<PAGE> 1
VANGUARD
NEW YORK
INSURED
TAX-FREE FUND
ANNUAL REPORT 1995
<PAGE> 2
In this Annual Report, I am delighted to formally introduce you to John J.
Brennan, who, on January 31, 1996, will assume my responsibilities as Chief
Executive Officer of Vanguard New York Insured Tax-Free Fund and the other
Funds in The Vanguard Group. Mr. Brennan will continue to serve as President of
the Funds, and I will continue to serve as Chairman of the Board.
[FIGURE 1]
JOHN C. BRENNAN JOHN C. BOGLE
As Chairman of all the Vanguard Funds, I want to tell you that I am
enthusiastic and confident that Jack Brennan is exactly the right person to
succeed me as Chief Executive Officer. To use yet another Vanguard nautical
metaphor, he will be the new captain. He has the qualities of leadership,
integrity, intelligence, and vision that must continue to be Vanguard's
hallmark as we move toward, and then into, the 21st century.
I know that he has these qualities, because Jack Brennan and I have been
working closely together since he joined Vanguard in 1982. He is a graduate of
Dartmouth College and Harvard Business School. He started as Assistant to the
Chairman and, rising like a rocket, became President in 1989. While, at age 41,
he may seem young, he is in fact older than I was when I became Chief Executive
Officer of Vanguard's predecessor organization in 1967, at the age of 38. Most
important of all, Jack is completely dedicated to the Vanguard character, and
believes in our basic mission: serving solely the shareholder, free of any
conflict of interest. He believes in holding our costs of operation to a
minimum, and in retaining our position as the lowest-cost provider of financial
services in the world. He is a true competitor, who shares Vanguard's
dedication to providing highly competitive returns to our investors relative to
the returns provided by other mutual funds with comparable objectives. He also
believes in reporting our results to shareholders with complete candor. He has
the full support of the Board of Directors and our crew, and is committed to
staying the course we have set for Vanguard. You need have no doubt that the
essential elements that drew you to Vanguard in the first place will remain
intact.
As for me, I expect to fill a useful, if less demanding, role as Chairman of
the Board. I shall keep a watchful eye over the interests of our shareholders,
our crew, and our investment policies. I shall also speak out on industry
affairs, reminding all who will listen of the primacy of the interests of
mutual fund shareholders. I will be readily available to provide Jack Brennan
with whatever wisdom I may have acquired during my lifetime of experience in
this wonderful industry and in my service as captain of Vanguard since I
founded this unique organization more than two decades ago.
In short, I'll still be around. Thank you for all your confidence in me in
the past and, in advance, for your continued confidence in Vanguard under Jack
Brennan's leadership.
/s/ JOHN C. BOGLE
VANGUARD NEW YORK INSURED TAX-FREE FUND SEEKS A HIGH LEVEL OF INCOME THAT IS
EXEMPT FROM FEDERAL AS WELL AS NEW YORK STATE PERSONAL INCOME TAXES, BY
INVESTING PRIMARILY IN INSURED LONG-TERM MUNICIPAL BONDS ISSUED BY NEW YORK
STATE AND LOCAL MUNICIPALITIES. THE FUND ALSO INVESTS IN BONDS FOR WHICH
VANGUARD OBTAINS INSURANCE COVERAGE, A FEATURE WHICH REDUCES CREDIT RISK AND
HELPS TO ASSURE THE TIMELY PAYMENTS OF PRINCIPAL AND INTEREST.
<PAGE> 3
CHAIRMAN'S LETTER
DEAR SHAREHOLDER:
The 1995 fiscal year for Vanguard State Tax-Free Funds, which ended on November
30, presented a sharp contrast to fiscal 1994. During our prior fiscal year,
long-term interest rates rose sharply, engendering a commensurate drop in bond
prices; during our most recent fiscal year, long-term interest rates fell
steadily, driving bond prices upward. In the short-term arena, tax-exempt
interest rates moved lower during the 1995 fiscal year, but the yields on our
State Money Market Portfolios actually edged higher.
The net result of the turnabout in the course of long-term interest
rates was greatly enhanced returns to the shareholders of our Insured Long-Term
Portfolios. Given the relatively low interest rate environment that prevailed
during fiscal 1995 in the tax-exempt money markets, shareholders in our various
State Money Market Portfolios earned modest returns. Nonetheless, our Money
Market Portfolios' returns were comfortably above the returns achieved by their
respective competitive benchmarks. The detailed fiscal year results for each of
our State Tax-Free Portfolios, including net asset values and dividends for the
year, as well as current yields, are presented in a table at the conclusion of
this letter.
Over the past twelve months, the STATE MONEY MARKET PORTFOLIOS provided
returns in the area of +3.7%. As we would expect, all of our Portfolios' net
asset values remained at $1.00 per share throughout the year. The table below
provides an overview of each Portfolio's twelve-month total return, as well as
its yield at the beginning and the end of the fiscal YEAR:
<TABLE>
<CAPTION>
- --------------------------------------------------------
TOTAL SEVEN-DAY
RETURN ANNUALIZED YIELD
--------------- ---------------------
MONEY MARKET YEAR ENDED NOV. 30, NOV. 30,
PORTFOLIO NOV. 30, 1995 1995 1994
- --------------------------------------------------------
<S> <C> <C> <C>
CALIFORNIA +3.7% 3.61% 3.44%
PENNSYLVANIA +3.7 3.64 3.51
NEW JERSEY +3.6 3.57 3.34
OHIO +3.8 3.71 3.47
- --------------------------------------------------------
</TABLE>
Modest though these yields may be, they accrue to investors without
taxation at either the Federal level or the state and local levels in the
respective states. What's more, the yield of each Portfolio represents a nice
enhancement over the yield available from comparable competitive funds.
The STATE INSURED LONGER-TERM PORTFOLIOS recouped all of last year's
capital losses--and then some--turning in their best overall year of
performance since our first Insured Portfolios began operations in April 1986.
The following table summarizes the fiscal year total returns (capital change
plus income) for all of the Insured Longer-Term Portfolios. To provide some
perspective on just how beneficial the falling interest rates of the past
twelve months have been for holders of longer-term bonds, this table breaks
down our Portfolios' total returns into their income and capital components:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
INVESTMENT RETURNS
------------------------------
YEAR ENDED
NOVEMBER 30, 1995
------------------------------
INSURED LONGER-TERM PORTFOLIO INCOME CAPITAL TOTAL
- ----------------------------------------------------------------------
<S> <C> <C> <C>
CALIFORNIA
INTERMEDIATE-TERM +5.6% + 8.3% +13.9%
CALIFORNIA LONG-TERM +6.5 +13.6 +20.1
NEW YORK LONG-TERM +6.4 +13.5 +19.9
PENNSYLVANIA LONG-TERM +6.5 +12.0 +18.5
NEW JERSEY LONG-TERM +6.4 +13.3 +19.7
OHIO LONG-TERM +6.4 +13.1 +19.5
FLORIDA LONG-TERM +6.3 +13.8 +20.1
- ----------------------------------------------------------------------
</TABLE>
The generous positive capital returns exhibited in the table present a
dramatic contrast to the sharply negative capital returns of one year ago. It
should go without saying that, for investors in longer-term bond funds, this
kind of year-to-year principal volatility more or less comes with the
territory. With that caveat in mind, it would not be unexpected if the capital
reward of fiscal 1995 were to revert to a capital penalty sooner or later in
another fiscal year.
The Portfolios' strong absolute returns of the past year also stack up
pretty well relative to the results of their two most appropriate performance
1
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[FIGURE 2]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended November 30, 1995
- ------------------------------------------------------------------------
Since
1 Year 5 Years Inception*
- ------------------------------------------------------------------------
<S> <C> <C> <C>
VANGUARD NY TAX-FREE FUND +19.90% +9.13% +7.65%
AVERAGE NY MUNICIPAL FUND +19.38 +8.58 +7.25
LEHMAN MUNICIPAL BOND INDEX +18.90 +8.72 +8.41
</TABLE>
*Inception, April 7, 1986.
Note: Past performance is not predictive of future performance.
benchmarks: the unmanaged Lehman Municipal Bond Index and the average
competitive fund in each respective state category. The chart above shows the
cumulative returns earned by the New York Insured Tax-Free Fund since its
inception in April 1986, compared with each of these benchmarks.
You will note that the +7.6% annualized return for the New York Insured
Tax-Free Fund was a bit ahead of the +7.3% annualized return for the average
New York insured municipal fund. Despite our emphasis on high quality and our
reliance on the extra credit safety of insured bonds, our cost advantage
carried the day. However, our return fell shy of the +8.4% return for the
Lehman Municipal Bond Index. As you know, the Lehman Index is a tough standard
for all state tax-free funds, given that it exists in a world devoid of fund
operating expenses and transaction costs. While we endeavor to exceed this
Index standard after our expenses, doing so on a consistent basis may prove to
be a large challenge.
THE FISCAL YEAR IN REVIEW
Above all, fiscal 1995 can be viewed as a year of recovery in the bond market.
On balance for the fiscal year, the yield on the long-term U.S. Treasury bond
tumbled from 8.0% to 6.1%, a precipitous drop of 190 basis points, equivalent
to a +26% price increase excluding the generous interest coupon. The yield on
the 90-day U.S. Treasury bill also declined--albeit not nearly as
sharply--beginning the fiscal year at 5.8% and ending at 5.5%.
During this same period, the municipal bond market moved in similar
fashion; however, the decline in long-term municipal bond yields was somewhat
more subdued. On balance for the fiscal year, yields on high-grade municipal
bonds fell from 6.9% to 5.5%, engendering a price increase of +20%. Yields on
top-grade (MIG 1) municipal notes declined from 3.8% to 3.5%.
In my view, the abrupt decline in long-term interest rates over the past
twelve months was related
2
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[FIGURE 3]
to several contributing factors. Most importantly, we should not lose sight of
the fact that interest rates had risen virtually without interruption in the
months leading up to the commencement of our 1995 fiscal year, reaching a peak
in November 1994. This climb in rates was engendered largely by investors'
fears about a resurgence of inflation. With the Federal Reserve Board raising
the Federal funds rate (the rate at which banks borrow from one another) an
unprecedented seven times in the 13 months from February 1994 to February 1995,
these inflation fears certainly seemed well-founded.
Although restrictive monetary policy often fails to deliver the desired
result, in this case the Fed's medicine seemed to work as intended. That is,
U.S. economic growth slowed and inflation concerns gradually dissipated.
Reflecting this renewed investor optimism, long-term rates did an about-face
beginning in late January 1995 and began to move steadily lower. By the time
the summer of 1995 began, the Fed felt free to relax its stern monetary policy
and actually reduced the Federal funds rate by 1/4 of 1% to 5 3/4%.*
The chart to the left should place the events of the past two fiscal years
into a somewhat longer run perspective. You will note that the first three
years witnessed a steady downtrend in rates, followed by the abrupt two-year
cycle that I just described. Yet, when all is said and done, yields on
long-term municipal bonds today remain generally below the levels maintained
during fiscal 1991-1992. In other words, despite the "slings and arrows" of the
recent volatile period, the prices of municipal bonds are higher today than
during the early years of the period.
It is interesting to trace the relative yields of long and short
municipals over the past five years. You can see in the lower chart that the
difference between the two yields--the "spread," if you will--has come
virtually full circle over the past five years. It stood at 135 basis points
(1.35%) at the beginning of fiscal 1991, climbed to nearly 400 basis points by
the end of fiscal 1992, and has narrowed considerably since then, moving back
to roughly 200 basis points at the close of the past fiscal year. What this
means is that investors who choose to extend the maturity of their bond
holdings earn a much lower risk premium today than they did some three years
ago.
TAX-EXEMPT VERSUS TAXABLE YIELDS
It is perhaps obvious that the reason investors are willing to accept
relatively lower yields from municipal bonds is the tax-exempt status of these
securities. While the after-tax advantage of municipals is often taken for
granted, whether municipals represent an appropriate alternative depends
importantly on: (1) the investor's tax bracket; and (2) the yield spread
between taxable and tax-exempt securities.
When I wrote to you one year ago in my 1994 Chairman's letter, I noted
that, for investors in the highest marginal tax bracket, long-term municipal
bonds provided 44% higher after-tax income
- ------------------
* Another reduction, to 5 1/2%, was implemented shortly after the close of our
fiscal year.
3
<PAGE> 6
compared to Federally taxable U.S. Treasury bonds. Today, that yield advantage
has widened to 49%. However, on the short side of the yield spectrum, the
after-tax yield premium of MIG 1 notes over U.S. Treasury bills has shrunk,
from 9% to 6%. This table presents a comparison of the annual income earned on
tax-exempt and taxable securities as of November 30, 1995, assuming a $100,000
investment:
<TABLE>
<CAPTION>
- -------------------------------------------------------
ILLUSTRATION OF INCOME ON
HYPOTHETICAL $100,000 INVESTMENT
--------------------------------
LONG-TERM SHORT-TERM
- -------------------------------------------------------
<S> <C> <C>
TAXABLE GROSS INCOME $ 6,100 $ 5,500
LESS TAXES (39.6%) (2,400) (2,200)
------- -------
NET AFTER-TAX INCOME 3,700 3,300
- -------------------------------------------------------
TAX-EXEMPT INCOME $ 5,500 $ 3,500
- -------------------------------------------------------
INCREASE IN
AFTER-TAX INCOME $ 1,800 $ 200
- -------------------------------------------------------
PERCENTAGE INCREASE +49% +6%
- -------------------------------------------------------
</TABLE>
Table assumes current yields (as of November 30, 1995) of 6.1% for U.S.
Treasury bonds, 5.5% for U.S. Treasury bills, 5.5% for long-term municipal
bonds, and 3.5% for short-term municipal notes.
The table provides a good indication of the kind of boost in after-tax income
that a high-tax-bracket investor might receive by investing in a state tax-free
bond fund rather than a Federally taxable U.S. Treasury bond fund. However,
given the speed with which interest rates can fluctuate, the illustration
should not be considered a representation of future results.
In fairness, I should also add that this is not entirely an "apples to
apples" comparison. As you know, U.S. Treasury bonds are backed by the full
faith and credit of the U.S. government; municipal bonds, on the other hand,
are subject to some degree of credit risk. More to the point, state-specific
funds entail an incremental risk engendered by their high concentration of
investments in discrete economic regions of the country. This risk is mitigated
to a tremendous extent in our Insured Longer-Term Portfolios through the use of
private portfolio insurance for virtually all of the bonds held in the
portfolios. This insurance effectively guarantees the full payment of annual
income and, at maturity, principal for all of the insured bonds that we hold.
As a result, each of our Insured Longer-Term Portfolios carries an implied
average quality rating of Aaa, the highest rating accorded by Moody's Investors
Services.
In the case of our State Tax-Free Money Market Portfolios, similar
portfolio insurance generally is not available. Thus, the burden of assuring
the creditworthiness of each individual portfolio holding rests squarely on the
shoulders of the professional money managers in Vanguard's Fixed Income Group.
I am pleased to say that they have handled this task over the years with
considerable diligence, emphasizing high-quality and credit-enhanced
securities. (This "credit enhancement" consists largely of irrevocable letters
of credit from high-quality banks guaranteeing the timely payment of interest
and principal.) Their efforts have resulted in each of the holdings in our
Money Market Portfolios earning Moody's highest rating--or the equivalent--for
shorter-term instruments.
Notwithstanding the quality of our portfolio holdings, investors in all
money market funds should bear in mind that their investments are not
guaranteed by the Federal Deposit Insurance Corporation, as would be the case
for an investment in a bank account or a certificate of deposit. There is also
no assurance that a money market fund will be able to maintain a stable net
asset value of $1.00 per share. However, we believe that our diligent credit
analysis and strict adherence to conservative average maturity guidelines will
go a long way toward protecting the interests of our shareholders.
IN SUMMARY
When I wrote to you in my Annual Report one year ago, near the low point in the
tax-exempt bond market, I was optimistic enough to predict that "during fiscal
1995 the probabilities now favor greater stability in long-term tax-exempt
rates, and somewhat higher short-term rates." As it turns out, short rates
actually slipped a bit lower, and I was not nearly optimistic enough on the
bond side, as a strong rebound in the bond market commenced
4
<PAGE> 7
virtually in lock-step with the start of the new fiscal year. This
recovery--reflecting the traditional view that the dawn inevitably follows the
darkness--provided a substantive enhancement to shareholders in our Insured
Longer-Term Portfolios. It also reinforced the value of my traditional
admonition to shareholders to "stay the course."
In the coming year, we, too, fully intend to stay the course that has
served our investors so well for so many years. We will continue to focus on
providing returns that exceed those of appropriate competitive standards, but
we will do so with the highest standards of credit quality. While high credit
quality typically comes at a price--i.e., lower gross yields--our shareholders,
thanks to our exceptionally low expense ratios, need not sacrifice income for
quality. Indeed, while the average competitive state tax-free fund charges
annual expenses at the rate of 0.83% of average net assets, our Vanguard State
Tax-Free Portfolios incur an expense ratio of but 0.20%. This remarkable annual
benefit of 63 basis points is available through the Vanguard State Tax-Free
Funds with no sacrifice in quality. The resulting higher yields in a
higher-quality bond fund is as close to the proverbial "free lunch" as you are
likely to see.
Thank you for your continued support and commitment to Vanguard, and I look
forward to reporting to you again six months hence.
Sincerely,
/s/ JOHN C. BOGLE
John C. Bogle
Chairman of the Board
December 20, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
5
<PAGE> 8
A FEW WORDS ABOUT POSSIBLE CHANGES IN THE TAX LAW
In our last Semi-Annual Report, we mentioned that potential changes in the tax
laws had impacted the tax-exempt bond market, resulting in an unusually large
after-tax yield advantage for municipal bonds. Since then, Congress has
continued to debate the merits of a "flat tax," with no definitive resolution
in sight. Given this uncertainty, the current yield on municipal bonds remains
at approximately 90% of the yield on taxable U.S. Treasuries. As a result, an
investor in the highest marginal tax bracket (40%), can earn an after-tax yield
of about 3.7% (60% of 6.1%) on a U.S. Treasury bond, compared to 5.5% on a
high-grade municipal bond--an increase of nearly 50% in after-tax income.
Until the long-term implications of a revised tax code become clearer, we
would caution municipal bond investors to give careful consideration before
making precipitate changes in the allocation of their holdings of municipal
bonds. In the meantime, we will keep you abreast of our views on the possible
effects of any proposed legislation that could materially impact the tax status
of your holdings in Vanguard State Tax-Free Funds.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value
Total Per Share
Net Assets ------------------- Twelve Months
(Millions) Average Average Nov. 30, Nov. 30, ---------------- Current
Portfolio Nov. 30, 1995 Maturity Quality* 1994 1995 Dividends Total Return Yield**
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET
CALIFORNIA . . . . $1,202 65 DAYS MIG 1 $ 1.00 $ 1.00 $.036 +3.7% 3.61%
PENNSYLVANIA . . . 1,200 36 DAYS MIG 1 1.00 1.00 .036 +3.7 3.64
NEW JERSEY . . . . 859 57 DAYS MIG 1 1.00 1.00 .035 +3.6 3.57
OHIO . . . . . . . 178 57 DAYS MIG 1 1.00 1.00 .037 +3.8 3.71
- ---------------------------------------------------------------------------------------------------------------------
INSURED INTERMEDIATE-TERM
CALIFORNIA . . . . $ 206 7.1 YEARS Aaa $ 9.64 $10.44 $.511 +13.9% 4.61%
INSURED LONG-TERM
CALIFORNIA . . . . 975 13.1 YEARS Aaa 9.92 11.27 .602 +20.1 5.15
NEW YORK . . . . . 859 10.5 YEARS Aaa 9.70 11.01 .581 +19.9 4.97
PENNSYLVANIA . . . 1,569 10.3 YEARS Aaa 10.07 11.28 .612 +18.5 5.09
NEW JERSEY . . . . 796 10.7 YEARS Aaa 10.40 11.78 .623 +19.7 4.90
OHIO . . . . . . . 197 9.3 YEARS Aaa 10.28 11.63 .610 +19.5 5.01
FLORIDA. . . . . . 423 14.1 YEARS Aaa 9.61 10.94 .560 +20.1 5.08
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
*MIG 1 and Aaa are Moody's highest ratings for short-term and long-term
municipal bonds, respectively.
**Money Market Portfolios' yields are 7-day annualized yields; others are
30-day SEC yields.
Note: The shares of each of the Vanguard "single-state"
Portfolios are available for purchase solely by residents of the
designated states.
6
<PAGE> 9
AVERAGE ANNUAL TOTAL RETURNS
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE PORTFOLIOS (PERIODS ENDED SEPTEMBER
30, 1995) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SINCE INCEPTION
---------------------------
INCEPTION TOTAL INCOME CAPITAL
DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
--------- ------ ------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
CALIFORNIA INSURED INTERMEDIATE-TERM 3/4/94 + 8.79% -- +6.98% +5.09% +1.89%
CALIFORNIA INSURED LONG-TERM 4/7/86 +10.73 +9.00% +7.79 +6.51 +1.28
CALIFORNIA MONEY MARKET 6/1/87 + 3.62 +3.28 +4.15 +4.15 0.00
NEW YORK INSURED TAX-FREE 4/7/86 +11.06 +9.40 +7.39 +6.50 +0.89
PENNSYLVANIA INSURED LONG-TERM 4/7/86 +10.10 +9.36 +8.05 +6.70 +1.35
PENNSYLVANIA MONEY MARKET 6/13/88 + 3.60 +3.31 +4.16 +4.16 0.00
NEW JERSEY INSURED LONG-TERM 2/3/88 +10.98 +9.21 +8.58 +6.50 +2.08
NEW JERSEY MONEY MARKET 2/3/88 + 3.52 +3.26 +4.14 +4.14 0.00
OHIO INSURED LONG-TERM 6/18/90 +10.78 +9.13 +8.77 +6.03 +2.74
OHIO MONEY MARKET 6/18/90 + 3.70 +3.34 +3.48 +3.48 0.00
FLORIDA INSURED TAX-FREE 9/1/92 +11.14 -- +7.63 +5.45 +2.18
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
PLEASE NOTE THAT AN INVESTMENT IN A MONEY MARKET FUND, SUCH AS THE MONEY MARKET
PORTFOLIOS OF VANGUARD STATE TAX-FREE FUNDS, IS NEITHER INSURED NOR GUARANTEED
BY THE U.S. GOVERNMENT, AND THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
7
<PAGE> 10
REPORT FROM THE INVESTMENT ADVISOR
STATE INSURED LONG-TERM PORTFOLIOS
It seems hard to believe that just one year ago we experienced the worst
price decline for the fixed-income markets since the 1920s. A powerful market
rally during 1995 has recaptured 1994's "lost ground." In retrospect, we are
reminded of the relevance of our Chairman's advice to "stay the course" in
weathering periods of market volatility.
The Federal Reserve's 1994 tightening of monetary policy helped raise
short-term interest rates, which translated into a slowing of economic activity
this year. Such slowing has diminished inflationary pressure. Fixed-income
investors responded by aggressively buying bonds. During our 1995 fiscal year,
the yield on the 30-year Treasury bond fell 1.9 percentage points (from 8.0% to
6.1%). During the same period, the yield on high-grade, long-term municipal
bonds fell 1.4 percentage points (from 6.9% to 5.5%). Naturally, the decline
in interest rates has positively affected the share prices of the State Insured
Longer-Term Portfolios. This year has provided exceptionally good performance.
Specific to the municipal market, the Orange County bankruptcy and the
rumblings of a new Federal "flat tax" structure were pivotal events. First,
Orange County filed for bankruptcy in December of 1994. During the first six
months of 1995, County officials wrestled with several alternatives to "balance
the books." By the end of our fiscal year, the County appeared to be slowly
making progress through budget cuts, revenue sharing agreements, and the
rollover of short-term credit obligations. Ultimately, we expect that Orange
County will emerge from bankruptcy, but the process will be long and is not yet
clearly defined.
It is important to note again that the Vanguard Portfolios did not and do
not have any direct exposure to Orange County debt. To be sure, this
geographically specific event underscores the advantages of the extra level of
credit protection offered by insured bonds in municipal portfolios.
In contrast, there is very little protection we can offer against the
seemingly all too frequent changes in tax policy proposed by the various
branches of the Federal government. The latest discussions regarding a flat tax
have aroused great concern throughout the municipal market. A flat tax, if
enacted, will eliminate the current system's progression of increasing marginal
tax rates and replace it with a single lower level for all earned income. This
would require the abandonment of all or most tax deductions, exemptions, and
credits.
With some proposals, unearned income (interest, dividends, or capital
gains) will not be taxed. Under this scenario, municipal obligations would lose
their unique tax-exempt status. This would reduce the attractiveness of
municipal issues relative to their taxable brethren. Market participants have
already begun to factor in this potential unattractiveness. The yield on
long-term, high-quality municipal bonds has risen from 86.3% of the 30-year
Treasury bond yield at the beginning of the year to 90.2% at the close.
Certainly, it is far too early to forecast the ultimate outcome of the flat tax
legislative proposals, but without the support of the current administration it
is doubtful that any changes will occur prior to the 1996 Presidential
elections. In the meantime, shareholders can enjoy the very attractive
after-tax yield advantage of municipal bonds.
For the State Insured Portfolios, the past year has held great rewards for
investors who "stayed the course." However, as interest rates have now returned
to historically low levels, we are hesitant to suggest bond prices will
continue on this course through next year. Regardless, investors' paramount
focus should be on long-term objectives. Whatever direction interest rates move
from year to year, Vanguard will continue to combine low expenses with the
conservative management of high-quality Federal and state tax-exempt
portfolios. We believe the outcome is a superior and durable investment.
STATE MONEY MARKET PORTFOLIOS
The beginning of the fiscal year proved to be rocky for the short-term
municipal market. Not long after the Orange County debacle, the Japanese
banking industry came under fire, resulting in the downgrading of several large
Japanese banks. The Daiwa Bank trading scandal further tarnished the reputation
of the Japanese banking industry. We are pleased to report that Vanguard Money
Market Portfolios managed to safely navigate through these
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<PAGE> 11
murky waters. The Portfolios had no exposure to Orange County notes, nor did we
hold any issues backed by Daiwa Bank.
Notwithstanding the credit problems overshadowing the municipal money
market, prices on short-term municipals moved higher over the fiscal year. One
area of strength came from a phenomenal rally in the Treasury market. Evidence
of slow growth and low inflation pushed yields on one-year Treasury bills lower
by nearly -1.5% to 5.4% for the fiscal year. Similarly, comparable
high-quality, one-year municipal notes posted a -1.0% decline in yields over
the same period. The Federal Reserve Board intervened two times during the
fiscal year. The first was a tightening of monetary policy, the second an
offsetting easing of policy. Since the close of our fiscal year, signs of
continued economic weakness prompted the Fed to again lower the Federal funds
rate (the rate banks charge each other for overnight loans) 25 basis points to
5.50%.
Dividends for the Vanguard State Tax-Free Money Market Portfolios bucked
the trend of overall interest rates by moving dramatically higher during the
fiscal year. The average dividend rose more than +40% over this past year. The
impetus for the change came from widening credit spreads for issues supported
by Japanese banks, which led to a rise in average yields for all variable rate
instruments. Variable rate securities, which account for roughly 50% of the
Portfolios' composition, offset the decline in yields experienced in the
broader market and pushed municipal money market yields higher. In conclusion,
the growing number of risks in the marketplace underscore the advantage of
maintaining high quality standards. Vanguard's conservative investment style
and low expenses combine to provide shareholders with consistently superior
relative returns.
Sincerely,
Ian A. MacKinnon David E. Hamlin
Senior Vice President Principal
Pamela W. Tynan Danine A. Mueller
Principal Principal
Reid O. Smith Jerome J. Jacobs
Principal Principal
Vanguard Fixed Income Group
December 28, 1995
9
<PAGE> 12
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS (100.3%)
- ------------------------------------------------------------------------------------------------------------------
ISSUER INSURED (80.4%)
Albany County GO
5.00%, 10/1/05 (3) $ 2,000 $ 2,039
5.00%, 10/1/06 (3) 3,150 3,192
5.00%, 10/1/12 (3) 4,400 4,259
7.00%, 1/15/05 (2) 1,250 1,381
Albany Municipal Water
Finance Auth.
7.50%, 12/1/17 (1) 2,080 2,297
Broome County Public Safety
Facility Project
5.25%, 4/1/15 (1) 3,000 2,971
Buffalo & Erie Toll Bridge Auth.
6.00%, 1/1/15 (1) 4,500 4,719
Buffalo General Improvement
6.75%, 3/1/06 (1) 1,815 2,051
6.75%, 3/1/07 (1) 390 437
6.75%, 3/1/09 (1) 410 455
6.75%, 3/1/10 (1) 380 422
6.75%, 3/1/11 (1) 385 427
Buffalo Municipal Water
Finance Auth.
5.75%, 7/1/19 (4) 7,450 7,521
Buffalo Sewer Auth. System Rev.
5.00%, 7/1/12 (3) 2,400 2,324
5.25%, 7/1/08 (3) 3,500 3,546
Duchess County Resource Recovery
Solid Waste System
7.50%, 1/1/09 (3) 2,000 2,245
Erie County GO
6.10%, 1/15/06 (3) 1,865 2,059
6.125%, 1/15/07 (3) 1,660 1,834
6.125%, 1/15/09 (3) 735 807
6.125%, 1/15/10 (3) 735 807
6.125%, 1/15/11 (3) 735 806
6.125%, 1/15/12 (3) 735 805
Erie County Water Auth. Rev.
0.00%, 12/1/05 (2) 3,000 1,907
0.00%, 12/1/06 (2) 6,915 4,140
VRDO 3.65%, 12/6/95 (2) 6,000 6,000
5.00%, 12/1/04 (2) 5,920 6,093
6.00%, 12/1/08 (2) 1,600 1,752
Town of Hempstead GO
5.375%, 8/1/96 (3) 1,131 1,145
5.50%, 8/1/11 (3) 2,450 2,505
5.625%, 2/1/11 (3) 890 923
5.625%, 2/1/12 (3) 1,490 1,538
5.625%, 2/1/13 (3) 1,170 1,207
Huntington GO
5.50%, 4/1/13 (3) 3,400 3,467
6.70%, 2/1/10 (3) 375 435
6.70%, 2/1/11 (3) 310 360
City of Jamestown GO
7.50%, 5/15/02 (2) 110 129
7.50%, 5/15/06 (2) 250 307
Metropolitan Transit Auth.
of New York
(Commuter Facilities Rev.)
5.50%, 7/1/17 (1) 2,500 2,490
5.625%, 7/1/15 (4) 5,000 5,002
6.10%, 7/1/09 (1) 6,035 6,627
6.25%, 7/1/22 (1) 3,000 3,156
(Transportation Facilities Rev.)
5.40%, 7/1/07 (3) 17,330 18,120
6.00%, 7/1/11 (2) 2,000 2,056
7.00%, 7/1/09 (2) 13,650 16,303
Monroe County GO
(Rochester Water Dist.)
5.60%, 6/1/04 (3) 1,235 1,318
5.70%, 6/1/05 (3) 1,350 1,449
5.80%, 6/1/06 (3) 1,340 1,451
5.90%, 2/1/07 (3) 550 597
Montgomery, Ostego,
Scholoharie Counties Solid Waste
5.25%, 1/1/14 (1) 1,640 1,623
Mount Sinai Union Free School Dist.
6.20%, 2/15/14 (2) 1,050 1,161
6.20%, 2/15/15 (2) 540 599
Nassau County Combined
Sewer Dist. GO
4.70%, 10/1/04 (3) 1,805 1,811
4.80%, 10/1/05 (3) 1,760 1,767
4.90%, 10/1/06 (3) 1,740 1,749
5.00%, 10/1/07 (3) 1,715 1,724
5.00%, 10/1/08 (3) 1,695 1,689
5.00%, 5/1/09 (3) 3,210 3,167
5.00%, 5/1/10 (3) 2,875 2,820
5.00%, 5/1/11 (3) 1,770 1,725
5.00%, 5/1/12 (3) 1,760 1,704
5.35%, 7/1/08 (1) 4,730 4,865
5.35%, 1/15/09 (1) 3,505 3,574
5.35%, 7/1/09 (1) 4,635 4,729
5.875%, 8/1/12 (3) 825 864
6.20%, 5/15/07 (1) 840 910
6.20%, 5/15/08 (1) 835 905
6.25%, 5/15/09 (1) 825 891
6.25%, 5/15/10 (1) 820 885
Nassau County GO
5.00%, 11/1/97 (3) 7,825 7,975
5.50%, 7/15/07 (1) 1,270 1,332
5.50%, 7/15/08 (1) 1,300 1,355
5.50%, 7/15/09 (1) 1,325 1,371
5.50%, 7/15/10 (1) 1,345 1,387
5.50%, 7/15/11 (1) 1,370 1,408
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
5.70%, 8/1/11 (3) $ 2,000 $ 2,095
5.75%, 2/1/11 (1) 1,100 1,140
New York City Cultural Resources
(Museum of Modern Art)
5.40%, 1/1/06 (2) 805 838
5.40%, 1/1/12 (2) 1,400 1,411
5.50%, 1/1/07 (2) 840 874
New York City GO
5.75%, 8/1/09 (3) 4,250 4,423
6.625%, 8/1/13 (1) 675 735
6.95%, 8/15/12 (1) 1,460 1,653
7.10%, 2/1/09 (1) 5,000 5,683
New York City Health &
Hosp. Corp.
5.625%, 2/15/13 (2) 23,400 23,751
New York City Industrial
Development Auth.
(USTA Project)
6.375%, 11/15/14 (4) 2,000 2,165
New York City Municipal Water
Finance Auth. Water & Sewer
System Rev.
VRDO 3.80%, 12/4/95 (3) 4,100 4,100
5.875%, 6/15/12 (2) 20,000 21,347
5.875%, 6/15/13 (2) 20,000 21,397
8.75%, 6/15/97 (6) (Prere.) 2,500 2,735
New York State Dormitory Auth.
(City Univ. of New York)
5.75%, 7/1/11 (3) 5,950 6,303
6.25%, 7/1/19 (1) 4,485 4,747
7.00%, 7/1/14 (3) 20,700 22,950
(Colgate Univ.) 6.50%, 7/1/21 (1) 1,350 1,461
(Fashion Institute Student
Housing Corp.)
7.10%, 7/1/03 (1) 590 614
7.20%, 7/1/05 (1) 1,705 1,771
7.20%, 7/1/06 (1) 1,855 1,927
(Fordham Univ.) 5.50%, 7/1/23 (3) 10,150 10,107
7.20%, 7/1/15 (2) 710 796
(Foundling Charities Corp.)
6.50%, 7/1/12 (1) 6,530 6,849
(Iona College)
5.25%, 7/1/08 (1) 1,000 1,012
5.35%, 7/1/09 (1) 1,000 1,012
7.625%, 7/1/09 (1) 5,000 5,482
(Ithaca College)
6.25%, 7/1/21 (1) 10,000 10,529
(Mt. Sinai School of Medicine)
6.75%, 7/1/15 (1) 7,245 7,988
(New York Public Library)
0.00%, 7/1/06 (1) 910 542
0.00%, 7/1/07 (1) 1,000 559
0.00%, 7/1/08 (1) 910 477
0.00%, 7/1/09 (1) 910 447
0.00%, 7/1/10 (1) 500 230
0.00%, 7/1/11 (1) 500 216
(New York Univ.)
6.00%, 7/1/15 (3) 32,165 33,251
6.70%, 7/1/96 (1) (Prere.) 1,250 1,298
(Rensselaer Polytech. Institute)
6.50%, 7/1/06 (3) 3,000 3,329
(School Dist.)
6.00%, 7/1/15 (3) 2,675 2,733
(Siena College)
6.00%, 7/1/11 (1) 1,500 1,585
(State Univ.)
5.25%, 7/1/14 (2) 1,000 985
5.30%, 7/1/24 (2) 3,380 3,307
5.75%, 7/1/07 (2) 2,250 2,405
5.75%, 7/1/08 (2) 3,335 3,547
6.00%, 7/1/09 (2) 1,590 1,719
(Union College)
5.75%, 7/1/10 (3) 1,800 1,867
New York State Energy Research &
Development Auth. PCR
(Niagara Mohawk)
6.625%, 10/1/13 (3) 10,000 10,899
New York State Medical
Care Facility Finance Agency
8.00%, 8/15/97 (Prere.) (8) 5,000 5,431
(Mental Health Services)
5.50%, 8/15/21 (3) 8,000 7,934
6.00%, 8/15/15 (1) 15,000 15,658
6.375%, 8/15/10 (3) 6,100 6,601
7.40%, 8/15/07 (1) 890 979
(Sisters of Charity--Buffalo)
6.625%, 11/1/18 (2) 5,500 5,961
New York State Thruway Auth. Rev.
5.50%, 1/1/23 (3) 6,800 6,715
6.00%, 1/1/15 (3) 2,350 2,462
6.00%, 1/1/25 (3) 9,250 9,630
(Highway & Bridge Trust Fund)
5.30%, 4/1/10 (1) 3,775 3,787
5.50%, 4/1/15 (1) 12,480 12,521
5.80%, 4/1/10 (2) 14,215 14,901
6.00%, 4/1/09 (3) 5,000 5,358
New York State Urban Development Corp.
5.375%, 1/1/12 (1) 14,000 14,014
Niagara Falls Bridge Comm.
5.25%, 10/1/15 (3) 5,000 4,981
6.25%, 10/1/20 (3) 8,685 9,803
6.25%, 10/1/21 (3) 9,230 10,413
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
North Hempstead GO
6.30%, 4/1/08 (3) $ 2,055 $ 2,317
6.40%, 4/1/10 (3) 1,500 1,701
6.40%, 4/1/11 (3) 2,075 2,355
North Hempstead Solid
Waste Auth.
5.00%, 2/1/12 (1) 3,370 3,264
Oyster Bay Public Improvement
5.40%, 2/15/03 (1) 1,475 1,557
5.60%, 2/15/05 (1) 1,000 1,067
5.70%, 2/15/07 (1) 805 863
5.70%, 2/15/09 (1) 980 1,040
5.70%, 2/15/11 (1) 300 317
Rochester GO
5.70%, 8/15/03 (2) 2,330 2,526
5.70%, 8/15/04 (2) 2,180 2,367
Smithtown GO
5.25%, 4/1/06 (1) 1,000 1,030
5.45%, 4/1/08 (1) 400 412
Suffolk County GO
5.00%, 4/1/06 (1) 2,255 2,279
5.00%, 7/15/06 (3) 1,000 1,011
5.10%, 7/15/07 (3) 1,280 1,294
5.20%, 7/15/08 (3) 1,100 1,112
Suffolk County Southwest
Sewer Dist. GO 6.40%, 2/1/03 (3) 1,190 1,225
Suffolk County Water Auth.
5.10%, 6/1/07 (1) 7,110 7,209
5.25%, 6/1/02 (2) (Prere.) 21,305 22,194
5.25%, 6/1/10 (2) (ETM) 3,790 3,821
5.25%, 6/1/11 (2) (ETM) 2,380 2,388
5.25%, 6/1/12 (2) (ETM) 4,290 4,281
5.25%, 6/1/17 (2) 1,695 1,689
5.75%, 6/1/02 (2) (Prere.) 1,100 1,204
5.75%, 6/1/13 (2) 7,340 7,579
Triborough Bridge & Tunnel Auth.
5.50%, 1/1/17 (2) 18,485 18,393
City of Yonkers School Dist. GO
5.375%, 8/1/96 (3) 695 704
5.375%, 8/1/97 (3) 685 701
5.60%, 8/1/09 (3) 565 586
5.70%, 8/1/10 (3) 545 569
5.75%, 8/1/11 (3) 500 522
5.80%, 8/1/12 (3) 500 522
OUTSIDE NEW YORK:
Puerto Rico Electric Power
Auth. Rev.
6.50%, 7/1/06 (1) 10,000 11,407
Puerto Rico Public Building Auth.
0.00%, 7/1/03 (3) 4,000 2,862
------------
GROUP TOTAL 690,679
------------
- ------------------------------------------------------------------------------------------------------------------
PORTFOLIO INSURED (1.0%)
New York State Dormitory Auth.
(Cornell Univ.)
6.875%, 7/1/14 6,825 7,101
New York State Energy
Research & Development
(Niagara Mohawk Power Corp.)
8.875%, 11/1/25 1,100 1,124
------------
GROUP TOTAL 8,225
------------
- ------------------------------------------------------------------------------------------------------------------
SECONDARY MARKET INSURED (7.4%)
Municipal Assistance Corp. for
New York City 6.00%, 7/1/08 (3) 22,350 23,438
New York City Municipal Water
Finance Auth. Water & Sewer
System Rev.
5.00%, 6/15/17 (3) 4,000 3,778
New York State Dormitory Auth.
(City Univ.)
5.75%, 7/1/09 (3) 3,750 3,990
(Cornell Univ.)
7.25%, 7/1/12 (1) 1,175 1,320
(State Univ.)
6.00%, 5/15/17 (2) 5,600 5,718
Port Auth. of New York &
New Jersey
6.50%, 1/15/26 (1) 1,500 1,605
Triborough Bridge &
Tunnel Auth.
5.00%, 1/1/17 (2) 105 100
5.00%, 1/1/17 (3) 395 375
5.50%, 1/1/19 (2) 4,000 3,974
6.00%, 1/1/12 (1) 7,805 8,453
6.75%, 1/1/09 (2) 3,000 3,475
6.875%, 1/1/15 (3) 7,000 7,762
------------
GROUP TOTAL 63,988
------------
- ------------------------------------------------------------------------------------------------------------------
NON-INSURED (11.5%)
Half Hollow Hills Central School
Dist. TAN
4.25%, 6/28/96 3,000 3,014
Manhasset Union Free School
Dist. TAN
4.50%, 6/27/96 5,800 5,835
Metropolitan Transit Auth.
of New York
8.375%, 7/1/96 (Prere.) 2,590 2,714
New York City Cultural
Resources VRDO
(Carnegie Hall) 4.05%, 12/6/95 (LOC) 600 600
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
New York City GO VRDO
3.00%, 12/4/95 (LOC) 1,400 1,400
3.65%, 12/6/95 (LOC) 8,000 8,000
3.70%, 12/6/95 (LOC) 12,200 12,200
3.70%, 12/4/95 (LOC) 2,000 2,000
3.85%, 12/4/95 (LOC) 2,800 2,800
New York Environmental
Facilities Water PCR
5.20%, 5/15/14 1,500 1,438
New York Local Govt.
Assistance Corp. VRDO
3.50%, 12/6/95 (LOC) 1,000 1,000
New York State Dormitory Auth.
(Columbia Univ.)
5.75%, 7/1/15 11,965 12,075
New York State Energy Research
& Development Auth. PCR
VRDO 3.70%, 12/4/95 (LOC) 8,800 8,800
(Long Island Lighting Co.)
4.70%, 3/1/96 (LOC)* 5,000 5,015
New York State Power Auth.
7.00%, 1/1/09 6,000 6,509
Onondaga County Public
Improvements
5.875%, 2/15/06 1,580 1,710
5.875%, 2/15/08 2,475 2,662
Triborough Bridge & Tunnel Auth.
TOB VRDO
3.50%, 12/7/95 3,200 3,200
Westchester County GO
6.70%, 11/1/08 3,250 3,819
6.70%, 11/1/09 3,645 4,294
OUTSIDE NEW YORK:
Puerto Rico Govt. Development
Bank VRDO 3.30%, 12/6/95 (LOC) 9,600 9,600
------------
GROUP TOTAL 98,685
------------
- ------------------------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost $803,129) 861,577
- ------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.3%)
- ------------------------------------------------------------------------------------------------------------------
Other Assets--NOTE B 16,413
Liabilities (18,673)
------------
(2,260)
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------------------------------------------
Applicable to 78,036,651 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $859,317
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $11.01
==================================================================================================================
+ See Note A to Financial Statements.
- ------------------------------------------------------------------------------------------------------------------
AT NOVEMBER 30, 1995,
NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------------------------------------
Amount Per
(000) Share
--------- ----------
Paid in Capital $796,519 $10.21
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Gains 4,184 .05
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 58,448 .75
Futures Contracts 166 --
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS $859,317 $11.01
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
BAN=Bond Anticipation Note
COP=Certificate of Participation
CP=Commercial Paper
GO=General Obligation
PCR=Pollution Control Revenue
RAN=Revenue Anticipation Note
TAN=Tax Anticipation Note
TOB=Tender Option Bond
TRAN=Tax Revenue Anticipation Note
VRDO=Variable Rate Demand Obligation
(ETM)=Escrowed to Maturity
(Prere.)=Prerefunded
* Put Option Obligation.
++ Security purchased on a when-issued or delayed delivery basis for which the
Fund has not taken delivery as of November 30, 1995.
Scheduled principal and interest payments are guaranteed by:
(1) MBIA (Municipal Bond Insurance Association)
(2) AMBAC (AMBAC Indemnity Corporation)
(3) FGIC (Financial Guaranty Insurance Company)
(4) FSA (Financial Security Assurance)
(5) CGI (Capital Guaranty Insurance)
(6) BIGI (Bond Investors Guaranty Insurance)
(7) Connie Lee Inc.
(8) FHA (Federal Housing Authority)
The insurance does not guarantee the market value of the
municipal bonds.
(LOC)=Scheduled principal and interest payments are guaranteed by
bank letter of credit.
13
<PAGE> 16
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
November 30, 1995
(000)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44,463
- ------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . 44,463
- ------------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services . . . . . . . . . . . . . . . . . . . . . . $ 101
Management and Administrative . . . . . . . . . . . . . . . . . . . . . 1,343
Marketing and Distribution . . . . . . . . . . . . . . . . . . . . . . . 169 1,613
-------
Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Custodians' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . . 35
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . . . 6
Trustees' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . 3
- ------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 1,711
Expenses Paid Indirectly--Note C . . . . . . . . . . . . . . . . . (88)
- ------------------------------------------------------------------------------------------------------------------
Net Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 1,623
- ------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . 42,840
- ------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold . . . . . . . . . . . . . . . . . . . . . . . . 2,553
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
- ------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . 2,683
- ------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,799
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,102
- ------------------------------------------------------------------------------------------------------------------
Change in Unrealized
Appreciation (Depreciation) . . . . . . . . . . . . . . . . . 92,901
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . . . . . . . . . . . . $ 138,424
==================================================================================================================
</TABLE>
14
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
NOVEMBER 30, NOVEMBER 30,
1995 1994
(000) (000)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,840 $ 43,141
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,683 1,995
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . . . . . . 92,901 (95,745)
- ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations . . . . 138,424 (50,609)
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . (42,840) (43,141)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (855)
- ------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . (42,840) (43,996)
- ------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,445 144,207
--In Lieu of Cash Distributions . . . . . . . . . . . . . . . . 31,309 32,859
--Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,957 49,547
Redeemed --Regular . . . . . . . . . . . . . . . . . . . . . . . . . . . (86,802) (129,929)
--Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . (68,103) (114,519)
- ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital Share Transactions . . . . . 68,806 (17,835)
- ------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . . . . . . . . . 164,390 (112,440)
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 694,927 807,367
- ------------------------------------------------------------------------------------------------------------------
End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 859,317 $ 694,927
==================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . $.581 $.588
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . -- $.012
- ------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued 18,283 18,358
Issued in Lieu of Cash Distributions 2,958 3,139
Redeemed (14,879) (23,433)
- ------------------------------------------------------------------------------------------------------------------
6,362 (1,936)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended November 30,
----------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . $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 YEAR . . . . . . . . . . . . . . $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 Year (Millions) . . . . . . . . . . . $859 $695 $807 $574 $408
Ratio of Expenses to Average Net Assets . . . . . . . . .22%* .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%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Insurance expense represents .01% and .01%.
* 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. See Note C.
16
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
Vanguard New York Insured Tax-Free Fund is registered under the Investment
Company Act of 1940 as an open-end investment company. The Fund invests in
securities of municipal issuers whose ability to meet their obligations may be
affected by economic and political developments in the State of New York.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Municipal bonds are valued utilizing primarily the
latest bid prices or, if bid prices are not available, on the basis of
valuations based on a matrix system (which considers such factors as
security prices, yields, maturities, and ratings), both as furnished by an
independent pricing service.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its income. Accordingly,
no provision for Federal income taxes is required in the financial
statements.
3. FUTURES: The Fund utilizes Municipal Bond Index, U.S. Treasury Bond, and
U.S. Treasury Note futures contracts to a limited extent, with the
objectives of enhancing returns, managing interest rate risk, maintaining
liquidity, diversifying credit risk and minimizing transaction costs. The
Fund may purchase futures contracts instead of municipal bonds when futures
contracts are believed to be priced more attractively than municipal bonds.
The Fund may also seek to take advantage of price differences among bond
market sectors by simultaneously buying futures (or bonds) of one market
sector and selling futures (or bonds) of another sector. Futures contracts
may also be used to simulate a fully invested position in the underlying
bonds while maintaining a cash balance for liquidity.
The primary risks associated with the use of futures contracts are
imperfect correlation between changes in market values of bonds held by the
Fund and the price of futures contracts, and the possibility of an illiquid
market. Futures contracts are valued based upon their quoted daily
settlement prices. Fluctuations in the values of futures contracts are
recorded as unrealized appreciation (depreciation) until terminated at
which time realized gains (losses) are recognized. Unrealized appreciation
(depreciation) related to open futures contracts is required to be treated
as realized gain (loss) for Federal income tax purposes.
4. DISTRIBUTIONS: Distributions from net investment income are declared on a
daily basis payable on the first business day of the following month.
Annual distributions from realized gains, if any, are recorded on the
ex-dividend date. Capital gain distributions are determined on a tax basis
and may differ from realized capital gains for financial reporting purposes
due to differences in the timing of realization of gains.
5. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on the sale of investment securities are those of specific securities sold.
Premiums and original issue discounts are amortized and accreted,
respectively, to interest income over the lives of the respective
securities.
B. The Vanguard Group, Inc. furnishes at cost investment advisory, corporate
management, administrative, marketing, and distribution services. The costs
of such services are allocated to the Fund under methods approved by the
Board of Trustees. At November 30, 1995, the Fund had contributed capital
of $102,000 to Vanguard (included in Other Assets), representing .5% of
Vanguard's capitalization. The Fund's officers and trustees are also
officers and directors of Vanguard.
17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS (continued)
C. The Fund's investment adviser may direct certain new issue portfolio
trades, subject to obtaining the best price and execution, to underwriters who
have agreed to rebate or credit to the Fund a portion of the underwriting fees
generated. Such rebates or credits are used solely to reduce the Fund's
administrative expenses. The Fund's custodian bank has also agreed to reduce
its fees when the Fund maintains cash on deposit in the non-interest bearing
custody account. For the year ended November 30, 1995, directed brokerage and
custodian fee offset arrangements reduced the Fund's expenses by $67,000 and
$21,000, respectively. The combined expense reduction represented .01 of 1% of
average net assets.
D. During the year ended November 30, 1995, the Fund made purchases of
$125,923,000 and sales of $70,369,000 of investment securities other than
temporary cash investments.
The Fund utilized a capital loss carryforward of $435,000 to offset taxable
capital gains realized during the year ended November 30, 1995.
E. At November 30, 1995, unrealized appreciation of investment securities for
financial reporting and Federal income tax purposes aggregated $58,448,000 of
which $58,688,000 related to appreciated securities and $240,000 related to
depreciated securities.
At November 30, 1995, the Fund had long positions in Municipal Bond Index
futures contracts expiring in December 1995 with an aggregate settlement value
and net unrealized appreciation of $25,974,000 and $1,126,000, respectively.
The aggregate settlement value of short positions in U.S. Treasury Bond futures
contracts expiring in December 1995, and the related unrealized depreciation
were $25,434,000 and $960,000, respectively. The market value of securities
deposited as initial margin for open futures contracts was $6,050,000.
18
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTS
To the Shareholders and Board of Trustees
Vanguard New York Insured Tax-Free Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard New York Insured Tax-Free Fund (the "Fund") at November 30, 1995, and
the results of its operations, the changes in its net assets and the financial
highlights for each of the respective periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities by correspondence with
the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
December 29, 1995
19
<PAGE> 22
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman of Rhone-Poulenc Rorer Inc.; Director of Sun
Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications
Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co., and
The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Co. and
NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. and Kmart
Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
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; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
ROBERT A. DISTEFANO IAN A. MACKINNON
Senior Vice President Senior Vice President
Information Technology Fixed Income Group
JEREMY G. DUFFIELD F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Planning & Development Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
20
<PAGE> 23
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard Convertible
Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Funds
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
500 Portfolio
Total Stock Market Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Total Bond Market Portfolio
Short-Term Bond Portfolio
Intermediate-Term Bond Portfolio
Long-Term Bond Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Fund
U.S. Treasury Money Market Portfolio
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Fixed Income
Securities Fund
Vanguard Admiral Fund
Vanguard Preferred Stock Fund
[THE VANGUARD GROUP LOGO]
This Report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information:
1 (800) 662-7447
Shareholder Account Services:
1 (800) 662-2739
Q760-11/95
ON OUR COVER: On the evening of August 1, 1798, Lord Horatio Nelson sailed his
flagship, HMS Vanguard, into Egypt's Aboukir Bay. In a night encounter, the
British fleet annihilated Napoleon Bonaparte's ships of the line in what is
still considered to be the most complete victory ever recorded in naval
history. Our Report's cover illustration is Thomas Luny's 1830 painting, The
Battle Of The Nile, in which the French flagship, L'Orient, is shown as it
exploded at 10:00 p.m. under a gibbous moon.
<PAGE> 24
VANGUARD NEW YORK INSURED TAX-FREE FUND
EDGAR APPENDIX
This appendix describes the components of the printed version of this report
that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features Thomas Luny's 1830
painting "The Battle Of The Nile".
A photograph of John C. Brennan and John C. Bogle appears on the inside cover
top-center.
A running head featuring a sword, helmet, gloves and battleships in the
background appears at the top of pages one through six.
Line charts illustrating cumulative performance between Vanguard New York
Insured Tax-Free Fund, Lehman Municipal Bond Index and Average New York Insured
Municipal Fund, average Annual Total Returns for the period April 7, 1986, to
November 30, 1995 appear at the top of page two.
A line chart of the Month-End Yields of 30-Year Prime Municipal Bond and 90-Day
MIG 1 Note for the fiscal years 1991 through 1995 appears at the upper left of
page three.
A running head featuring an hour glass, compass and telescope, and battleships
in the background appears at the top of page seven.
A running head featuring ships wheel, rope and battleships in the background
appears at the top of pages eight & nine.
A running head featuring open log book, pen and battleships in the background
appears at the top of pages ten through eighteen.
A running head featuring a sextant, a map, and battleships in the background
appears at the top of page twenty.
A running had featuring birds flying and ship in the background appears at the
top of the inside back cover.
