<PAGE> 1
VANGUARD
BOND INDEX FUND
ANNUAL REPORT 1994
THE VANGUARD VOYAGE . . . STAYING THE COURSE
<PAGE> 2
THE VANGUARD VOYAGE . . . STAYING THE COURSE
WE ARE PRESENTLY OBSERVING TWO MILESTONES IN OUR HISTORY: (1) THE 20TH
ANNIVERSARY OF THE VANGUARD GROUP; AND (2) THE 65TH ANNIVERSARY YEAR OF
WELLINGTON FUND, THE OLDEST MUTUAL FUND ASSOCIATED WITH VANGUARD. WE CELEBRATE
THESE TWO EVENTS SINCE THEY HAVE INDELIBLY ALTERED THE MUTUAL FUND INDUSTRY--IN
OUR VIEW, FOR THE BETTER.
Wellington Fund--a pioneer in the mutual fund industry--began operations on
June 30,1929. Its first fifteen years were a struggle for survival in an
industry that was shaken to its roots by the Great Crash of 1929-1933. From an
initial base of $100,000, Wellington's assets had grown to but $27 million by
the end of World War II. The Vanguard Group was founded on September 24, 1974.
Soon thereafter, we assumed responsibility for the management of Wellington
Fund and ten associated funds, with assets aggregating $1.4 billion.
The years that followed the founding of The Vanguard Group were
marked by exceptional growth. Today, Wellington Fund, with assets of nearly $9
billion, remains one of the largest mutual funds in the nation. And Vanguard,
now managing 85 mutual fund portfolios, is entrusted with assets of $134
billion, and ranks as the second largest fund complex in the world.
Our durability in an era of change--and our longevity in an era of
challenge--didn't "just happen." What brought us to where we are today is what
we were when we began. Put another way, we set our original investment course
based on sound principles, and our corporate course based on a single focus:
serving solely the interests of our Fund shareholders.
FOUNDING INVESTMENT PRINCIPLES
The founding investment principles of Wellington Fund were, above all,
conservative. The Fund provided a broadly diversified portfolio at a time when
holding individual securities was the conventional strategy. It incurred no
debt in an era of high leverage that would soon come back to haunt less
cautious investors. And it was a "balanced" fund--in fact, Wellington is
America's oldest balanced fund--with holdings from each of the three basic
financial asset classes: cash reserves, bonds, and common stocks. In short,
Wellington Fund was a staid investment in an era of stock speculation that was
to become, almost within moments, an era of conservatism.
For Vanguard, these investment principles endure. "Balance" is still
our watchword, because the three basic financial asset classes have
different--and usually countervailing--investment characteristics. When it
began, Wellington Fund provided a balanced program in a single investment; in
1994, such a balance is often achieved by a combination of Vanguard money
market, bond, and stock funds.
"Conservatism," too, remains our standard. Over the years, we have
tried to maintain the discipline to eschew offering funds that lack sound
financial principles, often based on marketplace fads that could not--and did
not--endure. Our conservatism applies not only to the funds we offer, but to
the instruments in which they invest. For example, we have steered clear of
exotic derivative securities with unpredictable investment characteristics. Too
many fund managers have been taken in by these highly risky instruments, and
their shareholders have paid a heavy price--except in cases where the manager
has "made the fund whole," when to do otherwise would have shocked investors
and impaired their confidence in the fund complex.
Speculation, it seems, comes and goes, albeit in different guises. But
the investment principles to which we have adhered since Wellington Fund began
in 1929 remain firm:
* We offer Funds with sound and durable investment objectives, designed for
long-term investors.
(please turn to inside back cover)
VANGUARD BOND INDEX FUND CONSISTS OF FOUR PORTFOLIOS--TOTAL BOND MARKET,
LONG-TERM BOND, INTERMEDIATE-TERM BOND, AND SHORT-TERM BOND--WITH PRESCRIBED
MATURITY AND QUALITY STANDARDS, EACH OF WHICH SEEKS TO MATCH THE INVESTMENT
PERFORMANCE OF ITS COMPARABLE LEHMAN BOND INDEX.
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
If there is such a thing as having a good year in a bad market, surely that is
the way to describe Vanguard Bond Index Fund's performance during the twelve
months ended 1994. It was a year in which interest rates soared and bond prices
tumbled, but the relatively conservative maturity structure of our Total Bond
Market Portfolio shielded us from the worst of the carnage.
What is more, our Total Bond Market Portfolio provided--for the seventh
consecutive year--a total return (capital change plus income) that was superior
to that of the average fixed-income fund. And, as you can see in the table that
follows, our established Total Bond Market Portfolio actually outpaced its
target index, while our three new Portfolios provided exceptionally close
"tracking" of their respective market index benchmarks:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Total Return
---------------------------
Year Ended
December 31, 1994
- ---------------------------------------------------------
Portfolio Vanguard Benchmark*
- ---------------------------------------------------------
<S> <C> <C>
TOTAL BOND MARKET -2.7% -2.9%
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
March 1, 1994, to
December 31, 1994**
---------------------------
<S> <C> <C>
SHORT-TERM BOND -0.4% -0.2%
INTERMEDIATE-TERM BOND -2.9 -2.9
LONG-TERM BOND -4.5 -4.7
- ---------------------------------------------------------
</TABLE>
* Respectively, the Lehman Aggregate Bond Index and its Short-Term Bond,
Intermediate-Term Bond, and Long-Term Bond components.
** From date of inception.
The net asset values and income dividends per share on which each Portfolio's
total return is based are presented in a table at the conclusion of this
letter.
THE BOND MARKET IN 1994
There is an apocryphal story about a college student who hadn't prepared for
his exam on Genghis Khan. The student simply wrote: "the less said about him
the better." The same answer would be appropriate if the question were "please
describe the bond market in 1994." In fact, long-term U.S. Treasury bonds
turned in their second worst record of return in the past century.
Interest rates on long-term U.S. Treasury bonds were 6.4% when the year
began, soared to 8.2% in mid-November, and then retraced just a bit of the
increase before closing the year at 7.8%. On balance, this rate increase
engendered a stunning market price decline of -16.0%, offset to some degree by
interest income of +6.3% for the period, bringing the year's total return to
- -9.7%.
While the rate rise was in fact far sharper in Treasury bonds with
shorter maturities, the price declines were lower. As you know, the longer the
maturity of a bond, the greater its "interest rate sensitivity." This table
makes this sensitivity quite evident:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Total Return
Year-End Yields ---------------------------
---------------------- Price Interest Net
Treasury Bond 1993 1994 Increase Decline Income Return
- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Long-Term
(30 Year) 6.4% 7.8% +1.4% -16.0% +6.3% -9.7%
Intermediate-Term
(10 Year) 5.8 7.8 +2.0 -11.8 +5.8 -6.0
Short-Term
(3 Year) 4.5 7.8 +3.3 - 5.5 +4.5 -1.0
- ------------------------------------------------------------------
</TABLE>
(continued)
[FIGURE 1]
1
<PAGE> 4
[FIGURE 2]
A primary cause of the interest rate rise in 1994 was investor fears about a
resurgence of inflation. So far, at least, the U.S. Consumer Price Index gives
little evidence of it. The CPI has risen just 2.7% over the past twelve months,
although more sensitive indicators--such as commodity prices and producer
prices--have been rising at higher rates.
In an effort to quell inflationary fears, the Federal Reserve has acted
to "tighten" the money supply in order to slow economic growth and rein in
potential future inflation. Fully six rate increases--in February, March,
April, May, August, and again in November--combined to raise the Federal funds
rate (at which banks borrow from one another) from 3.00% to 5.50%. Still, the
specter of inflation remains, and further rate increases may well lie in
prospect.
The chart above compares the yields on long-term, intermediate-term, and
short-term U.S. Treasury bonds over the past five years. Two messages, it seems
to me, stand out:
* First, however sharply long-term rates have increased during 1994,
their rise has simply retraced an equally sharp earlier decline. As a result,
even today's "high" long-term rates are below those prevailing throughout most
of 1990-1992. Thus, investors who held longer-term bonds over the full
five-year period received high yields without, on balance, suffering erosion in
principal.
* Second, there has been a wide swing in the "spread" between long-term
(30-year) and short-term (3-year) interest rates. Five years ago, both rates
were virtually identical (about 8.5%), a so called "flat yield curve." By
mid-1992, the spread had widened to 3.1% (310 "basis points"), with long-rates
at 7.4% and short-rates at 4.3%. Today, with the spread back down to "zero," we
have returned to a flat yield curve.
Whatever else the snippet of history reflected in the chart and table
may show, it provides a useful reminder that: 1) the volatility of bond returns
rises as maturity lengthens; and 2) bond yields--across the board--may well be
at levels that not only discount the present level of inflation in our economy,
but also allow room for a somewhat higher inflation rate without faltering.
VANGUARD BOND INDEX FUND IN 1994
Because our three new maturity-segment Portfolios were introduced well after
the year began, this section of my letter will emphasize the results of our
Total Bond Market Portfolio (formerly named "Vanguard Bond Market Fund").
If you owned a bond fund during 1994, the Total Bond Market Portfolio
was a relatively good place to be. Our total return was -2.7%, an advantage of
+0.4% over the -3.1% return for the average fixed-income mutual fund (defined
as a composite of Lipper mutual fund groups weighted to parallel the
composition of the Lehman Aggregate Bond Index, our Portfolio's unmanaged
performance standard). Thus, 1994 goes into the record as the seventh
consecutive year (in our eight-year history) in which the Portfolio has
outpaced this competitive benchmark. In 1993, our advantage was +1.7% (+9.7%
versus +8.0%).
The difference between the two years is striking: our positive margin in
1993 was garnered largely by the advantage that our Portfolio held over
shorter-term bond funds in a fairly strong bond market; in 1994, our margin was
garnered entirely by our advantage over long- and intermediate-term bond
2
<PAGE> 5
funds in a very weak bond market. The following table illustrates the annual
return of our Total Bond Market Portfolio in each of the past two years, as
well as the returns of the relevant categories of mutual funds investing in the
segments that comprise our Portfolio.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Total Return for the Year
-------------------------
1993 1994
- -----------------------------------------------------------
<S> <C> <C>
TOTAL BOND MARKET PORTFOLIO + 9.7% -2.7%
- -----------------------------------------------------------
LONG-TERM GOVERNMENT FUNDS +12.9% -4.8%
LONG-TERM CORPORATE FUNDS +11.3 -4.6
- -----------------------------------------------------------
INTERMEDIATE-TERM GOVERNMENT FUNDS + 9.8% -3.6%
INTERMEDIATE-TERM CORPORATE FUNDS + 9.5 -3.4
MORTGAGE-BACKED FUNDS + 7.5 -4.2
- -----------------------------------------------------------
SHORT-TERM CORPORATE FUNDS + 6.4% -0.4%
SHORT-TERM GOVERNMENT FUNDS + 5.8 -1.4
- -----------------------------------------------------------
</TABLE>
The net result is that our very high-quality (Aa1) intermediate-term-maturity
(8.9 years) Portfolio has been a relatively good place to be, irrespective of
whether the bond market was rising or falling.
The Portfolio's lifetime record relative to each major bond fund
category reflects the consistency of our relative returns. As shown in the
chart below, we outpaced each bond fund group "across the board" during our
history. This advantage over actively managed bond funds is not alchemy. It is
low cost. As a market index fund, we pay no advisory fees (and also run a
"tight ship"). Our annual expense ratio for 1994 was 0.18%; for the average
fixed-income fund, the figure was 0.90%. What this means is that the Vanguard
Total Bond Market Portfolio currently enjoys a "natural advantage" of 0.72%,
leading to a solid increase in our yield without the assumption of any
additional risk. That may look like a small addition to yield, but I assure you
that it is not. In and of itself, for example, it raises a net yield of 7.00%
to 7.72%. Extended over the years, it dramatically enhances your cumulative
total return.
In addition to providing more-than-competitive returns in 1994, the
Total Bond Market Portfolio
[FIGURE 3]
3
<PAGE> 6
[FIGURE 4]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended December 31, 1994
- ------------------------------------------------------------------------------
1 Year 5 Years Since Inception*
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
VANGUARD TOTAL BOND MARKET PORTFOLIO** -2.69% +7.42% +7.34%
AVERAGE FIXED-INCOME FUND -3.12 +6.39 +6.54
LEHMAN AGGREGATE BOND INDEX -2.92 +7.66 +7.89
</TABLE>
* Inception: December 11, 1986. Performance begins December 31, 1986, to show
competitive data.
** Performance figures are adjusted for the $10 annual account maintenance fee.
Note: Past performance is not predictive of future performance.
exceeded its target benchmark, the Lehman Aggregate Bond Index. This is no mean
task, given the "drag" entailed by our (extremely modest) expense ratio and the
costs of portfolio transactions required to match the Portfolio's daily capital
inflows (and sometimes outflows).
We accomplished this goal in part by the exceptional professional
supervision provided by the Portfolio's management team, and in part by our
"corporate substitution" strategy. Under this policy, a portion of the
short-term segment of our portfolio "tilts" toward a widely diversified list of
investment-grade short-term bonds, with a commensurate tilt away from
short-term U.S. Treasuries. We believe that the minuscule increase in credit
risk engendered by this strategy is more than balanced by the incremental
increase in our return.
The three new Portfolios (Long-Term, Intermediate-Term, and Short-Term)
introduced last March have not had sufficient opportunity to demonstrate their
records vis a vis competitive funds. But they have had the opportunity to
demonstrate their ability to "track" their respective market indexes. As shown
in the table at the start of this letter, each Portfolio came within +0.2% of
its benchmark, a healthy augury for the future.
A "LIFETIME" PERSPECTIVE
The Vanguard Total Bond Market Portfolio--the first bond index fund (now there
are seventeen such funds, four of which are operated by Vanguard)--began
operations in December 1986. The chart above shows our cumulative return from
our inception through December 31, 1994, compared to our two major measurement
standards, the unmanaged target index and the average fixed-income fund. The
table that follows summarizes our results during the period along with those of
the other mutual funds. This comparison represents the "real world" choices
actually available to investors. (The Index, of course, operates in a "paper
world," bereft of the normal costs of carrying on a mutual fund's operations.)
4
<PAGE> 7
<TABLE>
<CAPTION>
- ---------------------------------------------------------
December 31, 1986, to
December 31, 1994
---------------------------
Final Value
of Initial
Annual Rate Investment
of Return of $10,000
- ---------------------------------------------------------
<S> <C> <C>
TOTAL BOND MARKET PORTFOLIO +7.3% $17,620
AVERAGE FIXED-INCOME FUND +6.5 16,605
- ---------------------------------------------------------
INDEX ADVANTAGE +0.8% $ 1,015
- ---------------------------------------------------------
</TABLE>
The net result is that, over the full period, the initial investment of $10,000
in the Total Bond Market Portfolio would have been enhanced by $1,015 over a
like investment in the average fixed-income mutual fund. This difference is
equivalent to 10% of the initial investment.
We believe that this advantage--while very significant--actually
understates our real advantage, for these three reasons:
1) Our investment strategies, professional skills, and substantial asset
growth have together served to effectively eliminate the tracking error of
earlier years. Our negative annual shortfall, averaging -0.5% during the
1987-1992 period, has been replaced by positive tracking during 1993 and 1994.
2) The quality of our Portfolio (I reemphasize, Aa1) is well above the
portfolio quality of most competitors. Paradoxically, despite their lower
returns, the competitive funds entail higher risks.
3) The purchase of many fixed-income mutual funds entails hefty initial
sales charges ("loads"), while our Portfolio carries none. Such charges are not
taken into account in the above comparison. We estimate (very roughly) that
their impact would reduce the results of the average fixed-income fund by about
- -0.4% annually, raising our advantage to +1.2% (without even considering the
first two factors).
It should go without saying, of course, that the Portfolio returns
reflected in the table and the chart are merely history. Future returns of the
Total Bond Market Portfolio--both on an absolute basis and relative to the
average fixed-income fund--are unpredictable, and may be better or worse than
those shown.
(continued)
[FIGURE 5]
5
<PAGE> 8
[FIGURE 6]
<TABLE>
<CAPTION>
Cumulative Total Returns Since Inception*
- --------------------------------------------------------
<S> <C>
VANGUARD SHORT-TERM PORTFOLIO -0.37%
AVERAGE SHORT-TERM BOND FUND -0.81
LEHMAN SHORT-TERM BOND INDEX -0.22
</TABLE>
<TABLE>
<CAPTION>
Cumulative Total Returns Since Inception*
- --------------------------------------------------------
<S> <C>
VANGUARD INTERMEDIATE-TERM PORTFOLIO -2.88%
AVERAGE INTERMEDIATE-TERM BOND FUND -2.85
LEHMAN INTERMEDIATE-TERM BOND INDEX -2.94
</TABLE>
* Inception: March 1, 1994. Performance begins on February 28, 1994 for the
average mutual fund.
Note: Past performance is not predictive of future performance.
A (VERY BRIEF) HISTORY OF BOND RETURNS
As I mentioned at the outset, 1994 produced the second worst performance for
bonds in the past century. But, because interest income is the dominant force
in shaping the total returns of bonds, there is a very limited possibility that
bonds will produce negative total returns. I won't take you through the whole
century, but I will illustrate the point using the chart on page 5, which shows
the year-by-year returns on 10-year U.S. Treasury bonds over the past 45 years,
from 1950 through 1994. (Ten-year Treasuries have a maturity that is only
slightly longer than the Portfolio's 8.9 year current average maturity.)
You can see that the annual returns moved into negative territory in but
10 of the 45 years. What is more, the average decline during these ten years,
at -2.6%, could hardly be considered devastating. On balance for the full
period, 10-year Treasuries provided an average rate of return of +5.3%. What
this history lesson suggests, simply put, is that bonds have done precisely
what they are supposed to do: provide a high enough level of current income to
minimize the risk of negative total returns.
I would emphasize that the outlook for future returns on bonds would
clearly call for--although not guarantee--higher returns than the +5.3% average
reflected in the chart. The reason has to do with the fact that, over time, the
initial yield at the start of each year has been the best single forecaster of
bond returns for the subsequent decade. For instance, from 1950 through the
early 1970s, the average return on the U.S. Treasury bond was +2.7%, largely
reflecting the 3.9% average yield at the start of each year.
Since 1980, when yields at the start of each year averaged 9.3%, the
average return on Treasury bonds was +11.0%. Today, with such a bond providing
an initial yield of 7.8%, history would seem to suggest that future returns
should fall well into the upper range of the returns achieved during these two
periods.
Whatever the case may be, I would note that the present "real" return of
5.1% on a 10-year U.S. Treasury bond (7.8% nominal yield less the current
6
<PAGE> 9
inflation rate of 2.7%) is far in excess of the historical average real return
of 1.5% (5.7% nominal yield less 4.2% inflation). This relationship represents
another cause for guarded optimism about future bond returns.
LOOKING AHEAD
While it is simply not possible--for anyone--to consistently and accurately
forecast the future course of interest rates, it can be said unequivocally that
the yields that fund investors receive have risen sharply over the past year. I
believe, therefore, that the probabilities favor better total returns in the
coming year. (There are no guarantees!) It can also be said, virtually
unequivocally, that the lowest-cost bond funds (no sales charges, low expense
ratios) will provide higher returns than the highest-cost bond funds.
In this twin context, Vanguard Bond Index Fund offers three special
advantages: 1) with our four Portfolios, investors may determine the amount of
[FIGURE 7]
<TABLE>
<CAPTION>
Cumulative Total Returns Since Inception*
- ---------------------------------------------------
<S> <C>
VANGUARD LONG-TERM PORTFOLIO -4.53%
AVERAGE LONG-TERM BOND FUND -3.95
LEHMAN LONG-TERM BOND INDEX -4.65
</TABLE>
* Inception: March 1, 1994. Performance begins on February 28, 1994 for the
average mutual fund.
Note: Past performance is not predictive of future performance.
interest rate risk, and therefore price volatility, they wish to assume; 2) the
quality of our four Portfolios is exceptionally high--Aaa for two and Aa1 for
two; and 3) our costs are, as far as we know, virtually the lowest in the
field. If bond funds of comparable maturity and quality earn comparable gross
rates of return (as most must), Vanguard Bond Index Fund will continue to rank
high among all funds in terms of net returns.
So, bond indexing--as its cousin, stock indexing--is here to stay. While
our asset growth has been substantial--assets have risen nearly fourteen-fold,
from $139 million five years ago to $1.89 billion today--most of the growth has
been reflected in our original Portfolio. Assets of the Total Bond Market
Portfolio presently total $1.73 billion; the three new Portfolios already total
$157 million. As bond fund investors come to realize the validity of the
concepts reviewed in this letter, they will, inevitably it seems to me,
gradually turn to Vanguard.
Index funds--their composition defined by the market indexes they
emulate--inevitably "stay the course" in terms of investment policy. What
remains is for shareholders to stay the course as well: deciding which maturity
structure best fits their long-term risk/return profile and holding fast to
that structure, and doing their best to ignore the inevitable short-term ups
and downs of the bond market. For our part, we shall continue to do our very
best to serve your interests.
Sincerely,
/s/ JOHN C. BOGLE
- ---------------------
John C. Bogle
Chairman of the Board
January 9, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
7
<PAGE> 10
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Net Asset Value
Total Per Share
Net Assets ------------------- Twelve Months Current
(millions) Average Average Dec. 31, Dec. 31, ------------------------ SEC
Portfolio Dec. 31, 1994 Maturity Quality 1993 1994 Dividends Total Return Yield
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL BOND MARKET $1,731 8.9 YEARS Aaa $10.06 $9.17 $.624+ -2.7%* 7.82%
SHORT-TERM BOND 77 2.8 YEARS Aaa -- 9.50 .463** -0.4** 7.79
INTERMEDIATE-TERM BOND 71 7.5 YEARS Aa1 -- 9.18 .533** -2.9** 8.07
LONG-TERM BOND 9 21.8 YEARS Aa1 -- 8.96 .586** -4.5** 8.20
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Performance figures are adjusted for the annual account maintenance fee of
$10.
** Since inception, March 1, 1994.
+ Includes capital gains distribution of $.002.
AVERAGE ANNUAL TOTAL RETURNS--THE CURRENT YIELDS NOTED IN THE CHAIRMAN'S LETTER
ARE CALCULATED IN ACCORDANCE WITH SEC GUIDELINES. THE AVERAGE ANNUAL TOTAL
RETURNS FOR THE PORTFOLIOS (PERIODS ENDED DECEMBER 31, 1994) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SINCE INCEPTION
-------------------------------
INCEPTION TOTAL INCOME CAPITAL
PORTFOLIO DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
- ----------------------------------- --------- ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
TOTAL BOND MARKET PORTFOLIO* 12/11/86 -2.69% +7.42% +7.26% +8.04% - 0.78%
SHORT-TERM BOND PORTFOLIO** 3/1/94 -- -- -0.37 +4.63 - 5.00
INTERMEDIATE-TERM BOND PORTFOLIO** 3/1/94 -- -- -2.88 +5.32 - 8.20
LONG-TERM BOND PORTFOLIO** 3/1/94 -- -- -4.53 +5.87 -10.40
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
* PERFORMANCE FIGURES ARE ADJUSTED FOR THE ANNUAL ACCOUNT MAINTENANCE FEE OF
$10.
** CUMULATIVE PERFORMANCE.
8
<PAGE> 11
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD BOND INDEX FUND-TOTAL BOND MARKET PORTFOLIO since inception through
December 31, 1994. During the period illustrated, long-term bond prices
fluctuated widely; these results should not be considered a representation of
the dividend income or capital gain or loss that may be realized from an
investment made in the Portfolio today.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN*
- ------------------------------------------------------------------------------------------------------------------------------------
Lehman
Aggregate
Total Bond Market Portfolio Bond Index
Value with Income ----------------------------- ----------
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total
December 31 Value Distributions Dividends Gains Reinvested Return Return Return Return
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (12/86) $10.00 -- -- $10.00 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
1986 9.94 -- $.028 9.98 -0.6% +0.4% - 0.2% --
- ------------------------------------------------------------------------------------------------------------------------------------
1987 9.20 -- .834 10.09 -7.4 +8.5 + 1.1 + 2.8%
- ------------------------------------------------------------------------------------------------------------------------------------
1988 9.05 -- .807 10.84 -1.6 +8.9 + 7.3 + 7.9
- ------------------------------------------------------------------------------------------------------------------------------------
1989 9.44 -- .797 12.31 +4.3 +9.3 +13.6 +14.5
- ------------------------------------------------------------------------------------------------------------------------------------
1990 9.41 -- .796 13.38 -0.3 +8.9 + 8.6 + 9.0
- ------------------------------------------------------------------------------------------------------------------------------------
1991 9.99 $.025 .766 15.42 +6.4 +8.8 +15.2 +16.0
- ------------------------------------------------------------------------------------------------------------------------------------
1992 9.88 .092 .699 16.52 -0.2 +7.3 + 7.1 + 7.4
- ------------------------------------------------------------------------------------------------------------------------------------
1993 10.06 .120 .638 18.12 +3.0 +6.7 + 9.7 + 9.7
- ------------------------------------------------------------------------------------------------------------------------------------
1994 9.17 .002 .622 17.64 -8.8 +6.1 - 2.7 - 2.9
- ------------------------------------------------------------------------------------------------------------------------------------
LIFETIME +76.2% +83.6%
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN + 7.3% + 7.9%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Returns begin December 31, 1986, for both the Fund and the Index, and are
adjusted to include reinvestment of income dividends and any capital gains
distributions. Fund performance also adjusted for the $10 annual account
maintenance fee.
Note: No adjustment has been made for income taxes payable by shareholders on
reinvested income dividends and capital gains distributions.
9
<PAGE> 12
FINANCIAL STATEMENTS
December 31, 1994
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Face Market
Amount Value
TOTAL BOND MARKET PORTFOLIO (000) (000)+
- ------------------------------------------------------------------------------------------------
U.S. GOVERNMENT &
AGENCY OBLIGATIONS (69.8%)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT SECURITIES (34.7%)
U.S. Treasury Bonds
7.25%, 5/15/16 $ 680 $ 629
7.50%, 11/15/16 2,135 2,026
7.625%, 2/15/07 670 653
7.875%, 11/15/07-2/15/21 16,595 16,388
8.125%, 8/15/19-8/15/21 49,020 49,750
8.375%, 8/15/00 2,000 2,009
8.50%, 2/15/20 38,670 40,755
8.75%, 5/15/17-8/15/20 18,465 19,962
8.875%, 8/15/17-2/15/19 46,715 50,908
9.125%, 5/15/09 500 536
9.25%, 2/15/16 435 490
9.375%, 2/15/06 110 122
9.875%, 11/15/15 4,890 5,808
10.00%, 5/15/10 2,000 2,279
10.375%, 11/15/09-11/15/12 20,160 23,787
10.75%, 2/15/03-8/15/05 9,735 11,684
11.125%, 8/15/03 1,135 1,362
11.25%, 2/15/15 200 264
11.625%, 11/15/02-11/15/04 13,650 16,617
11.75%, 2/15/10-11/15/14 1,085 1,425
12.00%, 8/15/13 350 465
12.375%, 5/15/04 100 129
12.75%, 11/15/10 380 510
13.375%, 8/15/01 2,600 3,333
14.00%, 11/15/11 5,420 7,890
U.S. Treasury Notes
4.75%, 8/31/98 560 506
5.75%, 8/15/03 200 174
6.00%, 11/30/97 1,900 1,812
6.25%, 2/15/03 5,820 5,263
6.375%, 6/30/97 830 804
6.75%, 2/28/97-5/31/99 10,400 10,058
6.875%, 10/31/96-7/31/99 25,810 24,984
7.00%, 4/15/99 26,310 25,496
7.25%, 8/31/96-5/15/04 20,450 19,701
7.375%, 5/15/96 11,000 10,981
7.50%, 2/29/96-11/15/01 22,300 21,922
7.75%, 3/31/96-2/15/01 7,900 7,873
7.875%, 7/15/96-11/15/99 65,725 65,914
8.00%, 10/15/96-5/15/01 9,050 9,101
8.25%, 7/15/98 6,390 6,469
8.50%, 8/15/95-2/15/00 42,925 43,793
8.625%, 8/15/97 18,000 18,340
8.75%, 10/15/97-8/15/00 11,320 11,672
8.875%, 11/15/98-2/15/99 44,660 46,211
9.125%, 5/15/99 4,250 4,444
9.25%, 8/15/98 1,000 1,043
9.375%, 4/15/96 3,125 3,194
11.25%, 2/15/95 540 543
U.S. Treasury Strip
0.00%, 8/15/01 1,000 601
--------------
GROUP TOTAL 600,680
--------------
- -----------------------------------------------------------------------------------------------
AGENCY BONDS AND NOTES (3.5%)
Aid Indonesia
8.90%, 6/1/21 5,000 5,006
Federal Home Loan Bank
5.45%, 1/25/95 670 669
6.85%, 2/25/97 560 548
6.99%, 4/25/97 390 384
8.10%, 3/25/96 115 115
8.25%, 6/25/96 335 337
8.60%, 1/25/00 110 113
Federal Home Loan Mortgage Corp.
4.125%, 10/21/96 515 483
6.09%, 3/1/00 285 259
Federal Land Bank
7.95%, 10/21/96 175 175
Federal National Mortgage Assn.
4.95%, 9/30/98 2,350 2,111
5.30%, 3/11/98 10,400 9,578
5.35%, 8/12/98 12,350 11,273
5.80%, 12/10/03 2,300 1,961
6.20%, 7/10/03 625 541
6.40%, 3/25/03 5,000 4,397
8.10%, 8/12/19 110 108
8.20%, 3/10/98 225 228
8.35%, 11/10/99 170 172
8.45%, 7/12/99 110 113
8.625%, 9/10/96-10/18/21 6,270 6,306
8.70%, 6/10/99 110 113
8.80%, 11/10/95 670 677
9.00%, 1/10/95 1,000 1,000
9.55%, 3/10/99 225 237
10.50%, 9/11/95 200 204
10.60%, 11/10/95 2,000 2,054
11.50%, 2/10/95 370 372
Government Trust Certificate
9.625%, 5/15/02 550 577
Private Export Funding Corp.
7.70%, 1/31/97 500 497
8.40%, 7/31/01 225 229
Resolution Funding Corp.
8.125%, 10/15/19 550 553
8.625%, 1/15/30 110 118
8.875%, 7/15/20 280 304
Small Business Administration
Variable Rate Interest Only
Custodial Receipts
2.62%, 7/15/17 30,361 3,781
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Tennessee Valley Authority
8.375%, 10/1/99 $ 610 $ 620
8.625%, 11/15/29 4,000 3,969
--------------
GROUP TOTAL 60,182
--------------
- -----------------------------------------------------------------------------------------------
MORTGAGE OBLIGATIONS (31.6%)
Bear Stearns Collateralized Mortgage
Obligation Series 1988-4B
(Secured by Federal Home Loan
Mortgage Corp.)
9.20%, 11/1/18 196 199
Federal Home Loan Mortgage Corp.
5.50%, 12/1/98-11/1/08 4,744 4,360
6.00%, 6/1/98-2/1/24 17,335 15,787
6.50%, 2/1/98-7/1/24 41,395 37,550
7.00%, 1/1/98-7/1/24 43,029 39,944
7.50%, 6/1/97-9/1/24 28,596 27,251
8.00%, 6/1/96-10/1/24 21,253 20,617
8.50%, 2/1/96-11/1/24 13,474 13,345
9.00%, 8/1/01-6/1/22 8,930 8,995
9.50%, 6/1/16-12/1/21 7,345 7,537
10.00%, 7/1/00-3/1/21 2,447 2,555
10.50%, 9/1/00-12/1/15 1,134 1,192
11.25%, 8/1/14 60 64
Federal Housing Administration
7.43%, 10/1/20 561 516
Federal National Mortgage Assn.
5.50%, 1/1/01-11/1/08 1,903 1,703
6.00%, 10/1/00-1/1/24 16,470 14,796
6.50%, 2/1/00-7/1/24 40,028 36,151
7.00%, 9/1/99-7/1/24 46,484 42,882
7.50%, 1/1/00-8/1/24 29,722 28,215
7.75%, 10/1/02 2,238 2,176
8.00%, 8/1/99-11/1/24 30,151 29,304
8.50%, 12/1/98-10/1/24 15,413 15,251
9.00%, 6/1/97-8/1/24 11,461 11,550
9.50%, 10/1/01-11/1/21 6,417 6,594
10.00%, 6/1/19-6/1/22 3,357 3,515
10.50%, 11/1/00-8/1/20 2,010 2,132
(Collateralized Mortgage Obligation)
9.50%, 7/25/17 268 277
Government National Mortgage Assn.
6.00%, 3/1/09-5/15/24 4,004 3,466
6.50%, 9/15/08-5/15/24 16,089 14,178
7.00%, 6/15/08-4/15/24 32,607 29,530
7.50%, 1/15/08-8/15/24 29,290 27,368
8.00%, 11/15/01-9/15/24 31,711 30,615
8.50%, 1/15/17-12/15/24 15,155 14,979
9.00%, 8/15/01-12/15/24 20,341 20,542
9.50%, 1/1/04-8/15/21 10,913 11,250
10.00%, 3/15/00-12/15/20 4,115 4,320
10.50%, 11/15/10-1/15/21 7,441 7,916
11.00%, 4/15/13 21 22
11.50%, 3/15/10-11/15/17 665 726
12.00%, 4/15/15 9 10
Resolution Trust Corp.
Collaterialized Mortgage
Obligations
7.75%, 12/25/18 5,463 5,386
10.40%, 8/25/21 2,155 2,183
--------------
GROUP TOTAL 546,949
--------------
- -----------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (Cost $1,269,456) 1,207,811
- -----------------------------------------------------------------------------------------------
CORPORATE BONDS (25.4%)
- -----------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (3.0%)
Chase Manhattan Credit Card Trust
7.40%, 5/15/00 3,850 3,790
7.65%, 11/15/98 1,500 1,498
8.75%, 8/15/99 3,850 3,885
First Chicago Master Trust
6.25%, 8/15/99 5,400 5,150
8.40%, 6/15/98 5,700 5,718
MBNA Master Credit Card Trust
6.20%, 8/15/99 5,700 5,435
7.75%, 10/15/98 3,850 3,822
Sears Credit Card Trust
5.90%, 11/15/98 3,977 3,920
7.75%, 9/15/98 3,850 3,828
Standard Credit Card Trust
8.00%, 10/7/97 5,700 5,691
8.50%, 8/7/97 5,700 5,750
9.375%, 8/10/96 4,150 4,180
--------------
GROUP TOTAL 52,667
--------------
- -----------------------------------------------------------------------------------------------
FINANCE (11.9%)
American Express Credit Corp.
8.50%, 6/15/99 2,325 2,340
American General Finance
5.875%, 7/1/00 3,770 3,357
7.45%, 7/1/02 1,575 1,487
8.50%, 8/15/98 700 702
Associates Corp.
5.875%, 8/15/97 300 283
6.375%, 4/15/95 3,000 2,998
6.875%, 1/15/97 1,000 975
7.25%, 5/15/98 4,800 4,625
8.75%, 2/1/96 210 212
9.70%, 5/1/97 3,050 3,134
AVCO Financial Services
5.50%, 5/1/98 750 689
7.50%, 11/15/96 200 198
8.85%, 2/1/96 2,520 2,544
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
BankAmerica Corp.
6.00%, 7/15/97 $ 1,000 $ 948
7.50%, 10/15/02 400 374
10.00%, 2/1/03 4,200 4,478
Bankers Trust Corp.
4.70%, 7/1/96 250 239
7.25%, 11/1/96 4,155 4,072
Bayerische Landesbank
7.375%, 12/14/02 145 138
Bear Stearns Co.
6.625%, 1/15/04 3,150 2,725
Beneficial Corp.
9.125%, 2/15/98 5,710 5,814
CIT Group Holdings
5.65%, 11/15/95 5,025 4,946
CNA Financial Corp.
8.625%, 3/1/96 6,000 6,036
Chase Manhattan Corp.
7.875%, 1/15/97 700 696
8.50%, 3/1/96 2,150 2,160
Chemical Banking Corp.
6.625%, 1/15/98 200 191
7.375%, 6/15/97 150 147
Chrysler Finance Corp.
5.375%, 10/15/98 850 763
5.625%, 1/15/99 2,725 2,449
6.50%, 6/15/98 4,000 3,752
6.625%, 8/15/00 2,550 2,334
Commercial Credit Corp.
5.90%, 9/1/03 550 465
6.375%, 1/1/96 2,000 1,972
6.75%, 1/15/97 2,400 2,338
7.375%, 11/15/96 1,250 1,234
7.70%, 8/15/95 6,700 6,713
Countrywide Funding
8.25%, 7/15/02 3,750 3,599
10.60%, 8/30/95 6,000 6,116
Dean Witter Discover & Co.
6.00%, 3/1/98 9,350 8,730
6.875%, 3/1/03 1,600 1,435
First Chicago Corp.
7.625%, 1/15/03 2,400 2,259
10.25%, 5/1/01 2,750 2,961
First Interstate Bancorp
10.875%, 4/15/01 2,750 3,037
First Union Corp.
8.00%, 11/15/02 100 96
8.125%, 6/24/02 2,900 2,820
Fleet Norstar Finance Corp.
8.125%, 7/1/04 2,750 2,637
Ford Motor Credit Corp.
6.25%, 2/26/98 1,000 942
6.75%, 5/15/05 1,385 1,205
7.875%, 1/15/97 4,950 4,915
8.25%, 7/15/96 4,665 4,674
8.625%, 4/15/96 750 755
8.875%, 8/1/96 3,000 3,033
9.375%, 12/15/97 125 127
General Electric Capital Corp.
8.30%, 9/20/09 275 280
General Motors Acceptance Corp.
8.40%, 10/15/99 190 190
Household Finance Corp.
6.45%, 2/1/09 2,430 1,995
7.50%, 3/15/97 2,700 2,658
ITT Financial Corp.
7.00%, 1/15/97 700 684
8.75%, 3/1/06 2,350 2,352
International Lease Finance
5.50%, 4/1/97 2,000 1,886
6.375%, 11/1/96 3,540 3,433
6.50%, 7/15/97 1,300 1,245
7.90%, 10/1/96 670 667
8.20%, 4/15/95 120 120
9.80%, 7/28/95 1,000 1,014
Lehman Brothers, Inc.
5.50%, 6/15/96 365 351
9.75%, 4/1/96 2,500 2,543
Manufacturers Hanover Corp.
8.125%, 1/15/97 5,000 4,987
Mellon Bank
6.75%, 6/1/03 2,775 2,470
Mellon Financial Corp.
7.625%, 11/15/99 850 825
Merrill Lynch & Co., Inc.
7.25%, 5/15/97 900 880
8.00%, 2/1/02 2,600 2,501
8.30%, 11/1/02 2,735 2,661
8.60%, 7/8/95 125 126
9.00%, 5/1/98 2,450 2,475
Morgan Stanley Group, Inc.
7.32%, 1/15/97 950 934
9.25%, 3/1/98 4,625 4,720
9.875%, 5/1/95 4,000 4,035
NCNB Corp.
9.50%, 6/1/04 1,725 1,821
NationsBank
5.375%, 12/1/95 4,075 3,995
6.625%, 1/15/98 3,900 3,717
6.875%, 2/15/05 580 504
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Norwest Financial, Inc.
6.65%, 10/15/23 $ 40 $ 31
7.10%, 11/15/96 4,950 4,870
8.875%, 7/1/96 4,000 4,050
PaineWebber Inc.
7.00%, 3/1/00 2,350 2,152
7.875%, 2/15/03 2,250 2,055
Republic Bank of New York
7.75%, 5/15/02 3,000 2,865
Salomon Inc.
9.25%, 5/30/96 4,000 4,031
Suntrust Banks
8.875%, 2/1/98 115 117
Transamerica Financial Corp.
6.75%, 1/15/98 1,200 1,148
8.375%, 2/15/98 100 100
U.S. Leasing International
6.625%, 5/15/03 195 173
Wachovia Corp.
6.375%, 4/15/03 110 96
--------------
GROUP TOTAL 205,626
--------------
- -----------------------------------------------------------------------------------------------
INDUSTRIAL (7.7%)
American Brands, Inc.
7.875%, 1/15/23 1,900 1,706
Amoco Canada
6.75%, 2/15/05 145 129
Anheuser Busch Co., Inc.
7.375%, 7/1/23 800 695
8.625%, 12/1/16 2,900 2,857
Applied Materials
8.00%, 9/1/04 1,625 1,559
Archer-Daniels-Midland Co.
6.25%, 5/15/03 1,000 879
8.875%, 4/15/11 3,745 3,894
Auburn Hills
12.375%, 5/1/20 800 1,077
Baxter International
9.25%, 12/15/99 100 103
Boeing Co.
8.375%, 3/1/96 500 503
8.75%, 8/15/21 1,800 1,813
British Aerospace
8.50%, 6/10/02 3,000 2,955
British Petroleum
7.875%, 5/15/02 2,700 2,639
CSX Corp.
8.25%, 11/1/96 5,050 5,062
8.40%, 8/1/96 2,625 2,632
8.625%, 5/15/22 875 862
9.00%, 8/15/06 700 721
Chrysler Corp.
10.40%, 8/1/99 3,550 3,688
Caterpillar, Inc.
9.00%, 4/15/06 1,600 1,644
Conrail Corp.
9.75%, 6/15/20 1,680 1,865
Deere & Co.
8.50%, 1/9/22 985 975
Dole Foods Co.
6.75%, 7/15/00 105 95
Dow Chemical Co.
8.50%, 6/8/10 2,500 2,482
Eastman Chemical Co.
6.375%, 1/15/04 2,375 2,053
7.25%, 1/15/24 600 498
Exxon Capital Corp.
8.00%, 12/1/95 155 155
Ford Capital BV
9.00%, 6/1/96 3,300 3,340
9.00%, 8/15/98 3,300 3,350
9.125%, 5/1/98 5,000 5,084
9.50%, 7/1/01 1,925 2,015
9.50%, 6/1/10 825 872
Ford Motor Corp.
9.95%, 2/15/32 835 931
Gannett Co.
5.25%, 3/1/98 190 174
General Motors Corp.
9.625%, 12/1/00 1,000 1,037
Grand Metropolitan Investment Corp.
9.00%, 8/15/11 2,225 2,309
Hanson Overseas
5.50%, 1/15/96 345 337
H.J. Heinz Co.
6.875%, 1/15/03 100 92
ITT Corp.
7.25%, 11/15/96 3,750 3,693
8.875%, 2/1/08 900 946
International Business Machines Corp.
6.375%, 11/1/97 100 95
International Paper Co.
7.625%, 1/15/07 1,765 1,647
Kellogg Co.
5.90%, 7/15/97 120 114
Martin Marietta Corp.
9.50%, 5/15/95 1,280 1,291
Masco Corp.
6.25%, 6/15/95 420 419
May Department Stores Co.
9.75%, 2/15/21 1,680 1,799
9.875%, 12/1/02 1,775 1,916
</TABLE>
13
<PAGE> 16
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
McDonald's Corp.
6.75%, 2/15/03 $ 945 $ 857
Mobil Corp.
7.625%, 2/23/33 920 821
J.C. Penney Co.
6.125%, 11/15/03 2,000 1,722
7.125%, 11/15/23 955 806
9.05%, 3/1/01 625 644
PepsiCo, Inc.
5.00%, 2/24/97 6,500 6,112
6.125%, 1/15/98 3,550 3,352
7.875%, 8/15/96 1,700 1,697
Philip Morris Co.
6.00%, 7/15/01 110 95
8.25%, 10/15/03 1,900 1,851
Rockwell International
8.875%, 9/15/99 110 112
Sears, Roebuck & Co.
6.25%, 1/15/04 1,200 1,034
8.55%, 8/1/96 125 126
9.25%, 8/1/97 6,800 6,928
9.25%, 4/15/98 4,550 4,666
9.375%, 11/1/11 970 1,014
Shell Oil Co.
7.00%, 9/15/95 170 170
Tenneco Corp.
8.00%, 11/15/99 5,000 4,890
Texaco Capital Corp.
7.50%, 3/1/43 850 727
8.25%, 10/1/06 1,000 1,002
8.875%, 9/1/21 705 725
9.00%, 12/15/99 300 309
Union Carbide Corp.
6.75%, 4/1/03 1,700 1,506
7.875%, 4/1/23 1,955 1,710
Union Oil of California
9.125%, 2/15/06 1,935 2,010
9.25%, 2/1/03 545 566
9.75%, 12/1/00 2,840 2,999
Union Pacific
8.625%, 5/15/22 2,865 2,751
Waste Management Inc.
4.625%, 4/14/96 290 278
7.875%, 8/15/96 2,975 2,966
Whirlpool Corp.
9.00%, 3/1/03 2,250 2,314
9.10%, 2/1/08 940 967
--------------
GROUP TOTAL 132,729
--------------
- -----------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC & GAS (1.6%)
Alabama Power Co.
6.00%, 3/1/00 1,950 1,764
8.75%, 12/1/21 1,147 1,122
Arizona Public Service Co.
8.00%, 2/1/25 2,510 2,186
Carolina Power & Light Co.
6.875%, 8/15/23 2,550 2,046
8.20%, 7/1/22 110 103
Cincinnati Gas & Electric Co.
8.125%, 8/1/03 2,250 2,170
Connecticut Power and Light Co.
7.625%, 4/1/97 500 491
Consolidated Edison Co. of
New York, Inc.
6.625%, 2/1/02 1,000 900
Enron Corp.
9.65%, 5/15/01 4,150 4,392
Georgia Power Co.
4.75%, 3/1/96 330 319
9.23%, 12/1/19 876 874
Houston Lighting and Power Co.
8.75%, 3/1/22 1,050 1,035
Pacific Gas and Electric Co.
6.75%, 10/1/23 150 118
Pennsylvania Power & Light Co.
6.50%, 4/1/05 135 117
Public Service Electric & Gas Co.
6.50%, 5/1/04 170 148
South Carolina Electric & Gas
9.00%, 7/15/06 145 149
Southern California Gas
7.375%, 3/1/23 120 103
Texas Utilities Co.
5.75%, 7/1/98 1,200 1,103
7.125%, 6/1/97 800 776
7.875%, 3/1/23 2,975 2,593
8.75%, 11/1/23 180 172
Union Electric Power Co.
6.75%, 5/1/08 40 35
7.65%, 7/15/03 2,000 1,919
Virginia Electric Power Co.
6.625%, 4/1/03 2,300 2,066
Wisconsin Electric Power
7.70%, 12/15/27 65 58
--------------
GROUP TOTAL 26,759
--------------
- -----------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES--TELEPHONE (1.2%)
AT&T Capital Corp.
9.00%, 9/27/95 $ 1,000 $ 1,011
GTE Corp.
8.85%, 3/1/98 2,300 2,322
9.10%, 6/1/03 225 231
MCI Communications Corp.
7.50%, 8/20/04 1,950 1,847
Michigan Bell Telephone Co.
6.375%, 2/1/05 155 134
7.50%, 2/15/23 2,510 2,264
New England Telephone &
Telegraph Co.
6.875%, 10/1/23 890 728
8.625%, 8/1/01 1,000 1,017
New Jersey Bell Telephone Co.
6.625%, 4/1/08 190 161
New York Telephone Co.
7.00%, 8/15/25 1,925 1,558
7.75%, 12/15/06 120 112
Pacific Bell Corp.
7.00%, 7/15/04 175 160
7.25%, 7/1/02 250 235
Southern Bell Telephone Co.
7.625%, 3/15/13 4,950 4,517
Southwestern Bell Telephone Co.
7.625%, 10/1/13 1,620 1,469
7.625%, 3/1/23 3,780 3,355
US West Communications
6.875%, 9/15/33 165 130
---------------
GROUP TOTAL 21,251
---------------
- ------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $464,930) 439,032
- ------------------------------------------------------------------------------------------------
FOREIGN & INTERNATIONAL
AGENCY BONDS (3.3%)
- ------------------------------------------------------------------------------------------------
Province of Alberta
9.20%, 11/1/97 145 149
9.25%, 4/1/00 5,075 5,291
Asian Development Bank
9.125%, 6/1/00 740 772
Province of British Columbia
7.00%, 1/15/03 2,550 2,376
British Columbia Hydro
12.50%, 9/1/13 400 464
European Investment Bank
8.875%, 3/1/01 4,300 4,431
10.125%, 10/1/00 125 135
Export Import Bank Japan
7.50%, 3/9/97 110 109
9.00%, 4/15/98 600 613
Finland Global Bond
6.75%, 11/24/97 200 193
Inter American Development Bank
7.125%, 3/15/23 975 833
8.50%, 3/15/11 2,705 2,793
9.50%, 10/15/97 5,400 5,552
International Bank for Reconstruction
& Development
8.125%, 3/1/01 800 807
9.25%, 7/15/17 1,615 1,760
12.375%, 10/15/02 966 1,189
KFW, Inc.
7.625%, 2/15/04 125 120
8.85%, 6/15/99 1,025 1,051
9.55%, 6/1/95 5,000 5,051
Province of Manitoba
8.75%, 5/15/01 2,600 2,638
8.875%, 9/15/21 965 981
9.25%, 4/1/20 1,680 1,765
9.50%, 10/1/00 1,560 1,634
9.625%, 3/15/99 2,500 2,606
Province of New Brunswick
6.75%, 8/15/13 210 175
New Zealand Government
8.75%, 12/15/06 1,175 1,206
9.125%, 9/25/16 1,180 1,238
9.875%, 1/15/11 1,450 1,634
10.625%, 11/15/05 400 463
Province of Ontario
7.375%, 1/27/03 915 862
7.75%, 6/4/02 1,175 1,135
8.25%, 4/8/96 7,185 7,218
Sweden Global Bond
6.50%, 3/4/03 145 130
Tokyo Metro Govt.
10.375%, 10/20/97 135 142
- ------------------------------------------------------------------------------------------------
TOTAL FOREIGN & INTERNATIONAL
AGENCY BONDS (Cost $60,833) 57,516
- ------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.0%)
- ------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 5.90%, 1/3/95
(Cost $17,104) 17,104 17,104
- ------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.5%)
(Cost $1,812,323) 1,721,463
- ------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
(000)+
- -----------------------------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (.5%)
- ------------------------------------------------------------------------------------------------
Other Assets--Notes B and E $ 62,063
Liabilities--Note E (52,818)
----------
9,245
- -----------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------------------------
Applicable to 188,782,025 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $1,730,708
- -----------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $9.17
===============================================================================================
</TABLE>
+ See Note A to Financial Statements.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1994,
NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------------------
Amount Per
(000) Share
---------- ------
<S> <C> <C>
Paid in Capital--Note D $1,834,156 $9.72
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Losses--Note D (12,588) (.07)
Unrealized Depreciation
of Investments--Note C (90,860) (.48)
- ------------------------------------------------------------------------------------------------
NET ASSETS $1,730,708 $9.17
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
Amount Value
SHORT-TERM BOND PORTFOLIO (000) (000)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT &
AGENCY OBLIGATIONS (73.5%)
- ------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (69.4%)
U.S. Treasury Notes
4.75%, 8/31/98 $ 375 $ 339
5.125%, 6/30/98 450 413
6.75%, 2/28/97-6/30/99 3,600 3,480
6.875%, 7/31/99 4,740 4,562
7.00%, 4/15/99 2,825 2,738
7.25%, 11/15/96 750 744
7.375%, 5/15/96 3,120 3,115
7.50%, 2/29/96-10/31/99 1,745 1,740
7.75%, 11/30/99 1,365 1,360
7.875%, 2/15/96-4/15/98 14,245 14,295
8.00%, 10/15/96 2,425 2,438
8.25%, 7/15/98 1,225 1,240
8.50%, 4/15/97-7/15/97 8,050 8,172
8.625%, 8/15/97 2,600 2,649
8.75%, 10/15/97 200 205
8.875%, 2/15/96-2/15/99 5,740 5,917
---------
GROUP TOTAL 53,407
---------
- -----------------------------------------------------------------------------------------------
AGENCY NOTES (4.1%)
Federal National Mortgage Assn.
4.95%, 9/30/98 700 629
5.30%, 3/11/98 1,075 990
5.35%, 8/12/98 700 639
8.625%, 9/10/96 900 910
---------
GROUP TOTAL 3,168
- -----------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT &
AGENCY OBLIGATIONS (Cost $58,123) 56,575
- -----------------------------------------------------------------------------------------------
CORPORATE BONDS (22.3%)
- -----------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (1.9%)
Chase Manhattan Credit Card Trust
7.40%, 9/15/97 300 295
8.75%, 12/15/96 300 303
First Chicago Master Trust
6.25%, 2/15/98 300 286
MBNA Master Credit Card Trust
7.75%, 4/15/97 300 298
Sears Credit Account Trust
7.75%, 9/15/96 300 298
---------
GROUP TOTAL 1,480
---------
- -----------------------------------------------------------------------------------------------
FINANCE (12.5%)
American General Finance Corp.
8.50%, 8/15/98 300 301
Associates Corp.
5.875%, 8/15/97 200 188
6.875%, 1/15/97 250 244
7.25%, 5/15/98 200 193
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
AVCO Financial Services
5.50%, 5/1/98 $ 250 $ 230
7.50%, 11/15/96 300 297
BankAmerica Corp.
6.00%, 7/15/97 250 237
7.50%, 3/15/97 180 177
Bankers Trust Corp.
4.70%, 7/1/96 250 239
Chase Manhattan Corp.
8.50%, 3/1/96 250 251
Chemical Bank Corp.
6.625%, 1/15/98 200 191
7.375%, 6/15/97 200 196
Chrysler Finance Corp.
5.375%, 10/15/98 400 359
6.50%, 6/15/98 250 234
Commercial Credit Corp.
6.75%, 1/15/97 200 195
7.375%, 11/15/96 250 247
Dean Witter Discover & Co.
6.00%, 3/1/98 600 560
Ford Motor Credit Corp.
6.25%, 2/26/98 250 236
8.625%, 4/15/96 495 498
Household Finance Corp.
7.50%, 3/15/97 300 295
7.80%, 11/1/96 135 134
ITT Financial Corp.
7.00%, 1/15/97 300 293
International Lease Finance Corp.
6.375%, 11/1/96 150 145
6.50%, 7/15/97 200 192
7.90%, 10/1/96 300 298
Mellon Financial Corp.
6.50%, 12/1/97 300 287
7.625%, 11/15/99 150 146
Merrill Lynch & Co., Inc.
7.25%, 5/15/97 200 196
9.00%, 5/1/98 300 303
Morgan Stanley Group, Inc.
7.32%, 1/15/97 300 295
9.25%, 3/1/98 200 204
NCNB Corp.
8.50%, 11/1/96 170 171
NationsBank
6.625%, 1/15/98 350 334
Suntrust Banks
8.875%, 2/1/98 500 507
Transamerica Financial Corp.
6.75%, 1/15/98 300 287
8.375%, 2/15/98 400 400
---------
GROUP TOTAL 9,560
---------
- -----------------------------------------------------------------------------------------------
INDUSTRIAL (5.7%)
BP America
9.50%, 1/1/98 110 113
Chrysler Corp.
10.40%, 8/1/99 350 364
CSX Corp.
8.25%, 11/1/96 200 201
8.40%, 8/1/96 250 251
Ford Capital BV
9.00%, 6/1/96 200 202
9.00%, 8/15/98 300 305
9.125%, 5/1/98 500 508
ITT Corp.
7.25%, 11/15/96 200 197
PepsiCo, Inc.
6.125%, 1/15/98 200 189
7.875%, 8/15/96 300 300
Philip Morris Co.
8.875%, 7/1/96 110 111
Sears, Roebuck & Co.
9.25%, 8/1/97 450 458
9.25%, 4/15/98 300 308
Tenneco Inc.
8.00%, 11/15/99 350 342
Texaco Capital Corp.
9.00%, 11/15/97 105 107
9.00%, 12/15/99 250 257
Waste Management, Inc.
7.875%, 8/15/96 200 199
---------
GROUP TOTAL 4,412
---------
- -----------------------------------------------------------------------------------------------
UTILITIES (2.2%)
Alabama Power Co.
6.00%, 3/1/00 300 271
GTE Corp.
8.85%, 3/1/98 700 707
Texas Utilities Co.
5.75%, 7/1/98 300 276
7.125%, 6/1/97 480 466
---------
GROUP TOTAL 1,720
---------
- -----------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $18,094) 17,172
- -----------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
FOREIGN & INTERNATIONAL
AGENCY BONDS (2.1%)
- -----------------------------------------------------------------------------------------------
Export Import Bank Japan
9.00%, 4/15/98 $ 500 $ 510
Inter American Development Bank
9.50%, 10/15/97 600 617
Province of Manitoba
9.625%, 3/15/99 500 521
- -----------------------------------------------------------------------------------------------
TOTAL FOREIGN & INTERNATIONAL
AGENCY BONDS (Cost $1,710) 1,648
- -----------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.0%)
- -----------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 5.90%, 1/3/95
(Cost $773) 773 773
- -----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.9%)
(Cost $78,700) 76,168
- -----------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.1%)
- -----------------------------------------------------------------------------------------------
Other Assets--Notes B and E 3,217
Liabilities--Note E (2,403)
---------
814
- -----------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------------------------
Applicable to 8,100,217 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $76,982
- -----------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $9.50
===============================================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
AT DECEMBER 31, 1994,
NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------------
Amount Per
(000) Share
----- -----
<S> <C> <C>
Paid in Capital $79,961 $9.87
Undistributed Net
Investment Income -- --
Accumulated Net Realized
Losses--Note D (447) (.06)
Unrealized Depreciation
of Investments--Note C (2,532) (.31)
- -----------------------------------------------------------------------------------------------
NET ASSETS $76,982 $9.50
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
INTERMEDIATE-TERM Amount Value
BOND PORTFOLIO (000) (000)+
- -----------------------------------------------------------------------------------------------
U.S. GOVERNMENT &
AGENCY OBLIGATIONS (55.6%)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT SECURITIES (50.7%)
U.S. Treasury Bond
10.375%, 11/15/12 $1,125 $ 1,339
U.S. Treasury Notes
5.75%, 8/15/03 7,795 6,774
6.25%, 2/15/03 3,415 3,088
6.375%, 1/15/00 4,550 4,278
6.875%, 7/31/99 175 169
7.25%, 5/15/04 6,790 6,521
7.50%, 10/31/99-11/15/01 6,810 6,689
7.75%, 2/15/01 1,475 1,469
7.875%, 8/15/01 675 676
8.00%, 5/15/01 1,500 1,512
8.625%, 10/15/95 600 606
8.75%, 8/15/00 2,980 3,102
---------
GROUP TOTAL 36,223
---------
- -----------------------------------------------------------------------------------------------
AGENCY NOTES (4.9%)
Federal National Mortgage Assn.
5.80%, 12/10/03 900 767
7.00%, 8/12/02 2,900 2,726
---------
GROUP TOTAL 3,493
---------
- -----------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT &
AGENCY OBLIGATIONS (Cost $41,398) 39,716
- -----------------------------------------------------------------------------------------------
CORPORATE BONDS (30.9%)
- -----------------------------------------------------------------------------------------------
FINANCE (12.1%)
American General Finance Corp.
5.875%, 7/1/00 450 401
7.45%, 7/1/02 250 236
Bank America Corp.
7.50%, 10/15/02 400 374
10.00%, 2/1/03 400 427
Bear Stearns Cos.
6.625%, 1/15/04 250 216
Chase Manhattan Corp.
7.75%, 11/1/99 135 131
Chrysler Finance Corp.
5.625%, 1/15/99 350 315
6.625%, 8/15/00 450 412
Citicorp
7.125%, 6/1/03 135 123
Commercial Credit Corp.
5.90%, 9/1/03 450 380
Countrywide Funding
8.25%, 7/15/02 250 240
Dean Witter Discover & Co.
6.25%, 3/15/00 210 188
6.875%, 3/1/03 400 359
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
First Chicago Corp.
7.625%, 1/15/03 $ 250 $ 235
9.875%, 8/15/00 150 159
10.25%, 5/1/01 250 269
First Interstate Bancorp
10.875%, 4/15/01 250 276
First Union Corp.
8.125%, 6/24/02 600 583
Fleet Norstar Financial Corp.
8.125%, 7/1/04 250 240
ITT Financial Corp.
8.50%, 10/15/01 290 290
Mellon Financial Corp.
6.75%, 6/1/03 225 200
7.625%, 11/15/99 450 437
Merrill Lynch & Co., Inc.
8.00%, 2/1/02 400 385
8.30%, 11/1/02 250 243
NationsBank
6.875%, 2/15/05 325 282
Norwest Financial Inc.
7.00%, 1/15/03 110 101
Paine Webber Inc.
7.00%, 3/1/00 450 412
7.875%, 2/15/03 250 228
Republic Bank of New York
7.75%, 5/15/02 500 478
---------
GROUP TOTAL 8,620
---------
- -----------------------------------------------------------------------------------------------
INDUSTRIAL (11.7%)
Air Products & Chemicals, Inc.
6.25%, 6/15/03 125 109
Applied Materials
8.00%, 9/1/04 150 144
Archer-Daniels-Midland Co.
6.25%, 5/15/03 250 220
BP America
7.875%, 5/15/02 650 635
CSX Corp.
9.00%, 8/15/06 275 283
Caterpillar, Inc.
9.00%, 4/15/06 500 514
Eastman Chemical Co.
6.375%, 1/15/04 625 540
Ford Capital BV
9.50%, 7/1/01 675 707
9.875%, 5/15/02 170 181
General Motors
9.625%, 12/1/00 800 830
May Department Stores Co.
9.875%, 12/1/02 225 243
McDonalds Corp.
6.75%, 2/15/03 450 408
J.C. Penney & Co.
6.125%, 11/15/03 130 112
9.05%, 3/1/01 375 387
Philip Morris Co.
8.25%, 10/15/03 250 244
Sears, Roebuck & Co.
6.25%, 1/15/04 650 560
Texaco Inc.
9.00%, 12/15/99 450 463
Union Carbide Corp.
6.75%, 4/1/03 550 487
Union Oil of California
9.125%, 2/15/06 200 208
9.25%, 2/1/03 200 208
9.75%, 12/1/00 210 222
Whirlpool Corp.
9.00%, 3/1/03 400 411
Xerox Corp.
9.625%, 10/15/00 250 253
---------
GROUP TOTAL 8,369
---------
- -----------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC & GAS (5.6%)
Alabama Power Co.
6.00%, 3/1/00 750 679
Cincinnati Gas & Electric Co.
8.125%, 8/1/03 250 241
Consolidated Edison Co.
of New York, Inc.
6.625%, 2/1/02 500 450
Florida Power & Light
6.625%, 2/1/03 210 188
Texas Utilities Co.
8.125%, 2/1/02 600 586
Union Electric Corp.
7.65%, 7/15/03 1,000 959
Virginia Electric Power Co.
6.625%, 4/1/03 1,000 898
---------
GROUP TOTAL 4,001
---------
- -----------------------------------------------------------------------------------------------
UTILITIES--TELEPHONE (1.5%)
MCI Communications Corp.
7.50%, 8/20/04 350 332
New England Telephone
& Telegraph Co.
8.625%, 8/1/01 500 508
Pacific Bell Corp.
7.25%, 7/1/02 250 235
---------
GROUP TOTAL 1,075
---------
- -----------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $23,412) 22,065
- -----------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 22
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
FOREIGN & INTERNATIONAL
AGENCY BONDS (10.7%)
- ------------------------------------------------------------------------------------------------
Asian Development Bank
9.125%, 6/1/00 $ 700 $ 731
Province of British Columbia
7.00%, 1/15/03 400 373
European Investment Bank
8.875%, 3/1/01 1,100 1,134
International Bank for
Reconstruction & Development
8.125%, 3/1/01 700 707
12.375%, 10/15/02 1,000 1,231
KFW, Inc.
7.625%, 2/15/04 875 842
Province of Manitoba
7.75%, 2/1/02 375 367
8.75%, 5/15/01 400 406
9.50%, 10/1/00 450 471
New Zealand Government
8.75%, 12/15/06 125 128
10.625%, 11/15/05 600 694
Province of Ontario
7.75%, 6/4/02 550 531
- ------------------------------------------------------------------------------------------------
TOTAL FOREIGN & INTERNATIONAL
AGENCY BONDS (Cost $7,929) 7,615
- ------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.2%)
- ------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 5.90%, 1/3/95
(Cost $875) 875 875
- ------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.4%)
(Cost $73,614) 70,271
- ------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.6%)
- ------------------------------------------------------------------------------------------------
Other Assets--Notes B and E 8,227
Liabilities--Note E (7,098)
----------
1,129
- ------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------------------------
Applicable to 7,780,739 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $71,400
- ------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $9.18
================================================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
AT DECEMBER 31, 1994,
NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------------
Amount Per
(000) Share
------- -----
<S> <C> <C>
Paid in Capital $75,514 $9.71
Undistributed Net
Investment Income -- --
Accumulated Net Realized
Losses--Note D (771) (.10)
Unrealized Depreciation
of Investments--Note C (3,343) (.43)
- -----------------------------------------------------------------------------------------------
NET ASSETS $71,400 $9.18
- -----------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
Face Market
Amount Value
LONG-TERM BOND PORTFOLIO (000) (000)+
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT &
AGENCY OBLIGATIONS (60.7%)
- ------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
7.875%, 2/15/21 $ 345 $ 341
8.125%, 8/15/19 1,835 1,859
8.50%, 2/15/20 670 706
8.875%, 8/15/17-2/15/19 1,660 1,809
10.375%, 11/15/12 165 196
U.S. Treasury Notes
5.75%, 8/15/03 225 196
7.25%, 5/15/04 110 106
- ------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT &
AGENCY OBLIGATIONS (Cost $5,472) 5,213
- ------------------------------------------------------------------------------------------------
CORPORATE BONDS (28.3%)
- ------------------------------------------------------------------------------------------------
FINANCE (4.2%)
Chemical Bank Corp
6.125%, 11/1/08 100 78
Ford Motor Credit Corp.
6.75%, 5/15/05 115 100
Household Finance Corp.
6.45%, 2/1/09 70 57
NationsBank
6.875%, 2/15/05 95 82
Norwest Corp.
6.65%, 10/15/23 60 47
---------
GROUP TOTAL 364
---------
- -----------------------------------------------------------------------------------------------
INDUSTRIAL (13.4%)
Archer-Daniels-Midland Co.
8.875%, 4/15/11 80 83
Auburn Hills
12.375%, 5/1/20 60 81
Caterpillar, Inc.
9.00%, 4/15/06 100 103
CSX Corp.
8.625%, 5/15/22 25 25
9.00%, 8/15/06 25 26
Deere & Co.
8.50%, 1/9/22 40 40
Eastman Chemical Co.
7.25%, 1/15/24 75 62
Ford Capital BV
9.50%, 6/1/10 75 79
Grand Metropolitan Investment Corp.
9.00%, 8/15/11 75 78
International Paper Co.
7.625%, 1/15/07 35 33
May Department Stores Co.
9.75%, 5/16/04 40 43
Mobil Corp.
7.625%, 2/23/33 80 71
J.C. Penney Co.
7.125%, 11/15/23 70 59
Sears, Roebuck & Co.
9.375%, 11/1/11 70 73
Texaco Capital Corp.
8.875%, 9/1/21 45 46
Union Carbide Corp.
7.875%, 4/1/23 70 61
Union Oil of California
9.125%, 2/15/06 90 93
Union Pacific Corp.
8.625%, 5/15/22 35 34
Whirlpool Corp.
9.10%, 2/1/08 60 62
---------
GROUP TOTAL 1,152
---------
- -----------------------------------------------------------------------------------------------
UTILITIES--ELECTRIC & GAS (7.4%)
Alabama Power Co.
8.75%, 12/1/21 140 137
Arizona Public Service Co.
8.00%, 2/1/25 115 100
Georgia Power Co.
9.23%, 12/1/19 100 100
Texas Utilities Co.
7.875%, 3/1/23 90 78
8.75%, 11/1/23 50 48
Union Electric Corp.
6.75%, 5/1/08 120 104
Wisconsin Electric Power Co.
7.70%, 12/15/27 75 67
---------
GROUP TOTAL 634
---------
- -----------------------------------------------------------------------------------------------
UTILITIES--TELEPHONE (3.3%)
Michigan Bell Telephone Co.
7.50%, 2/15/23 40 36
New England Telephone &
Telegraph Co.
6.875%, 10/1/23 110 90
Southern Bell Telephone Co.
7.625%, 3/15/13 50 46
Southwestern Bell Telephone Co.
7.625%, 10/1/13 80 73
7.625%, 3/1/23 45 40
---------
GROUP TOTAL 285
---------
- -----------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $2,551) 2,435
- -----------------------------------------------------------------------------------------------
FOREIGN & INTERNATIONAL
AGENCY BONDS (7.4%)
- -----------------------------------------------------------------------------------------------
British Columbia Hydro
12.50%, 9/1/13 100 116
</TABLE>
21
<PAGE> 24
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Inter-American Development Bank
7.125%, 3/15/23 $ 25 $ 21
8.50%, 3/15/11 110 112
International Bank for Reconstruction
& Development
9.25%, 7/15/17 135 147
Province of Manitoba
8.875%, 9/15/21 35 36
9.25%, 4/1/20 70 74
New Zealand Government
9.125%, 9/25/16 20 21
9.875%, 1/15/11 100 113
- ------------------------------------------------------------------------------------------------
TOTAL FOREIGN & INTERNATIONAL
AGENCY BONDS (Cost $663) 640
- ------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (.6%)
- ------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 5.90%, 1/3/95
(Cost $52) 52 52
- ------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (97.0%)
(Cost $8,738) 8,340
- ------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (3.0%)
- ------------------------------------------------------------------------------------------------
Other Assets--Note B 282
Liabilities (28)
----------
254
- ------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------------------------
Applicable to 958,934 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $8,594
- ------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $8.96
================================================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1994,
NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------------------
Amount Per
(000) Share
----- -----
<S> <C> <C>
Paid in Capital $9,046 $9.44
Undistributed Net
Investment Income -- --
Accumulated Net Realized
Losses--Note D (54) (.06)
Unrealized Depreciation
of Investments--Note C (398) (.42)
- ------------------------------------------------------------------------------------------------
NET ASSETS $8,594 $8.96
- ------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 25
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
TOTAL BOND SHORT-TERM
MARKET PORTFOLIO BOND PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
Year Ended March 1 to
December 31, 1994 December 31, 1994
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . $ 111,235 $ 3,028
- -------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . 111,235 3,028
- -------------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services . . . . . . . . . . . . $ 180 $ 4
Management and Administrative . . . . . . . . . . . 2,047 59
Marketing and Distribution . . . . . . . . . . . . . 393 2,620 5 68
------- ----
Taxes (other than income taxes) . . . . . . . . . . . . 126 4
Custodian's Fees . . . . . . . . . . . . . . . . . . . 109 5
Auditing Fees . . . . . . . . . . . . . . . . . . . . . 11 7
Shareholders' Reports . . . . . . . . . . . . . . . . . 75 1
Annual Meeting and Proxy Costs . . . . . . . . . . . . 16 --
Directors' Fees and Expenses . . . . . . . . . . . . . 8 --
- -------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . 2,965 85
- -------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . 108,270 2,943
- -------------------------------------------------------------------------------------------------------------------
REALIZED NET LOSS ON INVESTMENT
SECURITIES SOLD . . . . . . . . . . . . . . . . . . . . . (10,960) (447)
- -------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . (139,346) (2,532)
- -------------------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets
Resulting from Operations . . . . . . . . . $ (42,036) $ (36)
===================================================================================================================
</TABLE>
23
<PAGE> 26
STATEMENT OF OPERATIONS (continued)
<TABLE>
<CAPTION>
INTERMEDIATE-TERM LONG-TERM
BOND PORTFOLIO BOND PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
March 1 to March 1 to
December 31, 1994 December 31, 1994
(000) (000)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . $ 3,100 $ 364
- --------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . 3,100 364
- --------------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services . . . . . . . . . . . . $ 3 --
Management and Administrative . . . . . . . . . . . 48 $3
Marketing and Distribution . . . . . . . . . . . . . 5 56 -- 3
---- ----
Taxes (other than income taxes) . . . . . . . . . . . . 3 --
Custodian's Fees . . . . . . . . . . . . . . . . . . . 6 --
Auditing Fees . . . . . . . . . . . . . . . . . . . . . 7 --
Shareholders' Reports . . . . . . . . . . . . . . . . . 2 --
Annual Meeting and Proxy Costs . . . . . . . . . . . . -- --
Directors' Fees and Expenses . . . . . . . . . . . . . -- --
- --------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . 74 3
- --------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . 3,026 361
- --------------------------------------------------------------------------------------------------------------------
REALIZED NET LOSS ON INVESTMENT
SECURITIES SOLD . . . . . . . . . . . . . . . . . . . . . (771) (54)
- --------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . (3,343) (398)
- --------------------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets
Resulting from Operations . . . . . . . . $(1,088) $ (91)
====================================================================================================================
</TABLE>
24
<PAGE> 27
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
TOTAL BOND SHORT-TERM
MARKET PORTFOLIO BOND PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended MARCH 1 TO
DECEMBER 31, 1994 December 31, 1993 DECEMBER 31, 1994
(000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . $ 108,270 $ 79,569 $ 2,943
Realized Net Gain (Loss) . . . . . . . . . . . . . (10,960) 16,495 (447)
Change in Unrealized Appreciation (Depreciation) . (139,346) 16,216 (2,532)
- -------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . (42,036) 112,280 (36)
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . (108,270) (79,569) (2,943)
Realized Net Gain . . . . . . . . . . . . . . . . (311) (17,323) --
- -------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . (108,581) (96,892) (2,943)
- -------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . . 648,465 660,398 37,891
--In Lieu of Cash Distributions . . . . 89,968 78,877 2,476
--Exchange . . . . . . . . . . . . . . 153,240 170,196 50,546
Redeemed --Regular . . . . . . . . . . . . . . . (346,283) (270,983) (3,177)
--Exchange . . . . . . . . . . . . . . (204,306) (180,104) (7,775)
- -------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions 341,084 458,384 79,961
- -------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . 190,467 473,772 76,982
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . 1,540,241 1,066,469 --
- -------------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . $1,730,708 $1,540,241 $76,982
===================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . $.622 $.638 $.463
Realized Net Gain . . . . . . . . . . . . . $.002 $.120 --
- -------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . 84,134 81,776 8,976
Issued in Lieu of Cash Distributions . . . . 9,518 7,767 256
Redeemed . . . . . . . . . . . . . . . . . . (57,903) (44,499) (1,132)
- -------------------------------------------------------------------------------------------------------------------
35,749 45,044 8,100
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 28
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
INTERMEDIATE-TERM LONG-TERM
BOND PORTFOLIO BOND PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
MARCH 1 TO MARCH 1 TO
DECEMBER 31, 1994 DECEMBER 31, 1994
(000) (000)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . $ 3,026 $ 361
Realized Net Gain (Loss) . . . . . . . . . . . . (771) (54)
Change in Unrealized Appreciation (Depreciation) (3,343) (398)
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations . . . . . . . . . . . . (1,088) (91)
- --------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . (3,026) (361)
Realized Net Gain . . . . . . . . . . . . . . . . -- --
- --------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . (3,026) (361)
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . 48,154 3,553
--In Lieu of Cash Distributions . . 2,387 257
--Exchange . . . . . . . . . . . . . 33,601 7,519
Redeemed --Regular . . . . . . . . . . . . . (1,745) (487)
--Exchange . . . . . . . . . . . . . (6,883) (1,796)
- --------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions 75,514 9,046
- --------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . 71,400 8,594
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . -- --
- --------------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . $71,400 $ 8,594
====================================================================================================================
(1) Distributions Per Share . . . . . . . . .
Net Investment Income . . . . . . . . . . $.533 $.586
Realized Net Gain . . . . . . . . . . . . -- --
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . 8,449 1,180
Issued in Lieu of Cash Distributions . . 254 28
Redeemed . . . . . . . . . . . . . . . . (922) (249)
- --------------------------------------------------------------------------------------------------------------------
7,781 959
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 29
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
TOTAL BOND MARKET PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------
For a Share Outstanding Throughout Each Year . . 1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . $10.06 $ 9.88 $ 9.99 $ 9.41 $ 9.44
-------- ------- ------- -------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . .622 .638 .699 .766 .796
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . (.888) .300 (.018) .605 (.030)
-------- ------- ------- -------- -------
TOTAL FROM INVESTMENT OPERATIONS . . (.266) .938 .681 1.371 .766
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . (.622) (.638) (.699) (.766) (.796)
Distributions from Realized Capital Gains . . (.002) (.120) (.092) (.025) --
-------- ------- ------- -------- -------
TOTAL DISTRIBUTIONS . . . . . . . . (.624) (.758) (.791) (.791) (.796)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . $ 9.17 $10.06 $9.88 $9.99 $9.41
=================================================================================================================================
TOTAL RETURN (1) . . . . . . . . . . . . . . . . -2.66% +9.68% +7.14% +15.25% +8.65%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . $1,731 $1,540 $1,066 $849 $277
Ratio of Expenses to Average Net Assets . . . . . .18% .18% .20% .16% .21%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . 6.57% 6.24% 7.06% 7.95% 8.60%
Portfolio Turnover Rate . . . . . . . . . . . . . 33% 50% 49% 31% 29%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return figures do not reflect the annual account maintenance fee of
$10.
27
<PAGE> 30
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
SHORT-TERM INTERMEDIATE-TERM LONG-TERM
BOND PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
MARCH 1+ TO MARCH 1+ TO MARCH 1+ TO
For a Share Outstanding Throughout Each Period DECEMBER 31, 1994 DECEMBER 31, 1994 DECEMBER 31, 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . $10.00 $10.00 $10.00
------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . .463 .533 .586
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . (.500) (.820) (1.040)
------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . (.037) (.287) (.454)
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . (.463) (.533) (.586)
Distributions from Realized Capital Gains . . -- -- --
------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . (.463) (.533) (.586)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . $ 9.50 $ 9.18 $ 8.96
===================================================================================================================
TOTAL RETURN(1) . . . . . . . . . . . . . . . . -0.37% -2.88% -4.53%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . $77 $71 $9
Ratio of Expenses to Average Net Assets . . . . . .18%* .18%* .18%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . 5.77%* 6.88%* 7.70%*
Portfolio Turnover Rate . . . . . . . . . . . . . 53% 63% 70%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return figures do not reflect the annual account maintenance fee of
$10.
* Annualized.
+ Subscription period for the Portfolio was from January 18, 1994, through
February 28, 1994, during which time all assets were held in money market
instruments.
28
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS
Vanguard Bond Index Fund is registered under the Investment Company Act of 1940
as a diversified open-end investment company and consists of the Total Bond
Market, Short-Term Bond, Intermediate-Term Bond, and Long-Term Bond Portfolios.
Certain of the Fund's investments are in corporate debt instruments; the
issuers' abilities to meet these obligations may be affected by economic
developments in their respective industries.
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: Securities are valued utilizing the latest bid prices
and on the basis of a matrix system (which considers such factors as
security prices, yields, maturities and ratings), both as furnished by
independent pricing services. Temporary cash investments are valued at
cost which approximates market.
2. FEDERAL INCOME TAXES: Each Portfolio of the Fund intends to continue to
qualify as a regulated investment company and distribute all of its
taxable income. Accordingly, no provision for Federal income taxes is
required in the financial statements.
3. REPURCHASE AGREEMENTS: Each Portfolio of the Fund, along with other
members of The Vanguard Group of Investment Companies, transfers
uninvested cash balances into a Pooled Cash Account, the daily aggregate
of which is invested in repurchase agreements secured by U.S. Government
obligations. Securities pledged as collateral for repurchase agreements
are held by the Fund's custodian bank until maturity of each repurchase
agreement. Provisions of the agreement ensure that the market value of
this collateral is sufficient in the event of default; however, in the
event of default or bankruptcy by the other party to the agreement,
realization and/or retention of the collateral may be subject to legal
proceedings.
4. 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. Distributions from net investment income are declared on
a daily basis payable on the first business day of the following month.
Discounts and premiums on securities purchased are amortized 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
Directors. At December 31, 1994, the Fund had contributed capital of $291,000
to Vanguard (included in Other Assets), representing 1.5% of Vanguard's
capitalization. The Fund's directors and officers are also directors and
officers of Vanguard.
C. During the period ended December 31, 1994, purchases and sales of
investment securities, other than U.S. Government securities and temporary cash
investments, were:
<TABLE>
<CAPTION>
- -------------------------------------------------------
(000)
-------------------------
Portfolio Purchases Sales
- -------------------------------------------------------
<S> <C> <C>
TOTAL BOND MARKET $196,796 $115,532
SHORT-TERM BOND 19,972 214
INTERMEDIATE-TERM BOND 32,105 687
LONG-TERM BOND 3,310 93
- -------------------------------------------------------
</TABLE>
Purchases and sales of U.S. Government securities were:
<TABLE>
<CAPTION>
- -------------------------------------------------------
(000)
---------------------------
Portfolio Purchases Sales
- -------------------------------------------------------
<S> <C> <C>
TOTAL BOND MARKET $789,648 $432,936
SHORT-TERM BOND 92,198 32,775
INTERMEDIATE-TERM BOND 75,256 33,016
LONG-TERM BOND 9,518 3,987
- -------------------------------------------------------
</TABLE>
29
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS (continued)
At December 31, 1994, unrealized depreciation of investment securities for
financial reporting and Federal income tax purposes were:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
(000)
----------------------------------------------------
Appreciated Depreciated Net Unrealized
Portfolio Securities Securities Depreciation
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL BOND MARKET $3,361 $(94,221) $(90,860)
SHORT-TERM BOND -- (2,532) (2,532)
INTERMEDIATE-TERM
BOND -- (3,343) (3,343)
LONG-TERM BOND 7 (405) (398)
- -----------------------------------------------------------------------------
</TABLE>
D. During the period ended December 31, 1994, the Total Bond Market Portfolio
realized $624,000 of net capital gains resulting from in-kind redemptions. Such
gains are not taxable income to the Portfolio and will not be distributed to
shareholders; accordingly, such gains have been reclassified from accumulated
net realized gains to paid in capital.
At December 31, 1994, the Total Bond Market, Short-Term Bond, Intermediate-Term
Bond, and Long-Term Bond Portfolios had available realized capital losses of
$12,114,000, $447,000, $771,000, and $54,000, respectively, to offset future
net capital gains through December 31, 2003.
E. The market values of securities on loan to broker/dealers at December 31,
1994, and collateral received with respect to such loans, were:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
(000)
-------------------------------------------------
Collateral Received
---------------------------
Market Value U.S.
of Loaned Treasury
Portfolio Securities Cash Securities
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL BOND MARKET $39,447 $27,270 $13,129
SHORT-TERM BOND 1,369 -- 1,396
INTERMEDIATE-TERM BOND 6,237 6,370 --
- ---------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard Bond Index Fund
In our opinion, the accompanying statements 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
the Total Bond Market, Short-Term Bond, Intermediate-Term Bond, and Long-Term
Bond Portfolios of Vanguard Bond Index Fund (the "Fund") at December 31, 1994,
the results of each of their operations, the changes in each of their 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
February 2, 1995
31
<PAGE> 34
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
Company, Alco Standard Corp., Raytheon Company, Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of American
Express Bank Ltd., The St. Paul Companies, Inc., and Scott Paper Company.
BURTON G. MALKIEL, 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., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company,
Reliance Electric Company, and The Standard Products Company.
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 Company
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.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas
Company; Director of Cummins Engine Company; Trustee of Vanderbilt University
and the Culver Educational Foundation.
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
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.
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
JEREMY G. DUFFIELD VINCENT S. MCCORMACK
Senior Vice President Senior Vice President
Planning & Development Operations
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Institutional Chief Financial Officer
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
32
<PAGE> 35
THE VANGUARD VOYAGE . . . STAYING THE COURSE
(continued from inside front cover)
* We set specific standards for each Fund's investment policies and
principles.
* We adhere to the highest standards of investment quality, consistent with
each Fund's objectives.
* We offer candor in our Fund descriptions (including full disclosure of
risk) to prospective investors, and in our description to shareholders
of each Fund's success (or, sometimes, lack of the same).
These principles make at least as much sense today as they did in 1929, perhaps
even more. For we live in an era when many fund organizations have become
asset-gathering machines, capitalizing on past performance that is unrepeatable
and investment fads that today, as yesterday, will come and go. The new
marketing policy is too often "if investors want it, we'll sell it to them."
But our principle remains "if it makes sound investment sense, we'll offer it,
even if it takes years to attract substantial assets."
FOUNDING CORPORATE VALUES
With the founding of The Vanguard Group in 1974, a new concept of values was
brought to bear on mutual fund management. Unlike other fund organizations,
Vanguard alone is structured to serve only its Funds' shareholders. Vanguard's
corporate structure places not the fund management company, but the fund
shareholders, "at the top" of the organizational chart. Vanguard Fund
shareholders are literally the owners of the firm and are entitled to all of
the benefits that, at other fund firms, accrue to the owners of the management
company.
Because of this unique structure, Vanguard has become best known for
its low costs, which we believe are just as essential a consideration in
investing in mutual funds as risk potential and total return. We call this
relationship between risk, return, and cost the "eternal triangle" of mutual
fund investing.
We take special pride in our position as (by far) the lowest-cost
provider of financial services in the world. Under our "no-load" offering
structure, shareholders begin their Vanguard investment program with $1,000 of
assets (not, say, $950) for each $1,000 investment. Then, under our "at-cost"
operating structure, each $1,000 is managed for only about $3 per year; our
competitors may charge three, four, or even five times that amount.
In all, Vanguard has distinguished itself by providing Funds with
sound and durable goals to investors with long-term time horizons, and doing so
at the fairest financial terms available. We believe that the unique Vanguard
structure "promotes a healthy and viable mutual fund complex within which each
Fund can better prosper; enables the Funds to realize substantial savings from
advisory fee reductions; promotes savings from economies of scale; and provides
the Funds with direct and conflict-free control over distribution functions."
We are not alone in this belief. Indeed, the quotation is taken verbatim from
the unanimous decision of the U.S. Securities and Exchange Commission when, in
1981, it approved our application for the structure under which we operate
today.
A CLOSING THOUGHT
We are proud of what Wellington Fund, the other Vanguard Funds, and The
Vanguard Group have come to represent, and we are grateful for the success and
growth with which we have been blessed. We are an industry leader, and, as a
competitor observed a few years ago, we are "the standard by which all fund
organizations are judged."
In battle terms, "the vanguard" is the first wave of troops or ships,
and Vanguard surely is in the first wave of the battle for investment survival.
As we look behind us, however, the "second wave" is not in sight. No fund
organization has followed our lead, leaving ours a lonely course. No matter. We
have an organization that places the interests of our Fund shareholders first.
We have Funds that shall endure the vicissitudes of the future. Come what may,
we intend to "stay the course," and we shall do our very best to continue to
deserve your confidence and loyalty. We hope that you will stay the course
with us.
<PAGE> 36
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money Market Portfolio
Vanguard Money Market Reserves
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 Admiral Funds
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[LOGO]
<TABLE>
<S> <C>
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739
</TABLE>
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.
Q840-12/94
<PAGE> 37
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 front cover of the printed version of this report features the
Vanguard ship in the crashing sea.
A small picture of a rear view of the Vanguard ship crashing through
the sea appears at the top of the inside covers of the report.
A running head featuring a sextant appears on pages one through eight.
A photograph of John C. Bogle appears at the lower-right of page one.
A line chart depicting Month-End Yields of the 30 year U.S. Treasury
Bond, 10 year U.S. Treasury Bond and the 3-Year U.S. Treasury Note for the
period of 1990-1994 appears at the top left of page two.
A bar chart depicting Eight Year Average Annual Total Returns or the
Bond Market Portfolio for the period December 31, 1986 to December 31, 1994
appears at the bottom of page three.
A line chart depicting Cumulative Performance for Lehman Aggregate Bond
Index, Total Bond Market Portfolio, Average Fixed-Income Fund for the period
December 31, 1986 to December 31, 1994, including Average Total Returns at the
top of page four.
A bar chart depicting the Annual Total Returns on Ten-Year U.S.
Treasury Bonds at the bottom of page 5.
A line chart depicting Cumulative Performance for Lehman Short Term
Bond Index, Average Short-Term Bond Fund, and Vanguard Short-Term Portfolio
along with Vanguard Intermediate-Term Portfolio, Average Intermediate-Term Bond
Fund and Lehman Intermediate-Term Bond appears at the top of page six.
A line chart depicting Cumulative Performance of the Vanguard Long-Term
Portfolio for the period February 1, 1994, to December 31, 1994, including
Average Long-Term Bond Fund, and Lehman Long-Term Bond Index, appears at the
bottom right of page seven.
A running head featuring a lantern appears on page nine.
A running head featuring a log book and pen appears on page ten through
thirty-one.
A running head featuring a compass appears on page thirty-two.
At the bottom of the inside back cover appears a triangle with the
sides labled "Risk," "Cost," and "Return."
A seagull in flight is featured at the top of the outside back cover of
the report.
