
interest periodically, and to repay the principal value of the bond on a
specific maturity date.
Unlike most other bonds, however, municipal bonds pay interest that is
exempt from federal income taxes and, in some cases, also from state and local
taxes. Municipal bonds--and municipal bond funds--can therefore be advantageous
to investors in higher tax brackets. However, because the interest is
tax-exempt, municipal bond yields typically are lower than yields on taxable
bonds and bond funds with comparable maturity ranges.
Taxable versus tax-exempt funds
Because the yields on municipal bond funds and other tax-exempt funds are
usually lower than those on taxable bond funds, you may not always profit from a
tax-exempt investment. To determine whether a tax-exempt fund is more suitable
for you than a taxable fund, see page 17 for a "Plain Talk" on taxable versus
tax-exempt investments.
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.
There is no guarantee that all of a tax-exempt fund's income will remain
exempt from federal or state income taxation. Income from municipal bonds
purchased by a tax-exempt fund could be declared taxable due to unfavorable
changes in tax laws, adverse IRS interpretations, or certain unanticipated
conduct of the bond beneficiary.
<PAGE>
2
Fund Profile--Vanguard Tax-Exempt Money Market Fund
The following profile summarizes key features of Vanguard Tax-Exempt Money
Market Fund.
INVESTMENT OBJECTIVE
The Fund is a municipal bond fund that seeks to provide a high level of
tax-exempt current income, while maintaining a stable net asset value of $1 per
share.
INVESTMENT STRATEGIES
The Fund invests in a variety of high-quality, short-term municipal securities.
The Fund seeks to provide a stable net asset value of $1 per share by investing
in securities with maturities of 397 days or less, and by maintaining an average
maturity of 90 days or less. To be considered high quality, a security is
generally rated in one of the two highest credit ratings 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 ratings categories. For more information on credit
quality, see "Additional Risk Information" under "More on the Funds".
PRIMARY RISKS
The Fund is subject to income risk, which is the chance that falling 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:
o Credit risk, which is the chance that a bond issuer will fail to repay
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.
o Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
It is important to note that the Fund seeks to maintain, but does not
guarantee, a stable net asset value of $1 per share. In addition, an investment
in the Fund is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. 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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Fund's return for the most recent calendar quarter ended December 31, 1998,
was _____%.
- --------------------------------------------------------------------------------
<PAGE>
3
During the period shown in the bar chart, the highest return for a calendar
quarter was o% (quarter ending _____________ ) and the lowest return for a
quarter was -o% (quarter ending _____________ ).
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Vanguard Tax-Exempt Money Market Fund o% o% o%
Lipper Tax-Exempt Money Market Average o o o
- --------------------------------------------------------------------------------
If you would like to know the current dividend yield for the Fund, please
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 Tax-Exempt Money Market Fund. The expenses shown under Annual
Fund Operating Expenses are based upon those incurred in the fiscal year ended
October 31, 1998.
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: o%
12b-1 Distribution Fees: None
Other Expenses: o%
Total Annual Operating Expenses: o%
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
- --------------------------------------------------------------------------------
$o $o $o $o
- --------------------------------------------------------------------------------
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>
4
Fund Profile--Vanguard Tax-Exempt Money Market Fund (continued)
Additional Information
Dividends
Declared daily and paid on the first business day of each month
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since 1981
Inception Date
June 10, 1980
Net Assets as of October 31, 1998
$o billion
Suitable for IRAs
No
Minimum Initial Investment
$3,000; $1,000 for custodial accounts for minors
Newspaper Abbreviation*
VangMB
Vanguard Fund Number
045
Cusip Number
922907506
Ticker Symbol
VMSXX
*Money market funds are listed separately from other newspaper mutual fund
listings.
<PAGE>
5
Fund Profile--Vanguard Short-Term Tax-Exempt Fund
The following profile summarizes key features of Vanguard Short-Term Tax-Exempt
Fund.
INVESTMENT OBJECTIVE
The Fund is a municipal bond fund that seeks to provide a high level of
tax-exempt current income with a modest amount of share-price fluctuation.
INVESTMENT STRATEGIES
The Fund holds securities with maturities of five years or less and is expected
to maintain an average maturity of one to two years. At least 75% of the
securities held by the Fund are municipal bonds in the top three credit ratings
categories (Aaa, Aa, and A for Moody's Investors Service, Inc., or AAA, AA, and
A for Standard & Poor's Corporation). No more than 20% of the Fund's assets may
be invested in bonds rated Baa (by Moody's) or BBB (by Standard & Poor's). The
remaining 5% may be invested in securities with lower credit ratings or that are
unrated. For more information on credit quality, see "Additional Risk
Information" under "More on the Funds".
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
o Income risk, which is the chance that falling interest rates will cause the
Fund's income--and thus its total return--to decline. Income risk is
generally high for short-term bonds.
o Interest rate risk, which is the chance that bond prices overall will
decline over short or even long periods due to rising interest rates.
Interest rate risk should be modest for shorter-term bonds.
o Call risk, which is the chance that during periods of falling interest
rates, a bond issuer will "call"--or repay--a high-yielding bond before the
bond's maturity date. Forced to reinvest the unanticipated proceeds at
lower interest rates, the Fund would experience a decline in income--and
the potential for taxable capital gains. Call risk is generally low for
shorter-term bonds.
o Credit risk, which is the chance that a bond issuer will fail to repay
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.
o Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Fund's return for the most recent calendar quarter ended December 31, 1998,
was _____%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was o% (quarter ending _____________ ) and the lowest return for a
quarter was -o% (quarter ending _____________ ).
<PAGE>
6
Fund Profile--Vanguard Short-Term Tax-Exempt Fund (continued)
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Vanguard Short-Term Tax-Exempt Fund o% o% o%
Lipper Short-Term Municipal Bond Average o o o
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Short-Term Tax-Exempt Fund. The expenses shown under Annual
Fund Operating Expenses are based upon those incurred in the fiscal year ended
October 31, 1998.
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: o%
12b-1 Distribution Fees: None
Other Expenses: o%
Total Annual Operating Expenses: o%
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
- --------------------------------------------------------------------------------
$o $o $o $o
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Dividends are paid monthly; capital gains, if any, are paid annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since 1981
Inception Date
September 1, 1977
Net Assets as of October 31, 1998
$o billion
Suitable for IRAs
No
Minimum Initial Investment
$3,000; $1,000 for custodial accounts for minors
Newspaper Abbreviation
MuSht
Vanguard Fund Number
041
Cusip Number
922907100
Ticker Symbol
VWSTX
<PAGE>
7
Fund Profile--Vanguard Limited-Term Tax-Exempt Fund
The following profile summarizes key features of Vanguard Limited-Term
Tax-Exempt Fund.
INVESTMENT OBJECTIVE
The Fund is a municipal bond fund that seeks to provide a higher level of
tax-exempt current income than shorter-term bonds, but with less share-price
fluctuation than longer-term bonds.
INVESTMENT STRATEGIES
The Fund holds securities with maturities of up to ten years and is expected to
maintain an average maturity of two to five years. At least 75% of the
securities held by the Fund are municipal bonds in the top three credit ratings
categories (Aaa, Aa, and A for Moody's Investors Service, Inc., or AAA, AA, and
A for Standard & Poor's Corporation). No more than 20% of the Fund's assets may
be invested in bonds rated Baa (by Moody's) or BBB (by Standard & Poor's). The
remaining 5% may be invested in securities with lower credit ratings or that are
unrated. For more information on credit quality, see "Additional Risk
Information" under "More on the Funds".
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
o Income risk, which is the chance that falling interest rates will cause the
Fund's income--and thus its total return--to decline. Income risk is
generally moderate for limited-term bonds
o Interest rate risk, which is the chance that bond prices overall will
decline over short or even long periods due to rising interest rates.
Interest rate risk should be low to moderate for limited-term bonds.
o Call risk, which is the chance that during periods of falling interest
rates, a bond issuer will "call"--or repay--a high-yielding bond before the
bond's maturity date. Forced to reinvest the unanticipated proceeds at
lower interest rates, the Fund would experience a decline in income--and
the potential for taxable capital gains. Call risk is generally low to
moderate for limited-term bonds.
o Credit risk, which is the chance that a bond issuer will fail to repay
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.
o Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Fund's return for the most recent calendar quarter ended December 31, 1998,
was _____%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was o% (quarter ending _____________ ) and the lowest return for a
quarter was -o% (quarter ending _____________ ).
<PAGE>
8
Fund Profile--Vanguard Limited-Term Tax-Exempt Fund (continued)
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Vanguard Limited-Term Tax-Exempt Fund o% o% o%
Lipper Limited-Term Municipal Bond Average o o o
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Limited-Term Tax-Exempt Fund. The expenses shown under Annual
Fund Operating Expenses are based upon those incurred in the fiscal year ended
October 31, 1998.
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: o%
12b-1 Distribution Fees: None
Other Expenses: o%
Total Annual Operating Expenses: o%
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
- --------------------------------------------------------------------------------
$o $o $o $o
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Dividends are paid monthly; capital gains, if any, are paid annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
Inception Date
August 31, 1987
Net Assets as of October 31, 1998
$o billion
Suitable for IRAs
No
Minimum Initial Investment
$3,000; $1,000 for custodial accounts for minors
Newspaper Abbreviation
MuLtd
Vanguard Fund Number
031
Cusip Number
922907704
Ticker Symbol
VMLTX
<PAGE>
9
Fund Profile--Vanguard Intermediate-Term Tax-Exempt Fund
The following profile summarizes key features of Vanguard Intermediate-Term
Tax-Exempt Fund.
INVESTMENT OBJECTIVE
The Fund is a municipal bond fund that seeks to provide a higher level of
tax-exempt current income than shorter-term or limited-term bonds, but with less
share-price fluctuation than longer-term bonds.
INVESTMENT STRATEGIES
The Fund has no limitations on the maturity of individual securities, but is
expected to maintain an average maturity of 7 to 12 years. At least 75% of the
securities held by the Fund are municipal bonds in the top three credit ratings
categories (Aaa, Aa, and A for Moody's Investors Service, Inc., or AAA, AA, and
A for Standard & Poor's Corporation). No more than 20% of the Fund's assets may
be invested in bonds rated Baa (by Moody's) or BBB (by Standard & Poor's). The
remaining 5% may be invested in securities with lower credit ratings or that are
unrated. For more information on credit quality, see "Additional Risk
Information" under "More on the Funds".
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
o Interest rate risk, which is the chance that bond prices overall will
decline over short or even long periods due to rising interest rates.
Interest rate risk should be moderate for intermediate-term bonds.
o Income risk, which is the chance that falling interest rates will cause the
Fund's income--and thus its total return--to decline. Income risk is
generally moderate for intermediate-term bonds.
o Call risk, which is the chance that during periods of falling interest
rates, a bond issuer will "call"--or repay--a high-yielding bond before the
bond's maturity date. Forced to reinvest the unanticipated proceeds at
lower interest rates, the Fund would experience a decline in income--and
the potential for taxable capital gains. Call risk is generally moderate
for intermediate-term bonds.
o Credit risk, which is the chance that a bond issuer will fail to repay
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.
o Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Fund's return for the most recent calendar quarter ended December 31, 1998,
was _____%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was o% (quarter ending _____________ ) and the lowest return for a
quarter was -o% (quarter ending _____________ ).
<PAGE>
10
Fund Profile--Vanguard Intermediate-Term Tax-Exempt Fund (continued)
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Vanguard Intermediate-Term Tax-Exempt Fund o% o% o%
Lipper Intermediate-Term Municipal Bond Average o o o
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Intermediate-Term Tax-Exempt Fund. The expenses shown under
Annual Fund Operating Expenses are based upon those incurred in the fiscal year
ended October 31, 1998.
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: o%
12b-1 Distribution Fees: None
Other Expenses: o%
Total Annual Operating Expenses: o%
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
- --------------------------------------------------------------------------------
$o $o $o $o
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Dividends are paid monthly; capital gains, if any, are paid annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since 1981
Inception Date
September 1, 1977
Net Assets as of October 31, 1998
$o billion
Suitable for IRAs
No
Minimum Initial Investment
$3,000; $1,000 for custodial accounts for minors
Newspaper Abbreviation
MuInt
Vanguard Fund Number
042
Cusip Number
922907209
Ticker Symbol
VWITX
<PAGE>
11
Fund Profile--Vanguard Long-Term Tax-Exempt Fund
The following profile summarizes key features of Vanguard Long-Term Tax-Exempt
Fund.
INVESTMENT OBJECTIVE
The Fund is a municipal bond fund that seeks to provide a high and sustainable
level of tax-exempt current income.
INVESTMENT STRATEGIES
The Fund has no limitations on the maturity of individual securities, but is
expected to maintain an average maturity of 15 to 25 years. At least 75% of the
securities held by the Fund are municipal bonds in the top three credit ratings
categories (Aaa, Aa, and A for Moody's Investors Service, Inc., or AAA, AA, and
A for Standard & Poor's Corporation). No more than 20% of the Fund's assets may
be invested in bonds rated Baa (by Moody's) or BBB (by Standard & Poor's). The
remaining 5% may be invested in securities with lower credit ratings or that are
unrated. For more information on credit quality, see "Additional Risk
Information" under "More on the Funds".
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
o Interest rate risk, which is the chance that bond prices overall will
decline over short or even long periods due to rising interest rates.
Interest rate risk should be high for longer-term bonds.
o Call risk, which is the chance that during periods of falling interest
rates, a bond issuer will "call"--or repay--a high-yielding bond before the
bond's maturity date. Forced to reinvest the unanticipated proceeds at
lower interest rates, the Fund would experience a decline in income--and
the potential for taxable capital gains. Call risk is generally high for
long-term bonds.
o Income risk, which is the chance that falling interest rates will cause the
Fund's income--and thus its total return--to decline. Income risk is
generally low for long-term bonds.
o Credit risk, which is the chance that a bond issuer will fail to repay
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.
o Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Fund's return for the most recent calendar quarter ended December 31, 1998,
was _____%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was o% (quarter ending _____________ ) and the lowest return for a
quarter was -o% (quarter ending _____________ ).
<PAGE>
12
Fund Profile--Vanguard Long-Term Tax-Exempt Fund (continued)
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Vanguard Long-Term Tax-Exempt Fund o% o% o%
Lipper General Municipal Bond Average o o o
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Long-Term Tax-Exempt Fund. The expenses shown under Annual
Fund Operating Expenses are based upon those incurred in the fiscal year ended
October 31, 1998.
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: o%
12b-1 Distribution Fees: None
Other Expenses: o%
Total Annual Operating Expenses: o%
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
- --------------------------------------------------------------------------------
$o $o $o $o
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Dividends are paid monthly; capital gains, if any, are paid annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since 1981
Inception Date
September 1, 1977
Net Assets as of October 31, 1998
$o billion
Suitable for IRAs
No
Minimum Initial Investment
$3,000; $1,000 for custodial accounts for minors
Newspaper Abbreviation
MuLong
Vanguard Fund Number
043
Cusip Number
922907308
Ticker Symbol
VWLTX
<PAGE>
13
Fund Profile--Vanguard Insured Long-Term Tax-Exempt Fund
The following profile summarizes key features of Vanguard Insured Long-Term
Tax-Exempt Fund.
INVESTMENT OBJECTIVE
The Fund is a municipal bond fund that seeks to provide a high and sustainable
level of tax-exempt current income.
INVESTMENT STRATEGIES
The Fund invests at least 80% of its assets in high-quality municipal bonds that
are covered by insurance guaranteeing the timely payment of principal and
interest. (This insurance applies only to the bonds in the Fund and not to the
Fund's share price.) Although the Fund has no limitations as to maturity, its
average maturity is expected to be between 15 and 25 years. For more information
about insurance, see "A Note About Insurance" under "More on the Funds."
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
o Interest rate risk, which is the chance that bond prices overall will
decline over short or even long periods due to rising interest rates.
Interest rate risk should be high for longer-term bonds.
o Call risk, which is the chance that during periods of falling interest
rates, a bond issuer will "call"--or repay--a high-yielding bond before the
bond's maturity date. Forced to reinvest the unanticipated proceeds at
lower interest rates, the Fund would experience a decline in income--and
the potential for taxable capital gains. Call risk is generally high for
long-term bonds.
o Income risk, which is the chance that falling interest rates will cause the
Fund's income--and thus its total return--to decline. Income risk is
generally low for long-term bonds.
o Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Fund's return for the most recent calendar quarter ended December 31, 1998,
was _____%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was o% (quarter ending _____________ ) and the lowest return for a
quarter was -o% (quarter ending _____________ ).
<PAGE>
14
Fund Profile--Vanguard Insured Long-Term Tax-Exempt Fund (continued)
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Vanguard Insured Long-Term Tax-Exempt Fund o% o% o%
Lipper Insured Municipal Bond Average o o o
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Insured Long-Term Tax-Exempt Fund. The expenses shown under
Annual Fund Operating Expenses are based upon those incurred in the fiscal year
ended October 31, 1998.
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: o%
12b-1 Distribution Fees: None
Other Expenses: o%
Total Annual Operating Expenses: o%
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
- --------------------------------------------------------------------------------
$o $o $o $o
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Dividends are paid monthly; capital gains, if any, are paid annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
Inception Date
September 30, 1984
Net Assets as of October 31, 1998
$o billion
Suitable for IRAs
No
Minimum Initial Investment
$3,000; $1,000 for custodial accounts for minors
Newspaper Abbreviation
MuInlg
Vanguard Fund Number
058
Cusip Number
922907605
Ticker Symbol
VILPX
<PAGE>
15
Fund Profile--Vanguard High-Yield Tax-Exempt Fund
The following profile summarizes key features of Vanguard High-Yield Tax-Exempt
Fund.
INVESTMENT OBJECTIVE
The Fund is a municipal bond fund that seeks to provide a very high level of
tax-exempt current income.
INVESTMENT STRATEGIES
The Fund invests at least 80% of its assets in longer-term, investment-grade
municipal bonds, which are securities with ratings of Baa or higher, and up to
20% in bonds that are rated less than Baa or are unrated. For more information
on credit quality, see "Additional Risk Information" under "More on the Funds".
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause an investor to
lose money. These include:
o Interest rate risk, which is the chance that bond prices overall will
decline over short or even long periods due to rising interest rates.
Interest rate risk should be high for longer-term bonds.
o Call risk, which is the chance that during periods of falling interest
rates, a bond issuer will "call"--or repay--a high-yielding bond before the
bond's maturity date. Forced to reinvest the unanticipated proceeds at
lower interest rates, the Fund would experience a decline in income--and
the potential for taxable capital gains. Call risk is generally high for
high-yield bonds.
o Credit risk, which is the chance that a bond issuer will fail to repay
interest and principal in a timely manner. Credit risk, which has the
potential to hurt the Fund's performance, should be moderate for the Fund.
o Income risk, which is the chance that falling interest rates will cause the
Fund's income--and thus its total return--to decline. Income risk is
generally low for longer-term bonds.
o Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Fund's return for the most recent calendar quarter ended December 31, 1998,
was _____%.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was o% (quarter ending _____________ ) and the lowest return for a
quarter was -o% (quarter ending _____________ ).
<PAGE>
16
Fund Profile--Vanguard High-Yield Tax-Exempt Fund (continued)
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Vanguard High-Yield Tax-Exempt Fund o% o% o%
Lipper High-Yield Municipal Bond Average o o o
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the High-Yield Tax-Exempt Fund. The expenses shown under Annual
Fund Operating Expenses are based upon those incurred in the fiscal year ended
October 31, 1998.
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: o%
12b-1 Distribution Fees: None
Other Expenses: o%
Total Annual Operating Expenses: o%
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
- --------------------------------------------------------------------------------
$o $o $o $o
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
Additional Information
Dividends and Capital Gains
Dividends are paid monthly; capital gains, if any, are paid annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since 1981
Inception Date
December 27, 1978
Net Assets as of October 31, 1998
$o billion
Suitable for IRAs
No
Minimum Initial Investment
$3,000; $1,000 for custodial accounts for minors
Newspaper Abbreviation
MuHY
Vanguard Fund Number
044
Cusip Number
922907407
Ticker Symbol
VWAHX
<PAGE>
17
More on the Funds
The following sections discuss other important features of the Vanguard
Municipal Bond Funds, including additional risk information, insurance, costs
and market-timing, turnover rate, and other investment policies and risks.
Additional Risk Information
Each of the Funds invests in municipal bonds that, depending on their maturity
and quality, provide varying amounts of tax-exempt income. Each Fund is
therefore subject to certain risks.
Each Fund is subject to income risk, which is the chance that a Fund's
dividends (income)--and thus its total return--will decline due to falling
interest rates. Income risk is generally the greatest for short-term bonds,
and the least for long-term bonds.
Changes in interest rates will affect bond prices as well as bond income.
Six of the seven Funds (the Tax-Exempt Money Market Fund is the exception)
are subject to interest rate risk, which is the chance that bond prices
overall will decline over short or even long periods due to rising interest
rates. Interest rate risk should be modest for shorter-term bonds, moderate
for intermediate-term bonds, and high for longer-term bonds.
In the past, bond investors have seen the value of their investment rise
and fall--sometimes significantly--with changes in interest rates. Between
December 1976 and September 1981, for instance, rising interest rates caused
long-term bond prices to fall by almost 48%.
Because each Fund (except the Tax-Exempt Money Market Fund) invests mainly
in bonds, changes in interest rates will impact, to varying degrees, the value
of each Fund's assets. To illustrate how much of an impact, the following table
shows the effect of a 2% change (both up and down) in interest rates on three
bonds with a face value of $1,000; each has a different maturity.
- --------------------------------------------------------------------------------
How Interest Rate Changes Affect Bonds*
- --------------------------------------------------------------------------------
Value of a $1,000 Bond Value of a $1,000 Bond
After a 2% Increase After a 2% Decrease
Maturity in Interest Rates in Interest Rates
- --------------------------------------------------------------------------------
Short-Term (2.5 years) $956 $1,046
Intermediate-Term (10 years) 870 1,156
Long-Term (20 years) 816 1,251
- --------------------------------------------------------------------------------
*Assuming a 7% yield.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
Taxable Versus
Tax-Exempt Investments
You may not always profit from a tax-exempt investment; some taxable investments
could serve you better. To determine which is more suitable, figure out the
tax-exempt fund's taxable equivalent yield. You do this by dividing the fund's
tax-exempt yield by the total of 100% minus your tax bracket. For example, if
you are in the 28% federal tax bracket, and can earn a tax-exempt yield of 5%,
the taxable equivalent yield would be 6.94% (5.0% / 72% [100% - 28%]). In this
example, you would choose the tax-exempt fund if its taxable equivalent yield of
6.94% were greater than the yield of a similar, though taxable, investment.
PLAIN TALK ABOUT
Bonds and Interest Rates
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--causing you to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you would be able to sell your 5% bond for more than you
paid.
<PAGE>
18
PLAIN TALK ABOUT
Bond Maturities
A bond is issued with a specific maturity date--the date when the bond's issuer,
or seller, must pay back the bond's initial value (known as its "face value").
Bond maturities generally range from less than one year (short term) to 30 years
(long term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise--but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks in hope of higher yields; short-term bond investors should be willing to
accept lower yields in return for less fluctuation in the value of their
investment.
PLAIN TALK ABOUT
Callable Bonds
Although bonds are issued with clearly defined maturities, a bond issuer may be
able to redeem, or call, a bond earlier than its maturity date. The bondholder
must now replace the called bond with a bond that may have a lower yield than
the original. One way for bond investors to protect themselves against call risk
is to purchase a bond early in its lifetime, when it is less likely to be
called. Another way is to buy bonds with call protection--that is, assurance
that a bond will not be called for a specific time period, such as ten years.
PLAIN TALK ABOUT
Credit Quality
A bond's credit quality depends on the issuer's ability to pay interest on the
bond and, ultimately, to repay the debt. The lower the rating by one of the
independent bond-rating agencies (for example, Moody's or Standard & Poor's),
the greater the chance (in the rating agency's opinion) the bond issuer will
default, or fail to meet its payment obligations. All things being equal, the
lower a bond's credit rating, the higher its yield should be to compensate
investors for assuming additional risk. Bonds rated in one of the four highest
ratings categories are considered "investment grade."
These figures are for illustration only and should not be regarded as an
indication of future returns from the municipal bond market as a whole, or any
Fund in particular.
Falling interest rates can cause other problems for bond fund shareholders.
Six of the seven Funds (the Tax-Exempt Money Market Fund is the exception)
are subject to call risk, which is the chance that during periods of
falling interest rates, a bond issuer will "call"--or repay--its
high-yielding bond before the bond's maturity date. Forced to reinvest the
unanticipated proceeds at lower interest rates, the Fund would experience a
decline in income--and the potential for taxable capital gains.
Call risk is low for shorter-term bonds, moderate for intermediate-term
bonds, and high for longer-term bonds.
Each Fund is subject to credit risk, which is the chance that a bond issuer
will fail to repay interest and principal in a timely manner.
Credit risk should be negligible for the Insured Long-Term Tax-Exempt Fund;
very low for the Tax-Exempt Money Market Fund; low for the Short-Term,
Limited-Term, Intermediate-Term, and Long-Term Tax-Exempt Funds; and moderate
for the High-Yield Tax-Exempt Fund. The table below shows the average credit
quality of each Fund's holdings, as rated by Moody's Investors Service, as of
October 31, 1998:
- --------------------------------------------------------------------------------
Fund Average Quality
- --------------------------------------------------------------------------------
Money Market MIG-1
Short-Term Aa1
Limited-Term Aa1
Intermediate-Term Aa1
Long-Term Aa1
Insured Long-Term Aaa
High-Yield Aa3
- --------------------------------------------------------------------------------
<PAGE>
19
PLAIN TALK ABOUT
Alternative Minimum Tax
Certain tax-exempt bonds whose proceeds are used to fund private, for-profit
organizations are subject to the alternative minimum tax (AMT)--a special tax
system that ensures that individuals pay at least some federal taxes. Although
AMT bond income is exempt from regular federal income tax, a very limited number
of taxpayers who have many tax deductions may have to pay alternative minimum
tax on the income from bonds considered "tax-preference items."
The Funds try to minimize credit risk by purchasing a wide selection of
municipal securities issued by many different state and local governments. As a
result, there is less chance that a Fund will be seriously affected by a
particular bond issuer's failure to repay either principal or interest.
Up to 20% of each Fund may be invested in securities that are subject to
the alternative minimum tax (AMT). See above for a "Plain Talk" on the
alternative minimum tax.
The Funds are subject to manager risk, which is the possibility that the
adviser will do a poor job of selecting securities.
To help you distinguish between the Funds and their various risks, a
summary table is provided below.
- --------------------------------------------------------------------------------
Risks of the Funds
- --------------------------------------------------------------------------------
Income Interest Call Credit
Fund Risk Rate Risk Risk Risk
Money Market High Low Negligible Very Low
Short-Term High Low Low Low
Limited-Term Moderate Moderate Low Low
Intermediate-Term Moderate Moderate Moderate Low
Long-Term Low High High Low
Insured Long-Term Low High High Very Low
High-Yield Low High High Moderate
- --------------------------------------------------------------------------------
A Note About Insurance
At least 80% of the Insured Long-Term Tax-Exempt Fund's assets is invested in
municipal bonds whose principal and interest payments are guaranteed by a
top-rated private insurance company at the time of purchase. This insurance
coverage may take one of several forms:
o A new-issue insurance policy, which is purchased by a bond issuer at the
time the security is issued. This insurance is likely to increase the
credit rating of the security, as well as its purchase price and resale
value.
o A mutual fund insurance policy, which is used to guarantee specific bonds
only while held by a mutual fund. For the Insured Long-Term Fund (which has
obtained a policy from Financial Guaranty Insurance Company), the annual
premiums for the policy may reduce the Fund's current yield.
o A secondary market insurance policy, which is purchased by an investor
(such as the Insured Long-Term Tax-Exempt Fund) after a bond has been
issued and insures the bond until its maturity date.
Typically, an insured municipal bond in the Fund will be covered by only
one of the three types of policies. For instance, if a bond is covered by a
new-issue insurance policy or a secondary market insurance policy, the security
will probably not be insured under the Fund's mutual fund insurance policy.
The remaining 20% of the Insured Long-Term Tax-Exempt Fund's assets may be
invested in municipal securities with a minimum quality rating of A by a
Nationally Recognized Statistical Rating Organization (NRSRO) or equivalent
rating firm.
<PAGE>
20
Costs and Market-Timing
Some investors try to profit from a strategy called market-timing--switching
money into investments when they expect prices to rise, and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Vanguard Municipal Bond Funds have adopted the following
policies, among others, designed to discourage short-term trading:
o Each Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of
the investment or because of a history of excessive trading by the
investor.
o There is a limit on the number of times you can exchange into and out of a
Fund (see "Redeeming Shares" in the Investing with Vanguard section).
o Each Fund reserves the right to stop offering shares at any time.
The Vanguard funds do not permit market-timing. Do not invest in these
Funds if you are a market-timer.
Turnover Rate
Although the Funds generally seek to invest for the long term, they retain the
right to sell securities regardless of how long the securities have been held.
Shorter-term bonds will mature, and need to be replaced, more frequently than
longer-term bonds. As a result, shorter-term bond funds tend to have higher
turnover rates than longer-term bond funds.
Other Investment Policies and Risks
Besides investing in high-quality municipal bonds, each Fund may make certain
other kinds of investments to achieve its objective.
PLAIN TALK ABOUT
Derivatives
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
The Funds may invest, to a limited extent, in derivatives.
The Tax-Exempt Money Market Fund may invest in partnership and grantor
trust-type derivatives. Ownership of derivative securities allows the purchaser
to receive principal and interest payments on underlying municipal bonds or
municipal notes. There are many types of derivatives, including derivatives in
which the tax-exempt interest rate is determined by an index, a swap agreement,
or some other formula.
The Tax-Exempt Money Market Fund intends to use derivatives to increase the
diversification and maintain the quality of securities held by the Fund.
Derivative securities are subject to certain structural risks that, in
unexpected circumstances, could cause the Fund's shareholders to lose money or
receive taxable income. However, the Fund will invest in derivatives only when
these securities are judged consistent with the Fund's objective of maintaining
a stable $1 share price and producing tax-exempt income.
The Short-Term, Limited-Term, Intermediate-Term, Long-Term, Insured
Long-Term, and High-Yield Tax-Exempt Funds may invest in bond (interest rate)
futures and options contracts and other types of derivatives. Losses (or gains)
involving futures can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. The Funds will not use futures for
speculative purposes or as leveraged investments that magnify
<PAGE>
21
PLAIN TALK ABOUT
Cash Reserves
With mutual funds, holding cash reserves--"cash"--does not mean literally that
the fund holds a stack of currency. Rather, cash refers to short-term,
interest-bearing securities that can easily and quickly be converted to cash.
(Most mutual funds keep at least a small percentage of assets in cash to
accommodate shareholder redemptions.) While some funds strive to keep cash
levels at a minimum and to always remain fully invested in bonds, other bond
funds allow investment advisers to hold up to 20% or more of a fund's assets in
cash reserves.
the gains or losses of an investment. The value of all futures contracts in
which a Fund acquires an interest cannot exceed 20% of the Fund's total assets.
The reasons for which a Fund may use futures and options are:
o To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in bonds.
o To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
Except for the Tax-Exempt Money Market Fund, the Funds may, from time to
time, take temporary defensive measures--such as holding cash reserves without
limit--that are inconsistent with the Funds' primary investment strategies, in
response to adverse market, economic, political, or other conditions. In taking
such measures, the Funds may not achieve their investment objectives.
In addition, each Fund may purchase tax-exempt securities on a
"when-issued" basis. With "when-issued" securities, a Fund agrees to buy the
securities at a certain price, even if the market price of the securities at the
time of delivery is higher or lower than the agreed-upon purchase price.
The Funds and Vanguard
Vanguard Municipal Bond 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 $o 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>
22
PLAIN TALK ABOUT
The Funds' Adviser
Vanguard Fixed Income Group provides investment advisory services to many
Vanguard funds; as of October 31, 1998, the Group managed more than $___ billion
in total assets. The individuals responsible for overseeing 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.
Christopher M. Ryon, CFA, Principal, and (since 1988) Fund Manager of the
Intermediate-Term and Long-Term Tax-Exempt Funds; has worked in investment
management since 1985; B.S., Villanova University; M.B.A, Drexel University.
Reid O. Smith, CFA, Principal, and (since June 1996) Fund Manager of the
Insured Long-Term and High-Yield Tax-Exempt Funds; has worked in investment
management since 1984; B.A., M.B.A., University of Hawaii.
Pamela Wisehaupt Tynan, Principal, and (since 1988) Fund Manager of the
Tax-Exempt Money Market Fund and the Short-Term and Limited-TermTax-Exempt
Funds; has worked in investment management since 1982; B.S., Temple University.
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 Vanguard
Municipal Bond Funds. For the fiscal year ended October 31, 1998, the advisory
and administrative fees represented an effective annual rate of ____.
The Funds have authorized the Group to choose brokers or dealers to handle
the purchase and sale of securities for the Funds, and to get the best available
price and most favorable execution from these brokers or dealers with respect to
all transactions. The Funds may direct the Group to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Funds. When a Fund purchases a newly-issued security at a fixed
price, the Group may designate certain members of the underwriting syndicate to
receive compensation associated with that transaction. Certain dealers have
agreed to rebate a portion of their compensation directly to the Funds to offset
their management expenses.
Year 2000 Challenge
The common practice in computer programming of using just two digits to identify
a year has resulted in the Year 2000 challenge throughout the information
technology industry. If unchanged, many computer applications and systems could
misinterpret dates occurring after December 31, 1999, leading to errors or
failure. Such failure could adversely affect a fund's operations, including
pricing, securities trading, and the servicing of shareholder accounts.
The Vanguard Group is dedicated to providing uninterrupted, high-quality
performance from our computer systems before, during, and after 2000. In July
1998, we completed the renovation and initial testing of our internal systems.
Vanguard is diligently working with external partners, suppliers, and vendors,
including fund managers and other service providers, to assure that the systems
with which we interact remain operational at all times.
In addition to taking every reasonable step to secure our internal systems
and external relationships, Vanguard is further developing contingency plans
intended to assure that unexpected systems failures will not adversely affect
the Funds' operations. Vanguard intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternate solutions if
necessary.
However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on a Fund's business,
operations, or financial condition. Additionally, a Fund's performance could be
hurt if a computer-system failure at a company or governmental unit affects the
price of securities the Fund owns.
<PAGE>
23
Dividends, Capital Gains, and Taxes
The Funds' dividends accrue daily. Generally, on the first business day of every
month, the Funds distribute virtually all of their net tax-exempt interest
income (interest less expenses) to their shareholders. Any capital gains
realized from the sale of the Funds' holdings are generally distributed
annually, in December.
You can receive distributions of income or capital gains in cash, or you
can have them automatically invested in more shares of a Fund. In either case,
distributions of capital gains are taxable to you. It is important to note that
distributions of capital gains that are declared in December--if paid to you by
the end of January--are taxed as if they had been paid to you in December. The
income dividends you receive from the Funds are expected to be exempt from
federal income taxes.
Vanguard will send you a statement each year showing the tax status of all
your distributions.
o Any short-term capital gains distributions that you receive are taxable to
you as ordinary dividend income for federal income tax purposes.
o Any distributions of net long-term capital gains by a Fund are taxable to
you as long-term capital gains, no matter how long you've owned shares in
the Fund.
o Although the Funds do not seek to realize capital gains, such gains are
realized from time to time as by-products of their ordinary investment
activities. Keep in mind, however, that capital gains are not expected to
be a significant part of any Fund's investment return.
o If you sell or exchange shares, any gain or loss you have is a taxable
event. This means that you may have a capital gain to report as income, or
a capital loss to report as a deduction, when you complete your federal
income tax return.
o Distributions of dividends or capital gains, and capital gains or losses
from your sale or exchange of Fund shares, may be subject to state and
local income taxes as well.
The tax information in this prospectus is provided as general information.
You should consult your tax adviser about the tax consequences of an investment
in one or more of the Funds
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 that the fund earns from its money market and bond investments.
Capital gains are realized whenever the fund sells securities for higher prices
than it paid for them. The 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.
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). Net asset
value per share is computed by adding up the total value of the Fund's
investments and other assets, subtracting any of its liabilities (debts), and
then dividing by the number of Fund shares outstanding:
Total Assets - Liabilities
Net Asset Value = ----------------------------
Number of Shares Outstanding
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A Note on Pricing: A Fund's investments (with the exception of the
Tax-Exempt Money Market Fund, which uses the amortized cost method of valuation)
will be priced at their market value when market quotations are readily
available. When these quotations are not readily available, investments will be
priced at their fair value, calculated according to procedures adopted by the
Funds' Board of Trustees.
<PAGE>
24
With the exception of the Tax-Exempt Money Market Fund (which seeks to
maintain a stable net asset value of $1 per share), each Fund's share price can
be found daily in the mutual fund listings of most major newspapers under the
heading "Vanguard Funds." Different newspapers use different abbreviations for
each Fund, but the most common are MuSht, MuLtd, MuInt, MuLong, MuInlg, and
MuHY. Newspapers typically list money market fund yields weekly, separately from
other mutual funds. The Tax-Exempt Money Market Fund's abbreviation is VangMB.
Financial Highlights
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years, and reflect 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 each year on an investment
in a Fund (assuming reinvestment of all dividends and distributions). This
information has been derived from the financial statements audited by
PricewaterhouseCoopers LLP, independent accountants, whose report--along with
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 Tax-Exempt Money Market Fund
Year Ended August 31,
Year Ended Sep. 1 to -----------------------------
Oct. 31, 1998 Oct. 31, 1997 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period o $1.00 $1.00 $1.00 $1.00 $1.00
- -----------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income o .006 .034 .034 .036 .024
Net Realized and Unrealized
Gain (Loss) on Investments o -- -- -- -- --
--------------------------------------------------------------
Total from Investment
Operations o .006 .034 .034 .036 .024
--------------------------------------------------------------
Distributions
Dividends from Net
Investment Income o (.006) (.034) (.034) (.036) (.024)
Distributions from Realized
Capital Gains o -- -- -- -- --
--------------------------------------------------------------
Total Distributions o (.006) (.034) (.034) (.036) (.024)
- -----------------------------------------------------------------------------------------------
Net Asset Value, End of Period o $1.00 $1.00 $1.00 $1.00 $1.00
===============================================================================================
Total Return o 0.59% 3.47% 3.48% 3.63% 2.43%
===============================================================================================
Ratios/Supplemental Data
Net Assets, End of Period
(Millions) o $5,380 $5,345 $4,624 $4,166 $4,164
Ratio of Total Expenses to
Average Net Assets o 0.18%* 0.19% 0.20% 0.22% 0.20%
Ratio of Net Investment
Income to Average
Net Assets o 3.53%* 3.41% 3.42% 3.56% 2.41%
===============================================================================================
*Annualized.
</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 Tax-Exempt 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 $o per share from investment income (interest and
dividends).
Shareholders received $o per share in the form of dividend distributions. A
portion of each year's distributions may come from the prior year's income.
The earnings ($o per share) minus the distributions ($ o 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 o% for the year.
As of October 31, 1998, the Fund had $o billion in net assets. For the
year, its expense ratio was o% ($o per $1,000 of net assets); and its net
investment income amounted to o% of its average net assets.
<PAGE>
25
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Vanguard Short-Term Tax-Exempt Fund
Year Ended August 31,
Year Ended Sep. 1 to ----------------------------------
Oct. 31, 1998 Oct. 31, 1997 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period o $15.57 $15.54 $15.59 $15.46 $15.63
- ----------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income o .103 .610 .609 .600 .534
Net Realized and Unrealized Gain (Loss)
on Investments o .010 .034 (.050) .131 (.150)
--------------------------------------------------------------------
Total from Investment Operations o .113 .644 .559 .731 .384
--------------------------------------------------------------------
Distributions
Dividends from Net Investment Income o (.103) (.610) (.609) (.600) (.534)
Distributions from Realized Capital Gains o -- (.004) -- (.001) (.020)
--------------------------------------------------------------------
Total Distributions o (.103) (.614) (.609) (.601) (.554)
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period o $15.58 $15.57 $15.54 $15.59 $15.46
======================================================================================================================
Total Return o 0.73% 4.22% 3.64% 4.83% 2.49%
======================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) o $1,485 $1,464 $1,457 $1,442 $1,561
Ratio of Total Expenses to Average Net Assets o 0.18%* 0.19% 0.20% 0.22% 0.20%
Ratio of Net Investment Income to Average Net Assets o 3.96%* 3.91% 3.90% 3.88% 3.42%
Turnover Rate o 4% 34% 33% 32% 27%
======================================================================================================================
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Vanguard Limited-Term Tax-Exempt Fund
Year Ended August 31,
Year Ended Sep. 1 to ---------------------------------
Oct. 31, 1998 Oct. 31, 1997 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period o $10.71 $10.62 $10.71 $10.57 $10.80
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Operations
Net Investment Income o .078 .476 .483 .476 .454
Net Realized and Unrealized Gain (Loss)
on Investments o .030 .090 (.090) .140 (.208)
--------------------------------------------------------------------
Total from Investment Operations o .108 .566 .393 .616 .246
--------------------------------------------------------------------
Distributions
Dividends from Net Investment Income o (.078) (.476) (.483) (.476) (.454)
Distributions from Realized Capital Gains o -- -- -- -- (.022)
--------------------------------------------------------------------
Total Distributions o (.078) (.476) (.483) (.476) (.476)
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period o $10.74 $10.71 $10.62 $10.71 $10.57
======================================================================================================================
Total Return o 1.01% 5.44% 3.73% 5.99% 2.31%
======================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) o $1,962 $1,929 $1,761 $1,669 $1,814
Ratio of Total Expenses to Average Net Assets o 0.18%* 0.19% 0.21% 0.22% 0.20%
Ratio of Net Investment Income to Average Net Assets o 4.34%* 4.46% 4.51% 4.51% 4.24%
Turnover Rate o 2% 28% 27% 35% 21%
======================================================================================================================
</TABLE>
*Annualized.
<PAGE>
26
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Vanguard Intermediate-Term Tax-Exempt Fund
Year Ended August 31,
Year Ended Sep. 1 to ---------------------------------
Oct. 31, 1998 Oct. 31, 1997 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period o $13.30 $13.04 $13.14 $13.02 $13.45
- ----------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income o .111 .669 .671 .686 .683
Net Realized and Unrealized Gain (Loss)
on Investments o .050 .263 (.091) .278 (.354)
--------------------------------------------------------------------
Total from Investment Operations o .161 .932 .580 .964 .329
--------------------------------------------------------------------
Distributions
Dividends from Net Investment Income o (.111) (.669) (.671) (.686) (.683)
Distributions from Realized Capital Gains o -- (.003) (.009) (.158) (.076)
--------------------------------------------------------------------
Total Distributions o (.111) (.672) (.680) (.844) (.759)
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period o $13.35 $13.30 $13.04 $13.14 $13.02
======================================================================================================================
Total Return o 1.21% 7.31% 4.47% 7.82% 2.49%
======================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) o $6,770 $6,658 $5,927 $5,448 $5,068
Ratio of Total Expenses to Average Net Assets o 0.18%* 0.19% 0.20% 0.22% 0.20%
Ratio of Net Investment Income to Average Net Assets o 4.99%* 5.07% 5.09% 5.35% 5.15%
Turnover Rate o 1% 15% 14% 12% 18%
======================================================================================================================
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Vanguard Long-Term Tax-Exempt Fund
Year Ended August 31,
Year Ended Sep. 1 to ---------------------------------
Oct. 31, 1998 Oct. 31, 1997 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period o $11.11 $10.73 $10.68 $10.58 $11.38
- ----------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income o .098 .588 .591 .608 .609
Net Realized and Unrealized Gain (Loss)
on Investments o .070 .403 .050 .256 (.595)
--------------------------------------------------------------------
Total from Investment Operations o .168 .991 .641 .864 .014
--------------------------------------------------------------------
Distributions
Dividends from Net Investment Income o (.098) (.588) (.591) (.608) (.609)
Distributions from Realized Capital Gains o -- (.023) -- (.156) (.205)
--------------------------------------------------------------------
Total Distributions o (.098) (.611) (.591) (.764) (.814)
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period o $11.18 $11.11 $10.73 $10.68 $10.58
======================================================================================================================
Total Return o 1.52% 9.46% 6.08% 8.74% 0.08%
======================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) o $1,249 $1,222 $1,110 $1,054 $1,001
Ratio of Total Expenses to Average Net Assets o 0.18%* 0.19% 0.20% 0.23% 0.20%
Ratio of Net Investment Income to Average Net Assets o 5.28%* 5.37% 5.45% 5.87% 5.56%
Turnover Rate o 1% 9% 26% 35% 45%
======================================================================================================================
</TABLE>
*Annualized.
<PAGE>
27
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Vanguard Insured Long-Term Tax-Exempt Fund
Year Ended August 31,
Year Ended Sep. 1 to ---------------------------------
Oct. 31, 1998 Oct. 31, 1997 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period o $12.45 $12.14 $12.12 $11.98 $12.89
- -----------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income o .111 .674 .670 .684 .699
Net Realized and Unrealized Gain (Loss)
on Investments o .060 .382 .020 .313 (.734)
--------------------------------------------------------------------
Total from Investment Operations o .171 1.056 .690 .997 (.035)
--------------------------------------------------------------------
Distributions
Dividends from Net Investment Income o (.111) (.674) (.670) (.684) (.699)
Distributions from Realized Capital Gains o -- (.072) -- (.173) (.176)
--------------------------------------------------------------------
Total Distributions o (.111) (.746) (.670) (.857) (.875)
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period o $12.51 $12.45 $12.14 $12.12 $11.98
======================================================================================================================
Total Return o 1.37% 8.93% 5.77% 8.88% -0.32%
======================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) o $2,043 $2,024 $1,936 $1,935 $1,938
Ratio of Total Expenses to Average Net Assets o 0.18%* 0.19% 0.20% 0.22% 0.20%
Ratio of Net Investment Income to Average Net Assets o 5.32%* 5.47% 5.46% 5.82% 5.62%
Turnover Rate o 1% 18% 18% 7% 16%
======================================================================================================================
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Vanguard High-Yield Tax-Exempt Fund
Year Ended August 31,
Year Ended Sep. 1 to ---------------------------------
Oct. 31, 1998 Oct. 31, 1997 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period o $10.76 $10.39 $10.43 $10.39 $11.17
- ----------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income o .106 .589 .594 .625 .626
Net Realized and Unrealized Gain (Loss)
on Investments o .070 .370 (.040) .213 (.566)
--------------------------------------------------------------------
Total from Investment Operations o .176 .959 .554 .838 .060
--------------------------------------------------------------------
Distributions
Dividends from Net Investment Income o (.106) (.589) (.594) (.625) (.626)
Distributions from Realized Capital Gains o -- -- -- (.173) (.214)
--------------------------------------------------------------------
Total Distributions o (.106) (.589) (.594) (.798) (.840)
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period o $10.83 $10.76 $10.39 $10.43 $10.39
======================================================================================================================
Total Return o 1.63% 9.45% 5.39% 8.69% 0.52%
======================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) o $2,256 $2,193 $1,985 $1,865 $1,781
Ratio of Total Expenses to Average Net Assets o 0.19%* 0.19% 0.20% 0.22% 0.20%
Ratio of Net Investment Income to Average Net Assets o 6.08%* 5.56% 5.66% 6.15% 5.83%
Turnover Rate o 3% 27% 19% 33% 50%
======================================================================================================================
</TABLE>
*Annualized.
"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., and have been licensed
for use by The Vanguard Group.
<PAGE>
28
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?
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 each Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
Checkwriting
Method for drawing money from your account by writing a check for $250 or more.
- --------------------------------------------------------------------------------
Vanguard Direct Deposit Service(TM) (book)
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)
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
Vanguard Fund Express(R) (book)
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)
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)
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:
o Open a new account.*
o Buy, sell or exchange shares of most funds.
o Change your name/address.
o 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.
- --------------------------------------------------------------------------------
<PAGE>
29
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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 (book)
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
If Vanguard receives your check (or electronic transfer) before the close of
trading on the New York Stock Exchange (generally 4 p.m. Eastern time) on a
regular business day, your investment in any Vanguard Municipal Bond Fund
(except the Tax-Exempt Money Market Fund) will be converted to federal funds and
credited to your account at that day's closing price, the next-determined net
asset value. You will begin earning dividends on your investment the following
calendar day. (Federal funds are Federal Reserve deposits that banks and other
financial institutions "borrow" from one another to meet short-term cash needs;
fund advisers must use federal funds to pay for the securities they buy.)
Your investment in the Tax-Exempt Money Market Fund will also be converted
to federal funds and credited to your account; however, the conversion to
federal funds for the Tax-Exempt Money Market Fund investments takes one
business day. Because of this conversion period, your Tax-Exempt Money Market
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 following
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
add to an existing account
$100 by mail or exchange; $1,000 by wire.
<PAGE>
30
Buying Shares (continued)
A Note on Low Balances
The Fund reserves the right to close any account whose balance falls below the
minimum initial investment. The Fund will deduct a $10 annual fee in June if
your account balance falls below $2,500. The fee is waived if your total
Vanguard account assets are $50,000 or more.
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.
Make your check payable to: The Vanguard Group-(insert appropriate Fund number;
see below)
Vanguard Tax-Exempt Money Market Fund-45
Vanguard Short-Term Tax-Exempt Fund-41
Vanguard Limited-Term Tax-Exempt Fund-31
Vanguard Intermediate-Term Tax-Exempt Fund-42
Vanguard Long-Term Tax-Exempt Fund-43
Vanguard Insured Long-Term Tax-Exempt Fund-58
Vanguard High-Yield Tax-Exempt Fund-44
All purchases must be made in U.S. dollars, and checks must be drawn on
U.S. banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2600 455 Devon Park Drive
Valley Forge, PA 19482-2600 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division ...
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
By Telephone to . . . (telephone)
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.
- --------------------------------------------------------------------------------
<PAGE>
31
By Wire to Open a New Account or Add to an Existing Account (wire)
Call Client Services 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 Tax-Exempt Money Market Fund-45
Vanguard Short-Term Tax-Exempt Fund-41
Vanguard Limited-Term Tax-Exempt Fund-31
Vanguard Intermediate-Term Tax-Exempt Fund-42
Vanguard Long-Term Tax-Exempt Fund-43
Vanguard Insured Long-Term Tax-Exempt Fund-58
Vanguard High-Yield Tax-Exempt Fund-44
[Account number, or temporary number for a new account]
[Registered account owner/s]
[Registered address]
For the Tax-Exempt Money Market Fund only: 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.
Keep in mind that if you buy or sell Fund shares through a registered
broker/dealer or investment adviser, the broker/dealer or adviser may charge you
a service fee.
- --------------------------------------------------------------------------------
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 a 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.
*Proceeds sent to third parties require a signature guarantee; see footnote on
page 34.
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.
<PAGE>
32
Redeeming Shares (continued)
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 (that is, either a sale or exchange of shares) 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)
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)
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 this 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:
/X/ The ten-digit account number.
/X/ The name and address exactly as registered on the account.
/X/ The primary Social Security or employer identification number as registered
on the account.
/X/ The Personal Identification Number, if applicable.
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
<PAGE>
33
A Note on Unusual Circumstances
Vanguard reserves the right to revise or terminate the 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
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.
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)
You can sell shares by writing a Checkwriting draft for $250 or more.
- --------------------------------------------------------------------------------
A Note on Large Redemptions
It is important that you call Vanguard before you redeem a large dollar amount.
We must consider the interests of all fund shareholders and so reserve the right
to delay delivery of your redemption proceeds--up to seven days--if the amount
will disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in kind, i.e., in securities, rather than in cash. If
payment is made in kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check, wire
(money market funds and other daily dividend funds only), or exchange to another
Vanguard fund.
- --------------------------------------------------------------------------------
Check Redemptions
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
Wire Redemptions (wire)
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.
<PAGE>
34
Redeeming Shares (continued)
For Money Market Funds:
For telephone requests made by 10:30 a.m. EST, the wire will arrive at your bank
by the close of business that same day. Requests made by 4 p.m. EST will arrive
at your bank by the close of business on the following business day.
For Other Daily Dividend Funds:
For telephone requests made by 4 p.m. EST, the wire will arrive at your bank by
the close of business on the following business day.
- --------------------------------------------------------------------------------
Exchange Redemptions
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
Request in "Good Order"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
/X/ The Fund name and account number.
/X/ The amount of the transaction (in dollars or shares).
/X/ Signatures of all owners exactly as registered on the account (for mail
requests).
/X/ Signature guarantees (if required).*
/X/ Any supporting legal documentation that may be required.
/X/ Any outstanding certificates representing shares to be redeemed.
*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most banks, credit unions,
and licensed brokers.
Transactions are processed at the next-determined share price after Vanguard has
received all required information.
- --------------------------------------------------------------------------------
Limits on Account Activity
Because excessive account transactions can disrupt management of the Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
o You may make no more than two substantive "round trips" through the Fund
during any 12-month period.
o Your round trips through the Fund must be at least 30 days apart.
o The Fund may refuse a share purchase at any time, for any reason.
o Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also, "round trip" covers transactions accomplished by any combination
of methods, including transactions conducted by check, wire, or exchange to/from
another Vanguard fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect management of the
Fund.
- --------------------------------------------------------------------------------
Return Your Share Certificates
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
All Trades Final
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been received
and a confirmation number assigned.
- --------------------------------------------------------------------------------
<PAGE>
35
Transferring Registration
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division ...
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
Fund and Account Updates
STATEMENTS AND REPORTS
We will send you clear, concise 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 Fund's financial statements which
include a listing of the Fund's holdings.
To keep each Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When we find that two or
more Fund shareholders have the same last name and address, we send just one
Fund report to that address--instead of mailing separate reports to each
shareholder. If you want us to send separate reports, however, you may notify
our 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)
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 April and October for all seven Funds.
- --------------------------------------------------------------------------------
Tax Statements
Generally mailed in January; report previous year's taxable dividend
distributions, capital gains distributions, and proceeds from the sale of
shares.
- --------------------------------------------------------------------------------
Average Cost Review Statement (book)
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using the average cost single category method.
- --------------------------------------------------------------------------------
Checkwriting Statement
Sent monthly to shareholders using Vanguard's checkwriting option. Our clear,
easy-to-use 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>
(This page intentionally left blank.)
<PAGE>
Glossary of Investment Terms
Alternative Minimum Tax
A measure designed to assure that individuals pay at least a minimum amount of
federal income taxes. Certain securities used to fund private, for-profit
activities are subject to AMT.
Bond
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and make regular interest payments until
that date.
Capital Gains Distribution
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit, minus any realized losses.
Cash Reserves
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
Dividend Income
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
Duration
A measure of the sensitivity of bond--and bond fund--prices to interest rate
movements. For example, if a bond has a duration of two years, its price would
fall by about 2% when interest rates rose one percentage point. On the other
hand, the bond's price would rise by about 2% when interest rates fell by one
percentage point.
Expense Ratio
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
Face Value
The amount to be paid at maturity of a bond; also known as the par value or
principal.
Fixed-Income Securities
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
Investment Adviser
An organization that makes the day-to-day decisions regarding a fund's
investments.
Investment Grade
A bond whose credit quality is considered by independent bond-rating agencies to
be sufficient to ensure timely payment of principal and interest under current
economic circumstances.
Maturity
The date when a bond issuer agrees to repay the bond's principal, or face value,
to the bond's buyer.
<PAGE>
Municipal Bond
A bond issued by a state or local government. Interest income from municipal
bonds, and therefore dividend income from municipal bond funds, is generally
free from federal income taxes.
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.
Total Return
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
Volatility
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
Yield
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
For More Information
If you'd like more information about Vanguard Municipal Bond Funds, the
following documents are available free upon request:
Annual/Semiannual Report to Shareholders
Additional information about the Funds' investments is available in the Funds'
annual and semiannual reports to shareholders. In these reports, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Funds' performance during the most recent fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about the Funds.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Funds or other Vanguard funds,
please contact us as follows:
The Vanguard Group
Investor Information Department
P.O. Box 2600
Valley Forge, PA 19482-2600
Telephone:
1-800-662-7447 (SHIP)
Text Telephone:
1-800-952-3335
World Wide Web:
www.vanguard.com
E-mail:
[email protected]
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 Funds are also available on the SEC's website (www.sec.gov), or you
can receive copies of this information, for a fee, by writing the Public
Reference Section, Securities and Exchange Commission, Washington, DC
20549-6009.
Funds' Investment Company Act file number: 811-2687
(C) 1999 Vanguard Marketing
Corporation, Distributor.
All rights reserved.
P045N-02/26/1999
<PAGE>
PART B
VANGUARD MUNICIPAL BOND FUNDS
(THE "TRUST")
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 26, 1999
This Statement is not a prospectus but should be read in conjunction with
the Trust's current Prospectus relating to all of the Trust's Funds (dated
February 26, 1999). To obtain the Trust's Prospectus and the Annual Report to
Shareholders, containing the Funds' Financial Statements, which are hereby
incorporated by reference, please call:
INVESTOR INFORMATION DEPARTMENT
1-800-662-7447
TABLE OF CONTENTS
PAGE
----
Description of the Trust.................................... B-1
Investment Policies......................................... B-3
Fundamental Investment Limitations.......................... B-8
Calculation of Yield (Money Market Fund).................... B-9
Yield and Total Return...................................... B-10
Investment Management....................................... B-11
Portfolio Transactions...................................... B-11
Purchase of Shares.......................................... B-12
Redemption of Shares........................................ B-12
Valuation of Shares......................................... B-12
Management of the Trust..................................... B-14
Financial Statements........................................ B-17
DESCRIPTION OF THE TRUST
ORGANIZATION
The Trust was organized as Warwick Tax-Exempt Bond Fund, a Maryland
corporation, in 1976. In 1984, the Trust was reorganized into a Pennsylvania
business trust. The Trust was reorganized as a Maryland corporation again in
1985, and was then reorganized as a Delaware business trust in July, 1998. Prior
to its reorganization as a Delaware business trust, the Trust was known as
Vanguard Municipal Bond Fund, 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 Tax-Exempt Money Market Fund
Vanguard Short-Term Tax-Exempt Fund
Vanguard Limited-Term Tax-Exempt Fund
Vanguard Intermediate-Term Tax-Exempt Fund
Vanguard Long-Term Tax-Exempt Fund
Vanguard Insured Long-Term Tax-Exempt Fund
Vanguard High-Yield Tax-Exempt Fund
(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.
B-1
<PAGE>
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 Fund's assets and keeping all necessary
accounts and records.
INDEPENDENT ACCOUNTANT. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, serves as the Trust's independent accountant.
The accountant audits financial statements for the Trust and provides other
related services.
TRANSFER AND DIVIDEND-PAYING AGENT. The Fund's transfer agent and
dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, Pennsylvania 19355.
CHARACTERISTICS OF THE TRUST'S SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions
on the right of shareholders to retain or dispose of the Trust's shares, other
than the possible future termination of the Trust or any of its funds. The Trust
or any of its funds may be terminated by reorganization into another 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 of shareholders.
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 the
Trust.
CONVERSION RIGHTS. There are no conversion rights associated with the
Trust.
REDEMPTION PROVISIONS. The Trust's redemption provisions are described in
its current prospectus and elsewhere in this Statement of Additional
Information.
B-2
<PAGE>
SINKING FUND PROVISIONS. The Trust has no sinking fund provisions.
CALLS OR ASSESSMENT. The Trust's shares 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, each fund of the Trust
must comply with certain requirements. If a fund fails to meet these
requirements in any taxable year, it will be subject to tax on its taxable
income at corporate rates, and all distributions from earnings and profits,
including any distributions of net tax-exempt income and net long-term capital
gains, will be taxable to shareholders as ordinary income. In addition, the 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
FUTURES CONTRACTS AND OPTIONS
Each Fund of the Trust (except the Money Market Fund) may enter into
futures contracts, options, and options on futures contracts for several
reasons: to simulate full investment in the underlying securities while
retaining a cash balance for Fund management purposes, to facilitate trading, to
reduce transaction costs, or to seek higher investment returns from intermarket
arbitrage opportunities when a futures contract is mispriced relative to the
underlying security or index. Futures contracts provide for the future sale by
one party and purchase by another party of a specified amount of a specific
security at a specified future time and at a specified price. Futures contracts
which are standardized as to maturity date and underlying financial instrument
are traded on national futures exchanges. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"), a U.S. Government Agency. Assets committed to Futures
contracts will be segregated to the extent required by law.
Most futures contracts are closed out before the settlement date without
the making or taking of delivery. Closing out an open futures position is done
by taking an opposite position ("buying" a contract which has previously been
"sold," or "selling" a contract previously purchased) in an identical contract
to terminate the position. Brokerage commissions are incurred when a futures
contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its initial margin deposit.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures
B-3
<PAGE>
contracts with the expectation of realizing profits from fluctuations in the
prices of underlying securities. Under CFTC regulations, the Funds may use
futures transactions for bona fide hedging purposes only, except that a Fund may
establish non-hedging futures positions if the aggregate initial margin and
premiums for such positions do not exceed five percent of the value of the
Fund's assets.
Although techniques other than the sale and purchase of futures contracts
could be used to control a Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS
A Fund of the Trust will not enter into futures contract transactions to
the extent that, immediately thereafter, the sum of its initial margin deposits
on open contracts exceeds 5% of the market value of the Fund's total assets. In
addition, a Fund will not enter into futures contracts to the extent that its
outstanding obligations to purchase securities under these contracts would
exceed 20% of its total assets.
RISK FACTORS IN FUTURES TRANSACTIONS
Positions in futures contracts may be closed out only on an Exchange which
provides a secondary market for such futures. However, there can be no assurance
that a liquid secondary market will exist for any particular futures contract at
any specific time. Thus, it may not be possible to close a futures position. In
the event of adverse price movements, a Fund would continue to be required to
make daily cash payments to maintain its required margin. In such situations, if
the Fund has insufficient cash, it may have to sell portfolio securities to meet
daily margin requirements at a time when it may be disadvantageous to do so. In
addition, a Fund may be required to make delivery of the instruments underlying
futures contracts it holds. The inability to close options and futures positions
also could have an adverse impact on the ability to effectively hedge.
A Fund will minimize the risk that it will be unable to close out a futures
contract by only entering into futures which are traded on national futures
exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading resulting from futures contracts in some
strategies can be substantial, due both to the low margin deposits required, and
the extremely high degree of leverage involved. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (as well as gain) to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
initial margin requirement for the contract. However, because the futures
strategies of a Fund are engaged in only for hedging purposes and will not be
leveraged, the Adviser does not believe that the Fund is subject to the risks of
loss frequently associated with futures transactions. A Fund would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying financial instrument and sold it after the decline.
Utilization of futures transactions by a Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that a Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the fund of margin deposits in the event of bankruptcy of a
broker with whom a Fund has an open position in a futures contract or related
option.
B-4
<PAGE>
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
OTHER TYPES OF DERIVATIVES
In addition to futures and options, each Fund may invest in other types of
derivatives, including warrants, swap agreements and partnerships or grantor
trust derivative products. Derivatives are instruments whose value is linked to
or derived from an underlying security. Derivatives may be traded separately on
exchanges or in the over-the-counter market, or they may be imbedded in
securities. The most common imbedded derivative is the call option attached to,
or imbedded in, a callable bond. The owner of a traditional callable bond holds
a combination of a long position in a non-callable bond and a short position in
a call option on that bond.
Derivative instruments may be used individually or in combination to hedge
against unfavorable changes in interest rates, or to take advantage of
anticipated changes in interest rates. Derivatives may be structured with no or
a high degree of leverage. When derivatives are used as hedges, the risk
incurred is that the derivative instrument's value may change differently than
the value of the security being hedged. This "basis risk" is generally lower
than the risk associated with an unhedged position in the security being hedged.
Some derivatives may entail liquidity risk, i.e., the risk that the instrument
cannot be sold at a reasonable price in highly volatile markets. Leveraged
derivatives used for speculation are very volatile, and therefore, very risky.
However, the Funds will only utilize derivatives for hedging or arbitrage
purposes, and not for speculative purposes. Over-the-counter derivatives involve
a counterparty risk, i.e., the risk that the individual or institution on the
other side of the agreement will not or cannot meet their obligations under the
derivative agreement.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS AND OTHER FEDERAL TAX MATTERS
Except for transactions a Fund has identified as hedging transactions, each
Fund is required for federal income tax purposes to recognize as income for each
taxable year its net unrealized gains and losses on certain futures contracts as
of the end of the year as well as those actually realized during the year. In
most cases, any gain or loss recognized with respect to a futures contract is
considered to be 60% long-term capital gain or loss and 40% short-term capital
gain or loss, without regard to the holding period of the contract. Furthermore,
sales of futures contracts which are intended to hedge against a change in the
value of securities held by a Fund may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition. A Fund may be required to defer the recognition of losses on
futures contracts to the extent of any unrecognized gains on related positions
held by the Fund.
In order for a Fund to continue to qualify for federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income; i.e., dividends, interest,
income derived from loans of securities, gains from the sale of securities or of
foreign currencies or other income derived with respect to the Fund's business
of investing in securities. It is anticipated that any net gain realized from
the closing out of futures contracts will be considered qualifying income for
purposes of the 90% requirement.
B-5
<PAGE>
A Fund will distribute to shareholders annually any net capital gains which
have been recognized for federal income tax purposes including unrealized gains
at the end of the Fund's fiscal year on futures transactions. Such distributions
will be combined with distributions of capital gains realized on the Fund's
other investments and shareholders will be advised on the nature of the
transactions.
REPURCHASE AGREEMENTS
Each Fund along with other members of The Vanguard Group may invest in
repurchase agreements with commercial banks, brokers or dealers either for
defensive purposes due to market conditions or to generate income from its
excess cash balances. A repurchase agreement is an agreement under which the
Fund acquires a money market instrument (generally a security issued by the U.S.
Government or an agency thereof, a banker's acceptance or a certificate of
deposit) from a commercial bank, broker or dealer, subject to resale to the
seller at an agreed upon price and date (normally, the next business day). A
repurchase agreement may be considered a loan collateralized by securities. The
resale price reflects an agreed upon interest rate effective for the period the
instrument is held by the 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 monitors
repurchase agreement transactions generally and has established guidelines and
standards for review by the investment adviser of the creditworthiness of any
bank, broker or dealer party to a repurchase agreement.
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 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.
B-6
<PAGE>
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 15% of its net assets, except that the Money
Market 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.
MUNICIPAL LEASE OBLIGATIONS
Each Fund of the Trust may invest in municipal lease obligations. These
securities are sometimes considered illiquid because of the inefficiency and
thinness of the market in which they are traded. Under the supervision of the
Trust's Board of Trustees, the Fixed Income Group may determine to treat certain
municipal lease obligations as liquid, and therefore not subject to the Fund's
15% limit on illiquid securities (10% for the Money Market Fund). The factors
that the Fixed Income Group may consider in making these liquidity
determinations include: (1) the frequency of trades and quotations for the
security; (2) the number of dealers willing to purchase or sell the security and
the number of other potential buyers; (3) the willingness of dealers to
underwrite and make a market in the security; (4) the nature of the marketplace
trades, including the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer; and (5) factors unique to a
particular security, including general creditworthiness of the issuer, the
importance to the issuer of the property covered by the lease and the likelihood
that the marketability of the securities will be maintained throughout the time
the security is held by the Fund.
In the case of any unrated municipal lease obligations, a Fixed Income
Group analyst will assign a credit rating based upon criteria that include an
analysis of factors similar to those considered by nationally recognized
statistical rating organizations. In addition, the Fixed Income Group's
liquidity determinations will incorporate those factors mentioned in (5) in the
previous paragraph.
B-7
<PAGE>
WHEN-ISSUED SECURITIES
Each Fund of the Trust may purchase tax-exempt securities on a
"when-issued" basis. In buying "when-issued" securities, a Fund commits to buy
securities at a certain price even though the securities may not normally be
delivered for up to 45 days. The Fund pays for the securities and begins earning
interest when the securities are actually delivered. As a consequence, it is
possible that the market price of the securities at the time of delivery may be
higher or lower than the purchase price. It is also possible that the securities
will never be issued and the commitment canceled.
FUNDAMENTAL INVESTMENT LIMITATIONS
Each Fund of the Trust 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 reprenting the lesser of: (i) 67% or more of
the Fund's net asset value, 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 not make any additional investments whenever its outstanding borrowings
exceed 5% of net assets, and interest paid on such borrowings will reduce
income.
COMMODITIES. The Fund may not invest in commodities, except that it may
invest in bond futures contracts and options on bond futures contracts. No more
than 5% of the Fund's total assets may be used as initial margin deposit for
futures contracts, and no more than 20% of the Fund's total assets may be
invested in futures contracts or options at any time.
DIVERSIFICATION. 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, or any Municipal Bond
guaranteed by the U.S. Government.
ILLIQUID SECURITIES. The Fund may not acquire any security if, as a
result, more than 15% (10% with respect to the Money Market Fund) of its net
assets would be invested in securities that are illiquid.
INDUSTRY CONCENTRATION. The Fund may not invest in securities other than
Municipal Securities, except that it may make temporary investments (up to 20%
of its total assets under normal circumstances) in certain short-term taxable
securities issued by or on behalf of municipal or corporate issuers, obligations
of the United States Government and its agencies or instrumentalities,
commercial paper, bank certificates of deposit, and any such items subject to
short-term repurchase agreements.
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 lend money to any person except by purchasing
fixed income securities that are publicly distributed or lending its portfolio
securities, or through Vanguard's interfund lending program.
MARGIN. The Fund may not purchase securities on margin or sell securities
short, except as permitted by the Fund's investment policies relating to
commodities.
B-8
<PAGE>
OIL, GAS, MINERALS. The Fund may not invest in interests in oil, gas or
other mineral exploration or development programs (although the Fund may invest
in bonds and money market instruments secured by interests in these programs),
except as permitted by the Fund's investment policies relating to commodities.
PLEDGING ASSETS. The Fund may not pledge, mortgage or hypothecate more
than 15% of its net assets.
PUT OPTIONS, CALL OPTIONS, STRADDLES, AND SPREADS. The Fund may not invest
in put or call options, or employ straddles or spread strategies, except as
permitted by the Fund's investment policies relating to commodities.
REAL ESTATE. The Fund may not invest directly in real estate, although it
may invest in Municipal Bonds secured by real estate and interests therein.
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 investment limitations set forth above are considered at the time that
investment securities are purchased. If a percentage restriction is adhered to
at the time of purchase, a later increase in percentage resulting from a change
in the market value of assets will not constitute a violation of such
restriction.
None of these limitations prevents the Trust from participating in The
Vanguard Group ("Vanguard"). Because the Trust is a member of the Group, each
Fund 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.
CALCULATION OF YIELD (MONEY MARKET FUND)
The current yield of the Money Market 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 the Money Market Fund for the 7 day
base period ending October 31, 1998.
MONEY MARKET
FUND
10/31/1998
------------
Value of account at beginning of period..................... $ o
Value of same account at end of period*..................... o
----------
Net Change in account value................................. $ o
Annualized Current Net Yield (Net Change X 365/7)/average
net asset value........................................... o %
B-9
<PAGE>
MONEY MARKET
FUND
10/31/1998
------------
Effective Yield [(Net Change) + 1](365/7) -1................ o %
Average Weighted Maturity of investments.................... o days
- ------------
*Exclusive of any capital changes.
The net asset value of a share of the Money Market Fund is $1.00 and it is
not expected to fluctuate. However, the yield of the Fund will fluctuate. The
Trust has obtained private insurance that partially protects the 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 Fund, 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 value and calculating yield.
YIELD AND TOTAL RETURN
The yield of each Fund of the Trust for the 30-day period ended October 31,
1998 is set forth below. Yields are calculated daily for each Fund.
Tax-Exempt Money Market Fund................................ o%
Short-Term Tax-Exempt Fund.................................. o%
Limited-Term Tax-Exempt Fund................................ o%
Intermediate-Term Tax-Exempt Fund........................... o%
Long-Term Tax-Exempt Fund................................... o%
Insured Long-Term Tax-Exempt Fund........................... o%
High-Yield Tax-Exempt Fund.................................. o%
The average annual total return of each Fund of the Trust for the one-,
five- and ten-year periods ended October 31, 1998 is set forth below:
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
ENDED ENDED ENDED
10/31/1998 10/31/1998 10/31/1998
---------- ---------- ----------
<S> <C> <C> <C>
Tax-Exempt Money Market Fund................ o% o% o%
Short-Term Tax-Exempt Fund.................. o% o% o%
Limited-Term Tax-Exempt Fund................ o% o% o%
Intermediate-Term Tax-Exempt Fund........... o% o% o%
Long-Term Tax-Exempt Fund................... o% o% o%
Insured Long-Term Tax-Exempt Fund........... o% o% o%
High-Yield Tax-Exempt Fund.................. o% o% o%
</TABLE>
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.
B-10
<PAGE>
INVESTMENT MANAGEMENT
The Trust receives all investment advisory services on an "internalized,"
at-cost, basis from an experienced investment management staff employed directly
by The Vanguard Group, Inc. ("Vanguard"), a subsidiary jointly-owned by the
Trust and the other Trusts in The Vanguard Group of Investment Companies. The
investment management staff is supervised by the senior officers of the Trust.
In substance, the Trust can be viewed as a series of seven broadly
diversified Funds of Municipal Bonds, with the investment management staff
responsible for: maintaining the specified standards; making changes in specific
issues in light of changes in the fundamental basis for purchasing such
securities; and adjusting the seven Funds to meet cash inflow (or outflow),
which reflects net purchases and exchanges of shares by investors (or net
redemptions of shares) and reinvestment of a Fund's income.
The investment policies of each of the Funds may lead to frequent changes
in investments, particularly in periods of rapidly fluctuating interest rates. A
change in securities held by a Fund is known as "turnover rate" and may involve
the payment by the Fund of dealer mark-ups, underwriting commissions and other
transaction costs on the sales of securities as well as on the reinvestment of
the proceeds in other securities. The annual turnover rate for the Funds is set
forth under the heading "Financial Highlights" in the Vanguard Municipal Bond
Funds Prospectus. The turnover rate is not a limiting factor when management
deems it desirable to sell or purchase securities. It is impossible to predict
whether or not the turnover rates in future years will vary significantly from
the rates in recent years.
PORTFOLIO TRANSACTIONS
HOW TRANSACTIONS ARE EFFECTED
The types of securities in which the Funds invest are generally purchased
and sold through principal transactions, meaning that the Funds normally
purchase securities directly from the issuer or a primary market-maker acting as
principal for the securities on a net basis. Brokerage commissions are not paid
on these transactions, although the purchase price for securities usually
includes an undisclosed compensation. Purchases from underwriters of securities
typically include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers serving as market-makers typically
include a dealer's mark-up (i.e., a spread between the bid and the asked
prices). During the fiscal year ended August 31, 1997, the two-month fiscal
period ended October 31, 1997, and the fiscal year ended October 31, 1998, the
Funds did not pay any brokerage commissions.
HOW BROKERS AND DEALERS ARE SELECTED
Vanguard's Fixed Income Group chooses brokers or dealers to handle the
purchase and sale of the Funds' securities, and is responsible for getting the
best available price and most favorable execution for all transactions. When the
Funds purchase a newly-issued security at a fixed price, the Group may designate
certain members of the underwriting syndicate to receive compensation associated
with that transaction. Certain dealers have agreed to rebate a portion of such
compensation directly to the Funds to offset their management expenses. The
Group is required to seek best execution of all transactions and is not
authorized to pay a brokerage commission in excess of that which another broker
might have charged for effecting the same transaction solely on account of the
receipt of research or other services.
B-11
<PAGE>
HOW THE REASONABLENESS OF BROKERAGE COMMISSIONS IS EVALUATED
As previously explained, the types of securities that the Funds purchase do
not normally involve the payment of brokerage commissions. If any brokerage
commissions are paid, however, the Fixed Income Group will evaluate their
reasonableness by considering: (a) historical commission rates; (b) rates which
other institutional investors are paying, based upon publicly available
information; (c) rates quoted by brokers and dealers; (d) the size of a
particular transaction, in terms of the number of shares, dollar amount, and
number of clients involved; (e) the complexity of a particular transaction in
terms of both execution and settlement; (f) the level and type of business done
with a particular firm over a period of time; and (g) the extent to which the
broker or dealer has capital at risk in the transaction.
PURCHASE OF SHARES
The Trust reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the 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 or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the Securities and Exchange
Commission (the "Commission"), (ii) during any period when an emergency exists
as defined by the rules of the Commission, as a result of which it is not
reasonably practicable for the Trust 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 the Fund for redemptions, except for wire withdrawals
under $5,000 which are subject to a $5.00 charge. Any redemption may be more or
less than the shareholder's cost depending on the market value of the securities
held by each Fund.
SIGNATURE GUARANTEES. To protect your account, the Trust and Vanguard from
fraud, signature guarantees are required for certain redemptions. Signature
guarantees enable the Trust to verify the identity of the person who has
authorized a redemption from your account. SIGNATURE GUARANTEES ARE REQUIRED IN
CONNECTION WITH: (1) ALL REDEMPTIONS, REGARDLESS OF THE AMOUNT INVOLVED, WHEN
THE PROCEEDS ARE TO BE PAID TO SOMEONE OTHER THAN THE REGISTERED OWNER(S) AND/OR
ARE GOING TO AN ADDRESS OTHER THAN THE ONE ON RECORD; AND (2) SHARE TRANSFER
REQUESTS.
A signature guarantee may be obtained from banks, brokers and any other
guarantor institution that Vanguard deems acceptable. NOTARIES PUBLIC ARE NOT
ACCEPTABLE GUARANTORS.
The signature guarantee must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by the Trust are also
being redeemed, on the letter or stock power.
VALUATION OF SHARES
SHORT-TERM TAX-EXEMPT, LIMITED-TERM TAX-EXEMPT, INTERMEDIATE-TERM
TAX-EXEMPT, LONG-TERM TAX-EXEMPT, INSURED LONG-TERM TAX-EXEMPT AND HIGH-YIELD
TAX-EXEMPT FUNDS. The net asset values per share of the Short-Term Tax-Exempt,
Limited-Term Tax-Exempt, Intermediate-Term Tax-Exempt, Long-Term Tax-Exempt,
Insured Long-Term Tax-Exempt and
B-12
<PAGE>
High-Yield Tax-Exempt Funds are determined on each day that the New York Stock
Exchange is open. For purposes of calculating net asset values, the Board of
Trustees has approved the use of pricing services to value bonds and other fixed
income securities held by the Funds, so long as the prices provided are believed
to reflect the fair market value of such securities. (Since the majority of
municipal bond issues do not trade each day, current prices are generally not
available for many securities. In estimating a security's price, a pricing
service takes into account institutional-size trading in similar groups of
securities and any developments related to specific securities.) The methods
used by the pricing services and the valuations so established are reviewed by
the officers of the Trust under policies determined by the Trustees. There are a
number of pricing services available and the Trustees, as part of an on-going
evaluation of these services, may authorize the use of other pricing services or
discontinue the use of any service in whole or in part. Securities not priced in
this manner are priced at the most recent quoted bid price provided by
investment dealers. Short-term instruments maturing within 60 days of the
valuation date may be valued at cost, plus or minus any amortized discount or
premium. Other assets and securities for which no quotations are readily
available will be valued in good faith at their fair value using methods
determined by the Trustees.
TAX-EXEMPT MONEY MARKET FUND. The net asset value per share of the
Tax-Exempt Money Market Fund is determined on each day that the New York Stock
Exchange is open.
The instruments held by the Money Market 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-cost and thereafter assuming a
continuous amortization for as long as the security is held 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 the Fund would receive if it sold the instrument.
During periods of declining interest rates, the daily yield on shares of the
Fund computed as described above may tend to be higher than a like computation
made by a fund with identical investments utilizing a method of valuation based
upon market prices and estimates of market prices for all of its portfolio
instruments. Thus, if the use of amortized cost by the Fund resulted in a lower
aggregate portfolio value on a particular day, a prospective investor in the
Fund would be able to obtain a somewhat higher yield than would result from
investment in a fund utilizing solely market values, and existing investors in
the Fund would receive less investment income. The converse would apply in a
period of rising interest rates.
It is a fundamental objective of management to maintain the Fund's price
per share as computed for the purpose of sales and redemptions at $1.00. The
Trustees have established procedures designed to achieve this objective. Such
procedures will include a review of the Fund's holdings by the Trustees, at such
intervals as they may deem appropriate, to determine whether the Fund's 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 portfolio instruments prior to maturity to realize capital gains or
losses or to shorten average portfolio 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.
B-13
<PAGE>
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.
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.
B-14
<PAGE>
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 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 30 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 Vanguard
trusts, including Vanguard Municipal Bond Funds.
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 fund. 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 have 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 October 31,
1998, the Trust had contributed capital of $o to Vanguard, representing o% of
Vanguard's capitalization. The Amended and Restated Funds' Service Agreement
provides for the following arrangement: (a) each Vanguard trust may invest up to
0.40% of its current net 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
services provided to the Trusts by third parties. During the fiscal year ended
October 31, 1998, the Trust's allocated share of Vanguard's actual net costs of
operation relating to management and administrative services (including transfer
agency) totaled approximately $o.
B-15
<PAGE>
DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of
The Vanguard Group, Inc., provides all distribution and marketing activities for
the Trusts in the Group. The principal distribution expenses are for
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 their relative net assets. The
remaining one-half of these 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 the 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
year ended October 31, 1998, the Trust incurred approximately $o of The Vanguard
Group's distribution and marketing expenses, which represented an effective
annual rate of o of 1% of the Trust's average net assets.
INVESTMENT ADVISORY SERVICES. Vanguard provides investment advisory
services to the Trust, and to several other Vanguard trusts. 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 August 31, 1996
and 1997, the Trust paid approximately $2,254,000, and $2,917,000 respectively,
of Vanguard's expenses relating to investment advisory services. During the
two-month period ended October 31, 1997, the Trust incurred approximately $o of
Vanguard's expenses relating to investment advisory services. During the fiscal
year ended October 31, 1998, the Trust paid approximately $o of Vanguard's
expenses relating to investment advisory services.
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:
o 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.
o The independent Trustees are reimbursed for the travel and other expenses
that they incur in attending Board meetings.
o Upon retirement, the independent Trustees receive an aggregate annual fee
of $1,000 for each year served on the Board up to fifteen years of
service. This annual fee is paid for ten years following retirement, or
until each Trustee's death.
"INTERESTED" TRUSTEES. The Trusts' interested Trustees -- Messrs. Bogle
and Brennan -- receive no compensation for their service in that capacity.
However, they are paid in their role as officers of The Vanguard Group, Inc.
COMPENSATION TABLE. The following table provides compensation details for
each of the Trustees. For the Trust, we list the amounts paid as compensation
and accrued as retirement
B-16
<PAGE>
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 October 31, 1998.
VANGUARD MUNICIPAL BOND FUNDS
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT ESTIMATED COMPENSATION
BENEFITS ANNUAL FROM ALL
AGGREGATE ACCRUED AS BENEFITS VANGUARD
COMPENSATION PART OF TRUST UPON TRUSTS PAID TO
NAMES OF TRUSTEES FROM TRUST EXPENSES RETIREMENT TRUSTEES(1)
- ----------------- ------------ ------------- ---------- --------------
<S> <C> <C> <C> <C>
John C. Bogle............................ $ o $ o -- --
John J. Brennan.......................... $ o $ o -- --
Barbara Barnes Hauptfuhrer(2)............ $ o $ o $ o $ o
JoAnn Heffernan Heisen................... $ o $ o $ o $ o
Robert E. Cawthorn(2).................... $ o $ o $ o $ o
Burton G. Malkiel........................ $ o $ o $ o $ o
Alfred M. Rankin, Jr..................... $ o $ o $ o $ o
John C. Sawhill.......................... $ o $ o $ o $ o
James O. Welch, Jr....................... $ o $ o $ o $ o
J. Lawrence Wilson....................... $ o $ o $ o $ o
</TABLE>
- ------------------
(1) The amounts reported in this column reflect the total compensation paid to
each Trustee for their service as Trustee of 36 Vanguard Trusts (35 in the
case of Mr. Malkiel).
(2) Mr. Cawthorn and Mrs. Hauptfuher have retired from the Trust's Board,
effective May 31, 1998 and December 31, 1998, respectively.
FINANCIAL STATEMENTS
The Trust's Financial Statements for the fiscal year ended October 31,
1998, including the financial highlights for the four fiscal years in the period
ended August 31, 1997, and the two-month period ended October 31, 1997,
appearing in the Vanguard Municipal Bond Funds' Annual Report to Shareholders
and insert thereto, 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-17
<PAGE>
DESCRIPTION OF MUNICIPAL BONDS AND THEIR RATINGS
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member trusts of The Vanguard Group of Investment Companies.
MUNICIPAL BONDS--GENERAL. Municipal Bonds generally include debt
obligations issued by states and their political subdivisions, and duly
constituted authorities and corporations, to obtain funds to construct, repair
or improve various public facilities such as airports, bridges, highways,
hospitals, housing, schools, streets and water and sewer works. Municipal Bonds
may also be issued to refinance outstanding obligations as well as to obtain
funds for general operating expenses and for loan to other public institutions
and facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" or "special tax" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise or other tax, but not
from general tax revenues. The Trust may also invest in tax-exempt industrial
development bonds, short-term municipal obligations, demand notes and tax-exempt
commercial paper.
Industrial revenue bonds in most cases are revenue bonds and generally do
not have the pledge of the credit of the issuer. The payment of the principal
and interest on such industrial revenue bonds is dependent solely on the ability
of the user of the facilities financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed as
security for such payment. Short-term municipal obligations issued by states,
cities, municipalities or municipal agencies, include Tax Anticipation Notes,
Revenue Anticipation Notes, Bond Anticipation Notes, Construction Loan Notes and
Short-Term Discount Notes.
Note obligations with demand or put options may have a stated maturity in
excess of one year, but permit any holder to demand payment of principal plus
accrued interest upon a specified number of days' notice. Frequently, such
obligations are secured by letters of credit or other credit support
arrangements provided by banks. The issuer of such notes normally has a
corresponding right, after a given period, to repay in its discretion the
outstanding principal of the note plus accrued interest upon a specific number
of days' notice to the bondholders. The interest rate on a demand note may be
based upon a known lending rate, such as a bank's prime rate, and be adjusted
when such rate changes, or the interest rate on a demand note may be a market
rate that is adjusted at specified intervals. The demand notes in which the
Trust will invest are payable on not more than 397 days' notice. Each note
purchased by the Trust will meet the quality criteria set out above for the
Trust.
The yields of Municipal Bonds depend on, among other things, general money
market conditions, conditions in the Municipal Bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's Investors Service, Inc. and Standard & Poor's
Corporation represent their opinions of the quality of the Municipal Bonds rated
by them. It should be emphasized that such ratings are general and are not
absolute standards of quality. Consequently, Municipal Bonds with the same
maturity, coupon and rating may have different yields, while Municipal Bonds of
the same maturity and coupon, but with different ratings may have the same
yield. It will be the responsibility of the investment management staff to
appraise independently the fundamental quality of the bonds held by the Trust.
The Funds may purchase municipal bonds subject to so-called "demand
features." In such cases the Funds may purchase a security that is nominally
long-term, but has many of the features of shorter-term securities. By virtue of
this demand feature, the security will be deemed to have a maturity date that is
earlier than its stated maturity rate.
From time to time proposals have been introduced before Congress to
restrict or eliminate the Federal income tax exemption for interest on Municipal
Bonds. Similar proposals may be introduced
B-18
<PAGE>
in the future. If any such proposal were enacted, it might restrict or eliminate
the ability of the Trust to achieve its investment objective. In that event, the
Trust's Trustees and Officers would reevaluate its investment objective and
policies and consider recommending to its shareholders changes in such objective
and policies.
Similarly, from time to time proposals have been introduced before State
and local legislatures to restrict or eliminate the State and local income tax
exemption for interest on Municipal Bonds. Similar proposals may be introduced
in the future. If any such proposal were enacted, it might restrict or eliminate
the ability of each Fund to achieve its respective investment objective. In that
event, the Trust's Trustees and Officers would reevaluate its investment
objective and policies and consider recommending to its shareholders changes in
such objective and policies.
RATINGS. Excerpts from Moody's Investors Service, Inc.'s Municipal Bond
ratings: AAA--judged to be of the "best quality" and are referred to as "gilt
edge"; interest payments are protected by a large or by an exceptionally stable
margin and principal is secure; AA--judged to be of "high quality by all
standards" but as to which margins of protection or other elements make
long-term risks appear somewhat larger than Aaa-rated Municipal Bonds; together
with Aaa group they comprise what are generally known as "high grade bonds";
A--possess many favorable investment attributes and are considered "upper medium
grade obligations." Factors giving security to principal and interest of A-rated
Municipal Bonds are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future; BAA-- considered
as medium grade obligations; i.e., they are neither highly protected nor poorly
secured; interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time; BA--protection of
principal and interest payments may be very moderate; judged to have speculative
elements; their future cannot be considered as well-assured; B--lack
characteristics of a desirable investment; assurance of interest and principal
payments over any long period of time may be small; CAA--poor standing; may be
in default or there may be present elements of danger with respect to principal
and interest; CA--speculative in a high degree; often in default; C--lowest
rated class of bonds; issues so rated can be regarded as having extremely poor
prospects for ever attaining any real investment standing.
Description of Moody's ratings of state and municipal notes: Moody's
ratings for state and municipal notes and other short-term obligations are
designated Moody's Investment Grade ("MIG"). Symbols used will be as follows:
MIG-1--Best quality, enjoying strong protection from established cash flows of
funds for their servicing or from established and broad-based access to the
market for refinancing, or both: MIG-2--High quality with margins of protection
ample although not so large as in the preceding group.
Description of Moody's highest commercial paper rating;
PRIME-1("P-1")--judged to be of the best quality. Their short-term debt
obligations carry the smallest degree of investment risk.
Excerpts from Standard & Poor's Corporation's Municipal Bond ratings:
AAA--has the highest rating assigned by S&P; extremely strong capacity to pay
principal and interest; AA--has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree;
A--has a strong capacity to pay principal and interest, although somewhat more
susceptible to the adverse changes in circumstances and economic conditions;
BBB--regarded as having an adequate capacity to pay principal and interest;
normally exhibit adequate protection parameters but adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity to pay
principal and interest than for bonds in A category; BB--B--CCC--CC--
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with terms of obligations; BB is being paid; D--in
default, and payment of principal and/or interest is in arrears.
The ratings from "AA" to "B" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
B-19
<PAGE>
Excerpt from Standard & Poor's Corporation's rating of municipal note
issues: SP-1+--very strong capacity to pay principal and interest; SP-1--strong
capacity to pay principal and interest.
Description of S&P's highest commercial papers ratings: A-1+--This
designation indicates the degree of safety regarding timely payment is
overwhelming. A-1--This designation indicates the degree of safety regarding
timely payment is very strong.
At least 95% of the municipal securities held by each of the Trust's Funds,
with the exception of the Money Market and Insured Long-Term Funds, must be
rated a minimum of Baa (or BBB) by Moody's or Standard & Poor's. The Money
Market Fund cannot hold bonds rated BBB or below investment grade. The Insured
Long-Term Fund will be at least 80% insured with the remaining 20% having a
minimum rating of A. Of the remaining Funds, no more than 20% of the Fund will
be held in the lowest investment grade rating. Not more than 5% of the municipal
securities of each Fund may be lower-rated or unrated.
In the event that a particular obligation held by a Fund of the Trust is
downgraded below the minimum investment level permitted the investment policies
of such Fund, the Trustees and Officers of the Trust will carefully assess the
creditworthiness of the obligation to determine whether it continues to meet the
policies and objectives of the Fund.
B-20
<PAGE>
PART C
VANGUARD MUNICIPAL BOND FUNDS
OTHER INFORMATION
ITEM 23. EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
(a) Declaration of Trust*
(b) By-Laws*
(c) Not Applicable
(d) Not Applicable
(e) Not Applicable
(f) Reference is made to the section entitled "Management of the
Trust" in the Registrant's Statement of Additional Information
(g) Custodian Agreement*
(h) Amended and Restated Funds' Service Agreement*
(i) Legal Opinion*
(j) Consent of Independent Accountants**
(k) Not Applicable
(l) Not Applicable
(m) Not Applicable
(n) Financial Data Schedule+
(o) Not Applicable
- ------------------
* Filed Previously
** To Be Filed By Amendment
+ Filed Herewith
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
ITEM 25. INDEMNIFICATION
The Registrant's organizational documents contain provisions indemnifying
Trustees and Officers against liability incurred in their official capacity.
Article VII, Section 2 of the Declaration of Trust provides that the Registrant
may indemnify and hold harmless each and every Trustee and Officer from and
against any and all claims, demands, costs, losses, expenses, and damages
whatsoever arising out of or related to the performance of his or her duties as
a Trustee or Officer. However, this provision does not cover any liability to
which a Trustee or Officer would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office. Article VI of the By-Laws
generally provides that the Registrant shall indemnify its Trustees and Officers
from any liability arising out of their past or present service in that
capacity. Among other things, this provision excludes any liability arising by
reason of willful misfeasance, bad faith, gross negligence, or the reckless
disregard of the duties involved in the conduct of the Trustee's or Officer's
office with the Registrant.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Investment advisory services are provided to the Registrant on an at-cost
basis by The Vanguard Group, Inc., a jointly-owned subsidiary of the Registrant
and the other Trusts in the Group. See the information concerning The Vanguard
Group set forth in Parts A and B.
C-1
<PAGE>
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc., Valley Forge, Pennsylvania 19482; and the Registrant's
Custodian, First Union National Bank, PA4943, 530 Walnut Street, Philadelphia,
Pennsylvania 19106.
ITEM 29. MANAGEMENT SERVICES
Other than as set forth under the description of The Vanguard Group in Part
B of this Registration Statement, the Registrant is not a party to any
management-related service contract.
ITEM 30. UNDERTAKINGS
Not Applicable
C-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT HAS DULY CAUSED
THIS POST-EFFECTIVE AMENDMENT TO THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWN OF VALLEY
FORGE AND THE COMMONWEALTH OF PENNSYLVANIA, ON THE 28TH DAY OF DECEMBER, 1998.
VANGUARD MUNICIPAL BOND FUNDS
By: /s/ JOHN J. BRENNAN
--------------------------------------
(HEIDI STAM)
JOHN J. BRENNAN*,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY
THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
By: /s/ JOHN C. BOGLE Senior Chairman of the Board December 28, 1998
------------------------------- and Trustee
(HEIDI STAM)
JOHN C. BOGLE*
By: /s/ JOHN J. BRENNAN Chairman, Chief Executive December 28, 1998
------------------------------- Officer and Trustee
(HEIDI STAM)
JOHN J. BRENNAN
By: /s/ JOANN HEFFERNAN HEISEN Trustee December 28, 1998
-------------------------------
(HEIDI STAM)
JOANN HEFFERNAN HEISEN*
By: /s/ BURTON G. MALKIEL Trustee December 28, 1998
-------------------------------
(HEIDI STAM)
BURTON G. MALKIEL*
By: /s/ ALFRED M. RANKIN, JR. Trustee December 28, 1998
-------------------------------
(HEIDI STAM)
ALFRED M. RANKIN, JR.*
By: /s/ JOHN C. SAWHILL Trustee December 28, 1998
-------------------------------
(HEIDI STAM)
JOHN C. SAWHILL*
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
By: /s/ JAMES O. WELCH, JR. Trustee December 28, 1998
-------------------------------
(HEIDI STAM)
JAMES O. WELCH, JR.*
By: /s/ J. LAWRENCE WILSON Trustee December 28, 1998
-------------------------------
(HEIDI STAM)
J. LAWRENCE WILSON*
By: /s/ THOMAS J. HIGGINS Treasurer and Principal December 28, 1998
------------------------------- Financial Officer and
(HEIDI STAM) Accounting Officer
THOMAS J. HIGGINS*
</TABLE>
* By Power of Attorney. See File Number 333-63579, filed on December 4, 1998.
Incorporated by Reference.
C-4
<PAGE>
EXHIBIT INDEX
Financial Data Schedule..................................... EX-99.BN
C-5
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000225997
<NAME> Vanguard Municipal Bond Funds
<SERIES>
<NUMBER> 01
<NAME> Vanguard Short-Term Tax-Exempt Fund
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 1,633,083
<INVESTMENTS-AT-VALUE> 1,646,752
<RECEIVABLES> 27,565
<ASSETS-OTHER> 577
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,674,894
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<SHARES-COMMON-STOCK> 105,661
<SHARES-COMMON-PRIOR> 95,257
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<NET-ASSETS> 1,653,663
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 63,608
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<EXPENSES-NET> 3,025
<NET-INVESTMENT-INCOME> 60,583
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<DISTRIBUTIONS-OF-GAINS> 585
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<NUMBER-OF-SHARES-SOLD> 60,783
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<SHARES-REINVESTED> 3,290
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<ACCUMULATED-NII-PRIOR> 0
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000225997
<NAME> Vanguard Municipal Bond Funds
<SERIES>
<NUMBER> 02
<NAME> Vanguard Intermediate-Term Tax-Exempt Fund
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> Year
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<PERIOD-END> OCT-31-1998
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<INVESTMENTS-AT-COST> 7,215,773
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<PER-SHARE-NAV-BEGIN> 13.35
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000225997
<NAME> Vanguard Municipal Bond Funds
<SERIES>
<NUMBER> 03
<NAME> Vanguard Long-Term Tax-Exempt Fund
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 1,361,573
<INVESTMENTS-AT-VALUE> 1,490,830
<RECEIVABLES> 27,002
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<TOTAL-ASSETS> 1,518,446
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<TOTAL-LIABILITIES> 9,671
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<SHARES-COMMON-STOCK> 132,415
<SHARES-COMMON-PRIOR> 111,702
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<OVERDISTRIBUTION-GAINS> 2,180
<ACCUM-APPREC-OR-DEPREC> 126,967
<NET-ASSETS> 1,508,775
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 73,185
<OTHER-INCOME> 0
<EXPENSES-NET> 2,676
<NET-INVESTMENT-INCOME> 70,509
<REALIZED-GAINS-CURRENT> 13,447
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<DISTRIBUTIONS-OF-INCOME> 70,509
<DISTRIBUTIONS-OF-GAINS> 6,527
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<SHARES-REINVESTED> 4,653
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<ACCUMULATED-NII-PRIOR> 0
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<GROSS-EXPENSE> 2,830
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<PER-SHARE-NAV-BEGIN> 11.18
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000225997
<NAME> Vanguard Municipal Bond Funds
<SERIES>
<NUMBER> 04
<NAME> Vanguard High-Yield Tax-Exempt Fund
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 2,503,421
<INVESTMENTS-AT-VALUE> 2,700,340
<RECEIVABLES> 45,627
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<OVERDISTRIBUTION-GAINS> 13,103
<ACCUM-APPREC-OR-DEPREC> 193,101
<NET-ASSETS> 2,704,349
<DIVIDEND-INCOME> 0
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<EXPENSES-NET> 4,832
<NET-INVESTMENT-INCOME> 130,990
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<DISTRIBUTIONS-OF-GAINS> 10,865
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<NUMBER-OF-SHARES-SOLD> 67,558
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<SHARES-REINVESTED> 8,924
<NET-CHANGE-IN-ASSETS> 448,777
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (10,746)
<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-EXPENSE> 5,018
<AVERAGE-NET-ASSETS> 2,483,230
<PER-SHARE-NAV-BEGIN> 10.83
<PER-SHARE-NII> 0.582
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000225997
<NAME> Vanguard Municipal Bond Funds
<SERIES>
<NUMBER> 05
<NAME> Vanguard Tax-Exempt Money Market Fund
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 6,208,690
<INVESTMENTS-AT-VALUE> 6,208,690
<RECEIVABLES> 57,685
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<TOTAL-ASSETS> 6,268,126
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<SENIOR-LONG-TERM-DEBT> 0
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<TOTAL-LIABILITIES> 22,365
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<SHARES-COMMON-PRIOR> 5,381,033
<ACCUMULATED-NII-CURRENT> 0
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<ACCUMULATED-NET-GAINS> (608)
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<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 6,245,761
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 204,885
<OTHER-INCOME> 0
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<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (637)
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<PER-SHARE-NAV-END> 1.00
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000225997
<NAME> Vanguard Municipal Bond Funds
<SERIES>
<NUMBER> 06
<NAME> Vanguard Insured Long-Term Tax-Exempt Fund
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 1,981,234
<INVESTMENTS-AT-VALUE> 2,215,867
<RECEIVABLES> 67,151
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<TOTAL-LIABILITIES> 48,481
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<SHARES-COMMON-PRIOR> 163,349
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<OVERDISTRIBUTION-GAINS> 27,160
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<NET-ASSETS> 2,235,135
<DIVIDEND-INCOME> 0
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<OTHER-INCOME> 0
<EXPENSES-NET> 4,150
<NET-INVESTMENT-INCOME> 110,968
<REALIZED-GAINS-CURRENT> 4,877
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<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 110,968
<DISTRIBUTIONS-OF-GAINS> 13,338
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<NUMBER-OF-SHARES-SOLD> 28,400
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<SHARES-REINVESTED> 6,361
<NET-CHANGE-IN-ASSETS> 192,016
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 18,699
<GROSS-ADVISORY-FEES> 275
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,290
<AVERAGE-NET-ASSETS> 2,129,781
<PER-SHARE-NAV-BEGIN> 12.51
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000225997
<NAME> Vanguard Municipal Bond Funds
<SERIES>
<NUMBER> 07
<NAME> Vanguard Limited-Term Tax-Exempt Fund
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 2,267,447
<INVESTMENTS-AT-VALUE> 2,318,885
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<TOTAL-LIABILITIES> 24,060
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<PAID-IN-CAPITAL-COMMON> 2,294,957
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<ACCUMULATED-NII-CURRENT> 0
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<ACCUMULATED-NET-GAINS> (1,864)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 47,087
<NET-ASSETS> 2,340,180
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<INTEREST-INCOME> 95,063
<OTHER-INCOME> 0
<EXPENSES-NET> 4,150
<NET-INVESTMENT-INCOME> 90,913
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<EQUALIZATION> 0
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<NUMBER-OF-SHARES-SOLD> 86,051
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<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (2,443)
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,396
<AVERAGE-NET-ASSETS> 2,134,056
<PER-SHARE-NAV-BEGIN> 10.74
<PER-SHARE-NII> 0.460
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<EXPENSE-RATIO> 0.21
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
