<PAGE>
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 33-2908) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 11
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 13
VANGUARD NEW YORK INSURED
TAX-FREE FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600,
VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
It is hereby requested that this filing become effective on March 29, 1996,
pursuant to paragraph (b) of Rule 485.
Approximate Date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes effective*.
Registrant elects to register an indefinite number of shares pursuant to
Regulation 24f-2 under the Investment Company Act of 1940. Registrant filed
its Rule 24f-2 Notice for the year ended November 30, 1995 on January 25,
1996.
==============================================================================
<PAGE>
VANGUARD NEW YORK INSURED TAX-FREE FUND
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Form N-1A
Item Number Location in Prospectus
<S> <C> <C>
Item 1. Cover Page ................................. Cover Page
Item 2. Synopsis ................................... Not Applicable
Item 3. Condensed Financial Information ............ Financial Highlights
Item 4. General Description of Registrant .......... Investment Objective; Investment
Limitations; Investment Policies;
General Information
Item 5. Management of the Fund ..................... Investment Adviser
Management of the Fund;
Item 6. Capital Stock and Other Securities ......... Opening an Account and Purchasing
Shares; Selling Your Shares; The
Share Price of the Fund; Dividends,
Capital Gains and Taxes; General
Information
Item 7. Purchase of Securities Being Offered ....... Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase ................... Selling Your Shares
Item 9. Pending Legal Proceedings .................. Not Applicable
Form N-1A Location in Statement
Item Number of Additional Information
Item 10. Cover Page ................................. Cover Page
Item 11. Table of Contents .......................... Cover Page
Item 12. General Information and History ............ Management of the Fund
Item 13. Investment Objective and Policies .......... Investment Limitations; Investment
Policies
Item 14. Management of the Fund ..................... Management of the Fund;
Investment Management
Item 15. Control Persons and Principal Holders of
Securities ................................. Management of the Fund
Item 16. Investment Advisory and Other Services ..... Management of the Fund;
Investment Management
Item 17. Brokerage Allocation ...................... Not Applicable
Item 18. Capital Stock and Other Securities ......... Financial Statements
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered ................... Purchase of Shares; Redemption of
Shares
Item 20. Tax Status ................................. Appendix
Item 21. Underwriters ............................... Not Applicable
Item 22. Calculations of Yield Quotations of
Money Market Fund .......................... Calculation of Yield
Item 23. Financial Statements ...................... Financial Statements
</TABLE>
<PAGE>
===============================================================================
VANGUARD
NEW YORK
INSURED
TAX-FREE FUND A Member of The Vanguard Group
===============================================================================
PROSPECTUS-March 29, 1996
- -----------------------------------------------------------------------------
NEW ACCOUNT INFORMATION: Investor Information Department-1-800-662-7447 (SHIP)
- -----------------------------------------------------------------------------
SHAREHOLDER ACCOUNT SERVICES: Client Services Department-1-800-662-2739 (CREW)
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVE &
POLICIES Vanguard New York Insured Tax-Free Fund (the "Fund") is an
open-end non-diversified investment company that seeks to
provide income that is exempt from federal and New York
personal income taxes. The Fund will invest primarily in
securities issued by New York state and local governments
and public financing authorities, but may also invest in
securities of issuers other than New York and its political
subdivisions. The Fund is available only to New York
residents. Shares of the Fund are neither insured nor
guaranteed by any agency of the U.S. Government, including
the FDIC.
- --------------------------------------------------------------------------------
OPENING AN
ACCOUNT Please complete and return the Account Registration Form. If
you need assistance in completing this Form, please call the
Investor Information Department, Monday through Friday, from
8:00 a.m. to 9:00 p.m. and Saturday, from 9:00 a.m. to 4:00
p.m. (Eastern time). The minimum initial investment is
$3,000 or $1,000 for Uniform Gifts/Transfers to Minors Act
accounts. The Fund is offered on a no-load basis (i.e.,
there are no sales commissions or 12b-1 fees). However, the
Fund incurs expenses for investment advisory, management,
administrative and distribution services.
- --------------------------------------------------------------------------------
ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information that you should know about the Fund before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing additional
information about the Fund has been filed with the
Securities and Exchange Commission. This Statement is dated
March 29, 1996, and has been incorporated by reference into
this Prospectus. It may be obtained, without charge, by
writing to the Fund or by calling the Investor Information
Department.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page
<S> <C> <C> <C>
Fund Expenses .............................. 2 Investment Adviser ......................... 14
Financial Highlights ....................... 2 Dividends, Capital Gains and Taxes ......... 15
Yield and Total Return ..................... 3 The Share Price of the Fund ................ 16
FUND INFORMATION General Information ........................ 17
Investment Objective ....................... 4 SHAREHOLDER GUIDE
Investment Policies ........................ 4 Opening an Account and
Investment Risks ........................... 5 Purchasing Shares ........................ 18
Who Should Invest .......................... 7 When Your Account Will Be Credited ......... 21
How to Compare Tax-Free and Selling Your Shares ........................ 21
Taxable Yields ............................ 8 Exchanging Your Shares ..................... 24
Implementation of Policies ................. 9 Important Information About Telephone
Investment Limitations ..................... 13 Transactions ............................. 26
Management of the Fund ..................... 14 Transferring Registration .................. 26
Other Vanguard Services .................... 27
</TABLE>
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
<PAGE>
FUND EXPENSES The following table illustrates all expenses and fees that
you would incur as a shareholder of the Fund. The expenses
and fees set forth in the table are for the 1995 fiscal
year.
Shareholder Transaction Expenses
------------------------------------------------------------
Sales Load Imposed on Purchases ............... None
Sales Load Imposed on Reinvested Dividends .... None
Redemption Fees* .............................. None
Exchange Fees ................................. None
Annual Fund Operating Expenses
------------------------------------------------------------
Management & Administrative Expenses .......... 0.17 %
Investment Advisory Expenses .................. 0.01
12b-1 Fees .................................... None
Other Expenses
Distribution Costs ..... 0.02%
Fund Insurance ......... 0.00
Miscellaneous Expenses . 0.02
------
Total Other Expenses ........................... 0.04%
-------
Total Operating Expenses .................. 0.22%
=======
*Wire redemptions of less than $5,000 subject to a $5.00
charge.
The purpose of this table is to assist you in understanding
the various costs and expenses that you would bear directly
or indirectly as an investor in the Fund.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2) redemption
at the end of each period. As noted in the table above, the
Fund charges no redemption fees of any kind.
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$2 $7 $12 $28
This example should not be considered a representation of
past or future expenses or performance. Actual expenses may
be higher or lower than those shown.
- --------------------------------------------------------------------------------
FINANCIAL
HIGHLIGHTS The following financial highlights for a share outstanding
throughout each period insofar as they relate to each of the
five years in the period ended November 30, 1995, have been
audited by Price Waterhouse LLP, independent accountants,
whose report thereon was unqualified. This information
should be read in conjunction with the Fund's financial
statements and notes thereto, which, together with the
remaining portions of the Fund's 1995 Annual Report to
Shareholders, are incorporated by reference in the Statement
of Additional Information and this Prospectus, and which
appear, along with the report of Price Waterhouse LLP, in
the Fund's 1995 Annual Report to Shareholders. For a more
complete discussion of the Fund's performance, please see
the Fund's 1995 Annual Report to Shareholders, which may be
obtained without charge by writing to the Fund or by calling
our Investor Information Department at 1-800-662-7447.
2
<PAGE>
<TABLE>
<CAPTION>
Year Ended November 30,
-----------------------------------------------------
1995 1994 1993 1992 1991
-----------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $9.70 $10.97 $10.45 $10.04 $9.66
--------- --------- -------- -------- --------
Investment Operations
Net Investment Income ........ .581 .588 .594 .631 .639
Net Realized and Unrealized
Gain (Loss) on Investments . 1.310 (1.258) .665 .410 .380
--------- --------- -------- -------- --------
Total from Investment
Operations .............. 1.891 (.670) 1.259 1.041 1.019
- -----------------------------------------------------------------------------------------
Distributions
Dividends from Net Investment
Income .................... (.581) (.588) (.594) (.631) (.639)
Distributions from Realized
Capital Gains ............. -- (.012) (.145) -- --
--------- --------- -------- -------- --------
Total Distributions ....... (.581) (.600) (.739) (.631) (.639)
- -----------------------------------------------------------------------------------------
Net Asset Value, End of Period .. $11.01 $9.70 $10.97 $10.45 $10.04
=========================================================================================
Total Return ................... 19.90% (6.37)% 12.42% 10.63% 10.87%
=========================================================================================
Ratios/Supplemental Data .......
Net Assets, End of Period
(Millions) ................... $859 $695 $807 $574 $408
Ratio of Expenses to Average Net
Assets ....................... .22%(1) .22% .19% .23%+ .27%+
Ratio of Net Investment Income
to Average Net Assets ........ 5.51% 5.60% 5.47% 6.11% 6.48%
Portfolio Turnover Rate ........ 10% 20% 10% 28% 19%
Year Ended November 30, April 7,
-------------------------------------------- 1986 to
Nov. 30,
1990 1989 1988 1987 1986**
---------------------------------------------------------
Net Asset Value, Beginning of
Period $9.73 $9.26 $8.87 $10.08 $10.00
-------- -------- -------- --------- -----------
Investment Operations ..........
Net Investment Income ........ .629 .635 .618 .628 .381
Net Realized and Unrealized
Gain (Loss) on Investments . (.070) .470 .390 (1.210) .080
-------- -------- -------- --------- -----------
Total from Investment
Operations .............. .559 1.105 1.008 (.582) .461
- ----------------------------------------------------------------------------------------------
Distributions ..................
Dividends from Net Investment
Income .................... (.629) (.635) (.618) (.628) (.381)
Distributions from Realized
Capital Gains ............. -- -- -- -- --
-------- -------- -------- --------- -----------
Total Distributions ....... (.629) (.635) (.618) (.628) (.381)
- ----------------------------------------------------------------------------------------------
Net Asset Value, End of Period . $9.66 $9.73 $9.26 $8.87 $10.08
==============================================================================================
Total Return ................... 5.99% 12.25% 11.62% (5.82)% 5.10%
==============================================================================================
Ratios/Supplemental Data .......
Net Assets, End of Period
(Millions) ................... $241 $167 $103 $76 $52
Ratio of Expenses to Average Net
Assets ....................... .31%+ .34%+ .40%+ .35%+ .34%+
Ratio of Net Investment Income
to Average Net Assets ........ 6.60% 6.64% 6.75% 6.80% 6.50%*
Portfolio Turnover Rate ........ 17% 10% 4% 31% 8%
</TABLE>
* Annualized.
** Commencement of operations.
+ Insurance Expenses Represent .01%, .01%, .02%, .04%, .07%, .08% and .08%,
respectively.
(1) Effective in fiscal 1995, does not include expense reductions from directed
brokerage and custodian fee offset arrangements. The 1995 Ratio of Expenses
to Average Net Assets is .21% after including these reductions.
- -------------------------------------------------------------------------------
<PAGE>
YIELD AND
TOTAL RETURN From time to time the Fund may advertise its yield and total
return. Both yield and total return figures are based on
historical earnings and are not intended to indicate future
performance. The "total return" of the Fund refers to the
average annual compounded rates of return over one-, five-
and ten-year periods or over the life of the Fund (as stated
in the advertisement) that would equate an initial amount
invested at the beginning of a stated period to the ending
redeemable value of the investment, assuming the
reinvestment of all dividend and capital gains
distributions.
In accordance with industry guidelines set forth by the U.S.
Securities and Exchange Commission, the "30-day yield" of
the Fund is calculated by dividing the net investment income
per share earned during a 30-day period by the net asset
value per share on the last day of the period. Net
investment income includes interest and dividend income
earned on the Fund's securities; it is net of all expenses
and all recurring and nonrecurring charges that have been
applied to all shareholder accounts. The yield calculation
assumes that the net investment income earned over 30 days
is compounded monthly for six months and then annualized.
Methods used to calculate advertised yields are standardized
for all bond mutual funds. However, these methods differ
from the accounting methods used by the Fund to maintain its
books and records, and so the advertised 30-day yield may
not fully reflect the income paid to an investor's account
or the yield reported in the Fund's Annual Report to
Shareholders.
- -------------------------------------------------------------------------------
3
<PAGE>
INVESTMENT
OBJECTIVE The objective of the Fund is to provide investors with a
high level of income that is exempt from federal and New
York personal income taxes.
The Fund seeks to The Fund is available only to investors who reside in New
provide income that York. There is no assurance that the Fund will achieve its
is exempt from stated objective.
federal and New
York income taxes The investment objective of the Fund is fundamental and so
may not be changed without the approval of a majority of the
Fund's shareholders.
- --------------------------------------------------------------------------------
INVESTMENT
POLICIES The Fund will invest at least 80% of its assets in insured
New York municipal securities, exclusive of New York AMT
The Fund invests bonds (see below). New York municipal securities are debt
in insured New obligations issued by New York state and local governments
York municipal and public financing authorities (and, possibly, by certain
securities U.S. territories) that seek to provide interest income that
is exempt from both federal and New York personal income
taxes. The New York municipal securities described above
may include securities in which the tax-exempt interest rate
is determined by an index, swap or some other formula.
Insured New York municipal securities are those for which
scheduled payments of interest and principal are guaranteed
by a private (non-governmental) insurance company.
The insurance feature of the Fund does not guarantee the
market value of the municipal bonds or the value of the
Fund's shares. The insurance refers to the face or par value
of the securities in the Fund. See "Implementation of
Policies" for a description of the Fund's insurance feature.
The Fund is expected to maintain an average weighted
maturity between 15 and 25 years. Bonds with longer
maturities usually offer higher yields, but are also subject
to greater market fluctuations as interest rates change. See
"Investment Risks."
Normally, the Fund seeks to invest substantially all of its
assets in insured New York municipal obligations. However,
under certain circumstances, the Fund may invest up to 20%
of its assets in any combination of the following
securities:
o Municipal notes and variable rate demand instruments,
including derivative securities, rated MIG-1 or VMIG-1, or
P-1 by Moody's Investors Service, Inc. ("Moody's") or
SP-1+, SP-1, A-1+, or A-1 by Standard & Poor's Corporation
("Standard & Poor's");
o Uninsured, short-term municipal securities, issued in New
York or in other states;
o Certain taxable securities, including U.S. Government
securities; and
o Certain tax-exempt municipal securities issued by other
states that have similar characteristics to the securities
typically purchased by the Fund.
In such cases, a portion of the Fund's income may be subject
to New York income taxes, federal income taxes, or both.
(See page 16).
4
<PAGE>
Subject to the same 20% limit, the Fund is also authorized
to invest in New York AMT bonds. The income from New York
AMT bonds is exempt from federal and New York income taxes,
but may be a tax preference item for purposes of the federal
alternative minimum tax, see "Implementation of Policies."
Under unusual circumstances, such as a national financial
emergency, the Fund reserves the right to invest more than
20% of its assets in securities other than New York
municipal obligations. In most instances, however, the Fund
will seek to avoid such holdings in an effort to provide
income that is fully exempt from federal and New York
personal income taxes.
The Fund will
diversify its
holdings Although organized as a non-diversified investment company,
the Fund intends to diversify its holdings of New York
municipal securities by complying with Subchapter M of the
Internal Revenue Code (the "Code"). In part, Subchapter M
requires that, at the close of each quarter of the taxable
year, those issuers which represent more than 5% of the
Fund's assets be limited in aggregate to 50% of the Fund,
and that no one issue exceed 25% of the Fund's total assets.
As of November 30, 1995, the Fund held securities of 74
issuers, with the largest holding representing 11.74% of the
Fund's assets.
The Fund is responsible for voting the shares of all
securities it holds.
The Fund's policy of investing at least 80% of its assets in
New York municipal securities under normal circumstances is
fundamental and may not be changed without shareholder
approval. The other investment policies described above are
not fundamental and so may be changed by the Board of
Trustees without shareholder approval.
- --------------------------------------------------------------------------------
INVESTMENT
RISKS As a mutual fund investing in long-term municipal
securities, the Fund is subject to interest rate, credit,
call, income and manager risk.
The Fund is subject
to interest rate,
credit, call, income
and manager risk Interest rate risk is the potential for bond price
fluctuations due to changing interest rates. In general,
bond prices vary inversely with interest rates. If interest
rates rise, bond prices generally decline; if interest rates
fall, bond prices generally rise. In addition, for a given
change in interest rates, longer-maturity bonds exhibit
greater price fluctuations than shorter-maturity bonds. To
compensate investors for this risk, longer-maturity bonds
generally offer higher yields than shorter-maturity bonds,
other factors, including credit quality, being equal.
Interest rate risk may be increased or decreased when a fund
purchases derivative New York municipal securities. Such
derivative securities rely on sophisticated interest rate
calculation mechanisms. For certain types of derivative
bonds, the magnitude of increases and decreases in their
price may be proportionately larger or smaller than, or
inverse to, the price changes that broad market interest
rate fluctuations would produce in long-term bonds.
Credit risk is the possibility that a bond issuer will fail
to make timely payments of interest or principal to a fund.
The credit risk of a fund depends on the credit quality of
its underlying securities. In general, the lower the credit
quality of a fund's municipal securities, the higher a
fund's yield, all other factors such as maturity being
equal.
5
<PAGE>
Call risk is the possibility that, during periods of falling
interest rates, a municipal security with a high stated
interest rate will be prepaid (or "called") prior to its
expected maturity date. As a result, a fund will be required
to invest the unanticipated proceeds at lower interest
rates, and the fund's income may decline. Call provisions
are most common for intermediate- and long-term municipal
bonds.
Income risk is the potential for a decline in a fund's
income due to falling market interest rates. Because a
fund's income is based on interest rates, which can
fluctuate substantially over short periods, income risk is
expected to vary from fund to fund.
The Fund is
subject to
manager risk Finally, the investment adviser manages the Fund according
to the traditional methods of "active" investment
management, which involve the buying and selling of
securities based upon economic, financial and market
analysis and investment judgment. Manager risk refers to the
possibility that a fund's investment adviser may fail to
execute the Fund's investment strategy effectively. As a
result, a fund may fail to achieve its stated objective.
Because the Fund invests in long-term municipal bonds,
interest rate risk for the Fund may be high. The average
weighted maturity of the Fund is expected to exceed 15
years, meaning that the Fund's share price will fluctuate,
sometimes substantially, when interest rates change. The
following chart illustrates the potential interest rate risk
of the Fund. The chart shows the market value of a $1,000
investment in a single bond with the same yield and maturity
characteristics as the Fund on December 29, 1995, assuming a
1% and 2% point increase or decrease in interest rates:
Hypothetical Value of $1,000 Investment
---------------------------------------
After Change in Interest Rates of:
--------------------------------------------------
30-Day Average 1% Point 1% Point 2% Point 2% Point
Yield Maturity Increase Decrease Increase Decrease
- ---- ----------- ----------- ---------- ---------- ----------
4.84% 10.5 years $ 922 $1,086 $ 852 $1,180
This chart is intended to provide you with general
guidelines for evaluating the effect of interest rate
changes on the Fund and determining the degree of interest
rate risk you may be willing to assume. The yield and price
changes shown are purely for illustrative purposes, and
should not be taken as representative of current or future
yields or expected changes in the share price of the Fund.
Credit risk is
expected to be
low Credit risk depends on the average quality of the Fund's
underlying securities and the Fund's degree of
diversification. The Fund invests primarily in bonds insured
by top-rated insurance companies against the possible
default of an issuer as to the timely payment of interest
and principal. As a result, the average credit quality of
the Fund is expected to be very high, and credit risk is
expected to be minimal.
Ordinarily, an investment company concentrating its
investments in one state, such as the Fund, would be exposed
to greater credit risks than an
6
<PAGE>
investment company investing in a nationally diversified
portfolio of municipal securities. These risks include
possible tax law changes, a deterioration in economic
conditions, and differing levels of supply and demand for
New York municipal obligations.
To minimize the effects of concentrating its investments in
New York obligations, the Fund intends to diversify its
holdings by complying with Subchapter M of the Internal
Revenue Code. (See "Investment Policies" for a description
of the requirements of Subchapter M.) In addition, the use
of municipal bond insurance should minimize the credit risk
associated with the Fund.
As of December 31, 1995, the top ten portfolio holdings,
based on market value, represented 49.6% of the Fund's net
assets.
The following chart summarizes credit, interest rate, income
and call risks for the Fund.
------------------------------------------------------
Credit Interest Income Prepayment/
Risk Rate Risk Risk Call Risk
------------------------------------------------------
Very Low High Low Medium
------------------------------------------------------
- --------------------------------------------------------------------------------
WHO SHOULD
INVEST The Fund is intended for New York residents seeking income
that is exempt from federal and New York personal income
New York residents taxes. As a rule, tax-free income is attractive to investors
seeking tax-exempt in high federal and New York tax brackets. You can determine
income whether tax-exempt or taxable income is more attractive in
your own case by comparing the Fund's tax-free yield with
the yield from a comparable taxable mutual fund investment.
See "How to Compare Tax-Free and Taxable Yields."
Assuming that tax-free income is attractive in your own tax
bracket, you should weigh an investment in the Fund in terms
of its expected yield and price volatility, and your own
investment objectives, risk preferences, and time horizon.
The Fund is suitable for investors who are seeking the
highest, most durable streams of income and who can tolerate
sometimes sharp fluctuations in share price in pursuit of
their income objectives. The yield of the Fund is expected
to be higher, and the level of income provided more stable,
than that provided by other mutual funds which invest in
short-term New York municipal securities. However, because
of the Fund's potential price volatility, the Fund is
appropriate only for those investors who can hold their
investment over the long term.
The Fund is intended to be a long-term investment vehicle
and is not designed to provide investors with a means of
speculating on short-term market movements. Investors who
engage in an excessive amount of account activity generate
additional costs that are borne by all of the Fund's
shareholders. In order to minimize such costs, the Fund has
adopted the following policies. The Fund reserves the right
to reject any purchase request (including exchange purchases
from other Vanguard portfolios) that is reasonably deemed to
be disruptive to efficient portfolio management, either
because of the timing of the investment or previous
- --------------------------------------------------------------------------------
7
<PAGE>
excessive trading by the investor. Additionally, the Fund
has adopted exchange privilege limitations as described in
the section "Exchange Privilege Limitations." Finally, the
Fund reserves the right to suspend the offering of its
shares.
- --------------------------------------------------------------------------------
HOW TO COMPARE
TAX-FREE AND
TAXABLE YIELDS Before choosing a specific tax-exempt investment, such as
the Fund, you should determine if you would be better off
with taxable or tax-exempt income for your tax bracket. To
compare taxable and tax-free income, you should first
determine your combined federal, state and local tax
bracket. Then you should calculate the "taxable equivalent
yield" for the Fund you are considering, and compare it with
the yield of a taxable investment with similar credit and
maturity characteristics.
1. Determine your combined tax bracket. Your combined tax
bracket depends on whether you itemize state and local taxes
as a deduction on your federal return. If you do not
itemize, then your combined tax bracket is the sum of your
federal, state and local tax brackets.
If you do itemize, then your combined tax bracket is
calculated as follows. First, calculate your effective state
and local tax bracket using the following formula:
Federal Effective
(100% - Tax ) X State & = State &
Bracket Local Bracket Local Bracket
For example, if you are in a 7.6% state tax bracket, a local
tax bracket of 3.91%, and a 28% federal tax bracket, your
effective state and local tax bracket would be 8.28%:
(100% - 28%) X 11.51% = 8.28%
Second, add your effective state and local tax bracket to
your federal tax bracket to determine your combined tax
bracket:
Federal Effective Combined
Tax + State & = Tax
Bracket Local Bracket Bracket
28% + 8.28% = 36.28%
2. Calculate your taxable equivalent yield. The taxable
equivalent yield for a fund is based upon the Fund's current
tax-exempt yield and your combined tax bracket. The formula
is:
Fund's Tax-Free Yield Your Taxable
------------------------------- = Equivalent Yield
100% - Your Combined Tax Bracket
8
<PAGE>
For example, if you are in a combined tax bracket of 36.28%,
and the Fund's tax- free yield is 6%, the Fund's taxable
equivalent yield would be 9.42%:
6%
-------------------- = 9.42%
100% - 36.28%
In this example, you would choose the tax-free investment if
the 9.42% taxable equivalent yield were greater than the
taxable yield from a comparable investment (e.g., a taxable
bond fund of comparable maturity and credit quality).
- -------------------------------------------------------------------------------
IMPLEMENTATION
OF POLICIES The Fund's adviser uses a variety of investment vehicles to
achieve the objective of the Fund.
The Fund invests
in municipal The Fund invests principally in tax-exempt New York
bonds, notes and municipal securities, which are debt obligations issued by
securities derived New York state and local governments and public financing
from municipal authorities (and by certain U.S. territories) that provide
bonds and notes interest income that is exempt from federal and New York
personal income taxes. Municipal securities include both
municipal bonds (those securities with maturities of five
years or more) municipal notes (those with maturities of
less than five years) and derivative securities (those
securities in which a maturity may have been shortened by a
demand feature).
Municipal bonds are issued for a wide variety of reasons: to
construct public facilities, such as airports, highways,
bridges, schools, hospitals, housing, mass transportation,
streets, water and sewer works; to obtain funds for
operating expenses; to refund outstanding municipal
obligations; and to loan funds to various public
institutions and facilities. Certain industrial development
bonds are also considered municipal bonds if their interest
is exempt from federal income tax. Industrial development
bonds are issued by, or on behalf of public authorities to
obtain funds for various privately-operated manufacturing
facilities, housing, sports arenas, convention centers,
airports, mass transportation systems, and water, gas or
sewage works.
General obligation municipal bonds are secured by the
issuer's pledge of full faith, credit and taxing power.
Revenue or special tax bonds are payable from the revenues
derived from a particular facility or, in some cases, from a
special excise or other tax, but not from general tax
revenue. Industrial development bonds are ordinarily
dependent on the credit quality of a private authority.
Municipal notes are issued to meet the short-term funding
requirements of local, regional and state governments.
Municipal notes include tax anticipation notes, bond
anticipation notes, revenue anticipation notes, tax and
revenue anticipation notes, construction loan notes,
short-term discount notes, tax-exempt commercial paper, and
demand notes. Demand notes permit an investor (such as the
Fund) to demand from the issuer payment of principal plus
accrued interest upon a specified number of days' notice.
The Fund may invest
in AMT bonds The Fund is authorized to invest up to 20% of its assets in
so-called "AMT" bonds. AMT bonds are tax-exempt "private
activity" bonds issued after August 7, 1986, whose
9
<PAGE>
proceeds are directed at least in part to a private,
for-profit organization. While the income from AMT bonds is
exempt from regular federal income tax, it is a tax
preference item for purposes of the federal AMT. The
alternative minimum tax is a special separate tax that
applies to a limited number of taxpayers who have certain
adjustments to income or tax preference items.
The Fund may invest
in Market Discount
bonds The Fund may invest in "Market Discount" bonds when, in the
opinion of the Fund's adviser, the investment will be
advantageous to the Fund's shareholders. A Market Discount
bond is a bond purchased at a discount from its original
issue price after April 30, 1993 and with a maturity in
excess of one year from its issue date. In certain
circumstances, disposition of a Market Discount bond will
result in taxable ordinary income to the extent of any gain
realized.
Although the objective of the Fund is to provide income free
of federal income tax, certain market conditions may make
Market Discount bonds desirable investments. The Fund will
purchase Market Discount bonds only if the Fund's adviser
expects that the purchase of these investments on an
after-tax basis will enhance the Fund's total return.
Three types of
insurance may be
used by the Fund To provide an added level of credit protection, the Fund
uses three types of insurance: new issue, mutual fund and
secondary market insurance. A new issue insurance policy is
purchased by a bond issuer who wishes to increase the credit
rating of a security. By paying a premium and meeting the
insurer's underwriting standards, the bond issuer is able to
obtain a high credit rating for the security (usually Aaa
from Moody's or AAA from Standard & Poor's). New issue
insurance policies are non-cancellable and continue in force
as long as the bonds are outstanding.
A mutual fund insurance policy may be used to guarantee
specific bonds only while owned by a mutual fund. The Fund
has obtained a mutual fund insurance policy from Financial
Guaranty Insurance Company ("Financial Guaranty"), a
AAA-rated insurance company. Based upon the expected
composition of the Fund, the annual premiums for the policy
are likely to range from 0.20% to 0.40% of the principal
value of the bonds insured under the policy, thereby
reducing the Fund's current yield.
A secondary market insurance policy is purchased by an
investor (such as the Fund) subsequent to the bond's
original issuance and generally insures a particular bond
for the remainder of its term. The Fund may purchase bonds
that have already been insured under a secondary market
insurance policy by a prior investor, or the Fund may itself
purchase such a policy from Financial Guaranty for bonds
that are currently uninsured.
An insured municipal bond in the Fund will typically be
covered by only one of the three policies. For instance, if
a bond is already covered by a new issue insurance policy or
a secondary market insurance policy, then that security will
not be insured under the Fund's mutual fund insurance
policy. All of the insurance policies used by the Fund will
be obtained only from companies rated Aaa by Moody's or AAA
by Standard & Poor's at the time the insurance contract was
obtained.
10
<PAGE>
The Fund may report
an effective average
weighted maturity The Fund observes strict maturity guidelines as set forth in
detail under "Investment Policies." These maturity standards
are specified in terms of the Fund's average weighted
maturity. From time to time, however, the Fund may also
report an effective average weighted maturity, which
reflects, among other items, the likelihood that a municipal
bond or note held by the Fund may be redeemed or "called"
prior to its stated maturity date. For example, if the Fund
consists entirely of 20-year bonds, some of which may be
"called" prior to their stated maturity in 20 years, the
Fund's average weighted maturity will be 20 years, while its
effective average maturity will be shorter.
The Fund's effective average weighted maturity will be
influenced by bond market conditions, and so may vary from
day to day, even if no change has been made to the Fund's
underlying investment securities. For example, if interest
rates decline, a greater proportion of the Fund's securities
may be subject to call (redemption) prior to their stated
maturity. As a result, reflecting this increased call risk,
the effective average maturity of the Fund will shorten,
independent of actual purchases or sales of portfolio
securities.
The Fund may
purchase when-issued
securities The Fund may purchase tax-exempt securities on a
"when-issued" basis. In buying "when-issued" securities, the
Fund commits to buy securities at a certain price even
though the securities may not be delivered for a certain
time period. 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.
The Fund may lend
its securities The Fund may lend its investment securities on either a
short-term or long-term basis to qualified institutional
investors for the purpose of realizing additional net
investment income. Loans of securities by a Fund will be
collateralized by cash, letters of credit, or securities
issued or guaranteed by the U.S. Government or its agencies.
The collateral will equal at least 100% of the current
market value of the loaned securities. Income derived from
the lending of securities is not tax-exempt, and a portion
of the tax-exempt interest earned when a municipal security
is on loan must be characterized as taxable income.
Therefore, the Fund will limit such activity in accordance
with its investment objective.
The Fund may invest
in municipal lease
obligations The Fund may purchase municipal lease obligations, which are
securities issued by state and local governments to acquire
land, equipment and facilities. These obligations typically
are not backed by the issuing municipality's full authority
to assess taxes to meet its debt obligations. If the issuing
authority fails to make the appropriations necessary to
cover lease payments, then the lease may terminate. In
certain circumstances, the issuer could default on the lease
obligation and thereby cause a loss to investors. Also, in
certain circumstances, such as a default or termination of
the lease, all or a portion of the payments attributable to
the lease may be taxable as ordinary income.
Derivative
Investing Derivatives are instruments whose values are linked to or
derived from an underlying security or index. The most
common and conventional types of derivative securities are
futures and options.
11
<PAGE>
The Fund may
invest in
derivative
securities The Fund may invest in conventional derivative securities
including futures contracts and options, but only to a
limited extent. The Fund may enter into futures contracts
provided that not more than 5% of its assets are required as
a futures contract deposit; in addition, the Fund may enter
into futures contracts and options transactions only to the
extent that obligations under such contracts or transactions
represent not more than 20% of the Fund's assets.
Futures contracts and options may be used for several common
fund management strategies: to maintain cash reserves while
simulating full investment, to facilitate trading, to reduce
transaction costs, or to seek higher investment returns when
a specific futures contract is priced more attractively than
other futures contracts or the underlying security or index.
The Fund may not use futures contracts or options
transactions to leverage its assets.
For example, in order to remain fully invested in bonds
while maintaining liquidity to meet potential shareholder
redemptions, the Fund may invest a portion of its assets in
a bond futures contract. Because futures contracts only
require a small initial margin deposit, the Fund would then
be able to maintain a cash reserve to meet potential
redemptions, while at the same time remaining fully
invested. Also, because the transaction costs of futures and
options may be lower than the costs of investing in bonds
directly, it is expected that the use of futures contracts
and options may reduce the Fund's total transaction costs.
The Portfolios may use futures contracts for bona fide
"hedging" purposes. In executing a hedge, a manager sells,
for example, municipal bond futures contracts to protect
against a decline in the bond market. If the market drops,
the value of the futures position will rise, thereby
offsetting the decline in value of the portfolio's bond
holdings.
The Portfolios may invest in partnerships and grantor trust
derivative products. However, prior to the purchase of such
security, a determination must be made by the Fund that the
inherent risk of the partnership or grantor trust derivative
product is minimal.
Futures contracts
and options pose
risks The primary risks associated with the use of futures
contracts and options are: (i) imperfect correlation between
the change in market value of the bonds held by the Fund and
the prices of futures contracts and options; and (ii)
possible lack of a liquid secondary market for a futures
contract and the resulting inability to close a futures
position prior to its maturity date. The risk of imperfect
correlation will be minimized by investing in those
contracts whose price fluctuations are expected to resemble
those of the Fund's underlying securities. The risk that the
Fund will be unable to close out a futures position will be
minimized by entering into such transactions on a national
exchange with an active and liquid secondary market.
Historically, the futures market has been more liquid than
the municipal bond market; therefore, the Fund's liquidity
may be improved by investing in futures.
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of
12
<PAGE>
leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may
result in immediate and substantial loss (or gain) to the
investor. When investing in futures contracts, the Fund will
segregate cash or cash equivalents in the amount of the
underlying obligation.
Partnerships and
grantor trusts pose
certain risks The primary risks associated with partnerships and grantor
trust derivative products are (i) the possibility of a tax
ruling which affects the status of the state or federal
opinions which are necessary to support the issuance of the
derivative; (ii) the possibility that the tender option on a
security could be withdrawn upon the occurrence of certain
events; and (iii) the possible lack of a liquid secondary
market for the securities. The Fund will attempt to minimize
the risks of partnership and grantor trust derivative
products by carefully selecting which securities to purchase
and by constantly monitoring securities held by the Fund.
- --------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS The Fund has adopted certain limitations designed to reduce
its exposure to specific situations. These limitations
The Fund has include the following:
adopted certain
fundamental a) The Fund will invest a minimum of 80% of its net assets
limitations in insured municipal bonds, the interest on which is
exempt from federal and New York personal income taxes,
except that it may make temporary investments as
described in the section "Implementation of Policies."
b) At the close of each quarter of the taxable year, the
Fund will limit the aggregate value of all holdings,
except U.S. Government and cash items, as defined in the
Internal Revenue Code, each of which exceeds 5% of the
Fund's total assets, to an aggregate amount of 50% of
such assets.
c) The Fund will limit the aggregate value of holdings of a
single issuer (except U.S. Government and cash items as
defined in the Code) to a maximum of 25% of the Fund's
total assets. For the purposes of this limitation,
identification of the issuer will be based on a
determination of the source of assets and revenues
committed to meeting interest and principal payments on
each security.
d) The Fund will not borrow money except for temporary or
emergency purposes, and then not in excess of 10% of the
Fund's total assets. The Fund will repay all borrowings
before making additional investments, and the interest
paid on such borrowings will reduce income.
e) The Fund will not pledge, mortgage, or hypothecate more
than 10% of its total assets.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information may be changed only with the approval of a
majority of the Fund's shareholders.
- --------------------------------------------------------------------------------
13
<PAGE>
MANAGEMENT
OF THE FUND The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies
with more than 90 distinct investment portfolios and total
Vanguard assets in excess of $190 billion. Through their
administers jointly-owned subsidiary, The Vanguard Group, Inc.
and distributes ("Vanguard"), the Fund and the other funds in the Group
the Fund obtain at cost virtually all of their corporate management,
administrative, shareholder accounting and distribution
services. Vanguard also provides investment advisory
services on an at-cost basis to certain Vanguard funds. As a
result of Vanguard's unique corporate structure, the
Vanguard Funds have costs substantially lower than those of
most competing mutual funds. In 1995, the average expense
ratio (annual costs including advisory fees divided by total
net assets) for the Vanguard funds amounted to approximately
.31% compared to an average of 1.11% for the mutual fund
industry (data provided by Lipper Analytical Services).
The Officers of the Fund manage its day-to-day operations
and are responsible to the Fund's Trustees. The Trustees set
broad policies for the Fund and choose its Officers. A list
of Trustees and Officers of the Fund and a statement of
their present positions and principal occupations during the
past five years can be found in the Statement of Additional
Information.
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 (Directors) of each fund. In addition,
each fund bears its own direct expenses, such as legal,
auditing and custodian fees.
Vanguard also provides distribution and marketing services
to the Vanguard funds. The funds are available on a no-load
basis (i.e., there are no sales commissions or 12b-1 fees).
However, each fund bears its share of the Group's
distribution costs.
- --------------------------------------------------------------------------------
INVESTMENT
ADVISER The Fund receives all investment advisory services on an
at-cost basis from Vanguard's Fixed Income Group. The Group
Vanguard manages also provides investment advisory services to more than 40
the Fund's Vanguard money market and bond portfolios, both taxable and
investments tax-exempt. Total assets under management by Vanguard's
Fixed Income Group were approximately $66 billion as of
December 31, 1995. The Fixed Income Group is supervised by
the Officers of the Fund. Ian A. MacKinnon, Senior Vice
President of Vanguard, has been in charge of the Group since
its inception in 1981.
o David Hamlin, a Principal of Vanguard, serves as portfolio
manager of the New York Insured Tax-Free Fund. Mr. Hamlin
has managed the Fund since its inception in 1986. Prior to
joining Vanguard, Mr. Hamlin managed tax-exempt money
market funds for a major investment company.
The Fixed Income Group manages the investment and
reinvestment of the assets of the Fund and continuously
reviews, supervises and administers the Fund's
14
<PAGE>
investment program, subject to the maturity and quality
standards specified in this Prospectus and supplemental
guidelines approved by the Fund's Board of Trustees. The
Fixed Income Group's selection of investments is based on:
(a) continuing credit analysis of those instruments held in
the Fund and those being considered for inclusion therein;
(b) possible disparities in yield relationships between
different fixed-income securities; and (c) actual or
anticipated movements in the general level of interest
rates.
Vanguard's Fixed Income Group places all orders for
purchases and sales of portfolio securities. Purchases of
portfolio securities are made either directly from the
issuer or from municipal securities dealers. The Fixed
Income Group may sell portfolio securities prior to their
maturity if circumstances and considerations warrant and if
it believes such dispositions advisable. The Fixed Income
Group seeks to obtain the best available net price and most
favorable execution for all portfolio transactions. ..
- --------------------------------------------------------------------------------
DIVIDENDS,
CAPITAL GAINS
AND TAXES Dividends consisting of virtually all of the ordinary income
of the Fund are declared daily and are payable to
The Fund pays shareholders of record at the close of the previous business
month-end day. Such dividends are paid on the first business day of
dividends each month. Net capital gains distributions, if any, will be
made annually.
Dividend and capital gains distributions may be
automatically reinvested or received in cash. See "Choosing
a Distribution Option" for a description of these
distribution methods.
In addition, in order to satisfy certain distribution
requirements of the Tax Reform Act of 1986, the Fund may
declare special year-end dividend and capital gains
distributions during December. Such distributions, if
received by shareholders by January 31, are deemed to have
been paid by the Fund and received by shareholders by
December 31 of the prior year.
Dividends will be
exempt from federal
and New York
income taxes The Fund intends to continue to qualify for taxation as a
"regulated investment company" under the Internal Revenue
Code so that it will not be subject to federal income tax to
the extent its income is distributed to shareholders. In
addition, the Fund intends to invest a sufficient portion of
its assets in municipal bonds and notes so that it will
continue to qualify to pay "exempt-interest dividends" to
shareholders. Such exempt-interest dividends are excluded
from a shareholder's gross income for federal tax purposes.
The Revenue Reconciliation Act enacted during 1993 provides
that market discount on tax-exempt bonds purchased after
April 30, 1993 must be taxed as ordinary income.
Accordingly, to the extent that the Fund purchases such
discounted securities, taxable income may result.
Furthermore, the Fund expects to invest substantially all of
its assets in New York municipal securities. As a result, it
will be eligible to pay to New York residents dividends that
will be exempt from New York State personal income taxes.
Net long-term capital gains realized by the Fund from the
sale of securities will be distributed as taxable capital
gains distributions for federal income tax purposes. Any
short-term capital gains or any taxable interest income will
15
<PAGE>
be distributed as a taxable ordinary dividend distribution
for federal income tax purposes. In general, such taxable
income distributions from the Fund are expected to be
negligible in comparison with tax-exempt dividends. However,
under certain circumstances, the Fund may invest in
securities other than New York municipal obligations. In
such cases, a portion of the Fund's income may be subject to
New York income taxes, federal income taxes, or both.
At present, the Fund does not invest in AMT bonds. (See
"Investment Policies.") However, were the Fund to invest in
such bonds, all or a portion of the Fund's dividends, while
exempt from the regular federal income tax, would be a tax
preference item for purposes of the federal alternative
minimum tax.
A capital gain or loss
may be realized upon
exchange or
redemption A sale of the Fund's shares is a taxable event and may
result in a capital gain or loss. A capital gain or loss may
be realized from an ordinary redemption of shares, a
checkwriting redemption, or an exchange of shares between
two mutual funds (or two portfolios of a mutual fund). In
addition, if you held shares in the Fund for six months or
less, any capital loss realized upon redemption is
disallowed to the extent of the tax-exempt dividend income
you received.
Capital gains distributions from the Fund and any capital
gains or losses realized from the sale or exchange of shares
will generally be subject to state and local taxes.
The Fund is required to withhold 31% of any taxable
dividends, capital gains distributions, and redemptions paid
to shareholders who have not complied with IRS taxpayer
identification regulations. You may avoid this withholding
requirement by indicating your proper Social Security or
Taxpayer Identification Number on your Account Registration
Form and by certifying that you are not subject to backup
withholding.
Up to 85% of an individual's Social Security benefits may be
subject to federal income tax. Along with other factors,
total tax-exempt income, including any tax-exempt dividend
income from the Fund, is used to calculate the taxable
portion of Social Security benefits.
The Fund is organized as a Pennsylvania business trust and,
in the opinion of counsel, is not liable for any income or
franchise tax in the Commonwealth of Pennsylvania. The Fund
will be subject to Pennsylvania county personal property tax
in the county which is the site of its principal office.
The tax discussion set forth above is included for general
information only. Prospective investors should consult their
own tax advisers concerning the tax consequences of an
investment in the Fund.
- --------------------------------------------------------------------------------
THE SHARE PRICE
OF THE FUND The share price or "net asset value" per share of the Fund
is determined daily by dividing the total value of the
investments and other assets of the Fund, less any
liabilities, by the total outstanding shares of the Fund.
The net asset value per share of the Fund is determined as
of the close of regular trading on The New York Stock
Exchange (generally 4:00 p.m. Eastern time) on each day the
Exchange is open.
16
<PAGE>
When approved by the Board of Trustees, bonds and other
fixed-income securities of the Fund may be valued on the
basis of prices provided by a pricing service when such
prices are believed to reflect the fair market value of such
securities. (The prices provided by pricing services are
generally determined without regard to bid or last sale
prices. Because of the large number of outstanding municipal
bonds, the majority of issues do not trade each day;
therefore, last sale prices are not normally available. In
valuing such securities, the pricing services generally take
into account institutional size trading in similar groups of
securities and any developments related to specific
securities.) The methods used by the pricing service and the
valuations so established are reviewed by the Officers of
the Fund under the general supervision of the Trustees.
There are a number of pricing services available and the
Trustees, on the basis of ongoing evaluation of these
services, may use other pricing services or discontinue the
use of any pricing service.
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.
The price per share of the Fund can be found daily in the
mutual fund section of most major newspapers under the
heading of Vanguard.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION Vanguard New York Insured Tax-Free Fund is a Pennsylvania
business trust. The Declaration of Trust permits the
Trustees to issue an unlimited number of shares of
beneficial interest, without par value, from an unlimited
number of classes of shares. Currently the Fund is offering
one class of shares.
Shares of the Fund when issued are fully paid and
non-assessable; participate equally in dividends,
distributions and net assets; are entitled to one vote per
share; have pro rata liquidation rights; and do not have
pre-emptive rights. Also, shares of the Fund have
non-cumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of the
Trustees can elect all of the Trustees if they so choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Trustee or Trustees of the Fund if
requested in writing by the holders of not less than 10% of
the outstanding shares of the Fund.
All securities and cash are held by CoreStates Bank, N.A.,
Philadelphia, PA. The Vanguard Group, Inc., Valley Forge,
PA, serves as the Fund's Transfer and Dividend Disbursing
Agent. Price Waterhouse LLP serves as independent
accountants for the Fund and audits its financial statements
annually. The Fund is not involved in any litigation.
- --------------------------------------------------------------------------------
17
<PAGE>
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES To open a new account, either by mail or by wire, simply
complete and return an Account Registration Form and any
required legal documentation. Please indicate the amount you
wish to invest. Your purchase must be equal to or greater
than the $3,000 minimum initial investment requirement
($1,000 for Uniform Gifts/ Transfers to Minors Act
accounts). In addition, you must be a New York resident to
invest in the Fund. If you need assistance with the Account
Registration Form or have any questions about this Fund,
please call our Investor Information Department at
1-800-662-7447. Note: For other types of registrations (e.g.
corporations, associations, other organizations, trusts or
powers of attorney), please call us to determine which
additional forms you may need.
The Fund's shares generally are purchased at the
next-determined net asset value after your investment has
been received in the form of Federal Funds. See "When Your
Account Will Be Credited". The Fund is offered on a no-load
basis (i.e., there are no sales commissions or 12b-1 fees).
Purchase
Restrictions 1) Because of the risks associated with bond investments,
the Fund is intended to be a long-term investment vehicle
and is not designed to provide investors with a means of
speculating on short-term market movements. Consequently,
the Fund reserves the right to reject any specific
purchase (and exchange purchase) request. The Fund also
reserves the right to suspend the offering of shares for
a period of time.
2) Vanguard will not accept third-party period of time.
checks to purchase shares of the Fund. Please be sure
your purchase check is made payable to the Vanguard
Group.
Additional
Investments Subsequent investments may be made by mail ($100 minimum per
portfolio), wire ($1,000 minimum per portfolio), exchange
from another Vanguard Fund account ($100 minimum), or
Vanguard Fund Express.
------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
Purchasing By Mail Please include the amount of Additional investments should
Complete and sign the your initial investment on the include the Invest-by-Mail
enclosed Account registration form, make your remittance form attached to
Registration Form check payable to The Vanguard your Fund confirmation
Group-76, and mail to: statements. Please make your
check payable to The Vanguard
Group-76, write your account
number on your check and,
Vanguard Financial Center using the return envelope
P.O. Box 2600 provided, mail to the address
Valley Forge, PA 19482 indicated on the
Invest-by-Mail Form.
For express or Vanguard Financial Center All written requests should be
registered mail, 455 Devon Park Drive mailed to one of the addresses
send to: Wayne, PA 19087 indicated for new accounts. Do
not send registered or express
mail to the post office box
address.
</TABLE>
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18
<PAGE>
Purchasing By Wire CORESTATES BANK, N.A.
Money should be ABA 031000011
wired to: CORESTATES NO. 0141 1274
ATTN VANGUARD
Before Wiring VANGUARD NEW YORK INSURED TAX-FREE FUND
Please contact ACCOUNT NUMBER
Client Services ACCOUNT REGISTRATION
(1-800-662-2739)
To assure proper receipt, please be sure your bank includes
the name of the Fund, the account number Vanguard has
assigned to you and the eight-digit CoreStates number. If
you are opening a new account, please complete the Account
Registration Form and mail it to the "New Account" address
after completing your wire arrangement. Note: Federal Funds
wire purchase orders will be accepted only when the Fund and
Custodian Bank are open for business.
-----------------------------------------------------------
Purchasing By
Exchange (from a
Vanguard account) You may open an account or purchase additional shares of the
Fund by making an exchange from an existing Vanguard Fund
account. Accounts opened by exchange will have the same
registration as the existing account. Please note: the Fund
reserves the right to reject any exchange purchase request.
For more information, please call our Client Services
Department at 1-800-662-2739. Purchasing By Fund Express
Purchasing By ------------------------------------------------------------
Fund Express
Special Purchase
and Automatic
Investment The Fund Express Special Purchase option lets you move money
from your bank account to your Vanguard account on an "as
needed" basis. Or if you choose the Automatic Investment
option, money will be moved automatically from your bank
account to your Vanguard account on the schedule (monthly,
bimonthly [every other month], quarterly or yearly) you
select. To establish these Fund Express options, please
provide the appropriate information on the Account
Registration Form. We will send you a confirmation of your
Fund Express service; please wait three weeks before using
the service.
- --------------------------------------------------------------------------------
CHOOSING A
DISTRIBUTION
OPTION You must select one of three distribution options:
1. Automatic Reinvestment Option--Both dividends and capital
gains distributions will be reinvested to purchase
additional Fund shares. This option will be selected for
you automatically unless you specify one of the other
options.
2. Cash Dividend Option--Your dividends will be paid in cash
and your capital gains will be reinvested in additional
Fund shares.
3. All Cash Option--Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client Services
Department (1-800- 662-2739).
In addition, an option to reinvest your cash dividends
and/or capital gains distributions in another Vanguard Fund
account is available. Please call our Client Services
Department (1-800-662-2739) for information. You may also
19
<PAGE>
elect Vanguard Dividend Express which allows you to
transfer your cash dividends and/or capital gains
distributions automatically to your bank account. Please see
"Other Vanguard Services" for more information.
- --------------------------------------------------------------------------------
TAX CAUTION Under federal tax laws, the Fund is required to distribute
net capital gains and investment income to Fund
shareholders. These distributions are made to all
Investors should shareholders who own Fund shares as of the distribution's
ask about the record date, regardless of how long the shares have been
timing of capital owned. Purchasing shares just prior to the record date could
gains and dividend have a significant impact on your tax liability for the
distributions year. For example, if you purchase shares immediately prior
before investing to the record date of a sizable capital gain, you will be
assessed taxes on the amount of the capital gain
distribution later paid even though you owned the Fund
shares for just a short period of time. (Taxes are due on
the distributions even if the capital gain is reinvested in
additional Fund shares.) While the total value of your
investment will be the same after the capital gain
distribution--the amount of the capital gain distribution
will offset the drop in the net asset value of the
shares--you should be aware of the tax implications the
timing of your purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. The Fund's annual
capital gains distribution normally occurs in December,
while income dividends are generally paid on the first
business day of each month. For additional information on
distributions and taxes, see the section titled "Dividends,
Capital Gains, and Taxes."
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION The easiest way to establish optional Vanguard services on
your account is to select the options you desire when you
Establishing complete your Account Registration Form. If you wish to add
Optional shareholder options later, you may need to provide Vanguard
Services with additional information and a signature guarantee.
Please call our Client Services Department (1-800-662-2739)
for further assistance.
Signature
Guarantees For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature, and may be obtained from banks, brokers and any
other guarantor that Vanguard deems acceptable. A signature
guarantee cannot be provided by a notary public.
Certificates Share certificates will be issued upon request. If a
certificate is lost, you may incur an expense to replace it.
Broker-Dealer
Purchases If you purchase shares in Vanguard Funds through a
registered broker-dealer or investment adviser the
broker-dealer or adviser may charge a service fee.
Cancelling
Trades The Fund will not cancel any trade (e.g., a purchase,
exchange or redemption) believed to be authentic, received
in writing or by telephone, once the trade request has been
received.
20
<PAGE>
Electronic
Prospectus
Delivery If you would prefer to receive a prospectus for the Fund or
any of the Vanguard Funds in an electronic format, please
call 1-800-231-7870 for additional information. If you elect
to do so, you may also receive a paper copy of the
prospectus, by calling 1-800-662-7447.
- --------------------------------------------------------------------------------
WHEN YOUR
ACCOUNT WILL
BE CREDITED The trade date is the date on which your account is
credited. It is generally the day on which the Fund receives
your investment in the form of Federal Funds (monies
credited to the Fund's Custodian Bank by a Federal Reserve
Bank). Your trade date varies according to your method of
payment for your shares.
Purchases of Fund shares by check will receive a trade date
the day the funds are received in good order by Vanguard.
Thus, if your purchase by check is received by the close of
regular trading on the New York Stock Exchange (generally
4:00 p.m. Eastern time), your trade date is the business day
your check is received in good order. If your purchase is
received after the close of the Exchange, your trade date is
the business day following receipt of your check.
For purchases by Federal Funds wire or exchange, the Fund is
credited immediately with Federal Funds. Thus, if your
purchase by Federal Funds wire or exchange is received by
the close of the Exchange, your trade date is the day of
receipt. If your purchase is received after the close of the
Exchange, your trade date is the business day following
receipt of your wire or exchange.
Your shares are purchased at the net asset value determined
on your trade date. You will begin to earn dividends on the
calendar day following the trade date. (For a Friday trade
date, you will begin earning dividends on Saturday.)
In order to prevent lengthy processing delays caused by the
clearing of foreign checks, Vanguard will only accept a
foreign check which has been drawn in U.S. dollars and has
been issued by a foreign bank with a U.S. correspondent
bank. The name of the U.S. correspondent bank must be
printed on the face of the foreign check. ..
- --------------------------------------------------------------------------------
SELLING YOUR
SHARES You may withdraw any portion of the funds in your account by
redeeming shares at any time. You generally may initiate a
request by writing or by telephoning. Your redemption
proceeds are normally mailed, credited or wired--depending
upon the method of withdrawal you have previously
chosen--within two business days after the receipt of the
request in Good Order.
Selling By Writing
a Check You may withdraw funds from your account by writing a check
payable in the amount of $250 or more. When a check is
presented for payment to the Fund's agent, CoreStates Bank,
the Fund will redeem sufficient shares in your account at
the net asset value next determined to cover the amount of
the check.
In order to establish the checkwriting option on your
account, all registered shareholders must sign a signature
card. After your completed signature card is received by the
Fund, an initial supply of checks will be mailed within 10
business days. There is no charge for checks or for their
21
<PAGE>
clearance. Corporations, trusts and other organizations
should call our Client Services Department (1-800-662-2739)
before submitting signature cards, as additional documents
may be required to establish the checkwriting service.
Before establishing the checkwriting option, you should be
aware that:
1. Writing a check (a redemption of shares) is a taxable
event.
2. The Fund does not allow an account to be closed through
the checkwriting option.
3. Vanguard cannot guarantee a stop payment on any check. If
you wish to reverse a stop payment order, you must do so
in writing.
4. Shares held in certificate form cannot be redeemed using
the checkwriting option.
5. The Fund reserves the right to terminate or alter this
service at any time.
------------------------------------------------------------
Selling By Mail Requests should be mailed to Vanguard Financial Center,
Vanguard New York Insured Tax-Free Fund, P.O. Box 1120,
Valley Forge, PA 19482. (For express or registered mail,
send your request to Vanguard Financial Center, Vanguard New
York Insured Tax-Free Fund, 455 Devon Park Drive, Wayne, PA
19087.)
The redemption price of shares will be the Fund's net asset
value next determined after Vanguard has received all
required documents in Good Order.
------------------------------------------------------------
Definition of
Good Order Good Order means that the request includes the following:
1. The account number and Fund name.
2. The amount of the transaction (specified in dollars or
shares).
3. Signatures of all owners exactly as they are registered
on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required, in the case of estates, corporations, trusts,
and certain other accounts.
6. Any certificates that you hold for the account.
If you have questions about this definition as it pertains
to your request, please call our Client Services Department
at 1-800-662-2739.
------------------------------------------------------------
Selling By
Telephone To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department at
1-800-662-2739. For telephone redemptions, you may have the
proceeds sent to you either by mail or by wire. In addition
to the details below, please see "Important Information
About Telephone Transactions."
By Mail: Telephone mail redemption is automatically
established on your account unless you indicate otherwise on
your Account Registration Form. You may redeem any amount by
calling Vanguard. The proceeds will be paid to the
registered shareholders and mailed to the address of record.
Please Note: As a protection against fraud, your telephone
mail redemption privilege will be suspended for 10 calendar
22
<PAGE>
days following any expedited address change to your account.
An expedited address change is one that is made by
telephone, by Vanguard Online or, in writing, without the
signatures of all account owners.
By Wire: Telephone wire redemption must be specifically
elected for your account. The best time to elect telephone
wire redemption is at the time you complete your Account
Registration Form. If you do not presently have telephone
wire redemption and wish to establish it, please contact our
Client Services Department.
With the wire redemption option, you may withdraw a minimum
of $1,000 and have the amount wired directly to your bank
account. Wire redemptions less than $5,000 are subject to a
$5 charge deducted by Vanguard. There is no Vanguard charge
for wire redemptions of $5,000 or more. However, your bank
may assess a separate fee to accept incoming wires.
A request to change the bank associated with your wire
redemption option must be received in writing, signed by
each registered shareholder, and accompanied by a voided
check or preprinted deposit slip. A signature guarantee is
required if your bank registration is not identical to your
Vanguard Fund account registration.
------------------------------------------------------------
Selling By Fund
Express If you select the Fund Express Automatic Withdrawal option,
money will be automatically moved from your Vanguard Fund
Automatic account to your bank account according to the schedule you
Withdrawal have selected. The Special Redemption option lets you move
& Special money from your Vanguard account to your bank account on an
Redemption "as needed" basis. To establish these Fund Express options,
please provide the appropriate information on the Account
Registration Form. We will send you a confirmation of your
Fund Express service; please wait three weeks before using
the service.
------------------------------------------------------------
Selling By Exchange You may sell shares of the Fund by making an exchange to
another Vanguard Fund account. Please see "Exchanging Your
Shares" for details.
------------------------------------------------------------
Important
Redemption
Information Shares purchased by check or Fund Express may be redeemed at
any time. However, your redemption proceeds will not be paid
until payment for the purchase is collected, which may take
up to ten calendar days.
Delivery of
Redemption
Proceeds Redemption requests received by telephone prior to the close
of regular trading on the New York Stock Exchange (generally
4:00 p.m. Eastern time) are processed on the business day of
receipt and the redemption proceeds are normally sent on the
following business day.
Redemption requests received by telephone after the close of
the Exchange are processed on the business day following
receipt and the proceeds are normally sent on the second
business day following receipt.
Redemption proceeds must be sent to you within seven days of
receipt of your request in Good Order except as described
above in "Important Redemption Information."
23
<PAGE>
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular or
express mail. It will be implemented at the net asset value
next determined after your request has been received by
Vanguard in Good Order. The Fund reserves the right to
revise or terminate the telephone redemption privilege at
any time.
The Fund may suspend the redemption right or postpone
payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the
United States Securities and Exchange Commission.
-----------------------------------------------------------
Vanguard's Average
Cost Statement If you make a redemption from a qualifying account, Vanguard
will send you an Average Cost Statement which provides you
with the tax basis of the shares you redeemed. Please see
"Statements and Reports" for additional information.
-----------------------------------------------------------
Low Balance Fee and
Minimum Account
Balance
Requirement Due to the relatively high cost of maintaining smaller
accounts, the Fund will automatically deduct a $10 annual
fee from accounts with balances falling below $2,500 ($1,000
for Uniform Gifts/Transfers to Minors Act accounts). This
fee deduction will occur mid-year, beginning in 1996. The
fee generally will be waived for investors whose aggregate
Vanguard assets exceed $50,000.
In addition, the Fund reserves the right to liquidate any
non-retirement account that is below the minimum initial
investment amount of $3,000. If at any time the total
investment does not have a value of at least $3,000, you may
be notified that your account is below the Fund's minimum
account balance requirement. You would then be allowed 60
days to make an additional investment before the account is
liquidated. Proceeds would be promptly paid to the
registered shareholder.
Vanguard will not liquidate your account if it has fallen
below $3,000 solely as a result of declining markets (i.e.,
a decline in a Fund's net asset value).
- --------------------------------------------------------------------------------
EXCHANGING
YOUR SHARES Should your investment goals change, you may exchange your
shares of Vanguard New York Insured Tax-Free Fund for those
of other available Vanguard Funds.
Exchanging By
Telephone When exchanging shares by telephone, please have ready the
Fund name, account number, Social Security Number or
Call Client Employer Identification Number listed on the account, and
Services the exact name and address in which the account is
(1-800-662-2739) registered. Only the registered shareholder may complete
such an exchange. Requests for telephone exchanges received
prior to the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) are processed at the
close of business that same day. Requests received after the
close of the Exchange are processed the next business day.
Telephone exchanges are not accepted into or from Vanguard
Balanced Index, Vanguard Index Trust, Vanguard International
Equity Index Fund, and Vanguard Quantitative Portfolios. If
24
<PAGE>
you experience difficulty in making a telephone exchange,
your exchange request may be made by regular or express
mail, and it will be implemented at the closing net asset
value on the date received by Vanguard provided the request
is received in Good Order.
------------------------------------------------------------
Exchanging By Mail Please be sure to include on your exchange request the name
and account number of your current Fund, the name of the
Fund you wish to exchange into, the amount you wish to
exchange, and the signatures of all registered account
holders. Send your request to Vanguard Financial Center,
Vanguard New York Insured Tax-Free Fund, P.O. Box 1120,
Valley Forge, PA 19482. (For express or registered mail,
send your request to Vanguard Financial Center, Vanguard New
York Insured Tax-Free Fund, 455 Devon Park Drive, Wayne, PA
19087.)
------------------------------------------------------------
Important Exchange
Information Before you make an exchange, you should consider the
following:
o Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions you
may have, call our Investor Information Department
(1-800-662-7447).
o An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on the
transaction.
o Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
o The shares to be exchanged must be on deposit and not held
in certificate form.
o New accounts are not currently accepted in
Vanguard/Windsor Fund or Vanguard/PRIMECAP Fund.
o The redemption price of shares redeemed by exchange is the
net asset value next determined after Vanguard has
received the required documentation in Good Order.
o When opening a new account by exchange, you must meet the
minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange
privilege. However, the Fund reserves the right to revise or
terminate its provisions, limit the amount of or reject any
exchange, as deemed necessary, at any time.
The Fund's exchange privilege is only available in New York,
the only state in which the Fund's shares are registered for
sale.
- --------------------------------------------------------------------------------
EXCHANGE
PRIVILEGE
LIMITATIONS The Fund's exchange privilege is not intended to afford
shareholders a way to speculate on short-term movements in
the market. Accordingly, in order to prevent excessive use
of the exchange privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the
Fund has established a policy of limiting excessive exchange
activity.
25
<PAGE>
Exchange activity generally will not be deemed excessive if
limited to two substantive exchange redemptions (at least 30
days apart) from the Fund during any twelve-month period.
Notwithstanding these limitations, the Fund reserves the
right to reject any purchase request (including exchange
purchases from other Vanguard portfolios) that is reasonably
deemed to be disruptive to efficient portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ABOUT TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire
redemptions) and exchanges by telephone is automatically
established on your account unless you request in writing
that telephone transactions on your account not be
permitted. The ability to initiate wire redemptions by
telephone will be established on your account only if you
specifically elect this option in writing.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions, Vanguard
adheres to the following security procedures:
1. Security Check. To request a transaction by telephone,
the caller must know (i) the name of the Fund; (ii) the
10-digit account number; (iii) the exact name and address
used in the registration; and (iv) the Social Security or
Employer Identification number listed on the account.
2. Payment Policy. The proceeds of any telephone redemption
made by mail will be made payable to the registered
shareowner and mailed to the address of record, only. In the
case of a telephone redemption by wire, the wire transfer
will be made only in accordance with the shareowner's prior
written instructions.
Neither the Fund nor Vanguard will be responsible for the
authenticity of transaction instructions received by
telephone, provided that reasonable security procedures have
been followed. Vanguard believes that the security
procedures described above are reasonable, and that if such
procedures are followed, you will bear the risk of any
losses resulting from unauthorized or fraudulent telephone
transactions on your account. If Vanguard fails to follow
reasonable security procedures, it may be liable for any
losses resulting from unauthorized or fraudulent telephone
transactions on your account.
- --------------------------------------------------------------------------------
TRANSFERRING
REGISTRATION You may transfer the registration of any of your Fund shares
to another person by completing a transfer form and sending
it to: Vanguard Financial Center, P.O. Box 1110, Valley
Forge, PA 19482, Attention: Transfer Department. The request
must be in Good Order. Before mailing your request, please
call our Client Services Department (1-800-662-2739) for
full instructions.
- --------------------------------------------------------------------------------
STATEMENTS AND
REPORTS Vanguard will send you a confirmation statement each time
you initiate a transaction in your account except for
checkwriting redemptions from Vanguard money market
accounts. You will also receive a comprehensive account
statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement,
listing all transaction activity for the entire calendar
year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account, using the
average cost single category method. This service is
26
<PAGE>
available for most taxable accounts opened since January 1,
1986. In general, investors who redeemed shares from a
qualifying Vanguard account may expect to receive their
Average Cost Statement along with their Fund Summary
Statement. Please call our Client Services Department
(1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you
semi-annually, according to the Fund's fiscal year-end. ..
- --------------------------------------------------------------------------------
OTHER VANGUARD
SERVICES For more information about any of these services, please
call our Investor Information Department at 1-800-662-7447.
Vanguard
Direct Deposit
Service With Vanguard's Direct Deposit Service, most U.S. Government
checks (including Social Security and military pension
checks) and private payroll checks may be automatically
deposited into your Vanguard Fund account. Separate
brochures and forms are available for direct deposit of U.S.
Government and private payroll checks.
Vanguard Automatic
Exchange Service Vanguard's Automatic Exchange Service allows you to move
money automatically among your Vanguard Fund accounts. For
instance, the service can be used to "dollar cost average"
from a money market portfolio into a stock or bond fund or
to contribute to an IRA or other retirement plan. Please
contact our Client Services Department at 1-800-662-2739 for
additional information.
Vanguard Fund
Express Vanguard's Fund Express allows you to transfer money between
your Fund account and your account at a bank, savings and
loan association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our
Investor Information Department (1-800-662-7447) for a Fund
Express application.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition, some
services of Fund Express cannot be used with specific
Vanguard Funds. For more information, please refer to the
Vanguard Fund Express brochure.
Vanguard
Dividend
Express Vanguard's Dividend Express allows you to transfer your
dividends and/or capital gains distributions automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our
Investor Information Department (1-800-662-7447) for a
Vanguard Dividend Express application.
Vanguard
Tele-Account Vanguard's Tele-Account is a convenient, automated service
that provides share price, price change and yield quotations
on Vanguard Funds through any TouchTone(TR) telephone. This
service also lets you obtain information about your account
balance, your last transaction, and your most recent
dividend or capital gains payment. To contact Vanguard's
Tele-Account service, dial 1-800-ON- BOARD (1-800-662-6273).
A brochure offering detailed operating instructions is
available from our Investor Information Department
(1-800-662-7447).
- --------------------------------------------------------------------------------
27
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
Vanguard
NEW YORK
INSURED
TAX-FREE FUND
The Vanguard Group
of Investment
Companies
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
Investor Information
Department:
1-800-662-7447 (SHIP)
Client Services
Department:
1-800-662-2739 (CREW)
Tele-Account for
24-Hour Access:
1-800-662-6273 (ON-BOARD)
Telecommunication
Service for the
Hearing-Impaired:
1-800-662-2738
Transfer Agent:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
P076
Vanguard
NEW YORK
INSURED
TAX-FREE FUND
P R O S P E C T U S
MARCH 29, 1996
A member of
THE VANGUARD GROUP.
<PAGE>
PART B
VANGUARD NEW YORK INSURED TAX-FREE FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 29, 1996
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus dated March 29, 1996. To obtain this
Prospectus, please call:
Vanguard's Investor Information Department
1-800-662-7447
TABLE OF CONTENTS
Page
--------
Investment Limitations ....................................... B-1
Investment Policies .......................................... B-2
Risks Factors ................................................ B-6
Yield and Total Return ....................................... B-7
Performance Measures ......................................... B-7
Investment Management ........................................ B-9
Purchase of Shares ........................................... B-9
Redemption of Shares ......................................... B-10
Management of the Fund ....................................... B-11
Description of Shares and Voting Rights ...................... B-14
Financial Statements ......................................... B-15
Appendix A--Description of Municipal Bonds and their Ratings . B-16
Appendix B--Municipal Lease Obligations ...................... B-19
INVESTMENT LIMITATIONS
The following limitations cannot be changed without the consent of the
holders of a majority of the Fund's outstanding shares (as defined in the
Investment Company Act of 1940 (the "1940 Act").
1. The Fund will not invest in securities other than municipal bonds,
except that it may make temporary investments in (a) notes issued by or on
behalf of municipal or corporate issuers, obligations of the United States
Government and its agencies or instrumentalities, commercial paper and
bank certificates of deposit; (b) any investment companies investing in
such securities which have investment objectives and policies consistent
with those of the Fund, to the extent permitted by the 1940 Act; and (c)
any such securities or municipal bonds subject to short-term repurchase
agreements;
2. The Fund will limit the aggregate value of all issuers (except U.S.
Government and cash items, as defined under Subchapter M of the Internal
Revenue Code (the "Code"), each of which exceeds 5% of the Portfolio's
total assets, to an aggregate amount of 50% of such assets;
3. The Fund will limit the aggregate value of holdings of a single
issuer (except U.S. Government and cash items, as defined in the Code) to
a maximum of 25% of the Fund's total assets. For the purposes of this
limitation, identification of the issuer will be based on a determination
of the source of assets and revenues committed to meeting interest and
principal payments of each security;
4. The Fund will not borrow money except for temporary or emergency
purposes and then only in an amount not exceeding 10% of the value of the
total assets of that Fund. The Fund will repay all borrowing before making
additional investments. Interest paid on such borrowings will reduce
income;
B-1
<PAGE>
5. The Fund will not pledge, mortgage or hypothecate its assets to any
extent greater than 10% of the value of the total assets of the Fund;
6. The Fund will not issue senior securities as defined in the 1940
Act;
7. The Fund will not engage in the business of underwriting any issue
of securities issued by other persons, except to the extent that it may
technically be deemed to be an underwriter under the Securities Act of
1933, as amended, in disposing of investment securities;
8. The Fund will not purchase or sell real estate, but this shall not
prevent investments in municipal bonds secured by real estate or interests
therein;
9. The Fund will not make loans to other persons, except by the
purchase of bonds, debentures or similar obligations which are publicly
distributed and as provided under "Lending of Securities";
10. The Fund will not purchase on margin or sell short, except as
specified below in Investment Limitation No. 12;
11. The Fund will not purchase or retain securities of an issuer if
those Trustees of the Fund, each of whom owns more than 1/2 of 1% of such
securities, together own more than 5% of the securities of such issuer;
12. The Fund will not purchase or sell commodities or commodities
contracts, except that the Fund may invest in bond futures contracts, bond
options and options on bond futures contracts to the extent that not more
than 5% of the Fund's assets are required as deposit on futures contracts
and not more than 20% of the Fund's assets are invested in futures
contracts and/or options transactions at any time;
13. The Fund will not invest in securities of other investment
companies except as they may be acquired as part of a merger,
consolidation or acquisition of assets or otherwise to the extent
permitted by Section 12 of the 1940 Act;
14. The Fund will not invest in put, call, straddle or spread options
(except as described above in investment limitation No. 12) or interests
in oil, gas or other mineral exploration or development programs;
15. The Fund will not purchase an industrial revenue bond if as a
result of such purchase (i) more than 5% of the Fund's total assets,
determined at market value at the time of the proposed investment, would
be invested in industrial revenue bonds where the payment of principal and
interest is the responsibility of a company with less than three (3)
years' operating history, or (ii) more than 20% of the Fund's total
assets, determined at market value at the time of the proposed investment,
would be invested in industrial development bonds. These restrictions do
not apply to municipal obligations where the payment of principal and
interest is the responsibility of a government or the political
subdivision of a government; and
16. The Fund will not purchase or otherwise acquire any security
(including the Fund's investment in The Vanguard Group, Inc.) if, as a
result, more than 15% of its net assets would be invested in securities
that are illiquid.
The above-mentioned investment limitations are considered at the time
investment securities are purchased. Notwithstanding these limitations, the
Fund may own all or any portion of the securities of, or make loans to, or
contribute to the costs or other financial requirements of, any company which
will be (1) wholly-owned by the Fund and one or more other investment
companies and (2) primarily engaged in the business of providing, at cost,
management, administrative, distribution and/or related services to the Fund
and such other investment companies. Additionally, the Fund may invest in
when-issued securities without limitation. Please see the Prospectus for a
description of such securities.
INVESTMENT POLICIES
Repurchase Agreements. The Fund 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
B-2
<PAGE>
agreement is an agreement under which the Fund acquires a money market
instrument (generally a security issued by the U.S. Government or an agency
thereof, a banker's acceptance or a certificate of deposit) from a commercial
bank, broker or dealer, subject to resale to the seller at an agreed upon price
and date (normally, the next business day). A repurchase agreement may be
considered a loan collateralized by securities. The resale price reflects an
agreed upon interest rate effective for the period the instrument is held by the
Fund and is unrelated to the interest rate on the underlying instrument. In
these transactions, the securities acquired by the Fund (including accrued
interest earned thereon) must have a total value in excess of the value of the
repurchase agreement and are held by the Fund's custodian bank until
repurchased. In addition, the Fund's Board of Trustees will monitor the Fund's
repurchase agreement transactions generally and will establish guidelines and
standards for review by the investment adviser of the creditworthiness of any
bank, broker or dealer party to a repurchase agreement with the Fund. No more
than an aggregate of 15% of a Fund's assets, at the time of investment, will be
invested in repurchase agreements having maturities longer than seven days and
securities subject to legal or contractual restrictions on resale, or for which
there are no readily available market quotations.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligations 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 an agreement becomes insolvent and subject to liquidation or
reorganization under the Bankruptcy Code or other laws, a court may determine
that the underlying security is collateral for a loan by the Fund not within
the control of the Fund and therefore the realization by the Fund on such
collateral may be automatically stayed. Finally, it is possible that the Fund
may not be able to substantiate its interest in the underlying security and
may be deemed an unsecured creditor of the other party to the agreement.
While the Fund's management acknowledges these risks, it is expected that
they can be controlled through careful monitoring procedures.
Lending of Securities. The Fund may lend its investment securities to
qualified institutions who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to
deliver securities or completing arbitrage operations. By lending its
investment securities, the Fund attempts to increase its income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for
the account of the Fund. The Fund may lend its investment securities to
qualified brokers, dealers, banks or other financial institutions, so long as
the terms and the structure of such loans are not inconsistent with the 1940
Act, or the Rules and Regulations or interpretations of the Securities and
Exchange Commission (the "Commission") thereunder, which currently require
that (a) the borrower pledge and maintain with the Fund collateral having a
value at all times not less than 100% of the value of the securities loaned,
(b) the borrower add to such collateral whenever the price of the securities
loaned rises (i.e., the borrower "marks to the market" on a daily basis), (c)
the loan be made subject to termination by the Fund at any time and (d) the
Fund receive reasonable interest on the loan (which may include the Fund
investing any cash collateral in interest bearing short-term investments),
any distribution on the loaned securities and any increase in their market
value. The Fund will not lend its investment securities, if as a result, the
aggregate of such loans exceeds 10% of the value of its total assets. Loan
arrangements made by the Fund will comply with all other applicable
regulatory requirements, including the rules of the New York Stock Exchange,
which rules presently require the borrower, after notice, to redeliver the
securities within the normal settlement time of three business days. All
relevant facts and circumstances, including the creditworthiness of the
broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Fund's Board
of Trustees. Income derived from lending of securities is not tax-exempt,
and, thus, the Fund will limit such activity in accordance with its
investment objective.
Futures Contracts and Options. The Fund may enter into futures contracts,
options, and options on futures contracts for the purpose of simulating full
investment and reducing transactions costs. 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
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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 at the Fund's custodian bank to the extent
required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the 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. Futures contracts are customarily
purchased and sold at prices which may range upward from less than 5% of the
value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes, to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, changes 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 margin deposits.
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 interest rates of underlying securities. The Fund intends to use
futures contracts only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions. The Fund will
only sell futures contracts to protect securities it owns against price
declines or purchase contracts to protect against an increase in the price of
securities it intends to purchase. As evidence of this hedging interest, the
Fund expects that approximately 75% of its futures contract purchases will be
"completed," that is, equivalent amounts of related securities will have been
purchased or are being purchased by the Fund upon sale of open futures
contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Fund's exposure to market fluctuations, the use
of futures contracts may be a more effective means of hedging this exposure.
While the Fund will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in
the purchase and sale of the underlying securities.
Restrictions on the Use of Futures Contracts. The 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, the Fund will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of the Fund's total assets.
Risk Factors in Futures Transactions. Positions in futures contracts may be
closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if the Fund has insufficient
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cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, the 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 the Fund.
The 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 principal interest rate futures exchanges in the United States
are the Board of Trade of the City of Chicago and the Chicago Mercantile
Exchange.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may result in immediate
and 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 amount invested in the contract. However,
because the futures strategies of the Fund are engaged in only for hedging
purposes, the Adviser does not believe that the Fund is subject to the risks
of loss frequently associated with futures transactions. The 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 the Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities or other characteristics than the portfolio
securities being hedged. It is also possible that the 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 the 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.
Federal Tax Treatment of Futures Contracts. The 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 held as of the
end of the year as well as those actually realized during the year. In most
cases, any gain or loss recognized with respect to a futures contract is
considered to be 60% long-term capital gain or loss and 40% short-term
capital gain or loss, without regard to the holding period of the contract.
Furthermore, sales of futures contracts which are intended to hedge against a
change in the value of securities held by the Fund may affect the holding
period of such securities and, consequently, the nature of the gain or loss
on such securities upon disposition. The 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 the 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. In addition, gains realized on the sale or other
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disposition of securities held for less than three months must be limited to
less than 30% of the Fund's annual gross income. It is anticipated that any net
gain realized from the closing out of futures contracts will be considered gain
from the sale of securities and therefore be qualifying income for purposes of
the 90% requirement. In order to avoid realizing excessive gains on securities
held less than three months, the Fund may be required to defer the closing out
of futures contracts beyond the time when it would otherwise be advantageous to
do so. It is anticipated that unrealized gains on futures contracts, which have
been open for less than three months as of the end of the Fund's fiscal year and
which are recognized for tax purposes, will not be considered gains on sales of
securities held less than three months for the purpose of the 30% test.
The Fund will distribute to shareholders annually any net capital gains
which have been recognized for federal income tax purposes (including
unrealized gains at the end of the Fund's fiscal year) on futures
transactions. Such distributions will be combined with distributions of
capital gains realized on the Fund's other investments and shareholders will
be advised on the nature of the transactions.
RISK FACTORS
The Fund invests primarily in the obligations of New York state
government, state agencies, state authorities and various local governments,
including counties, cities, towns, special districts, and authorities. In
general, the credit quality and credit risk of any issuer's debt depend on
the state and local economy, the health of the issuer's finances, the amount
of the issuer's debt, the quality of management, and the strength of legal
provisions in debt documents that protect debt holders. Credit risk is
usually lower wherever the economy is strong, growing and diversified;
financial operations are sound; and the debt burden is reasonable.
The average rating among American states for full faith and credit state
debt is "double-A" by Moody's Investors Service and Standard & Poor's
Corporation. Against this measure and the criteria listed above, the credit
risk associated with direct obligations of the State of New York and State
agencies and authorities, including general obligation and revenue bonds,
"moral obligation" bonds, lease debt, and notes, compares somewhat
unfavorably. During most of the last two decades, the State's general
obligation bonds have been rated just below this average by both rating
agencies. Additionally, the State's credit quality could be characterized as
more volatile than that of other states, since the State's credit rating has
been upgraded and downgraded much more often than usual. This rating has
fluctuated between "double-A" and "single-A" since the early 1970s.
Nonetheless, during this period the State's obligations could still be
characterized as providing upper medium grade security, with a strong
capacity for timely repayment of debt.
The wealth of New York State, as well as the size and diversity of its
economy, serve to limit the credit risk of its securities. New York ranks
third among the states in per capita personal income, which is 19% above the
U.S. average. During most of the 1980s, economic indicators for New York,
including income and employment growth and unemployment rates, outperformed
the nation as a whole. The engine of growth for the State in the past decade
was the surge in financial and other services, especially in New York City.
Manufacturing centers in Upstate New York, which more closely parallel the
midwestern economy, suffered during the 1970s and early 1980s. The upstate
economy continues to benefit from the free trade treaty with Canada and the
strength of U.S. exports in general.
Credit risk in New York State is heightened by a large and increasing debt
burden, frequently marginal financial operations, limited revenue-raising
flexibility, and the uncertainty of the future credit quality of New York
City, which comprises 40% of the State's population and economy. Combined
State and local debt per capita is about 50% above the U.S. average, and debt
service expenditures have been growing as a claim on the State budget. New
York's debt structure is also complicated. To circumvent voter approval, most
State debt is issued by agencies, is not backed by the State's full faith and
credit and therefore has lower credit ratings. In the past, the State had to
rely on short-term borrowing to meet its obligations, but this practice has
ended.
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Buoyed by rapid economic growth in the mid-1980s, the State's financial
operations generated surpluses. Beginning in 1988, however, unforeseen
consequences of federal tax reform, combined with a weakening economy,
resulted in a series of state budget deficits. New York's heavy commitment to
local aid and social welfare programs allowed expenditure growth to exceed
available revenues. This lack of budgetary discipline caused the State's
credit ratings to fall. Moreover, New York's ability to raise revenues is
limited, since combined State and local taxes are among the highest in the
nation as a percent of personal income. Recent state budgets have been
balanced, and the prospects for reform of debt management are improving.
Recent political events pose uncertainty for the State. Governor George
Pataki is committed to reducing taxation. Unless expenditures also are cut,
the State will once again experience fiscal stress.
New York State's future credit quality will be heavily influenced by the
future of New York City. As the City's economic boom in the 1980s lifted the
State, the severe downturn in the financial services and real estate sectors,
which are concentrated in the City, has been serving as a drag on the State
economy. Stabilization or recovery in these areas is crucial to the economic
and fiscal health of the City and the State. Moreover, the City faces
daunting challenges in combatting deteriorating infrastructure and serious
social problems of housing, health, education and public safety. So far, City
government has demonstrated an ability to keep abreast of these problems, but
the City's and the State's ability to meet these challenges will be a
continuing risk factor.
YIELD AND TOTAL RETURN
The yield of the Fund for the 30-day period ended November 30, 1995 was
+4.97%.
The average annual total return of the Fund for the one- and five-year
periods ending November 30, 1995 was +19.90% and +9.13%, respectively. The
average annual total return for the Fund since its inception on April 7, 1986
is +7.65%.
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of the Vanguard Group of Investment Companies.
Vanguard New York Insured Tax-Free Fund may use one or more, either
singularly or in a composite, of the following unmanaged indexes for
comparative performance purposes:
Standard & Poor's 500 Composite Stock Price Index--is a well-diversified list
of 500 companies representing the U.S. Stock Market.
Wilshire 5000 Equity Index--consists of more than 6,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
Wilshire 4500 Equity Index--consists of all stocks in the Wilshire 5000
except for the 500 stocks in the Standard and Poor's 500 Index.
Russell 3000 Stock Index--a diversified portfolio of approximately 3,000
common stocks accounting for over 90% of the market value of publicly traded
stocks in the U.S.
Russell 2000 Stock Index--a subset of approximately 2,000 of the smallest
stocks contained in the Russell 3000; a widely-used benchmark for small
capitalization common stocks.
Morgan Stanley Capital International EAFE Index--is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on
the stock exchanges of countries in Europe, Australia and the Far East.
Goldman Sachs 100 Convertible Bond Index--currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
Salomon Brothers GNMA Index--includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government
National Mortgage Association.
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Salomon Brothers High-Grade Corporate Bond Index--consists of publicly
issued, non-convertible corporate bonds rated Aa or Aaa. It is a
value-weighted, total return index, including approximately 800 issues with
maturities of 12 years or greater.
Lehman Long-Term Treasury Bond--is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
Merrill Lynch Corporate & Government Bond--consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.
Lehman Corporate (Baa) Bond Index--all publicly offered fixed-rate
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
Lehman Brothers Long-Term Corporate Bond Index--is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
Bond Buyer Municipal Index (20 Year) Bond--is a yield index on current coupon
high-grade general obligation municipal bonds.
Standard & Poor's Preferred Index--is a yield index based upon the average
yield of four high- grade, non-callable preferred stock issues.
NASDAQ Industrial Index--is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not
include income.
Composite Index--70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
Composite Index--35% Standard & Poor's 500 Index and 65% Lehman Brothers
Long-Term Corporate Bond Index.
Composite Index--65% Standard & Poor's 500 Index and 35% Salomon Brothers
High-Grade Bond Index.
Lehman Brothers Aggregate Bond Index--is a market-weighted index that
contains individually priced U.S. Treasury, agency, corporate, and mortgage
pass-through securities corporate rated BBB- or better. The Index has a
market value of over $4 trillion.
Lehman Brothers Mutual Fund Short (1-5) Government/Corporate Index--is a
market-weighted index that contains individually priced U.S. Treasury,
agency, and corporate investment grade bonds rated BBB- or better with
maturities between 1 and 5 years. The index has a market value of over $1.3
trillion.
Lehman Brothers Mutual Fund Intermediate (5-10) Government/Corporate
Index--is a market- weighted index that contains individually priced U.S.
Treasury, agency, and corporate securities rated BBB- or better with
maturities between 5 and 10 years. The index has a market value of over $600
billion.
Lehman Brothers Mutual Fund Long (10+) Government/Corporate Index--is a
market-weighted index that contains individually priced U.S. Treasury,
agency, and corporate securities rated BBB- or better with maturities greater
than 10 years. The index has a market value of over $900 billion.
Lipper Small Company Growth Fund Average--the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average
performance and/or the average expense ratio of the small company growth
funds. (This fund category was first established in 1982. For years prior to
1982, the results of the Lipper Small Company Growth category were estimated
using the returns of the Funds that constituted the Group at its inception.)
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Lipper General Equity Fund Average--an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
Lipper Fixed Income Fund Average--an industry benchmark of average fixed
income funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
Lipper Balanced Fund Average--an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
Lipper Non-Government Money Market Fund Average--an industry benchmark of
average non-government money market funds with similar investment objectives
and policies, as measured by Lipper Analytical Services, Inc.
Lipper Government Money Market Fund Average--an industry benchmark of average
government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
INVESTMENT MANAGEMENT
The Fund receives all investment advisory services on an "internalized,"
at-cost basis from an experienced investment management staff employed
directly by The Vanguard Group, Inc. ("Vanguard"), a subsidiary jointly owned
by the Fund and the other Funds in The Vanguard Group of Investment
Companies. The investment management staff is supervised by the senior
officers of the Fund.
The investment management staff is 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 Fund
to meet cash inflow (or outflow), which reflects net purchases and exchanges
of shares by investors (or net redemptions of shares) and reinvestment of the
Fund's income.
A change in securities held by the Fund is known as "portfolio turnover"
and may involve the payment of 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 portfolio
turnover rate for the Fund is set forth under the heading "Financial
Highlights" in the Fund's Prospectus. The portfolio 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 portfolio turnover
rate in future years will vary significantly from the rates in recent years.
During the fiscal years ended November 30, 1993, 1994 and 1995, this Fund
did not pay any brokerage commissions.
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment
of management such rejection is in the best interest of the Fund, and (iii)
to reduce or waive the minimum investment for or any other restriction on
initial and subsequent investments under circumstances where certain
economies can be achieved in sales of the Fund's shares.
Stock Certificates. Your purchase will be made in full and fractional
shares of the Fund calculated to three decimal places. Shares are normally
held on deposit for shareholders by the Fund, which will send to shareholders
a statement of shares owned at the time of each transaction. This saves the
shareholders the trouble of safekeeping the certificates and saves the Fund
the cost of issuing certificates. Share certificates are, of course,
available at any time upon written request at no additional cost to
shareholders. No certificates will be issued for fractional shares.
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REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the Securities and Exchange
Commission (the "Commission"), (ii) during any period when an emergency exists
as defined by the rules of the Commission as a result of which it is not
reasonably practicable for the Fund to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the Commission may permit.
If the Board of Trustees determines that it would be detrimental to the
best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or
in part by a distribution in kind of securities held by the Fund in lieu of
cash in conformity with applicable rules of the Commission. Investors may
incur brokerage charges on the sale of such securities so received in payment
of redemptions.
No charge is made by the Fund for redemptions except for wire redemptions
of under $5,000 which may be charged a maximum fee of $5.00. Any redemption
may be more or less than the shareholder's cost depending on the market value
of the securities held by the Fund.
Signature Guarantees. To protect your account, the Fund and Vanguard from
fraud, signature guarantees are required for certain redemptions. Signature
guarantees enable the 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 guarantor must be a bank, a trust company, a member firm of a domestic
stock exchange, a foreign branch of any of the foregoing or any other
guarantor that Vanguard deems to be acceptable. Notaries public are not
acceptable guarantors.
The signature guarantees must appear either: (1) on the written request
for redemption or transfer, (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.
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MANAGEMENT OF THE FUND
OFFICERS AND TRUSTEES
The Fund's Officers, under the supervision of the Board of Trustees,
manage the day-to-day operations of the Fund. The Trustees, set broad
policies for the Fund and choose its Officers.
A list of the Trustees and Officers of the Fund and a brief statement of
their present positions and principal occupations during the past 5 years is
set forth below. As of November 30, 1995, the Trustees owned less than 1% of
the Fund's outstanding shares.
The mailing address of the Fund's Trustees and Officers is Post Office Box
876, Valley Forge, PA 19482.
JOHN C. BOGLE, Chairman and Trustee*
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group; Director of The Mead Corporation
and General Accident Insurance.
JOHN J. BRENNAN, President, Chief Executive Officer & Trustee*
President, Chief Executive Officer and Director of the Fund, The Vanguard
Group, Inc. and of each of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Trustee
Chairman of Rhone-Poulenc Rorer, Inc.; Direc- tor of Sun Company, Inc..
BARBARA BARNES HAUPTFUHRER, Trustee
Director of The Great Atlantic and Pacific Tea Company, Alco Standard Corp.,
Raytheon Company, Knight-Ridder, Inc., and Massachusetts Mutual Life
Insurance Co. and Trustee Emerita of Wellesley College.
BURTON G. MALKIEL, Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University;
Director of Prudential Insurance Co. of America, Amdahl Corporation, Baker
Fentress & Co., The Jeffrey Co., and Southern New England Communications
Company.
ALFRED M. RANKIN, JR., Trustee
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of The BFGoodrich Company and The Standard Products Company.
JOHN C. SAWHILL, Trustee
President and Chief Executive Officer, The Nature Conservancy; formerly,
Director and Senior Partner, McKinsey & Co.; President, New York University;
Director of Pacific Gas and Electric Company and NACCO Industries.
JAMES O. WELCH, Jr., Trustee
Retired Chairman of Nabisco Brands Inc., retired Vice Chairman and Director
of RJR Nabisco; Director of TECO Energy, Inc. and Director of Kmart
Corporation.
J. LAWRENCE WILSON, Trustee
Chairman and Chief Executive Officer of Rohm & Haas Company; Director of
Cummins Engine Company and Trustee of Vanderbilt University.
RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary
of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, Treasurer*
Treasurer of The Vanguard Group, Inc. and of each of the investment
companies in The Vanguard Group.
KAREN E. WEST, 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 Investment
Company Act of 1940.
THE VANGUARD GROUP
Vanguard New York Insured Tax-Free Fund is a member of The Vanguard Group
of Investment Companies. Through their jointly-owned subsidiary, The Vanguard
Group, Inc. ("Vanguard"), the Fund and the other Funds in the 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 the Vanguard New York
Insured Tax-Free Fund.
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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 net expenses which are allocated among
the Funds under methods approved by the Board of Trustees (Directors) 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.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics, certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines substantially similar to
those recommended by the mutual fund industry and approved by the U.S.
Securities and Exchange Commission.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
Funds' Service Agreement provides for the following arrangement: (1) each
Vanguard Fund may invest a maximum of 0.40% of its net assets in Vanguard; and
(2) there is no restriction on the maximum aggregate cash investment that the
Vanguard Funds may make in Vanguard. The amounts which each of the Funds has
invested are adjusted from time to time in order to maintain the proportionate
relationship between each Fund's relative net assets and its contribution to
Vanguard's capital. At November 30, 1995, Vanguard New York Insured Tax-Free
Fund had contributed capital of $102,000 to Vanguard representing .5% of
Vanguard's capitalization.
Management. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended November 30, 1995, the Funds share of Vanguard's actual net
costs of operations relating to management and administrative services
(including transfer agency) totaled approximately $1,343,000.
Distribution. Vanguard provides all distribution and marketing activities for
the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for shares of the
Funds in connection with any sales made directly to investors in the states of
Florida, Missouri, New York, Ohio, Texas and such other states as it may be
required.
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 Group. The Trustees
(Directors) and officers of Vanguard determine the amount to be spent annually
on distribution activities, the manner and amount to be spent on each Fund, and
whether to organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon their relative net assets. The 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 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 year ended November 30, 1995,
the Fund paid approximately $169,000 of the Group's distribution and marketing
expenses.
Investment Advisory Services. Vanguard also provides investment advisory
services to the Fund, Vanguard Municipal Bond Fund, Vanguard Money Market
Reserves, Vanguard California Tax- Free Fund, Vanguard Pennsylvania Tax-Free
Fund, Vanguard New Jersey Tax-Free Fund, Vanguard Florida Insured Tax-Free Fund,
Vanguard Ohio Tax-Free Fund, Vanguard Admiral Funds, Vanguard International
Equity Index Fund, Vanguard Balanced Index Fund, Vanguard Institutional Index
Fund, Vanguard Index Trust, Vanguard Tax-Managed Fund, the Aggressive Growth
Portfolio of Vanguard Horizon Fund, Vanguard Bond Index Fund, several Portfolios
B-12
<PAGE>
of Vanguard Variable Insurance Fund, several Portfolios of Vanguard Fixed Income
Securities Fund, a portion of Vanguard/Windsor II, a portion of Vanguard/Morgan
Growth Fund as well as several indexed separate accounts. 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. During the years ended November 30, 1993, 1994
and 1995 the Fund paid approximately $65,000, $89,000 and $101,000 of Vanguard's
investment advisory expenses.
Remuneration of Trustees and Officers. The Fund pays each Trustee, who is
not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. During the year ended November 30, 1995, the Fund
paid $3,000 in Trustees' expenses. The Fund's Officers and employees are paid
by Vanguard which, in turn, is reimbursed by the Fund, and each other Fund in
the Group, for its proportionate share of Officers' and employees' salaries
and retirement benefits. During the year ended November 30, 1995, the Fund's
proportionate share of remuneration paid to all Officers of the Fund as a
group was approximately $26,511.
Upon retirement, Trustees who are not Officers are paid an annual fee
based upon the number of years of service on the Board. The fee is equal to
$1,000 for each year of service up to a maximum of $15,000. Under its
Retirement Plan, Vanguard contributes annually an amount equal to 10% of each
Officer's annual compensation plus 5.7% of that part of the Officer's
compensation during the year, if any, that exceeds the Social Security
Taxable Wage Base then in effect. Under Vanguard's Thrift Plan, all employees
are permitted to make pre-tax contributions in a maximum amount equal to 4%
of total compensation. Vanguard matches the basic contribution on a 100%
basis. During the year ended November 30, 1995 the Fund's proportionate share
of retirement benefits paid to all Officers of the Fund, as a group, was
approximately $750.
B-13
<PAGE>
The following table provides detailed information with respect to the
amounts paid or accrued for the Trustees for the fiscal year ended November
30, 1995.
VANGUARD NEW YORK INSURED TAX-FREE FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement Estimated From All
Aggregate Benefits Accrued Annual Vanguard
Compensation As Part of Benefits Upon Funds Paid
Names of Trustees From Fund Fund Expenses Retirement to Trustees(3)
----------------- -------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
John C. Bogle(1)(2) ...... -- -- -- --
John J. Brennan(2) ....... -- -- -- --
Barbara Barnes Hauptfuhrer $342 $60 $15,000 $60,000
Robert E. Cawthorn ....... $342 $50 $13,000 $60,000
Burton G. Malkiel ........ $342 $40 $15,000 $60,000
Alfred M. Rankin, Jr. .... $342 $31 $15,000 $60,000
John C. Sawhill .......... $342 $37 $15,000 $60,000
James O. Welch, Jr. ...... $342 $46 $15,000 $60,000
J. Lawrence Wilson ....... $342 $33 $15,000 $60,000
</TABLE>
- ------
(1) For the period reported in this table, Mr. Bogle was the Fund's Chief
Executive Officer, and therefore an "Interested Trustee."
(2) As "Interested Trustees," Messrs. Bogle and Brennan receive no
compensation for their service as Trustees.
(3) The amounts reported in this column reflect the total compensation paid
to each Trustee for their service as Director or Trustee of 33 Vanguard
Funds.
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund was organized as a Pennsylvania Trust on October 16, 1985.
The Declaration of Trust, as amended and restated on January 15, 1986,
permits the Trustees to issue an unlimited number of shares of beneficial
interest, without par value, from an unlimited number of separate classes
("Portfolios") of shares. Currently, the Fund is offering shares of one
Portfolio.
The shares of the Fund are fully paid and nonassessable, except as set
forth under "Shareholder and Trustee Liability," and have no preference as to
conversion, exchange, dividends, retirement or other features. The shares of
the Fund have no pre-emptive rights. The shares of the Fund have non-
cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Trustees can elect 100% of the Trustees
if they choose to do so. A shareholder is entitled to one vote for each full
share held (and a fractional vote for each fractional share held), then
standing in his name on the books of the Fund. On any matter submitted to a
vote of shareholders, all shares of the Fund then issued and outstanding and
entitled to vote, irrespective of the class, shall be voted in the aggregate
and not by class: except (i) when required by the Investment Company Act of
1940, shares shall be voted by individual class; and (ii) when the matter
does not affect any interest of a particular class, then only shareholders of
the affected class or classes shall be entitled to vote thereon.
The Fund will continue without limitation of time, provided, however that:
1) Subject to the majority vote of the holders of shares of the Fund
outstanding, the Trustees may sell or convert the assets of the Fund to
another investment company in exchange for shares of such investment
company, and distribute such shares, ratably among the shareholders of the
Fund.
2) Subject to the majority vote of shares of the Fund outstanding, the
Trustees may sell and convert into money the assets of the Fund and
distribute such assets ratably among the shareholders of the Fund; and
B-14
<PAGE>
Upon completion of the distribution of the remaining proceeds or the
remaining assets of any Portfolio as provided in paragraphs 1) and 2) above
the Fund shall terminate and the Trustees shall be discharged of any and all
further liabilities and duties hereunder and the right, title and interest of
all parties shall be cancelled and discharged.
Shareholder and Trustee Liability Under Pennsylvania law, shareholders of
such a Trust may under certain circumstances, be held personally liable as
partners for the obligations of the Fund. Therefore, the Declaration of Trust
contains an express disclaimer of shareholder liability for acts or
obligations of the Fund and requires that notice of such disclaimer be given
in each agreement, obligation, or instrument entered into or executed by the
Fund or the Trustees. The Declaration of Trust provides for indemnification
out of the Fund property of any shareholder held personally liable for the
obligations of the Fund. The Declaration of Trust also provides that the Fund
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Fund and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which the Fund itself
would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he
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 office.
FINANCIAL STATEMENTS
The Fund's financial statements for the year ended November 30, 1995,
including the financial highlights for each of the five fiscal years in the
period ended November 30, 1995, appearing in the Vanguard New York Insured
Tax-Free Fund's 1995 Annual Report to Shareholders, and the report thereon of
Price Waterhouse LLP, independent accountants, also appearing therein, are
incorporated by reference in this Statement of Additional Information. The
Fund's 1995 Annual Report to Shareholders is enclosed with this Statement of
Additional Information.
B-15
<PAGE>
APPENDIX A--DESCRIPTION OF MUNICIPAL BONDS AND THEIR RATINGS
Municipal Bonds--General Municipal Bonds generally include debt
obligations issued by states and their political subdivisions, and duly
constituted authorities, not-for-profit corporations, 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
(rated SP-1+ of SP-1 by Standard & Poor's Corp. or MIG by Moody's Investors
Service), project notes, demand notes and tax- exempt commercial papers
(rated A-1 by Standard & Poor's Corp. or P-1 by Moody's Investors Service).
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.
Project Notes are instruments issued by the Department of Housing and
Urban Development but issued by a state or local housing agency. While the
issuing agency has the primary obligation on such Project notes, they are
also secured by the full faith and credit of the United States.
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 one year's 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.
Municipal Bonds are sometimes purchased on a "when-issued" basis meaning
the Fund has committed to purchasing certain specified securities at an
agreed upon price when they are issued. The period between commitment date
and issuance date can be a month or more. It is possible that the securities
will never be issued and the commitment canceled.
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
B-16
<PAGE>
enacted, it might restrict or eliminate the ability of the Fund to achieve its
investment objective. In that event, the Fund's Trustees and officers would
reevaluate its investment objective and policies and consider recommending to
its shareholders changes in such objective and policies.
Similarly, from time to time proposals have been introduced before State
and local legislatures to restrict or eliminate the State and local income
tax exemption for interest on Municipal Bonds. Similar proposals may be
introduced in the future. If any such proposal were enacted, it might
restrict or eliminate the ability of each Portfolio to achieve its respective
investment objective. In that event, the fund's trustees and officers would
reevaluate its investment objective and policies and consider recommending to
its shareholders changes in such objective and policies. (For more
information please refer to "Risk Factors" on page 5.)
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 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 or time; Ba -- protection
of principal and interest payments may be very moderate; judged to have
speculative elements; their future cannot be considered as well-assured; B --
lack characteristics of a desirable investment; assurance of interest and
principal payments over any long period of time may be small; Caa -- (poor
standing; may be in default or there may be present elements of danger with
respect to principal and interest; Ca -- speculative in a high degree; often
in default; C -- lowest rated class of bonds; issues so rated can be regarded
as having extremely poor prospects for ever attaining any real investment
standing.
Description of Moody's ratings of state and municipal notes: Moody's
ratings for state and municipal notes and other short-term obligations are
designated Moody's Investment Grade ("MIG"). Symbols used will be as follows:
MIG-1 -- Best quality, enjoying strong protection from established cash flows
of funds for their servicing or from established and broad-based access to
the market for refinancing, or both; MIG-2 -- High quality with margins of
protection ample although not so large as in the preceding group.
Description of Moody's highest commercial paper rating: Prime-1 ("P-1") --
Judged to be of the best quality. Their short-term debt obligations carry the
smallest degree of investment risk.
Excerpts from Standard & Poor's Corporation's Municipal Bond ratings: AAA
- -- has the highest rating assigned by S&P; extremely strong capacity to pay
principal and interest; AA -- has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in a small
degree; A -- has a strong capacity to pay principal and interest, although
somewhat more susceptible to the adverse changes in circumstances and
economic conditions; BBB -- regarded as having an adequate capacity to pay
principal and interest; normally exhibit adequate protection parameters but
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest than for bonds in A
category; BB -- B -- CCC -- CC -- predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with terms of
obligation; 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.
B-17
<PAGE>
Description of S&P's highest commercial papers rating: 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.
B-18
<PAGE>
APPENDIX B--MUNICIPAL LEASE OBLIGATIONS
The Fund may invest in municipal lease obligations. Such securities will
be treated as liquid under the following guidelines have been established by
the Board of Trustees:
1. The obligation has been rated "investment grade" by at least on
NRSRO and is considered to be investment grade by the investment adviser.
2. The obligation is secured by payments from a governmental lessee
which is generally recognized and has debt obligations which are actively
traded by a minimum of five broker/dealers.
3. At least $25 million of the lessee debt is outstanding either in a
single transaction or on parity, and owned by a minimum of five
institutional investors.
4. The investment adviser has determined that the obligation, or a
comparable lessee security, trades in the institutional marketplace at
least periodically, with a bid/offer spread of 20 basis points or less.
5. The governmental lessee has a full faith and credit general
obligation rating of at least "A-" as published by at least one NRSRO or
as determined by the investment adviser. If the lessee is a state
government, the general obligation rating must be at least BAA1, BBB+, or
equivalent, as determined above.
6. The projects to be financed by the obligation are determined to be
critical to the lessee's ability to deliver essential services.
7. Specific legal features such as covenants to maintain the tax-exempt
status of the obligation, covenants to make lease payments without the
right of offset or counterclaim, covenants to return leased property to
the lessor in the event of non-appropriation, insurance policies, debt
service reserve fund, are present.
8. The lease must be "triple net" (i.e.--lease payments are net of
property maintenance, taxes and insurance).
9. If the lessor is a private entity, there must be a sale and absolute
assignment of rental payments to the trustee, accompanied by a legal
opinion from recognized bond counsel that lease payments would not be
considered property of the lessor's estate in the event of lessor's
bankruptcy.
B-19
