<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-52698) UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 41
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 45
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 11, 2000, PURSUANT TO PARAGRAPH (B) OF RULE 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
WE HAVE ELECTED TO REGISTER AN INDEFINITE NUMBER OF SECURITIES UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 OF THE INVESTMENT COMPANY ACT OF
1940. REGISTRANT FILED ITS RULE 24F-2 NOTICE FOR ITS FISCAL YEAR ENDED OCTOBER
31, 1999 WITH THE COMMISSION ON JANUARY o, 2000.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
VANGUARD MUNICIPAL BOND FUNDS
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
<S> <C>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
- - -----------------------------------------------------------------------------------------------------
Item 1. Front and Back Cover Pages ....................Front and Back Cover Pages
Item 2. Risk/Return Summary; Investments, Risk, and
Performance ...................................Fund Profiles
Item 3. Risk/Return Summary: Fee Table ................Fee Table
Item 4. Investment Objectives, Principal Investment
Strategies, and Related Risks .................A Word About Risk; Who Should Invest;
Primary Investment Strategies
Item 5. Management's Discussion of Fund
Performance ...................................Herein incorporated by reference to
Registrant's Annual Report to Shareholders
dated October 31, 1999 filed with the
Securities & Exchange Commission's EDGAR
system December 29, 1999.
Item 6. Management, Organization, and Capital
Structure .....................................The Funds 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
FORM N-1A LOCATION IN STATEMENT OF ADDITIONAL
ITEM NUMBER INFORMATION
- - -----------------------------------------------------------------------------------------------------
Item 10.Cover Page and Table of Contents ..............Cover Page; Table of Contents
Item 11.Fund History ..................................Description of the Funds
Item 12.Description of the Fund and its Investments
and Risks .....................................Investment Policies; Description of the Funds;
Fundamental Investment Limitations
Item 13.Management of the Fund ........................Management of the Funds
Item 14.Control Persons and Principal Holders of
Securities ....................................Management of the Funds
Item 15.Investment Advisory and Other Services ........Investment Advisory Services
Item 16.Brokerage Allocation and Other Practices ......Portfolio Transactions
Item 17.Capital Stock and Other Securities ............Description of the Funds
Item 18.Purchase, Redemption, and Pricing of Shares ...Purchase of Shares; Redemption of Shares;
Share Price
Item 19.Taxation of the Fund ..........................Description of the Funds
Item 20.Underwriters ..................................Not Applicable
Item 21.Calculation of Performance Data ...............Yield and Total Return
Item 22.Financial Statements ..........................Financial Statements
</TABLE>
<PAGE>
[SHIP LOGO]
VANGUARD(R)
MUNICIPAL BOND
FUNDS
Prospectus
February 11, 2000
- - -----------------
This prospectus contains
financial data for the
Funds through the
fiscal year ended
October 31, 1999.
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
[MEMBERS OF THE VANGUARD GROUP (R) LOGO]
<PAGE>
VANGUARD MUNICIPAL BOND FUNDS
Prospectus
February 11, 2000
A Group of Federal Tax-Exempt Mutual Funds
1 FUND PROFILES
1 VANGUARD TAX-EXEMPT MONEY MARKET FUND
4 VANGUARD SHORT-TERM TAX-EXEMPT FUND
7 VANGUARD LIMITED-TERM TAX-EXEMPT FUND
10 VANGUARD INTERMEDIATE-TERM TAX-EXEMPT FUND
13 VANGUARD LONG-TERM TAX-EXEMPT FUND
16 VANGUARD INSURED LONG-TERM TAX-EXEMPT FUND
19 VANGUARD HIGH-YIELD TAX-EXEMPT FUND
22 AN INTRODUCTION TO TAX-EXEMPT INVESTING
23 MORE ON THE FUNDS
23 ADDITIONAL RISK INFORMATION
26 A NOTE ABOUT INSURANCE
27 COSTS AND MARKET-TIMING
27 TURNOVER RATE
27 OTHER INVESTMENT POLICIES AND RISKS
29 THE FUNDS AND VANGUARD
29 INVESTMENT ADVISER
30 DIVIDENDS, CAPITAL GAINS, AND TAXES
32 SHARE PRICE
32 FINANCIAL HIGHLIGHTS
37 INVESTING WITH VANGUARD
37 SERVICES AND ACCOUNT FEATURES
38 TYPES OF ACCOUNTS
38 BUYING SHARES
41 REDEEMING SHARES
45 TRANSFERRING REGISTRATION
45 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. Below you'll find profiles that summarize key features of each Fund.
Additional information concerning the Funds, including an Introduction to
Tax-Exempt Investing, appears following the profiles.
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 seeks to provide a high level of tax-exempt current income, while
maintaining a stable net asset value of $1 per share.
INVESTMENT POLICIES
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 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 pay
interest and principal in a timely manner. Credit risk, which has the
potential to hurt the Fund's performance, should be low for the Fund.
o Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN THE FUND.
PERFORMANCE/RISK INFORMATION
The following bar chart and table 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 total
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.
<PAGE>
2
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
BAR CHART
1990 5.82% 1995 3.75%
1991 4.57% 1996 3.38%
1992 3.01% 1997 3.54%
1993 2.75% 1998 3.34%
1994 3.75% 1999 3.16%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 1.45% (quarter ended June 30, 1990) and the lowest return for a
quarter was 0.55% (quarter ended March 31, 1994).
--------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------------
Vanguard Tax-Exempt Money Market Fund 3.16% 3.43% 3.57%
Lipper Tax-Exempt Money Market Average 2.68 2.99 3.14
--------------------------------------------------------------------------
If you would like to know the current seven-day 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 Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended October 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.16%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.18%
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.
3
-------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------
$18 $58 $101 $230
-------------------------------------------------
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 NEWSPAPER ABBREVIATION*
Declared daily and distributed on the VangMB
first business day of each month
VANGUARD FUND NUMBER
INVESTMENT ADVISER 045
The Vanguard Group, Valley Forge, Pa.,
since 1981 CUSIP NUMBER
922907506
INCEPTION DATE
June 10, 1980 TICKER SYMBOL
VMSXX
NET ASSETS AS OF OCTOBER 31, 1999
$7.14 billion *Money market funds are listed
separately from other newspaper
SUITABLE FOR IRAS mutual fund listings.
No
MINIMUM INITIAL INVESTMENT
$3,000; $1,000 for custodial accounts for minors
- - --------------------------------------------------------------------------------
<PAGE>
4
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 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 5 years or less and is expected to
maintain a dollar-weighted average nominal maturity of 1 to 2 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 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
lose the opportunity for additional price appreciation associated with
falling rates. Call risk is generally low for shorter-term bonds.
o Credit risk, which is the chance that a bond issuer will fail to pay
interest and principal in a timely manner. Credit risk, which has the
potential to hurt the Fund's performance, should be low for the Fund.
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 following bar chart and table 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.
<PAGE>
5
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
BAR CHART
1990 6.57% 1995 5.92%
1991 7.20% 1996 3.69%
1992 4.71% 1997 4.07%
1993 3.82% 1998 4.32%
1994 1.70% 1999 2.58%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 2.18% (quarter ended December 31, 1991) and the lowest return for a
quarter was -0.07% (quarter ended March 31, 1994).
--------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------------
Vanguard Short-Term Tax-Exempt Fund 2.58% 4.11% 4.45%
Lehman 3 Year Municipal Bond Index 1.96 5.17 5.64
--------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended October 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.15%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.18%
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
-------------------------------------------------
$18 $58 $101 $230
-------------------------------------------------
<PAGE>
6
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 MINIMUM INITIAL INVESTMENT
Dividends are distributed monthly; $3,000; $1,000 for custodial accounts
capital gains, if any, are for minors
distributed annually in December
NEWSPAPER ABBREVIATION
INVESTMENT ADVISER MuSht
The Vanguard Group, Valley Forge, Pa.,
since 1981 VANGUARD FUND NUMBER
041
INCEPTION DATE
September 1, 1977 CUSIP NUMBER
922907100
NET ASSETS AS OF OCTOBER 31, 1999
$1.89 billion TICKER SYMBOL
VWSTX
SUITABLE FOR IRAS
No
- - --------------------------------------------------------------------------------
<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 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 10 years and is expected to
maintain a dollar-weighted average nominal maturity of 2 to 6 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 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
lose the opportunity for additional price appreciation associated with
falling rates. 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 pay
interest and principal in a timely manner. Credit risk, which has the
potential to hurt the Fund's performance, should be low for the Fund.
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 following bar chart and table 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.
<PAGE>
8
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
BAR CHART
1990 7.04% 1995 8.57%
1991 9.48% 1996 4.08%
1992 6.39% 1997 5.10%
1993 6.31% 1998 5.12%
1994 0.07% 1999 1.47%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 2.97% (quarter ended March 31, 1995) and the lowest return for a
quarter was -1.17% (quarter ended March 31, 1994).
--------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------------
Vanguard Limited-Term Tax-Exempt Fund 1.47% 4.84% 5.33%
Lehman 3 Year Municipal Bond Index 1.96 5.17 5.64
--------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended October 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's
assets)
Management Expenses: 0.16%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.18%
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
- - --------------------------------------------------------------------------------
$18 $58 $101 $230
- - --------------------------------------------------------------------------------
<PAGE>
9
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 MINIMUM INITIAL INVESTMENT
Dividends are distributed monthly; $3,000; $1,000 for custodial accounts
capital gains, if any, are distributed for minors
annually in December
NEWSPAPER ABBREVIATION
INVESTMENT ADVISER MuLtd
The Vanguard Group, Valley Forge, Pa.,
since inception VANGUARD FUND NUMBER
031
INCEPTION DATE
August 31, 1987 CUSIP NUMBER
922907704
NET ASSETS AS OF OCTOBER 31, 1999
$2.58 billion TICKER SYMBOL
VMLTX
SUITABLE FOR IRAS
No
- - --------------------------------------------------------------------------------
<PAGE>
10
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 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 a dollar-weighted average nominal maturity of 6 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 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
lose the opportunity for additional price appreciation associated with
falling rates. Call risk is generally moderate for intermediate-term bonds.
o Credit risk, which is the chance that a bond issuer will fail to pay
interest and principal in a timely manner. Credit risk, which has the
potential to hurt the Fund's performance, should be low for the Fund.
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 following bar chart and table 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.
<PAGE>
11
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
BAR CHART
1990 7.20% 1995 13.65%
1991 12.16% 1996 4.20%
1992 8.85% 1997 7.08%
1993 11.55% 1998 5.76%
1994 -2.12% 1999 -0.50%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 5.26% (quarter ended March 31, 1995) and the lowest return for a
quarter was -3.21% (quarter ended March 31, 1994).
----------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
----------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
----------------------------------------------------------------------------
Vanguard Intermediate-Term Tax-Exempt Fund -0.50% 5.94% 6.67%
Lehman 7 Year Municipal Bond Index -0.14 6.35 6.59
----------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended October 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.16%
12b-1 Distribution Fee: None
Other Expenses: 0.02
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.18%
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
- - ---------------------------------------------------------------------------
$18 $58 $101 $230
- - ---------------------------------------------------------------------------
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>
12
- - --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are distributed monthly; $3,000; $1,000 for custodial accounts
capital gains, if any, are distributed for minors
annually in December
NEWSPAPER ABBREVIATION
INVESTMENT ADVISER MuInt
The Vanguard Group, Valley Forge, Pa.,
since 1981 VANGUARD FUND NUMBER
042
INCEPTION DATE
September 1, 1977 CUSIP NUMBER
922907209
NET ASSETS AS OF OCTOBER 31, 1999
$8.23 billion TICKER SYMBOL
VWITX
SUITABLE FOR IRAS
No
- - --------------------------------------------------------------------------------
<PAGE>
13
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 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 a dollar-weighted average nominal maturity of 12 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
lose the opportunity for additional price appreciation associated with
falling rates. 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 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 pay
interest and principal in a timely manner. Credit risk, which has the
potential to hurt the Fund's performance, should be low for the Fund.
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 following bar chart and table 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.
<PAGE>
14
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
BAR CHART
1990 6.82% 1995 18.72%
1991 13.50% 1996 4.41%
1992 9.30% 1997 9.29%
1993 13.45% 1998 6.02%
1994 -5.75% 1999 -3.53%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 7.60% (quarter ended March 31, 1995) and the lowest return for a
quarter was -2.15% (quarter ended June 30, 1999).
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- - --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- - --------------------------------------------------------------------------------
Vanguard Long-Term Tax-Exempt Fund -3.53% 6.74% 6.98%
Lehman Municipal Bond Index -2.06 6.91 6.89
- - --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended October 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's
assets)
Management Expenses: 0.16%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.18%
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
-------------------------------------------------
$18 $58 $101 $230
-------------------------------------------------
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>
15
- - --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are distributed monthly; $3,000; $1,000 for custodial accounts
capital gains, if any, are distributed for minors
annually in December
NEWSPAPER ABBREVIATION
INVESTMENT ADVISER MuLong
The Vanguard Group, Valley Forge, Pa.,
since 1981 VANGUARD FUND NUMBER
043
INCEPTION DATE
September 1, 1977 CUSIP NUMBER
922907308
NET ASSETS AS OF OCTOBER 31, 1999
$1.53 billion TICKER SYMBOL
VWLTX
SUITABLE FOR IRAS
No
- - --------------------------------------------------------------------------------
<PAGE>
16
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 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 or your investment in the Fund.) Although the Fund has no
limitations on the maturity of individual securities, its dollar-weighted
average nominal maturity is expected to be between 12 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
lose the opportunity for additional price appreciation associated with
falling rates. 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 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 following bar chart and table 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.
<PAGE>
17
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
BAR CHART
1990 7.04% 1995 18.60%
1991 12.49% 1996 4.02%
1992 9.17% 1997 8.65%
1993 13.09% 1998 6.13%
1994 -5.58% 1999 -2.91%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 7.94% (quarter ended March 31,1995) and the lowest return for a
quarter was -6.03% (quarter ended March 31, 1994).
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- - --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- - --------------------------------------------------------------------------------
Vanguard Insured Long-Term Tax-Exempt Fund -3.53% 6.74% 6.98%
Lehman Municipal Bond Index -2.06 6.91 6.89
- - --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended October 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.17%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.19%
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
-------------------------------------------------
$19 $61 $107 $243
-------------------------------------------------
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>
18
- - --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are distributed monthly; $3,000; $1,000 for custodial accounts
capital gains, if any, are distributed for minors
annually in December
NEWSPAPER ABBREVIATION
INVESTMENT ADVISER MuInlg
The Vanguard Group, Valley Forge, Pa.,
since inception VANGUARD FUND NUMBER
058
INCEPTION DATE
September 30, 1984 CUSIP NUMBER
922907605
NET ASSETS AS OF OCTOBER 31, 1999
$2.16 billion TICKER SYMBOL
VILPX
SUITABLE FOR IRAS
No
- - --------------------------------------------------------------------------------
<PAGE>
19
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 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 Credit risk, which is the chance that a bond issuer will fail to pay
interest and principal in a timely manner. Credit risk, which has the
potential to hurt the Fund's performance, should be moderate for the Fund.
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
lose the opportunity for additional price appreciation associated with
falling rates. Call risk is generally high for high-yield bonds.
o Income risk, which is the chance that falling interest rates will cause the
Fund's income 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 following bar chart and table 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.
<PAGE>
20
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
BAR CHART
1990 5.92% 1995 18.13%
1991 14.75% 1996 4.46%
1992 9.88% 1997 9.24%
1993 12.66% 1998 6.45%
1994 -5.06% 1999 -3.38%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 7.83% (quarter ended March 31,1995) and the lowest return for a
quarter was -5.11% (quarter ended March 31, 1994).
- - --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- - --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- - --------------------------------------------------------------------------------
Vanguard High-Yield Tax-Exempt Fund -3.38% 6.75% 7.07%
Lehman Municipal Bond Index -2.06 6.91 6.89
- - --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended October 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.16%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.18%
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
-------------------------------------------------
$18 $58 $101 $230
-------------------------------------------------
<PAGE>
21
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 MINIMUM INITIAL INVESTMENT
Dividends are distributed monthly; $3,000; $1,000 for custodial accounts
capital gains, if any, are distributed for minors
annually in December
NEWSPAPER ABBREVIATION
INVESTMENT ADVISER MuHY
The Vanguard Group, Valley Forge, Pa.,
since 1981 VANGUARD FUND NUMBER
044
INCEPTION DATE
December 27, 1978 CUSIP NUMBER
922907407
NET ASSETS AS OF OCTOBER 31, 1999
$2.87 billion TICKER SYMBOL
VWAHX
SUITABLE FOR IRAS
No
- - --------------------------------------------------------------------------------
<PAGE>
22
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 or variable
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 23 for a "Plain Talk" on taxable versus
tax-exempt investments.
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.
- - --------------------------------------------------------------------------------
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.
- - --------------------------------------------------------------------------------
<PAGE>
23
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
The Vanguard Group, adviser to the Funds, uses a "top down" investment
management approach. The adviser sets, and continually adjusts, a duration
target for each Fund based upon expectations about the direction of interest
rates and other economic factors. The adviser then buys and sells securities to
achieve the greatest relative value within each Fund's targeted duration. As a
matter of fundamental policy, each Fund will invest at least 80% of its net
assets in tax-exempt securities under normal market conditions.
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.
[FLAG] EACH FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT A FUND'S
DIVIDENDS (INCOME)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.
[FLAG] 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.
- - --------------------------------------------------------------------------------
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.
- - --------------------------------------------------------------------------------
<PAGE>
24
- - --------------------------------------------------------------------------------
PLAIN TALK ABOUT
BONDS AND INTEREST RATES
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--causing you to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you should be able to sell your 5% bond for more than you
paid.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
PLAIN TALK ABOUT
BOND MATURITIES
A bond is issued with a specific maturity date--the date when the bond's
issuer, or seller, must pay back the bond's initial value (known as its "face
value"). Bond maturities generally range from less than one year (short term)
to 30 years (long term). The longer a bond's maturity, the more risk you, as a
bond investor, face as interest rates rise--but also the more interest you
could receive. Long-term bonds are more suitable for investors willing to take
greater risks in hope of higher yields; short-term bond investors should be
willing to accept lower yields in return for less fluctuation in the value of
their investment.
- - --------------------------------------------------------------------------------
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 table below
shows the effect of a 1% and a 2% change (both up and down) in interest rates on
three bonds of different maturities, each with a face value of $1,000.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------
HOW INTEREST RATE CHANGES AFFECT BONDS*
- - --------------------------------------------------------------------------------------------------------------
VALUE OF A $1,000 VALUE OF A $1,000 VALUE OF A $1,000 VALUE OF A $1,000
BOND AFTER A 1% BOND AFTER A 1% BOND AFTER A 2% BOND AFTER A 2%
INCREASE DECREASE INCREASE DECREASE
TYPE OF BOND (MATURITY) IN INTEREST RATES IN INTEREST RATES IN INTEREST RATES IN INTEREST RATES
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-Term (2.5 years) $978 $1,023 $956 $1,046
Intermediate-Term (10 years) 932 1,074 870 1,156
Long-Term (20 years) 901 1,116 816 1,251
- - --------------------------------------------------------------------------------------------------------------
*Assuming a 7% yield.
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
The figures in the table above 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.
<PAGE>
25
[FLAG] 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 EXPER-
IENCE A DECLINE IN INCOME AND LOSE THE OPPORTUNITY FOR ADDITIONAL
PRICE APPRECIATION ASSOCIATED WITH FALLING RATES.
Call risk is low for shorter-term bonds, moderate for intermediate-term
bonds, and high for longer-term bonds.
- - --------------------------------------------------------------------------------
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.
- - --------------------------------------------------------------------------------
[FLAG] EACH FUND IS SUBJECT TO CREDIT RISK, WHICH IS THE CHANCE THAT A BOND
ISSUER WILL FAIL TO PAY 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 on the next page shows the
dollar-weighted average credit quality of each Fund's holdings, as rated by
Moody's Investors Service, as of October 31, 1999:
-------------------------------------------------
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
-------------------------------------------------
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 pay either principal or interest.
Up to 20% of each Fund may be invested in securities that are subject to
the alternative minimum tax (AMT).
<PAGE>
26
- - --------------------------------------------------------------------------------
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."
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
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."
- - --------------------------------------------------------------------------------
[FLAG] EACH FUND IS 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 Negligible 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.
<PAGE>
27
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.
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. A purchase request could be rejected
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
The Funds 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.
[FLAG] 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
<PAGE>
28
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 the gains or
losses of an investment. The Funds' obligation to purchase securities under
futures contracts will not exceed 20% of its total assets.
The reasons for which a Fund may use futures and options are:
o On 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.
The Funds (except the Tax-Exempt Money Market Fund) may temporarily depart
from their normal investment policies--for instance, by investing substantially
in cash reserves--in response to extraordinary market, economic, political, or
other conditions. In doing so, the Funds may succeed in avoiding losses but
otherwise fail to 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.
- - --------------------------------------------------------------------------------
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.
- - --------------------------------------------------------------------------------
<PAGE>
29
- - --------------------------------------------------------------------------------
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 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 funds holding assets worth
more than $530 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.
- - --------------------------------------------------------------------------------
INVESTMENT ADVISER
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1974, serves as the Funds' adviser through its Fixed Income Group. As of October
31, 1999, Vanguard served as adviser for about $345.6 billion in assets.
Vanguard manages the Funds on an at-cost basis, subject to the control of the
Trustees and officers of the Funds. For the fiscal year ended October 31, 1999,
the investment advisory expenses for each of the Funds represented an effective
annual rate of 0.01% of each Fund's average net assets.
The Funds have authorized Vanguard 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 Vanguard 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, Vanguard 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.
<PAGE>
30
- - --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUNDS' ADVISER
The Vanguard Group provides investment advisory services to many Vanguard
funds. The individuals responsible for overseeing the Funds' investments are:
IAN A. MACKINNON, Managing Director of Vanguard; and head of Vanguard's Fixed
Income Group; 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; has managed bond funds since 1988; 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; has managed bond funds since 1989; 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-Term Tax-Exempt
Funds; has worked in investment management since 1982; B.S., Temple University.
- - --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
Each Fund distributes to shareholders virtually all of its net tax-exempt income
(interest less expenses), as well as any capital gains realized from the sale of
its holdings. The Funds' income dividends accrue daily and are distributed on
the first business day of every month; capital gains distributions generally
occur in December. You can receive distributions of income dividends or capital
gains in cash, or you can have them automatically reinvested in more shares of
the Funds.
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. The majority of the income dividends you receive from the Funds
is expected to be exempt from federal income taxes. In addition, you should be
aware of the following basic tax points about tax-exempt mutual funds:
o Distributions of capital gains are taxable to you whether or not you
reinvest these amounts in additional Fund shares.
o Capital gains distributions declared in December--if paid to you by the end
of January--are taxable as if received in December.
o Exempt-interest dividends from a tax-exempt fund are taken into account in
determining the taxable portion of any social security or railroad
retirement benefits that you receive.
o Income paid from tax-exempt bonds whose proceeds are used to fund private,
for-profit organizations may be subject to the federal alternative minimum
tax.
o Any short-term capital gains that you receive are taxable to you as
ordinary income for federal income tax purposes.
<PAGE>
31
o Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
o Capital gains distributions may vary considerably from year to year as a
result of the Funds' normal investment activities and cash flows.
o A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
o State and local income taxes may apply to any dividend or capital gains
distributions that you receive, as well as your gains or losses from any
sale or exchange of Fund shares.
o Income dividends from interest earned on municipal securities of a state or
its political subdivisions are generally exempt from that state's income
taxes. Almost all states, however, tax interest earned on municipal
securities of other states.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not provide us with
your correct taxpayer identification number and certify that it is correct.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. Please
consult your tax adviser for detailed information about a fund's tax
consequences for you.
- - --------------------------------------------------------------------------------
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. The portion of such dividends that are exempt from federal income
tax will be designated as "exempt-interest dividends." Capital gains are
realized whenever the fund sells securities for higher prices than it paid for
them. These capital gains are either short-term or long-term, depending on
whether the fund held the securities for one year or less, or more than one
year.
- - --------------------------------------------------------------------------------
<PAGE>
32
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 when 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:
NET ASSET VALUE = TOTAL ASSETS - LIABILITIES
-------------------------------
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.
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 certain
information reflects financial results for a single Fund share in each case. The
total returns in each table represent the rate that an investor would have
earned or lost each year on an investment in 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.
<PAGE>
33
- - --------------------------------------------------------------------------------
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 1999 with a net asset value (price) of $1 per share. During the
year, the Fund earned $0.030 per share from investment income (interest and
dividends).
Shareholders received $0.030 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 ($0.030 per share) minus the distributions ($0.030 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 3.08% for the year.
As of October 31, 1999, the Fund had $7.144 billion in net assets. For the
year, its expense ratio was 0.18% ($1.80 per $1,000 of net assets); and its net
investment income amounted to 3.03% of its average net assets.
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VANGUARD TAX-EXEMPT MONEY MARKET FUND
SEP. 1 TO
YEAR ENDED OCT. 31, OCT. 31 YEAR ENDED AUGUST 31,
- - ---------------------------------------------------------- ----------------------------------
1999 1998 1997 1997 1996 1995
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- - -------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .030 .034 .006 .034 .034 .036
Net Realized and Unrealized Gain
(Loss) on Investments -- -- -- -- -- --
----------------------------------------------------------------------
Total from Investment Operations .030 .034 .006 .034 .034 .036
----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.030) (.034) (.006) (.034) (.034) (.036)
Distributions from Realized
Capital Gains -- -- -- -- -- --
----------------------------------------------------------------------
Total Distributions (.030) (.034) (.006) (.034) (.036) (.024)
- - -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
=============================================================================================================
TOTAL RETURN 3.08% 3.44% 0.59% 3.47% 3.48% 3.63%
=============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions) $7,144 $6,246 $5,380 $5,345 $4,624 $4,166
Ratio of Total Expenses to
Average Net Assets 0.18% 0.20% 0.18%* 0.19% 0.20% 0.22%
Ratio of Net Investment Income
to Average Net Assets 3.03% 3.37% 3.53%* 3.41% 3.42% 3.56%*
=============================================================================================================
</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.
<PAGE>
34
<TABLE>
<CAPTION>
VANGUARD SHORT-TERM TAX-EXEMPT FUND
SEP. 1 TO
YEAR ENDED OCT. 31, OCT. 31 YEAR ENDED AUGUST 31,
- - ---------------------------------------------------------------------- ----------------------------------
1999 1998 1997 1997 1996 1995
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $15.65 $15.58 $15.57 $15.54 $15.59 $15.46
- - -------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .578 .609 .103 .610 .609 .600
Net Realized and Unrealized Gain (.164) .076 .010 (.050) .131
(Loss) on Investments
----------------------------------------------------------------------
Total from Investment Operations .414 .685 .113 .644 .559 .731
----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.578) (.609) (.103) (.610) (.609) (.600)
Distributions from Realized (.006) (.006) -- (.004) -- (.001)
Capital Gains
----------------------------------------------------------------------
Total Distributions (.584) (.615) (.103) (.614) (.609) (.601)
- - -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $15.48 $15.65 $15.58 $15.57 $15.54 $15.59
=============================================================================================================
TOTAL RETURN 2.69% 4.49% 0.73% 4.22% 3.64% 4.83%
=============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions) $1,893 $1,654 $1,485 $1,464 $1,457 $1,442
Ratio of Total Expenses to
Average Net Assets 0.18% 0.20% 0.18%* 0.19% 0.20% 0.22%
Ratio of Net Investment
Income to Average Net Assets 3.71% 3.90% 3.96%* 3.91% 3.90% 3.88%
Turnover Rate 56% 36% 4% 34% 33% 32%
=============================================================================================================
</TABLE>
*Annualized
<TABLE>
<CAPTION>
VANGUARD LIMITED-TERM TAX-EXEMPT FUND
SEP. 1 TO
YEAR ENDED OCT. 31, OCT. 31 YEAR ENDED AUGUST 31,
- - ---------------------------------------------------------------------- ----------------------------------
1999 1998 1997 1997 1996 1995
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.85 $10.74 $10.71 $10.62 $10.71 $10.57
- - -------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .457 .460 .078 .476 .483 .476
Net Realized and Unrealized (.260) .110 .030 .090 (.090) .140
Gain (Loss) on Investments
----------------------------------------------------------------------
Total from Investment Operations .197 .570 .108 .566 .393 .616
----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income (.457) (.460) (.078) (.476) (.483) (.476)
Distributions from Realized -- -- -- -- -- --
Capital Gains
----------------------------------------------------------------------
Total Distributions (.457) (.460) (.078) (.476) (.483) (.476)
- - -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.59 $10.85 $10.74 $10.71 $10.62 $10.71
=============================================================================================================
TOTAL RETURN 1.83% 5.42% 1.01% 5.44% 3.73% 5.99%
=============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions) $2,577 $2,340 $1,962 $1,929 $1,761 $1,669
Ratio of Total Expenses to
Average Net Assets 0.18% 0.21% 0.18%* 0.19% 0.21% 0.22%
Ratio of Net Investment Income
to Average Net Assets 4.25% 4.27% 4.34%* 4.46% 4.51% 4.51%
Turnover Rate 14% 35% 2% 28% 27% 35%
=============================================================================================================
</TABLE>
*Annualized
<PAGE>
35
<TABLE>
<CAPTION>
VANGUARD INTERMEDIATE-TERM TAX-EXEMPT FUND
SEP. 1 TO
YEAR ENDED OCT. 31, OCT. 31 YEAR ENDED AUGUST 31,
- - ---------------------------------------------------------- ----------------------------------
1999 1998 1997 1997 1996 1995
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $13.52 $13.35 $13.30 $13.04 $13.14 $13.02
- - -------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .648 .661 .111 .669 .671 .686
Net Realized and Unrealized Gain
(Loss) on Investments (.695) .222 .050 .263 (.091) .278
----------------------------------------------------------------------
Total from Investment Operations (.047) .883 .161 .932 .580 .964
----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.648) (.661) (.111) (.669) (.671) (.686)
Distributions from Realized Capital (.035) (0.52) -- (.003) (.009) (.158)
Gains
----------------------------------------------------------------------
Total Distributions (.683) (.713) (.111) (.672) (.680) (.844)
- - -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $12.79 $13.52 $13.35 $13.30 $13.04 $13.14
=============================================================================================================
TOTAL RETURN -0.40% 6.78% 1.21% 7.31% 4.47% 7.82%
=============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $8,228 $7,773 $6,770 $6,658 $5,927 $5,448
Ratio of Total Expenses to Average
Net Assets 0.18% 0.21% 0.18%* 0.19% 0.20% 0.22%
Ratio of Net Investment Income to
Average Net Assets 4.83% 4.93% 4.99%* 5.07% 5.09% 5.35%
Turnover Rate 17% 14% 1% 15% 14% 12%
=============================================================================================================
</TABLE>
*Annualized
<TABLE>
<CAPTION>
VANGUARD INSURED LONG-TERM TAX-EXEMPT FUND
SEP. 1 TO
YEAR ENDED OCT. 31, OCT. 31 YEAR ENDED AUGUST 31,
- - ---------------------------------------------------------- ----------------------------------
1999 1998 1997 1997 1996 1995
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, $12.73 $12.51 $12.45 $12.14 $12.12 $11.98
BEGINNING OF YEAR
- - -------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .644 .658 .111 .674 .670 .684
Net Realized and Unrealized Gain
(Loss) on Investments (.971) .301 .060 .382 .020 .313
----------------------------------------------------------------------
Total from Investment Operations (.327) .959 .171 1.056 .690 .997
----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.644) (.658) (.111) (.674) (.670) (.684)
Distributions from
Realized Capital Gains (.069) (.081) -- (.072) -- (.173)
----------------------------------------------------------------------
Total Distributions (.713) (.739) (.111) (.746) (.670) (.857)
- - -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $11.69 $12.73 $12.51 $12.45 $12.14 $12.12
=============================================================================================================
TOTAL RETURN -2.74% 7.88% 1.37% 8.93% 5.77% 8.88%
=============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $2,160 $2,235 $2,043 $2,024 $1,936 $1,935
Ratio of Total
Expenses to Average Net Assets 0.19% 0.20% 0.18%* 0.19% 0.20% 0.22%
Ratio of Net
Investment Income to Average
Net Assets 5.20% 5.22% 5.32%* 5.47% 5.46% 5.82%
Turnover Rate 17% 16% 1% 18% 18% 7%
=============================================================================================================
</TABLE>
*Annualized
<PAGE>
36
<TABLE>
<CAPTION>
VANGUARD LONG-TERM TAX-EXEMPT FUND
SEP. 1 TO
YEAR ENDED OCT. 31, OCT. 31 YEAR ENDED AUGUST 31,
- - ---------------------------------------------------------- ----------------------------------
1999 1998 1997 1997 1996 1995
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING $11.39 $11.18 $11.11 $10.73 $10.68 $10.58
OF YEAR
- - -------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .565 .580 .098 .588 .591 .608
Net Realized and Unrealized (.935) .268 .070 .403 .050 .256
Gain (Loss) on Investments
----------------------------------------------------------------------
Total from Investment (.370) .848 .168 .991 .641 .864
Operations ----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.565) (.580) (.098) (.588) (.591) (.608)
Distributions from Realized (.115) (.058) -- (.023) -- (.156)
Capital Gains
----------------------------------------------------------------------
Total Distributions (.680) (.638) (.098) (.611) (.591) (.764)
- - -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.34 $11.39 $11.18 $11.11 $10.73 $10.68
=============================================================================================================
TOTAL RETURN -3.45% 7.78% 1.52% 9.46% 6.08% 8.74%
=============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $1,527 $1,509 $1,249 $1,222 $1,110 $1,054
Ratio of Total Expenses to
Average Net Assets 0.18% 0.21% 0.18%* 0.19% 0.20% 0.23%
Ratio of Net Investment
Income to Average Net Assets 5.13% 5.13% 5.28%* 5.37% 5.45% 5.87%
Turnover Rate 15% 18% 1% 9% 26% 35%
=============================================================================================================
</TABLE>
*Annualized
<TABLE>
<CAPTION>
VANGUARD HIGH-YIELD TAX-EXEMPT FUND
SEP. 1 TO
YEAR ENDED OCT. 31, OCT. 31 YEAR ENDED AUGUST 31,
- - ---------------------------------------------------------- ----------------------------------
1999 1998 1997 1997 1996 1995
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $11.06 $10.83 $10.76 $10.39 $10.43 $10.39
- - -------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .571 .582 .106 .589 .594 .625
Net Realized and Unrealized (.858) .282 .070 .370 (.040) .213
Gain (Loss) on Investments ----------------------------------------------------------------------
Total from Investment (.287) .864 .176 .959 .554 .838
Operations ----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income (.571) (.582) (.106) (.589) (.594) (.625)
Distributions from Realized (.072) (.052) -- -- -- (.173)
Capital Gains ----------------------------------------------------------------------
Total Distributions (.643) (.634) (.106) (.589) (.594) (.798)
- - -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.13 $11.06 $10.83 $10.76 $10.39 $10.43
=============================================================================================================
TOTAL RETURN -2.77% 8.19% 1.63% 9.45% 5.39% 8.69%
=============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $2,867 $2,704 $2,256 $2,193 $1,985 $1,865
Ratio of Total Expenses to
Average Net Assets 0.18% 0.20% 0.19%* 0.19% 0.20% 0.22%
Ratio of Net Investment Income
to Average Net Assets 5.33% 5.28% 6.08%* 5.56% 5.66% 6.15%
Turnover Rate 22% 24% 3% 27% 19% 33%
=============================================================================================================
</TABLE>
*Annualized
<PAGE>
37
- - --------------------------------------------------------------------------------
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services
we offer. Booklets providing detailed information are available on the services
marked with a [BOOK]. Please call us to request copies.
- - --------------------------------------------------------------------------------
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- - --------------------------------------------------------------------------------
TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for each Fund unless you notify us otherwise.
- - --------------------------------------------------------------------------------
CHECKWRITING [CHECK]
Method for drawing money from your account by writing a check for $250 or more.
- - --------------------------------------------------------------------------------
VANGUARD(R) DIRECT DEPOSIT SERVICE [BOOK]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- - --------------------------------------------------------------------------------
VANGUARD(R) AUTOMATIC EXCHANGE SERVICE [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 shares to and from most
Vanguard funds.
- - --------------------------------------------------------------------------------
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 our website. We will then mail you 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.
<PAGE>
38
o Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
(Some restrictions may apply.) Please call our Client Services Department
for assistance.
*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: 1-800-749-7273
Call Vanguard for information on your account, account transactions, and account
statements.
- - --------------------------------------------------------------------------------
SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- - --------------------------------------------------------------------------------
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
<PAGE>
39
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.
- - --------------------------------------------------------------------------------
A NOTE ON LOW BALANCES
Each Fund reserves the right to close any nonretirement fund account whose
balance falls below the minimum initial investment. The Fund will deduct a $10
annual fee in June if your nonretirement account balance at that time is below
$2,500. The low balance fee is waived for investors who have aggregate Vanguard
account assets of $50,000 or more.
- - --------------------------------------------------------------------------------
BY MAIL TO . . .[ENVELOPE]
open a new account
Complete and sign the account registration 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. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.
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 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division ...
<PAGE>
40
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). (NOTE THAT
SOME RESTRICTIONS APPLY TO INDEX FUND ACCOUNTS.)
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). (Note that
some restrictions apply to index fund accounts.) 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 available.
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 have initiated a telephone transaction and a
confirmation number has been assigned, the transaction cannot be revoked. We
reserve the right to refuse any purchase request.
- - --------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE]
Call Client Services to arrange your wire transaction.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
Vanguard 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]
<PAGE>
41
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.
- - --------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES
It is important that you call Vanguard before you invest a large dollar amount.
It is our responsibility to consider the interests of all Fund shareholders, and
so we reserve the right to refuse any purchase that may disrupt a Fund's
operation or performance.
- - --------------------------------------------------------------------------------
REDEEMING SHARES
This section describes how you can redeem--that is, sell or exchange--a Fund's
shares.
When Selling Shares:
o Vanguard sends the redemption proceeds to you or a designated third party.*
o You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 44.
When Exchanging Shares:
o The redemption proceeds are used to purchase shares of a different Vanguard
fund.
o You must meet the receiving fund's minimum investment requirements.
o 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.
o In order to exchange into an account with a different registration
(including a different name, address, or taxpayer identification number),
you must include the guaranteed signatures of all current account owners on
your written instructions.
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. NOTE:
Once a redemption is initiated and a confirmation number given, the transaction
CANNOT be canceled.
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail. You can also sell shares by check.
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, and VANGUARD GROWTH
AND INCOME FUND. These funds do, however, permit online and telephone exchanges
within IRAs and other retirement accounts. If you sell shares of these funds
online, you will receive a redemption check at your address of record.
<PAGE>
42
- - --------------------------------------------------------------------------------
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 our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).
- - --------------------------------------------------------------------------------
TELEPHONE REQUESTS [PHONE]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours--to sell or exchange shares. You can exchange shares from these Funds 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:
o The ten-digit account number.
o The name and address exactly as registered on the account.
o The primary Social Security or employer identification number as registered
on the account.
o The Personal Identification Number, if applicable (for instance,
Tele-Account).
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- - --------------------------------------------------------------------------------
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.
<PAGE>
43
- - --------------------------------------------------------------------------------
MAIL REQUESTS [ENVELOPE]
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 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
- - --------------------------------------------------------------------------------
CHECK REQUESTS [CHECK]
You can sell shares by writing a check for $250 or more.
- - --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders, and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt a Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in-kind, i.e., in securities, rather than in cash. If
payment is made in-kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- - --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check, exchange
to another Vanguard fund, or Fund Express redemption.
- - --------------------------------------------------------------------------------
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 registration. Wire
redemptions can be initiated by mail or by telephone during Vanguard's business
hours, but not online.
<PAGE>
44
For Money Market Funds:
For telephone requests made by 10:30 a.m. Eastern time, the wire will arrive at
your bank by the close of business that same day. Requests made by 4 p.m.
Eastern time 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. Eastern time, 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.
- - --------------------------------------------------------------------------------
FUND EXPRESS REDEMPTIONS
Vanguard will electronically transfer funds to your pre-linked checking or
savings account.
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:
o The Fund name and account number.
o The amount of the transaction (in dollars or shares).
o Signatures of all owners exactly as registered on the account (for mail
requests).
o Signature guarantees (if required).* n Any supporting legal documentation
that may be required. n 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 commercial and savings
banks, credit unions, trust companies, or member firms of a U.S. stock
exchange.
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: n 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, a "round trip" covers transactions accomplished by any
combination of methods, including transactions conducted by check, wire, or
exchange to/from another Vanguard fund. "Substantive" means a dollar amount that
Vanguard determines, in its sole discretion, could adversely affect the
management of the Fund.
<PAGE>
45
- - --------------------------------------------------------------------------------
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 ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- - --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- - --------------------------------------------------------------------------------
TRANSFERRING REGISTRATION
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division ...
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- - --------------------------------------------------------------------------------
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about 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
financial 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 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, notify our Client Services Department
at 1-800-662-2739.
<PAGE>
46
- - --------------------------------------------------------------------------------
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 December and June 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 only the average cost single category method.
- - --------------------------------------------------------------------------------
CHECKWRITING STATEMENT
Sent monthly to shareholders using Vanguard's checkwriting option. Our statement
provides images of the front and back of each checkwriting draft paid in the
previous month. This consolidated statement is sent instead of the original
canceled drafts, which will not be returned.
- - --------------------------------------------------------------------------------
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
ALTERNATIVE MINIMUM TAX (AMT)
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.
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 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>
[SHIP LOGO]
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about Vanguard 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
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, DC. 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) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P095N-02/11/2000
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PART B
VANGUARD MUNICIPAL(R) BOND FUNDS
(THE TRUST)
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 11, 2000
This Statement is not a prospectus but should be read in conjunction with the
current Prospectus relating to all of the Trust's funds (dated February 11,
2000). To obtain the Trust's Prospectus or the most recent Annual Report to
Shareholders, which contains the Trust's financial statement as hereby
incorporated by reference, please call:
VANGUARD'S INVESTOR INFORMATION DEPARTMENT 1-800-662-7447
TABLE OF CONTENTS
PAGE
DESCRIPTION OF THE FUNDS.........................................B-1
INVESTMENT POLICIES..............................................B-3
FUNDAMENTAL INVESTMENT LIMITATIONS...............................B-7
CALCULATION OF YIELD.............................................B-9
YIELD AND TOTAL RETURN...........................................B-10
INVESTMENT MANAGEMENT............................................B-11
PORTFOLIO TRANSACTIONS...........................................B-12
PURCHASE OF SHARES...............................................B-12
REDEMPTION OF SHARES.............................................B-12
VALUATION OF SHARES..............................................B-13
MANAGEMENT OF THE FUNDS..........................................B-14
FINANCIAL STATEMENTS.............................................B-17
DESCRIPTION OF THE FUNDS
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.
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SERVICE PROVIDERS
CUSTODIAN. First Union National Bank, PA4943, 530 Walnut Street,
Philadelphia, Pennsylvania 19106, serves as the Funds' custodian. The custodian
is responsible for maintaining the Funds' assets and keeping all necessary
accounts and records.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, serves as the Funds' independent accountants.
The accountants audit financial statements for the Funds and provide other
related services.
TRANSFER AND DIVIDEND-PAYING AGENT. The Funds' transfer agent and
dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, Pennsylvania 19355.
CHARACTERISTICS OF THE TRUST'S SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions
on the right of shareholders to retain or dispose of the Funds' shares, other
than the possible future termination of the Funds. The 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 Funds will continue indefinitely.
SHAREHOLDER LIABILITY. The Funds were 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 Fund will
not be personally liable for payment of the Fund'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 Fund obligation only if the Funds themselves 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 Fund's net assets, and to change any fundamental
policy of the Fund. Shareholders of the Fund receive one vote for each dollar of
net asset value owned on the record date, and a fractional vote for each
fractional dollar of net asset value owned on the record date. However, only the
shares of the fund affected by a particular matter are entitled to vote on that
matter. Voting rights are non-cumulative and cannot be modified without a
majority vote.
LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be
entitled to receive a pro rata share of the net assets of the applicable Fund.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with shares of
the Funds.
CONVERSION RIGHTS. There are no conversion rights associated with shares of
the Funds.
REDEMPTION PROVISIONS. The Funds' redemption provisions are described in
their current prospectus and elsewhere in this Statement of Additional
Information.
SINKING FUND PROVISIONS. The Funds have no sinking fund provisions.
CALLS OR ASSESSMENT. The Funds' shares, when issued, are fully paid and
non-assessable.
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TAX STATUS OF THE FUNDS
Each Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code. This special tax status means that a
Fund will not be liable for federal tax on income and capital gains distributed
to shareholders. In order to preserve its tax status, a Fund must comply with
certain requirements. If a Fund fails to meet these requirements in any taxable
year, it will be subject to tax on its taxable income at corporate rates, and
all distributions from earnings and profits, including any distributions of net
tax-exempt income and net long-term capital gains, will be taxable to
shareholders as ordinary income. In addition, a Fund could be required to
recognize unrealized gains, pay substantial taxes and interest, and make
substantial distributions before regaining its tax status as a regulated
investment company.
INVESTMENT POLICIES
The following policies supplement the Funds' investment objectives and policies
set forth in the Prospectus.
GENERAL
As a matter of fundamental policy, each Fund will invest at least 80% of its net
assets in tax-exempt securities under normal market conditions.
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 fixed-income security (generally a security issued by the U.S.
Government or an agency thereof, a banker's acceptance or a certificate of
deposit) from a commercial bank, broker or dealer, subject to resale to the
seller at an agreed upon price and date (normally, the next business day). A
repurchase agreement may be considered a loan collateralized by securities. The
resale price reflects an agreed upon interest rate effective for the period the
instrument is held by the Fund and is unrelated to the interest rate on the
underlying instrument. In these transactions, the securities acquired by the
Fund (including accrued interest earned thereon) must have a total value in
excess of the value of the repurchase agreement and are held by a custodian bank
until repurchased. In addition, the Funds' 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.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to the liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Fund not within the control
of the Fund and therefore the realization by the Fund on such collateral may be
automatically stayed. Finally, it is possible that the Fund may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While the Fund's
management acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.
VANGUARD INTERFUND LENDING PROGRAM
The Securities and Exchange Commission 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
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responsible for ensuring that the interfund lending program operates in
compliance with all conditions of the Commission's exemptive order.
FUTURES CONTRACTS AND OPTIONS
Each Fund (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 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 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 IN 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
B-4
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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.
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.
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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.
A Fund will annually distribute to shareholders 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.
FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS
Special rules govern the Federal income tax treatment of certain transactions
denominated in terms of a currency other than the U.S. dollar or determined by
reference to the value of one or more currencies other than the U.S. dollar. The
types of transactions covered by the special rules include the following: (i)
the acquisition of, or becoming the obligor under, a bond or other debt
instrument (including, to the extent provided in Treasury regulations, preferred
stock); (ii) the accruing of certain trade receivables and payables; and (iii)
the entering into or acquisition of any forward contract, futures contract,
option or similar financial instrument if such instrument is not marked to
market. The disposition of a currency other than the U.S. dollar by a U.S.
taxpayer is also treated as a transaction subject to the special currency rules.
However, foreign currency-related regulated futures contracts and nonequity
options are generally not subject to the special currency rules if they are or
would be treated as sold for their fair market value at year-end under the
marking-to-market rules applicable to other futures contracts unless an election
is made to have such currency rules apply. With respect to transactions covered
by the special rules, foreign currency gain or loss is calculated separately
from any gain or loss on the underlying transaction and is normally taxable as
ordinary gain or loss. A taxpayer may elect to treat as capital gain or loss
foreign currency gain or loss arising from certain identified forward contracts,
futures contracts and options that are capital assets in the hands of the
taxpayer and which are not part of a straddle. The Treasury Department issued
regulations under which certain transactions subject to the special currency
rules that are part of a "section 988 hedging transaction" (as defined in the
Internal Revenue Code of 1986, as amended, and the Treasury regulations) will be
integrated and treated as a single transaction or otherwise treated consistently
for purposes of the Code. Any gain or loss attributable to the foreign currency
component of a transaction engaged in by the Fund which is not subject to the
special currency rules (such as foreign equity investments other than certain
preferred stocks) will be treated as capital gain or loss and will not be
segregated from the gain or loss on the underlying transaction. It is
anticipated that some of the non-U.S. dollar-denominated investments and foreign
currency contracts the Fund may make or enter into will be subject to the
special currency rules described above.
TEMPORARY INVESTMENTS
The Funds may take temporary defensive measures that are inconsistent with the
Funds' normal fundamental or non-fundamental investment policies and strategies
in response to adverse market, economic, political or other conditions. Such
measures could include investments in (a) highly liquid short-term fixed income
securities issued by or on behalf of municipal or corporate issuers, obligations
of the U.S. Government and its agencies, commercial paper, and bank certificates
of deposit; (b) shares of other investment companies which have investment
objectives consistent with
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those of the Fund; (c) repurchase agreements involving any such securities; and
(d) other money market instruments. There is no limit on the extent to which the
Funds may take temporary defensive measures. In taking such measures, the Funds
may fail to achieve their investment objectives.
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
the Commission's 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
unregistered securities that can only be sold to qualified institutional buyers
in accordance with Rule 144A under the Securities Act of 1933. 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 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 Funds' 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 the
previous paragraph.
WHEN-ISSUED SECURITIES
Each Fund 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 is subject to the following fundamental investment limitations, which
cannot be changed in any material way without the approval of the holders of a
majority of the affected Fund's shares. For these purposes, a "majority" of
shares means shares representing the lesser of: (i) 67% or more of the votes
cast to approve a change, so long as shares representing more than 50% of the
Fund's net asset value are present or represented by proxy; or (ii) more than
50% of the Fund's net asset value.
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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 fixed-income futures contracts and options on fixed-income 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 teh U.S. Government. The Tax-Exempt Money Market Fund may,
however, invest in a single issuer as permitted by the Securities and Exchange
Commission (which currently permits a money market fund to invest up to 25% of
its total assets in the highest-quality securities of a single issuer for a
period of up to three business days).
ILLIQUID SECURITIES. The Fund may not acquire any security if, as a result,
more than 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 customarily purchased by
institutional investors, 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.
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.
B-8
<PAGE>
None of these limitations prevents a Fund from participating in The
Vanguard Group (Vanguard). Because the Funds are members 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 Funds"
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, 1999.
MONEY MARKET FUND
10/31/1999
================================================================================
VALUE OF ACCOUNT AT BEGINNING OF PERIOD.................. $.
VALUE OF SAME ACCOUNT AT END OF PERIOD*.................. .
NET CHANGE IN ACCOUNT VALUE.............................. $.
ANNUALIZED CURRENT NET YIELD (NET CHANGE X 365/7)/AVERAGE
NET ASSET VALUE........................................ .%
EFFECTIVE YIELD [(NET CHANGE) + 1](365/7) -1............. .%
AVERAGE WEIGHTED MATURITY OF INVESTMENTS................. . 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
Fund has obtained private insurance that partially protects the Money Market
Fund against default of principal or interest payments on some of 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
Funds 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.
CALCULATION OF YIELD (OTHER FUNDS OF THE TRUST)
Yield is the net annualized return based on a specified 30-day (or one month)
period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
YIELD = 2[((A-B)/CD+1)/6/-1] Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
B-9
<PAGE>
YIELD AND TOTAL RETURN
The yield of each Fund for the 30-day period (seven-day period for the
Tax-Exempt Money Market Fund ended October 31, 1999 is set forth below. Yields
are calculated daily for each Fund.
TAX-EXEMPT MONEY MARKET FUND.....................................3.27%
SHORT-TERM TAX-EXEMPT FUND.......................................3.80%
LIMITED-TERM TAX-EXEMPT FUND.....................................4.28%
INTERMEDIATE-TERM TAX-EXEMPT FUND................................4.84%
LONG-TERM TAX-EXEMPT FUND........................................5.29%
INSURED LONG-TERM TAX-EXEMPT FUND................................5.22%
HIGH-YIELD TAX-EXEMPT FUND.......................................5.51%
The average annual total return of each Fund for the one-, five-, and ten-year
periods ended October 31, 1999 is set forth below:
- - --------------------------------------------------------------------------------
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
- - ------------------------------- 10/31/1999 10/31/1999 10/31/1999
- - -------------------------------------------------------------------------------
Tax-Exempt Money Market Fund 3.08% 3.43% 3.61%
- - -------------------------------------------------------------------------------
Short-Term Tax-Exempt Fund 2.69% 4.07% 4.54%
- - -------------------------------------------------------------------------------
Limited-Term Tax-Exempt Fund 1.83% 4.77% 5.48%
- - -------------------------------------------------------------------------------
Intermediate-Term Tax-Exempt Fund -0.40% 5.91% 6.87%
- - -------------------------------------------------------------------------------
Long-Term Tax-Exempt Fund -3.45% 6.87% 7.23%
- - -------------------------------------------------------------------------------
Insured Long-Term Tax-Exempt Fund -2.74% 6.82% 7.05%
- - -------------------------------------------------------------------------------
High-Yield Tax-Exempt Fund -2.77% 6.96% 7.36%
- - -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is the average annual compounded rate of return for
the periods of one year, five years, ten years or the life of the Fund, all
ended on the last day of a recent month. Average annual total return quotations
will reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares. Average annual total return is calculated by finding
the average annual compounded rates of return of a hypothetical investment over
such periods according to the following formula (average annual total return is
then expressed as a percentage):
T = (ERV/P)/1//N-1
Where:
T = average annual total return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable period.
AVERAGE ANNUAL AFTER-TAX TOTAL RETURN QUOTATION
We calculate the Fund's average annual after-tax total return by finding the
average annual compounded rate of return over the 1-, 5-, and 10-year periods
that would equate the initial amount invested to the after-tax value, according
to the following formulas:
After-tax return:
P (1+T)/N/=ATV
B-10
<PAGE>
Where:
P =a hypothetical initial payment of $1,000
T =average annual after-tax total return
n =number of years
ATV =after-tax value at the end of the 1-,5-, or 10-year
periods of a hypothetical $1,000 payment made at the beginning of
the time period, assuming no liquidation of the investment at the
end of the measurement periods.
Instructions:
1.Assume all distributions by the Funds are reinvested--less the taxes due on
such distributions--at the price on the reinvestment dates during the period.
Adjustments may be made for subsequent re-characterizations of distributions.
2.Calculate the taxes due on distributions by the Funds by applying the highest
federal marginal tax rates to each component of the distributions on the
reinvestment date (e.g., ordinary income, short-term capital gain, long-term
capital gain, etc.). For periods after December 31, 1997, the federal marginal
tax rates used for the calculations are 39.6% for ordinary income and
short-term capital gains and 20% for long-term capital gains. Note that the
applicable tax rates may vary over the measurement period. Assume no taxes are
due on the portions of any distributions classified as exempt interest or
non-taxable (i.e. return of capital). Ignore any potential tax liabilities
other than federal tax liabilities (e.g., state and local taxes).
3.Include all recurring fees that are charged to all shareholder accounts. For
any account fees that vary with the size of the account, assume an account
size equal to the Fund's mean (or median) account size. Assume that no
additional taxes or tax credits result from any redemption of shares required
to pay such fees.
4. State the total return quotation to the nearest hundreth of one percent.
CUMULATIVE TOTAL RETURN
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):
C = (ERV/P)-1
Where:
C = cumulative total return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable period.
INVESTMENT MANAGEMENT
The Funds receive 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 funds
The Vanguard Group of Investment Companies. The investment management staff is
supervised by the senior officers of the Funds.
In substance, the Funds 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.
B-11
<PAGE>
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 years ended October 31, 1997, October 31, 1998, and
October 31, 1999, 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.
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 Funds reserve 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 Funds, 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 Funds' shares.
REDEMPTION OF SHARES
The Funds 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 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 Funds to
B-12
<PAGE>
dispose of securities owned by it, or fairly to determine the value of its
assets, and (iii) for such other periods as the Commission may permit.
The Funds have made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Funds at
the beginning of such period.
No charge is made by the Fund for redemptions, except for wire withdrawals
under $5,000 which are subject to a $5.00 charge. Shares redeemed may be worth
more or less than what was paid for them, depending on the market value of the
securities held by each Fund.
SIGNATURE GUARANTEES. To protect your account, the Funds, and Vanguard from
fraud, signature guarantees are required for certain redemptions. Signature
guarantees enable a Fund to verify the identity of the person who has authorized
a redemption from your account. SIGNATURE GUARANTEES ARE REQUIRED IN CONNECTION
WITH: (1) ALL REDEMPTIONS, REGARDLESS OF THE AMOUNT INVOLVED, WHEN THE PROCEEDS
ARE TO BE PAID TO SOMEONE OTHER THAN THE REGISTERED OWNERS; 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 Fund 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 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 Fund 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
B-13
<PAGE>
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.
MANAGEMENT OF THE FUNDS
OFFICERS AND TRUSTEES
The officers of the Fund manage its day-to-day operations and are responsible to
the Fund's Board of Trustees. The Trustees set broad policies for the Fund and
choose its officers. The following is a list of the Trustees and officers of the
Fund and a statement of their present positions and principal occupations during
the past five years. As a group, the Fund's Trustees and officers own less than
1% of the outstanding shares of each Fund. Each Trustee also serves as a
Director of The Vanguard Group, Inc., and as a Trustee of each of the 103 funds
administered by Vanguard (102 in the case of Mr. Malkiel). The mailing address
of the Trustees and officers of the Fund is Post Office Box 876, Valley Forge,
PA 19482.
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 & Johnson (Pharmaceuticals/Consumer Products), Director of Johnson &
Johnson* MERCK Consumer Pharmaceuticals Co., 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 Select
Sector SPDR Trust (Exchange-Traded Mutual Fund).
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee
Chairman, President, Chief Executive Officer, and Director of NACCO Industries,
Inc. (Machinery/ Coal/Appliances); and Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals).
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 and Gamble
Co., NACCO Industries, Inc.(Machinery/ Coal/Appliances), and Newfield
Exploration Co. (Energy); 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
Retired Chairman 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 each of the investment
companies in The Vanguard Group.
* Officers of the Fund are "interested persons" as defined in the 1940 Act.
THE VANGUARD GROUP
The Fund is a member of The Vanguard Group of Investment Companies, which
consists of more than 30 investment companies (the Funds). Through their
jointly-owned subsidiary, The Vanguard Group, Inc. (Vanguard), the Fund and the
other Funds 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
Funds, including Vanguard Municipal Bond Funds.
Vanguard employs a supporting staff of management and administrative personnel
needed to provide the requisite services to the Funds and also furnishes the
Funds with necessary office space, furnishings and equipment. Each Fund pays its
share of Vanguard's total expenses which are allocated among the Funds under
methods approved by the Board of Trustees of each fund. In addition, each Fund
bears its own direct expenses, such as legal, auditing and custodian fees.
The Fund'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 Funds.
Vanguard adheres to a Code of Ethics established pursuant to Rule 17j-1 under
the 1940 Act. 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 Funds.
The amounts which each of the Funds have invested are adjusted from time to time
in order to maintain the proportionate relationship between each Fund's relative
net assets and its contribution to Vanguard's capital. At October 31, 1999, the
Fund had contributed capital of $5,750,000 to Vanguard, representing 0.02% of
each Fund's net assets and 5.7% of Vanguard's capitalization. The Amended and
Restated Funds' Service Agreement provides for the following arrangement: (a)
each Vanguard Fund may be called upon to 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 Fund 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 Funds by third parties.
DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of The
Vanguard Group, Inc., provides all distribution and marketing activities for the
Funds 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 Fund, and
whether to organize new investment companies.
B-15
<PAGE>
One-half of the distribution expenses of a marketing and promotional nature is
allocated among the Funds based upon their relative net assets. The remaining
one-half of these expenses is allocated among the Funds based upon each Fund's
sales for the preceding 24 months relative to the total sales of the Funds as a
Group, provided, however, that no Fund's aggregate quarterly rate of
contribution for distribution expenses of a marketing and promotional nature
shall exceed 125% of the average distribution expense rate for The Vanguard
Group, and that no Fund shall incur annual distribution expenses in excess of
20/100 of 1% of its average month-end net assets.
During the last three fiscal years, the Funds incurred the following
approximate amounts of The Vanguard Group's management (including transfer
agency), distribution, and marketing expenses.
<TABLE>
<CAPTION>
FISCAL YEAR 9/01/1997 FISCAL YEAR FISCAL YEAR
ENDED TO ENDED ENDED
FUND 8/31/1997 10/31/1997 8/31/ 1998 10/31/1999
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Exempt Money Market Fund $8,231,000 $1,404,000 $9,944,000 $11,464,000
- - ----------------------------------------------------------------------------------------------------
Short-Term Tax-Exempt Fund 2,383,000 383,000 2,686,000 2,992,000
- - ----------------------------------------------------------------------------------------------------
Limited-Term Tax-Exempt Fund 3,006,000 507,000 3,887,000 4,260,000
- - ----------------------------------------------------------------------------------------------------
Intermediate-Term Tax-Exempt Fund 10,472,000 1,762,000 13,234,000 13,906,000
- - ----------------------------------------------------------------------------------------------------
Long-Term Tax-Exempt Fund 1,960,000 317,000 2,488,000 3,861,000
- - ----------------------------------------------------------------------------------------------------
Insured Long-Term Tax-Exempt Fund 3,298,000 526,000 3,761,000 2,631,000
- - ----------------------------------------------------------------------------------------------------
High-Yield Tax-Exempt Fund 3,469,000 534,000 4,406,000 4,971,000
- - ----------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT ADVISORY SERVICES. Vanguard provides investment advisory services
to the Fund, and to several other Vanguard Funds. These services are provided on
an at-cost basis from a money management staff employed directly by Vanguard.
The compensation and other expenses of this staff are paid by the Funds
utilizing these services.
TRUSTEE COMPENSATION
The same individuals serve as Trustees of all Vanguard Funds (with two
exceptions, which are noted in the following table), and each Fund pays a
proportionate share of the Trustees' compensation. The Funds employ their
officers on a shared basis, as well. However, officers are compensated by The
Vanguard Group, Inc., not the Funds.
INDEPENDENT TRUSTEES. The Funds compensate their independent Trustees -- that
is, the ones who are not also officers of the Fund -- in three ways:
. The independent Trustees receive an annual fee for their service to the Funds,
which is subject to reduction based on absences from scheduled Board meetings.
. The independent Trustees are reimbursed for the travel and other expenses that
they incur in attending Board meetings.
. Upon retirement, the independent Trustees receive an aggregate annual fee of
$1,000 for each year served on the Board up to fifteen years of service. This
annual fee is paid for ten years following retirement, or until each Trustee's
death.
"INTERESTED" TRUSTEES. The Funds' interested Trustees -- Messrs. Bogle and
Brennan -- receive no compensation for their service in that capacity. However,
they are paid in their role as officers of The Vanguard Group, Inc.
COMPENSATION TABLE. The following table provides compensation details for each
of the Trustees. We list the amounts paid as compensation and accrued as
retirement benefits by the Fund for each Trustee. In addition, the table shows
the total amount of benefits that we expect each Trustee to receive from all
Vanguard funds upon retirement, and the total amount of compensation paid to
each Trustee by all Vanguard funds. All information shown is for the fiscal year
ended October 31, 1999.
B-16
<PAGE>
VANGUARD MUNICIPAL BOND FUNDS COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS ESTIMATED FROM ALL
COMPENSATION ACCRUED AS PART ANNUAL VANGUARD
FROM THESE OF THESE FUNDS' BENEFITS UPON FUNDS PAID TO
NAMES OF TRUSTEES FUNDS EXPENSES RETIREMENT TRUSTEES(1)
- - --------------------------------------------------------------------------------------------------------------------
John C. Bogle(2) .......................... None None None None
John J. Brennan ........................... None None None None
Barbara Hauptfuhrer(3) .................... $847 $107 $15,000 $0
JoAnn Heffernan Heisen .................... $5,085 $280 $15,000 $80,000
Bruce K. MacLaury ......................... $0 $0 $12,000 $75,000
Burton G. Malkiel ......................... $5,125 $465 $15,000 $80,000
Alfred M. Rankin, Jr. ..................... $5,085 $339 $15,000 $80,000
John C. Sawhill ........................... $5,085 $429 $15,000 $80,000
James O. Welch, Jr. ....................... $5,085 $495 $15,000 $80,000
J. Lawrence Wilson ........................ $5,085 $358 $15,000 $80,000
</TABLE>
(1) The amounts reported in this column reflect the total compensation paid to
each Trustee for their service as Trustee of 103 Vanguard funds (102 in the
case of Mr. Malkiel).
(2) Mr. Bogle has retired from the Funds' Board, effective December 31, 1999.
(3) Mrs. Hauptfuhrer retired from the Funds' Board, effective December 31, 1998.
FINANCIAL STATEMENTS
The Funds' Financial Statements for the fiscal year ended October 31, 1999,
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 Funds' Annual Report to Shareholders, which may be
obtained without charge.
DESCRIPTION OF MUNICIPAL BONDS AND THEIR RATINGS
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or any
of the member Funds 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 Fund may also invest in tax-exempt industrial
development bonds, short-term municipal obligations, demand notes and tax-exempt
commercial paper.
B-17
<PAGE>
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 Fund
will invest are payable on not more than 397 days' notice. Each note purchased
by the Fund will meet the quality criteria set out above for the Fund.
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 Fund.
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 date.
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 in the future. If any such proposal were
enacted, it might restrict or eliminate the ability of the Fund to achieve its
investment objective. In that event, the Funds' 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 Funds' 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;
B-18
<PAGE>
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.
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 Fund, 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 is downgraded below
the minimum investment level permitted the investment policies of such Fund, the
Trustees and officers of the Fund will carefully assess the creditworthiness of
the obligation to determine whether it continues to meet the policies and
objectives of the Fund.
B-19
<PAGE>
SAI95-02/11/ 2000
B-20
<PAGE>
PART C
VANGUARD MUNICIPAL BOND FUNDS
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Declaration of Trust**
(b) By-Laws**
(c) Reference is made to Articles III and V of the Registrant's Declaration
of Trust
(d) Investment Advisory Contract**
(e) Not applicable
(f) Reference is made to the section entitled "Management of the Funds" 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) Not Applicable
(o) Not Applicable
- - ------------------------
* Filed herewith
**Filed previously
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
The Vanguard Group, Inc. (Vanguard) is an investment adviser registered under
the Advisers Act. The list required by this Item 26 of officers and directors of
Vanguard, together with any information as to any business profession, vocation,
or employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated herein by reference from Schedules B
and D of Form ADV filed by Vanguard pursuant to the Advisers Act (SEC File No.
801-11953).
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 to be maintained by Section 31
(a) of the Investment Company Act and the rules promulgated thereunder will be
maintained at the offices of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc., Valley Forge, Pennsylvania 19482; and the Registrant's
Custodian, The Bank of New York, One Wall Street, New York, NY 10286.
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 hereby certifies that it meets all
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and 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 21st day of January, 2000.
VANGUARD MUNICIPAL BOND FUNDS
SIGNATURE TITLE DATE
- - --------------------------------------------------------------------------------
By: /S/ JOHN J. BRENNAN President, Chairman, Chief January 21, 2000
-------------------------- Executive Officer, and Trustee
(Heidi Stam)
John J. Brennan*
By: /S/ JOANN HEFFERNAN HEISEN Trustee January 21, 2000
--------------------------
(Heidi Stam)
JoAnn Heffernan Heisen*
By: /S/ BURTON G. MALKIEL Trustee January 21, 2000
--------------------------
(Heidi Stam)
Burton G. Malkiel*
By: /S/ ALFRED M. RANKIN, JR. Trustee January 21, 2000
--------------------------
(Heidi Stam)
Alfred M. Rankin, Jr.*
By: /S/ JOHN C. SAWHILL Trustee January 21, 2000
--------------------------
(Heidi Stam)
John C. Sawhill*
By: /S/ JAMES O. WELCH, JR. Trustee January 21, 2000
--------------------------
(Heidi Stam)
James O. Welch, Jr.*
By: /S/ J. LAWRENCE WILSON Trustee January 21, 2000
--------------------------
(Heidi Stam)
J. Lawrence Wilson*
By: /S/ THOMAS J. HIGGINS Treasurer and Principal January 21, 2000
-------------------------- Financial Officer and
(Heidi Stam) Accounting Officer
Thomas J. Higgins*
*By Power of Attorney. See File Number 33-4424, filed on January 25, 1999.
Incorporated by Reference.
<PAGE>
INDEX TO EXHIBITS
Consent of Independent Accountants .....................................Ex-99.BJ
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 41 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated November 30, 1999, relating to the financial
statements and financial highlights appearing in the October 31, 1999 Annual
Report to Shareholders of Vanguard Municipal Bond Funds, which are also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the heading "Financial Statements" in the Prospectus
and under the headings "Financial Statements" and "Service Providers -
Independent Accountants" in the Statement of Additional Information.
PricewaterhouseCoopers LLP
Philadelphia, PA
January 20, 2000
