<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 33-6001) UNDER
THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. /X/
Post-Effective Amendment No. 13 /X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 14 /X/
VANGUARD BOND INDEX FUND, INC.
(Exact Name of Registrant as Specified in Charter)
100 VANGUARD BOULEVARD, P.O. BOX 2600, MALVERN, PA 19355-0741
(Address of Principal Executive Office)
REGISTRANT'S TELEPHONE NUMBER (610) 669-6000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
September 18, 1995, pursuant to paragraph (a) of Rule 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
REGISTRANT ELECTS TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. REGISTRANT FILED ITS
RULE 24F-2 NOTICE FOR THE PERIOD ENDED DECEMBER 31, 1994 ON FEBRUARY 15, 1995.
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<PAGE> 2
VANGUARD BOND INDEX FUND, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... Highlights
Item 3. Condensed Financial Information............... Financial Highlights
Item 4. General Description of Registrant............. Investment Objective; Investment
Limitations; Investment Policies;
General Information
Item 5. Management of the Funds....................... Management of the Funds; General
Information
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Shares; Selling Your Shares; The
Share Price of each Portfolio;
Dividends, Capital Gains, and Taxes;
General Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase...................... Selling Your Shares
Item 9. Pending Legal Proceedings..................... Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Investment Objective and Policies
Item 13. Investment Objective and Policies............. Investment Objective and Policies;
Investment Limitations
Item 14. Management of the Fund........................ Management of the Fund
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund
Item 16. Investment Advisory and Other Services........ Management of the Fund
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ Financial Statements
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares
Item 20. Tax Status.................................... Appendix
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund................................... Not Applicable
Item 23. Financial Statements.......................... Financial Statements
</TABLE>
<PAGE> 3
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[VANGUARD BOND INDEX FUND LOGO] A Member of The Vanguard Group
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--------------------------------------------------------------------------------
PROSPECTUS -- SEPTEMBER 18, 1995
--------------------------------------------------------------------------------
NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT -- 1-800-662-7447
(SHIP)
--------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT -- 1-800-662-2739
(CREW)
--------------------------------------------------------------------------------
INVESTMENT
OBJECTIVE
AND POLICIES Vanguard Bond Index Fund, Inc. (the "Fund"), is an
open-end diversified investment company designed as an
"index fund." The Fund consists of four distinct
portfolios: the Total Bond Market, Short-Term Bond,
Intermediate-Term Bond and Long-Term Bond Portfolios. Each
of the Portfolios invests in fixed-income securities with
prescribed maturity and credit quality standards in order
to match the investment performance of certain investment
grade bond indexes. There is no assurance that a Portfolio
will achieve its stated objective. Shares of the Fund are
neither insured nor guaranteed by any agency of the U.S.
Government, including the FDIC.
--------------------------------------------------------------------------------
OPENING AN
ACCOUNT To open a regular (non-retirement) account, please
complete and return the Account Registration Form. If you
need assistance in completing this Form, please call our
Investor Information Department. To open an Individual
Retirement Account (IRA), please use a Vanguard IRA
Adoption Agreement. To obtain a copy of this form, call
1-800-662-7447, Monday through Friday, from 8:00 a.m. to
9:00 p.m. and Saturday, from 9:00 a.m. to 4:00 p.m.
(Eastern time). The minimum initial investment is $3,000
or $500 for Uniform Gifts/Transfers to Minors Act
accounts. For certain investors investing $10 million or
more in the Total Bond Market Portfolio, the Fund offers a
second class of shares, Total Bond Market Portfolio
Institutional Shares, which are offered through a separate
prospectus. To obtain information on the Total Bond Market
Portfolio Institutional Shares, please call
1-800-523-1188. The Fund is offered on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees).
However, the Fund incurs expenses for management,
administrative and distribution services. Shareholders in
each Portfolio will also incur a $10 annual account
maintenance fee, deducted at a rate of $2.50 per quarter
from each Portfolio account.
--------------------------------------------------------------------------------
ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Fund before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing
additional information about the Fund has been filed with
the Securities and Exchange Commission. This Statement is
dated September 18, 1995 and has been incorporated by
reference into this Prospectus. A copy may be obtained
without charge by writing to the Fund or by calling the
Investor Information Department.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page Page
<S> <C> <C>
Highlights ....................... 2 Implementation of Policies ......... 14 SHAREHOLDER GUIDE
Fund Expenses .................... 5 Investment Limitations ............. 16 Opening an Account and
Financial Highlights ...............6 Management of the Fund ............. 17 Purchasing Shares ................... 22
Yield and Total Return .............8 Investment Adviser.................. 17 When Your Account Will Be Credited .... 25
Performance Record ................. 18 Selling Your Shares ................... 26
FUND INFORMATION Dividends, Capital Gains Exchanging Your Shares .............. 29
Investment Objective ............. 8 and Taxes ........................ 18 Important Information About
Investment Policies ................8 The Share Price of Each Portfolio .. 20 Telephone Transactions .............. 30
Investment Risks ................. 11 General Information ................ 20 Transferring Registration ............. 31
Who Should Invest ................ 13 Other Vanguard Services ............... 31
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 4
HIGHLIGHTS
OBJECTIVES AND
POLICIES The Fund is a no-load, open-end diversified investment
company designed as an "index" fund. The Fund consists of
four distinct Portfolios, each of which invests in
fixed-income securities with prescribed maturity and
credit quality standards in order to match the investment
performance of certain investment grade bond indexes.
There is no assurance that any of the Fund's Portfolios
will achieve its stated objective. PAGE 8
--------------------------------------------------------------------------------
FOUR SEPARATE
PORTFOLIOS Investors may choose to invest in any of four Portfolios
of the Fund:
TOTAL BOND MARKET PORTFOLIO -- seeks to match the
investment performance of the Lehman Brothers Aggregate
Bond Index, a broad market weighted index which
encompasses U.S. Treasury and agency securities, corporate
investment grade bonds, international (dollar-denominated)
investment grade bonds, and mortgage-backed securities.
SHORT-TERM BOND PORTFOLIO -- seeks to match the investment
performance of the Lehman Brothers Mutual Fund Short (1-5)
Government/Corporate Index, a market weighted index which
encompasses U.S. Treasury and agency securities and
investment grade corporate and international
(dollar-denominated) bonds, with maturities between 1 and
5 years.
INTERMEDIATE-TERM BOND PORTFOLIO -- seeks to match the
investment performance of the Lehman Brothers Mutual Fund
Intermediate (5-10) Government/Corporate Index, a market
weighted index which encompasses U.S. Treasury and agency
securities and investment grade corporate and
international (dollar-denominated) bonds, with maturities
between 5 and 10 years.
LONG-TERM BOND PORTFOLIO -- seeks to match the investment
performance of the Lehman Brothers Mutual Fund Long (10+)
Government/Corporate Index, a market weighted index which
encompasses U.S. Treasury and agency securities and
investment grade corporate and international
(dollar-denominated) bonds, with maturities greater than
10 years. PAGE 8
--------------------------------------------------------------------------------
RISK
CHARACTERISTICS Investors in the Fund are exposed to four types of risk
from fixed-income securities. (1) INTEREST RATE RISK is
the potential for fluctuations in bond prices due to
changing interest rates. (2) INCOME RISK is the potential
for a decline in a Portfolio's income due to falling
market interest rates. (3) CREDIT RISK is the possibility
that a bond issuer will fail to make timely payments of
either interest or principal to a Portfolio. (4)
PREPAYMENT RISK (applicable to the Total Bond Market
Portfolio which invests in mortgage-backed securities) or
CALL RISK (for corporate bonds) is the likelihood that,
during periods of falling interest rates, securities with
high stated interest rates will be prepaid (or "called")
prior to maturity, requiring a Portfolio to invest the
proceeds at generally lower interest rates.
The chart on page 3 summarizes interest rate, income,
credit and prepayment/call risks for the four Portfolios
of the Fund. As shown, interest rate risk should be low
for the
2
<PAGE> 5
Short-Term Bond Portfolio, moderate for the Total Bond
Market and Intermediate-Term Bond Portfolios, and high for
the Long-Term Bond Portfolio. PAGE 11
--------------------------------------------------------------------------------
RISK SUMMARY
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
INTEREST INCOME CREDIT PREPAYMENT/
PORTFOLIO RATE RISK RISK RISK CALL RISK
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Bond Market Medium Medium Low Medium
Short-Term Bond Low High Low Low
Intermediate-Term Bond Medium Medium Low Low
Long-Term Bond High Low Low Medium
---------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
THE VANGUARD
GROUP The Fund is a member of The Vanguard Group of Investment
Companies, a group of more than 30 investment companies
with more than 80 distinct investment portfolios and total
assets in excess of $160 billion. The Vanguard Group, Inc.
("Vanguard"), a subsidiary jointly owned by the Vanguard
Funds, provides all corporate management, administrative,
distribution, and shareholder accounting services on an
at-cost basis to the Funds in the Group. As a result,
Vanguard's operating expenses are substantially lower than
those of the mutual fund industry. PAGE 17
--------------------------------------------------------------------------------
INVESTMENT
ADVISER Vanguard's Fixed Income Group provides investment advisory
services on an at-cost basis to the Fund's four
Portfolios. PAGE 17
--------------------------------------------------------------------------------
FEES AND EXPENSES Shareholders in each Portfolio will incur an annual $10
maintenance fee which will be deducted from the dividend
income of each account. This fee will be waived for
shareholders with an account balance of $10,000 or
more. PAGE 5
--------------------------------------------------------------------------------
DIVIDEND POLICY Each Portfolio declares a dividend each business day based
on its ordinary income. Dividends are paid on the first
business day of each month. Net capital gain, if any, will
be distributed annually. Dividend and capital gains
distributions may be received in cash or reinvested in
additional shares. PAGE 18
--------------------------------------------------------------------------------
TAXES Dividends paid by the Fund's Portfolios are subject to
federal, state, and local income taxes. Any capital gains
distributions from a Portfolio are subject to federal
income tax, as well as any applicable state and local
taxes. A sale of shares -- whether by outright redemption,
checkwriting redemption or an exchange -- is a taxable
event and may result in a capital gain or loss. PAGE 18
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PURCHASING
SHARES You may purchase shares by mail, wire, or exchange from
another Vanguard Portfolio. The minimum initial investment
is $3,000 per Portfolio ($500 for retirement accounts and
Uniform Gifts/Transfers to Minors Act accounts); the
minimum for subsequent investments is $100. There are no
sales commissions or 12b-1 fees. PAGE 22
--------------------------------------------------------------------------------
3
<PAGE> 6
SELLING SHARES You may redeem shares of each Portfolio by mail, telephone
or check. Telephone redemption proceeds may be received by
mail or by wire. There is no charge for redemptions,
except for wire withdrawals under $5,000, which are
subject to a $5 charge. Your bank may also impose a fee
upon receipt of a wire. Each Portfolio's share price is
expected to fluctuate, and at the time of redemption may
be more or less than at the time of initial purchase,
resulting in a gain or loss. PAGE 26
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SERVICES TO
SHAREHOLDERS The Fund offers free checkwriting services (minimum $250
per check) for easy access to your account
balance. PAGE 26
The Fund offers two special services: Fund Express, for
electronic transfers between the Fund and your bank
account; and Tele-Account, for "round-the-clock" telephone
access to your Fund account balance and certain
transactions. PAGE 31
--------------------------------------------------------------------------------
SPECIAL
CONSIDERATIONS (1) Each Portfolio may invest a portion of its assets in
bond (interest rate) futures contracts and options.
(2) Each Portfolio may lend its securities. PAGE 16
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4
<PAGE> 7
FUND EXPENSES The following table illustrates ALL expenses and fees that
you would incur as a shareholder of the Fund. The expenses
and fees set forth in the table for the Total Bond Market
Portfolio are for the 1994 fiscal year. The expenses and
fees set forth in the table for the Short-Term Bond,
Intermediate-Term Bond and Long-Term Bond Portfolios are
estimates for the first full year of operations.
<TABLE>
<CAPTION>
TOTAL BOND SHORT-TERM INTERMEDIATE- LONG-TERM
SHAREHOLDER MARKET BOND TERM BOND BOND
TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------
Sales Load Imposed on
Purchases*.................... None None None None
Sales Load Imposed on Reinvested
Dividends..................... None None None None
Redemption Fees**............... None None None None
Exchange Fees................... None None None None
</TABLE>
* A portfolio transaction fee, payable directly to the
Portfolio, may be imposed on purchases of $30 million
or more for the Total Bond Market Portfolio; $10
million for the Short-Term and Intermediate-Term Bond
Portfolios; and $2 million for the Long-Term Bond
Portfolio. See the Fund's Statement of Additional
Information for further information.
** Wire redemptions of less than $5,000 are subject to a
$5 processing fee.
<TABLE>
<CAPTION>
TOTAL BOND SHORT-TERM INTERMEDIATE- LONG-TERM
ANNUAL FUND MARKET BOND TERM BOND BOND
OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
Management &
Administrative
Expenses+............... 0.12% 0.12% 0.12% 0.12%
Investment Advisory
Fees.................... 0.01 0.01 0.01 0.01
12b-1 Fees................ None None None None
Other Expenses
Distribution Costs...... 0.02 0.01 0.01 0.01
Miscellaneous
Expenses.............. 0.03 0.04 0.04 0.04
---- ---- ----- ----
Total Other Expenses...... 0.05 0.05 0.05 0.05
------ ------ ------- ------
TOTAL OPERATING
EXPENSES....... 0.18%++ 0.18% 0.18% 0.18%
------ ------ ------- ------
------ ------ ------- ------
</TABLE>
+ In addition to these costs, shareholders incur
an annual account maintenance fee of $10. This
fee will be waived for shareholders with an
account balance of $10,000 or more.
++ The Portfolio's Institutional class of shares
are offered at an estimated expense ratio of
0.10% per year.
The purpose of this table is to assist you in
understanding the various costs and expenses that you
would bear directly or indirectly as an investor in the
Fund.
EACH PORTFOLIO
CHARGES A $10 ACCOUNT
MAINTENANCE FEE Each Portfolio assesses an annual maintenance fee of $10
to offset the cost of maintaining smaller accounts. This
fee, which is paid directly by shareholders, is deducted
at a rate of $2.50 per quarter from the dividend income of
each account. See "Dividends, Capital Gains and Taxes" for
more information on this fee. The $10 fee amounts to 1.00%
on a $1,000 investment in a Portfolio, 0.33% on a $3,000
investment. This fee will be waived for shareholders with
an account balance of $10,000 or more.
5
<PAGE> 8
The following example illustrates the expenses that you
would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2) redemption
at the end of each period. As noted in the table above,
the Portfolios charge no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Total Bond Market Portfolio............ $ 12 $36 $60 $122
Short-Term Bond Portfolio.............. $ 12 $36 $60 $122
Intermediate-Term Bond Portfolio....... $ 12 $36 $60 $122
Long-Term Bond Portfolio............... $ 12 $36 $60 $122
</TABLE>
Included in these expenses are account maintenance fees of
$10, $30, $50 and $100 for the respective periods shown.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
--------------------------------------------------------------------------------
FINANCIAL
HIGHLIGHTS The following financial highlights information with
respect to the Total Bond Market, Short-Term Bond,
Intermediate-Term Bond and Long-Term Bond Portfolios, for
a share outstanding throughout each period presented,
insofar as they relate to each of the five years in the
period ended December 31, 1994, have been audited by Price
Waterhouse LLP, independent accountants, whose report
thereon was unqualified. This information should be read
in conjunction with the Fund's December 31, 1994 financial
statements and notes thereto, which, together with the
remaining portions of the Fund's 1994 Annual Report to
Shareholders, are incorporated by reference in the
Statement of Additional Information and this Prospectus,
and which appear, along with the report of Price
Waterhouse LLP, in the Fund's 1994 Annual Report to
Shareholders. For a more complete discussion of the Fund's
performance, please see the Fund's 1994 Annual Report to
Shareholders which may be obtained without charge by
writing to the Fund or calling our Investor Information
Department at 1-800-662-7447.
6
<PAGE> 9
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
TOTAL BOND MARKET PORTFOLIO
---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------- DEC. 11+
1994 1993 1992 1991 1990 1989 1988 1987 TO 31, 1986
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.... $10.06 $9.88 $9.99 $9.41 $9.44 $9.05 $9.20 $9.94 $10.00
----- ----- ----- ----- ----- ----- ----- ----- --------
INVESTMENT OPERATIONS
Net Investment Income................. .622 .638 .699 .766 .796 .797 .807 .834 .028
Net Realized and Unrealized Gain
(Loss) on Investments............... (.888) .300 (.018) .605 (.030) .390 (.150) (.740) (.060)
----- ----- ----- ----- ----- ----- ----- ----- --------
TOTAL FROM INVESTMENT
OPERATIONS...................... (.266) .938 .681 1.371 .766 1.187 .657 .094 (.032)
---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income.............................. (.622) (.638) (.699) (.766) (.796) (.797) (.807) (.834) (.028)
Distributions from Realized Capital
Gains............................... (.002) (.120) (.092) (.025) -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- --------
TOTAL DISTRIBUTIONS............... (.624) (.758) (.791) (.791) (.796) (.797) (.807) (.834) (.028)
---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.......... $9.17 $10.06 $9.88 $9.99 $9.41 $9.44 $9.05 $9.20 $9.94
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (1)........................ (2.66)% 9.68% 7.14% 15.25% 8.65% 13.65% 7.35% 1.14% (0.21)%
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).... $1,731 $1,540 $1,066 $849 $277 $139 $58 $43 $3
Ratio of Expenses to Average Net
Assets................................ .18% .18% .20% .16% .21% .24% .30% .14% 0%
Ratio of Net Investment Income to
Average Net Assets.................... 6.57% 6.24% 7.06% 7.95% 8.60% 8.49% 8.84% 9.01% 6.82%*
Portfolio Turnover Rate................. 33% 50% 49% 31% 29% 33% 21% 77% 0%
</TABLE>
* Annualized.
+ Commencement of operations.
(1) Total return figures are adjusted to reflect the annual account
maintenance fee of $10.
<TABLE>
<CAPTION>
-----------------------------------------------------------
SHORT-TERM INTERMEDIATE-TERM LONG-TERM
BOND PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO
-----------------------------------------------------------
MARCH 1+ TO MARCH 1+ TO
DECEMBER 31, MARCH 1+ TO DECEMBER 31,
1994 DECEMBER 31, 1994 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.
--------------------------------------------------------------------------------
7
<PAGE> 10
YIELD AND
TOTAL RETURN From time to time each Portfolio may advertise its yield
and total return. Both yield and total return figures are
based on historical earnings and are not intended to
indicate future performance. The "total return" of a
Portfolio refers to the average annual compounded rates of
return over one-, five- and ten-year periods or for the
life of the Portfolio (as stated in the advertisement)
that would equate an initial amount invested at the
beginning of a stated period to the ending redeemable
value of the investment, assuming the reinvestment of all
dividend and capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of a Portfolio is calculated by dividing the net
investment income per share earned during a 30-day period
by the net asset value per share on the last day of the
period. Net investment income includes interest and
dividend income earned on the Portfolio's securities; it
is net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder
accounts. The yield calculation assumes that the net
investment income earned over 30 days is compounded
monthly for six months and then annualized. Methods used
to calculate advertised yields are standardized for all
stock and bond mutual funds. However, these methods differ
from the accounting methods used by a Portfolio to
maintain its books and records, and so the advertised
30-day yield may not fully reflect the income paid to your
own account.
--------------------------------------------------------------------------------
INVESTMENT
OBJECTIVE
EACH PORTFOLIO
SEEKS TO MATCH
THE INVESTMENT
PERFORMANCE OF ITS
RESPECTIVE INDEX The Fund is an open-end diversified investment company
designed as an "index" fund. The Fund consists of four
Portfolios, each of which seeks to match the investment
results of a particular investment grade bond index
through the use of index sampling techniques. The Total
Bond Market Portfolio seeks to replicate the performance
of a broad market weighted bond index, while the
Short-Term Bond, Intermediate-Term Bond and Long-Term
Bond Portfolios attempt to replicate the performance of
market weighted bond indexes with prescribed maturity
standards. There is no assurance that any of the Fund's
Portfolios will achieve its stated objective.
The investment objective of each Portfolio is fundamental
and so cannot be changed without the approval of a
majority of a Portfolio's shareholders.
--------------------------------------------------------------------------------
INVESTMENT
POLICIES
EACH PORTFOLIO USES A
"PASSIVE" APPROACH
TO INVEST IN FIXED-
INCOME SECURITIES The four Portfolios of the Fund are not managed according
to traditional methods of "active" investment management,
which involve the buying and selling of securities based
upon economic, financial, and market analyses and
investment judgment. Instead, the Portfolios, utilizing a
"passive" or "indexing" investment approach, will attempt
to duplicate the investment performance of their
respective indexes through statistical sampling
procedures. Each Portfolio will invest in a group of
fixed-income securities selected from its respective index
which, when taken together, are expected to perform
similarly to the index as a whole. This sampling technique
is expected to enable each Portfolio to track the dividend
income and price movements of its respective index, while
minimizing brokerage, custodial and accounting costs. The
Portfolios are managed without regard to tax
ramifications.
8
<PAGE> 11
The TOTAL BOND MARKET PORTFOLIO will invest in a portfolio
of fixed-income securities selected to match the Lehman
Brothers Aggregate Bond Index (the "Aggregate Bond
Index"). The Aggregate Bond Index is a broad market
weighted index which encompasses four major classes of
investment grade fixed-income securities in the United
States: U.S. Treasury and agency securities, corporate
bonds, international (dollar-denominated) bonds, and
mortgage-backed securities, with maturities greater than
one year.
The SHORT-TERM BOND PORTFOLIO will invest in a portfolio
of fixed-income securities selected to match the Lehman
Brothers Mutual Fund Short (1-5) Government/ Corporate
Index (the "Short-Term Index"). The Short-Term Index is a
market weighted index which encompasses three major
classes of investment grade fixed-income securities: U.S.
Treasury and agency securities, corporate bonds, and
international (dollar-denominated) bonds, all with
maturities between 1 and 5 years.
The INTERMEDIATE-TERM BOND PORTFOLIO will invest in a
portfolio of fixed-income securities selected to match the
Lehman Brothers Mutual Fund Intermediate (5-10)
Government/Corporate Index (the "Intermediate-Term
Index"). The Intermediate-Term Index is a market weighted
index which encompasses three major classes of investment
grade fixed-income securities: U.S. Treasury and agency
securities, corporate bonds, and international
(dollar-denominated) bonds, all with maturities between 5
and 10 years.
The LONG-TERM BOND PORTFOLIO will invest in a portfolio of
fixed-income securities selected to match the Lehman
Brothers Mutual Fund Long (10+) Government/ Corporate
Index (the "Long-Term Index"). The Long-Term Index is a
market weighted index which encompasses three major
classes of investment grade fixed-income securities: U.S.
Treasury and agency securities, corporate bonds, and
international (dollar-denominated) bonds, all with
maturities greater than 10 years.
Each Portfolio will invest 80% or more of its assets in
securities included in its respective index. As of
December 31, 1994, the major classes of fixed-income
securities represented the following proportions of the
respective indexes total market values:
<TABLE>
<CAPTION>
AGGREGATE SHORT-TERM INTERMEDIATE- LONG-TERM
BOND INDEX INDEX TERM INDEX INDEX
---------- ---------- ------------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury and
agency securities 54% 88% 62% 68%
Corporate bonds 14% 10% 29% 26%
International (dollar-
denominated) bonds 3% 2% 9% 6%
Mortgage-backed securities 29% 0% 0% 0%
Dollar-weighted average
maturity (Years) 8.8 yrs 2.7 yrs 7.6 yrs 23.2 yrs
</TABLE>
9
<PAGE> 12
The Portfolios of the Fund may, from time to time,
substitute one type of investment grade bond for another.
For instance, a Portfolio may hold more short-term
corporate bonds (fewer short U.S. Treasury bonds) than
represented in the Index so as to increase income. This
corporate substitution strategy will entail the assumption
of additional credit risk; however, substantial
diversification within the corporate sector should
moderate issue-specific credit risk. In addition, current
investment policy restricts corporate substitutions to
issues with less than 4 years remaining to maturity and in
aggregate no more than 15% of net assets. Overall, credit
risk is expected to be very low for each of the
Portfolios.
Fixed-income securities will be primarily of investment
grade quality -- i.e., those rated at least Baa3 by
Moody's Investors Service, Inc. or BBB- by Standard &
Poor's Corporation. Securities rated Baa or BBB are
considered as medium grade obligations. Interest payments
and principal are regarded as adequate for the present but
certain protective elements found in higher rated bonds
may be lacking. Such bonds lack outstanding investment
characteristics and, in fact, have speculative
characteristics as well.
In its effort to duplicate the investment performance of
the Index, each Portfolio will invest in fixed-income
securities approximating its relative proportion of the
Index's total market value. For the Total Bond Market
Portfolio, these investments will include U.S. Treasury
and agency securities, mortgage-backed securities, and
corporate and international (dollar-denominated) bonds.
For the Short-Term Bond, Intermediate-Term Bond and
Long-Term Bond Portfolios, these investments include U.S.
Treasury and agency securities, corporate debt and
international (dollar-denominated) debt. The Portfolios
may invest in U.S. Treasury bills, notes and bonds and
other "full faith and credit" obligations of the U.S.
Government. The Portfolios may also invest in U.S.
Government agency securities, which are debt obligations
issued or guaranteed by agencies or instrumentalities of
the U.S. Government. Such "agency" securities may not be
backed by the "full faith and credit" of the U.S.
Government. Such U.S. Government agencies may include the
Federal Farm Credit Banks, the Resolution Trust
Corporation and in the case of the Total Bond Market
Portfolio, the Government National Mortgage Association.
Even though they all carry top (AAA) credit ratings,
"agency" obligations are not explicitly guaranteed by the
U.S. Government and so are perceived as somewhat riskier
than comparable Treasury bonds.
Each Portfolio may also invest up to 20% of its assets in
short-term money market instruments, and may invest in
bond (interest rate) futures contracts and options to a
limited extent. Such securities will be held only to
invest uncommitted cash balances, to maintain liquidity to
meet shareholder redemptions, or to minimize trading
costs. The Portfolios will not invest in such securities
as part of a temporary defensive strategy (such as
altering the aggregate maturity of a Portfolio) to protect
the Fund against potential bond market declines. Each
Portfolio intends to remain fully invested, to the extent
practicable, in a pool of securities which will duplicate
the investment characteristics of the respective index.
See "Implementation of Policies" for a description of
other investment practices of the Fund.
10
<PAGE> 13
These investment policies are not fundamental and so may
be changed by the Board of Directors without shareholder
approval. However, shareholders would be notified prior to
any material change in either.
--------------------------------------------------------------------------------
INVESTMENT
RISKS As mutual funds investing primarily in fixed-income
securities, the Portfolios are subject to interest rate,
income, call and credit risks. Since the Total Bond Market
Portfolio also invests in mortgage-backed securities, the
Portfolio is also subject to prepayment risk.
THE PORTFOLIOS ARE
SUBJECT TO INTEREST
RATE RISK INTEREST RATE RISK is the potential for fluctuations in
bond prices due to changing interest rates. As a rule,
bond prices vary inversely with interest rates. If
interest rates rise, bond prices generally decline; if
interest rates fall, bond prices generally rise. In
addition, for a given change in interest rates,
longer-maturity bonds fluctuate more in price than
shorter-maturity bonds. To compensate investors for these
larger fluctuations, longer-maturity bonds usually offer
higher yields than shorter-maturity bonds, other factors,
including credit quality, being equal.
These basic principles of bond prices also apply to U.S.
Government securities. A security backed by the "full
faith and credit" of the U.S. Government is guaranteed
only as to its stated interest rate and face value at
maturity, not its current market price. Just like other
fixed-income securities, government-guaranteed securities
will fluctuate in value when interest rates change.
The TOTAL BOND MARKET and INTERMEDIATE-TERM BOND
PORTFOLIOS maintain an intermediate-term dollar-weighted
average maturity, and are therefore subject to a moderate
to high level of interest rate risk. Interest rate risk
for the SHORT-TERM BOND PORTFOLIO should be modest.
Because of the short-term dollar-weighted average
maturities, the Portfolio is expected to exhibit low to
moderate price fluctuations as interest rates change. The
LONG-TERM BOND PORTFOLIO is exposed to substantial
interest rate risk. The Portfolio is expected to have a
dollar-weighted average maturity in excess of 15 years
which exposes it to high to very high price fluctuations
due to changing interest rates.
As an illustration of interest rate risk, the chart below
depicts the effect of a two percentage point change in
interest rates on three bonds of varying maturities:
PERCENTAGE CHANGE IN PRICE OF A PAR BOND YIELDING 7.5%
----------------------------------------------------------
<TABLE>
<CAPTION>
2 PERCENTAGE POINT 2 PERCENTAGE POINT
INCREASE IN DECREASE IN
STATED MATURITY INTEREST RATES INTEREST RATES
----------------------------- ------------------ ------------------
<S> <C> <C>
Short-Term (2.5 years) - 4.33% + 4.63%
Intermediate-Term (10 years) -12.71% +15.24%
Long-Term (20 years) -17.75% + 24.1%
</TABLE>
This chart is intended to provide you with guidelines for
determining the degree of interest rate risk you may be
willing to assume. The yield and price changes shown
11
<PAGE> 14
should not be taken as representative of a Portfolio's
current or future yield or expected changes in a
Portfolio's share price.
THE PORTFOLIOS ARE
SUBJECT TO INCOME
RISK INCOME RISK is the potential for a decline in a
Portfolio's income due to falling market interest rates.
In relative terms, income risk will be higher for the
Fund's shorter-term Portfolios and lower for the Fund's
longer-term Portfolios.
THE LONG-TERM BOND
PORTFOLIO IS SUBJECT
TO CALL RISK An additional risk associated with long-term corporate
bonds is call risk. CALL RISK is the possibility that
corporate bonds held by the Portfolio will be repaid prior
to maturity. Call provisions, common in many corporate
bonds, allow bond issuers to redeem bonds prior to
maturity (at a specific price). When interest rates are
falling, bond issuers often exercise these call
provisions, paying off bonds that carry high stated
interest rates and often issuing new bonds at lower rates.
For the Portfolio, the result would be that bonds with
high interest rates are "called" and must be replaced with
lower-yielding instruments. In these circumstances, the
income of the Portfolio would decline. Reflecting these
additional credit and call risks, the corporate portion of
the portfolio will generally offer higher yields than the
government portion.
THE TOTAL BOND
MARKET PORTFOLIO
IS SUBJECT TO
PREPAYMENT RISK As a mutual fund investing a portion of its assets in
mortgage-backed securities (see chart on page 9), the
Total Bond Market Portfolio is subject to prepayment risk
to a limited extent. PREPAYMENT RISK is the possibility
that, during periods of declining interest rates, the
principal invested in high-yielding mortgage-backed
securities will be repaid earlier than scheduled, and the
Fund will be forced to reinvest the unanticipated payments
at generally lower interest rates.
Prepayment risk has two important effects on the
Portfolio. First, when interest rates fall and principal
prepayments are reinvested at lower interest rates, the
income that the Portfolio derives from mortgage-backed
securities is reduced. Second, like other fixed-income
securities, mortgage-backed securities generally decline
in price when interest rates rise. However, because of
prepayment risk, mortgage-backed securities (and thus in
part the share price of the Portfolio and the value of the
Index) will not enjoy as large a gain in market value as
ordinary bonds when interest rates fall. In part to
compensate for prepayment risk, mortgage-backed securities
generally offer higher yields than bonds of comparable
credit quality and maturity.
CREDIT RISK IS
EXPECTED TO BE LOW CREDIT RISK is the possibility that an issuer of
securities held by a Portfolio will be unable to make
payments of either interest or principal. The credit risk
of a Portfolio is a function of the credit quality of its
underlying securities.
The credit quality of each Portfolio is expected to be
very high, and thus credit risk should be low. As of
December 31, 1994, the average quality, as rated by
Moody's Investors Service, Inc., of each Portfolio's
benchmark index was as follows:
<TABLE>
<S> <C>
Aggregate Bond Index............................. AAA
Short-Term Bond Index............................ AAA
Intermediate-Term Bond Index..................... AA2
Long-Term Bond Index............................. AA1
</TABLE>
12
<PAGE> 15
To a limited extent, the Portfolios are also exposed to
event risk, the possibility that corporate fixed-income
securities held by the Portfolios may suffer a substantial
decline in credit quality and market value due to a
corporate restructuring. Corporate restructurings, such as
mergers, leveraged buyouts, takeovers or similar events,
are often financed by a significant expansion of corporate
debt. As a result of the added debt burden, the credit
quality and market value of a firm's existing debt
securities may decline significantly. While event risk may
be high for certain corporate and international
(dollar-denominated) securities held by the Portfolios,
event risk for each Portfolio in the aggregate should be
low because of each Portfolios diversified holdings and
the small percentage of the Portfolio assets invested in
these securities.
The corporate substitution strategy will increase credit
risk somewhat, as short-term investment grade corporate
bonds are substituted for U.S. Treasury bonds and notes;
however, owing to the diversified nature of the
Portfolio's, and policies limiting the maturity and
maximum amount of substitutions, the overall credit and
event risk of the Portfolio is expected to be low.
NO CURRENCY RISK
IN ANY PORTFOLIO While each of the chosen Lehman Index benchmarks do have
limited exposure to international bonds, there is no
currency risk associated with the investments since they
are all dollar-denominated.
--------------------------------------------------------------------------------
WHO SHOULD
INVEST
INVESTORS SEEKING TO
PARTICIPATE IN THE
"BOND MARKET" AS A
WHOLE OR ITS VARIOUS
MATURITY SEGMENTS The Portfolios are designed for individual and
institutional investors seeking well-diversified, low-cost
ways to participate in the U.S. fixed-income markets. The
Portfolios will be essentially fully invested at all
times. Because the Total Bond Market Portfolio will
represent all major sectors of the investment grade fixed-
income securities market, the Portfolio is a suitable
vehicle for those investors seeking ownership in the "bond
market" as a whole, without regard to particular sectors.
The Short-Term Bond, Intermediate-Term Bond and Long-Term
Bond Portfolios are suitable vehicles for those investors
seeking ownership in specific maturity segments of the
"bond market." Each Portfolio concentrates on bonds of
various maturities as illustrated in the chart on page 9.
Because of the risks associated with bond investments,
each Portfolio is intended to be a long-term investment
vehicle and is not designed to provide investors with a
means of speculating on short-term bond market movements.
As with all longer-term, fixed-income investments, the
share price of the Total Bond Market, Intermediate-Term
Bond and Long-Term Bond Portfolios will vary, with the
Long-Term Bond Portfolio expected to exhibit the greatest
volatility. Share price volatility should be significantly
less for the Short-Term Bond Portfolio. Credit risk should
be minimal for each Portfolio. The investment risks are
described on page 11.
The Portfolios are also suitable for those investors with
common stock holdings who are seeking a complementary
fixed-income investment to create a more balanced asset
mix. Because of potential share price fluctuations, the
Portfolios
13
<PAGE> 16
may be inappropriate for investors who have short-term
objectives or who require stability of principal.
--------------------------------------------------------------------------------
IMPLEMENTATION
OF POLICIES The Portfolios follow a variety of investment practices in
an effort to duplicate the total return of their
respective indexes.
THE PORTFOLIOS INVEST
IN FIXED-INCOME
SECURITIES Each Portfolio will invest at least 80% or more of its
assets in securities included in its benchmark Index. The
Indexes measure the total investment return (capital
change plus income) provided by a universe of fixed-income
securities, weighted by the market value outstanding of
each security. The securities included in each Index
generally meet the following criteria, as defined by
Lehman Brothers: an outstanding market value of at least
$100 million; and investment grade quality -- i.e., rated
a minimum of Baa3 by Moody's Investors Service, Inc. or
BBB- by Standard & Poor's Corporation. The maturities of
securities included in each Index will vary as described
on page 8.
THE PORTFOLIOS USE A
"SAMPLING" TECHNIQUE The Portfolios will be unable to hold all of the
individual issues which comprise the Indexes because of
the large number of securities involved. Instead, each
Portfolio will hold a representative sample of the
securities in its respective Index, selecting one or two
issues to represent entire "classes" or types of
securities in the Index. Each Portfolio will be
constructed so as to match the composition of its
benchmark index as described on page 9.
At the broadest level, each Portfolio will seek to hold
securities which reflect the weighting of the major asset
classes in its respective index. For the Total Bond Market
Portfolio, these classes include U.S. Treasury and agency
securities, corporate bonds, and mortgage-backed
securities. For the Short-Term Bond, Intermediate-Term
Bond and Long-Term Bond Portfolios, the two major classes
of securities include U.S. Treasury and agency securities
and corporate bonds. For example, if U.S. Treasury and
agency securities represent approximately 60% of an
Index's interest rate risk, then approximately 60% of the
respective Portfolio's interest rate risk will come from
such securities. Similarly, if corporate bonds represent
20% of the interest rate risk of an Index, then they will
represent approximately 20% of the interest rate risk of
the Portfolio.
Such a sampling technique is expected to be an effective
means of substantially duplicating the income and capital
returns provided by each Index. Over time, the correlation
between the performance of the Fund and the Index is
expected to be 0.95 or higher. A correlation of 1.00 would
indicate perfect correlation, which would be achieved when
the net asset value of a Portfolio, including the value of
its dividend and capital gain distributions, increases or
decreases in exact proportion to changes in the Index.
Because the Portfolios of the Fund incur operating
expenses, as opposed to their respective indexes, which do
not, a perfect correlation of 1.00 is unlikely to be
achieved. The performance of a Portfolio versus that of
its respective index is monitored daily. If a tracking
error develops, the Portfolio is rebalanced to bring it in
line with the index.
14
<PAGE> 17
THE TOTAL BOND
MARKET PORTFOLIO
MAY INVEST IN
MORTGAGE-BACKED
SECURITIES As part of its effort to duplicate the investment
performance of its Index, the Total Bond Market Portfolio
may invest in mortgage-backed securities. Mortgage-backed
securities represent an interest in an underlying pool of
mortgages. Unlike ordinary fixed-income securities, which
generally pay a fixed rate of interest and return
principal upon maturity, mortgage-backed securities repay
both interest income and principal as part of their
periodic payments. Because the mortgages underlying
mortgage-backed certificates can be prepaid at any time by
homeowners or corporate borrowers, mortgage-backed
securities give rise to certain unique "prepayment" risks.
See "Investment Risks."
The Total Bond Market Portfolio may purchase
mortgage-backed securities issued by the Government
National Mortgage Association (GNMA), the Federal Home
Loan Mortgage Corporation (FHLMC), the Federal National
Mortgage Association (FNMA), and the Federal Housing
Authority (FHA). GNMA securities are guaranteed by the
U.S. Government as to the timely payment of principal and
interest; securities from other Government-sponsored
entities are generally not secured by an explicit pledge
of the U.S. Government. The Portfolio may also invest in
conventional mortgage securities, which are packaged by
private corporations and are not guaranteed by the U.S.
Government. Mortgage securities that are guaranteed by the
U.S. Government are guaranteed only as to the timely
payment of principal and interest. The market values of
the securities are not guaranteed and may fluctuate.
EACH PORTFOLIO MAY
INVEST IN SHORT-TERM
MONEY MARKET
INSTRUMENTS Although they normally seek to remain substantially fully
invested in securities in the respective indexes, the
Portfolios may invest temporarily in certain short-term
money market instruments. Such securities may be used to
invest uncommitted cash balances or to maintain liquidity
to meet shareholder redemptions. These securities include:
obligations of the United States Government and its
agencies or instrumentalities; commercial paper, bank
certificates of deposit, and bankers' acceptances; and
repurchase agreements collateralized by these securities.
THE PORTFOLIOS MAY
USE FUTURES CONTRACTS
AND OPTIONS The Portfolios may utilize bond (interest rate) futures
contracts and options to a limited extent. Specifically,
each Portfolio may enter into futures contracts provided
that not more than 5% of its assets are required as a
futures contract deposit. In addition, the Portfolios may
enter into futures contracts and options transactions only
to the extent that obligations under such contracts or
transactions represent not more than 20% of a Portfolio's
assets. Futures contracts and options may be used for
several reasons: to maintain cash reserves while
simulating full investment, to facilitate trading or to
reduce transaction costs. While futures contracts and
options can be used as leveraged investments, a Portfolio
may not use futures contracts or options transactions to
leverage its net assets.
FUTURES CONTRACTS
AND OPTIONS POSE
CERTAIN RISKS The primary risks associated with the use of futures
contracts and options are: (i) imperfect correlation
between the change in market value of the bonds held by
the Portfolio and the prices of futures contracts and
options; and (ii) possible lack of a liquid secondary
market for a futures contract and the resulting inability
to close a futures position prior to its maturity date.
The risk of imperfect correlation will be minimized by
investing only in those contracts whose behavior is
expected to
15
<PAGE> 18
resemble that of the Portfolios underlying securities. The
risk that a Portfolio will be unable to close out a
futures position will be minimized by entering into such
transactions on a national exchange with an active and
liquid secondary market.
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of
leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may
result in immediate and substantial loss (or gain) to the
investor. When investing in futures contracts, a Portfolio
will segregate cash or cash equivalents in the amount of
the underlying obligation.
EACH PORTFOLIO MAY
LEND ITS SECURITIES Each Portfolio may lend its investment securities to
qualified institutional investors for either short-term or
long-term purposes of realizing additional income. Loans
of securities by a Portfolio will be collateralized by
cash, letters of credit, or securities issued or
guaranteed by the U.S. Government or its agencies. The
collateral will equal at least 100% of the current market
value of the loaned securities.
PORTFOLIO TURNOVER
IS NOT EXPECTED
TO EXCEED 50% Although it generally seeks to invest for the long term,
each Portfolio retains the right to sell securities
irrespective of how long they have been held. It is
anticipated that the annual portfolio turnover of each
Portfolio will not exceed 50%. A turnover rate of 50%
would occur, for example, if one half of the securities of
a Portfolio were replaced within one year. A portfolio
turnover rate of 100% may be considered high for a bond
index fund and would result in additional expenses.
--------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS
EACH PORTFOLIO HAS
ADOPTED CERTAIN
FUNDAMENTAL
LIMITATIONS Each Portfolio has adopted certain limitations on its
investment practices. Specifically, a Portfolio will not:
(a) invest more than 5% of its assets in the securities of
any single issuer except obligations of the United
States Government;
(b) purchase more than 5% of the voting securities of any
issuer;
(c) borrow money, except that each Portfolio may borrow
from banks (or through reverse repurchase agreements),
for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which
might otherwise require the untimely disposition of
securities, in an amount not exceeding 15% of the
value of a Portfolio's net assets (including the
amount borrowed and the value of any outstanding
reverse repurchase agreements) at the time the
borrowing is made. Whenever borrowings exceed 5% of
the value of a Portfolio's net assets, the Portfolio
will not make any additional investments;
(d) pledge, mortgage or hypothecate its assets to an
extent greater than 5% of the value of its total
assets; and
(e) invest more than 25% of its assets in any one
industry.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information may be changed only with the approval of a
majority of a Portfolio's shareholders.
--------------------------------------------------------------------------------
16
<PAGE> 19
MANAGEMENT
OF THE FUND
VANGUARD ADMINISTERS
AND DISTRIBUTES
THE FUND The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies
with more than 80 distinct portfolios and total assets in
excess of $160 billion. Through their jointly-owned
subsidiary, The Vanguard Group, Inc. ("Vanguard"), the
Fund and the other funds in the Group obtain at cost
virtually all of their corporate management,
administrative, shareholder accounting and distribution
services. Vanguard also provides investment advisory
services on an at-cost basis to certain Vanguard funds. As
a result of Vanguard's unique corporate structure, the
Vanguard funds have costs substantially lower than those
of most competing mutual funds. In 1994, the average
expense ratio (annual costs including advisory fees
divided by total net assets) for the Vanguard funds
amounted to approximately .30% compared to an average of
1.05% for the mutual fund industry (data provided by
Lipper Analytical Services).
The Officers of the Fund manage its day-to-day operations
and are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. A list of the Directors and Officers of the Fund
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each
fund pays its share of Vanguard's net expenses, which are
allocated among the funds under methods approved by the
Board of Directors (Trustees) of each fund. In addition,
each fund bears its own direct expenses, such as legal,
auditing and custodian fees.
Vanguard also provides distribution and marketing services
to the Vanguard funds. The funds are available on a
no-load basis (i.e., there are no sales commissions or
12b-1 fees). However, each fund bears its share of the
Group's distribution costs.
--------------------------------------------------------------------------------
INVESTMENT
ADVISER
VANGUARD MANAGES
THE FUND'S
INVESTMENTS Each Portfolio receives all investment advisory services
from Vanguard's Fixed Income Group. The Fixed Income Group
provides investment advisory services to more than 40
Vanguard money market and bond portfolios, both taxable
and tax-exempt. Total assets under management by
Vanguard's Fixed Income Group were $55 billion as of
December 31, 1994. The Portfolios are not actively
managed, but are instead administered by the Fixed Income
Group using computerized, quantitative techniques. The
Fixed Income Group is supervised by the Officers of the
Fund. Ian A. MacKinnon, Senior Vice President of Vanguard,
has been in charge of the Group since its inception in
1981.
Mr. MacKinnon is responsible for setting the broad
investment strategies employed by the Fund, and for
overseeing the portfolio manager who implements those
strategies on a day-to-day basis.
The Fund's portfolio manager is Kenneth E. Volpert, Vice
President of Vanguard, who serves as portfolio manager of
the Vanguard Variable Insurance Fund -- High-Grade Bond
Portfolio and the bond portion of the Vanguard Balanced
Index Fund. Mr. Volpert began managing the Vanguard Bond
Index Fund in December 1992.
17
<PAGE> 20
For six years prior to joining Vanguard, Mr. Volpert was
associated with Mellon Bond Associates.
The Fixed Income Group places all orders for purchases and
sales of portfolio securities. Purchases of portfolio
securities are made either directly from the issuer or
from securities dealers. The Fixed Income Group may sell
portfolio securities prior to their maturity if
circumstances and considerations warrant and if it
believes such dispositions advisable. The Group seeks to
obtain the best available net price and most favorable
execution for all portfolio transactions.
--------------------------------------------------------------------------------
PERFORMANCE
RECORD The table in this section provides investment results for
the Total Bond Market Portfolio for several periods
throughout its lifetime. The results shown represent
"total return" investment performance, which assumes the
reinvestment of all capital gains and income dividends for
the indicated periods. Also included is comparative
information with respect to the unmanaged Aggregate Bond
Index described on page 9, and the Consumer Price Index, a
statistical measure of changes in the prices of goods and
services. The table does not make any allowance for
federal, state or local income taxes, which shareholders
must pay on a current basis. The other three Portfolio's
of the Fund did not commence operations until January 18,
1994.
The results shown should not be considered a
representation of the total return from an investment made
in the Portfolio today. This information is provided to
help investors better understand the Portfolio and may not
provide a basis for comparison with other investments or
mutual funds.
AVERAGE ANNUAL RETURN
<TABLE>
<CAPTION>
FISCAL PERIODS TOTAL BOND AGGREGATE CONSUMER
ENDED 12/31/94 MARKET PORTFOLIO BOND INDEX PRICE INDEX
--------------- ---------------- ---------- -----------
<S> <C> <C> <C>
1 Year -2.7 -2.9 + 2.7%
3 Years +4.6 +4.6 + 2.8
5 Years +7.5 +7.7 + 3.5
Lifetime* +7.3 N/A N/A
</TABLE>
* December 11, 1986 to December 31, 1994.
--------------------------------------------------------------------------------
DIVIDENDS,
CAPITAL GAINS
AND TAXES
EACH PORTFOLIO PAYS
MONTHLY DIVIDENDS Dividends consisting of virtually all of the ordinary
income of each Portfolio are declared daily and are
payable to shareholders of record at the time of
declaration. Such dividends are paid on the first business
day of each month. Capital gains distributions, if any,
are made annually.
Each Portfolio's dividend and capital gains distributions
may be reinvested in additional shares or received in
cash. See "Choosing a Distribution Option" for a
description of these distribution methods. Shareholders
who choose to reinvest their dividend distributions will
receive a quarterly (not monthly) confirmation statement.
Each Portfolio automatically deducts a $10 annual account
maintenance fee from the dividend income of each account
on a quarterly basis (at a rate of $2.50 per quarter). If
the monthly dividend for the account is less than the fee
to be deducted,
18
<PAGE> 21
the Portfolio will redeem sufficient shares to make up the
difference. The Board of Directors reserves the right to
change the annual account maintenance fee to reflect the
actual cost of maintaining smaller shareholder accounts.
For federal tax purposes, the account maintenance fee does
not reduce dividend income and is treated as an investment
expense (deductible as a miscellaneous itemized deduction
in the case of individual investors). This fee will be
waived for shareholders with an account balance of $10,000
or more.
Pursuant to the Internal Revenue Code, certain dividend
and capital gains distributions declared by each Portfolio
during December, if received by shareholders by January
31, are deemed to have been paid by the Portfolio and
received by shareholders on December 31 of the prior year.
Each Portfolio intends to continue to qualify for taxation
as a "regulated investment company" under the Internal
Revenue Code so that it will not be subject to federal
income tax to the extent its income is distributed to
shareholders. Dividends paid by the Portfolio from net
investment income and net short-term capital gains,
whether received in cash or reinvested in additional
shares, will be taxable to shareholders as ordinary
income. For corporate investors, dividends paid by the
Portfolios from net investment income will generally not
qualify for the intercorporate dividends-received
deduction.
Distributions paid by a Portfolio from long-term capital
gains, whether received in cash or reinvested in
additional shares, are taxable as long-term capital gains,
regardless of the length of time you have owned shares in
the Portfolio. Capital gains distributions are made when
the Portfolio realizes net capital gains on sales of
portfolio securities during the year. Realized capital
gains are not expected to be a significant or predictable
part of investment return of each Portfolio.
The Fund will notify you annually as to the tax status of
dividend and capital gains distributions paid by each
Portfolio.
A CAPITAL GAIN OR LOSS
MAY BE REALIZED
UPON EXCHANGE OR
REDEMPTION A sale of shares of a Portfolio is a taxable event and may
result in a capital gain or loss. A capital gain or loss
may be realized from an ordinary redemption of shares, a
check-writing redemption, or an exchange of shares between
two mutual funds (or two portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges may
be subject to state and local taxes.
Each Portfolio is required to withhold 31% of taxable
dividends, capital gains distributions, and redemptions
paid to shareholders who have not complied with IRS
taxpayer identification regulations. You may avoid this
withholding requirement by certifying on your Account
Registration Form your proper Social Security or Taxpayer
Identification Number and by certifying that you are not
subject to backup withholding.
The Fund has obtained a Certificate of Authority to do
business as a foreign corporation in Pennsylvania and
does business and maintains an office in that
19
<PAGE> 22
state. In the opinion of counsel, the shares of the Fund
are exempt from Pennsylvania personal property taxes.
The tax discussion set forth above is included for
general information only. Prospective investors should
consult their own tax advisers concerning the tax
consequences of an investment in the Fund.
--------------------------------------------------------------------------------
THE SHARE PRICE
OF EACH PORTFOLIO A Portfolio's share price or "net asset value" per share
is determined by dividing the total market value of its
investments and other assets, less any liabilities, by the
total number of outstanding shares of the Portfolio. The
net asset value per share is calculated as of the close of
regular trading on the New York Stock Exchange (generally
4:00 p.m. Eastern time) on each day that the Exchange is
open for business. A Portfolio's net asset value includes
interest on fixed-income securities, which is accrued
daily.
Portfolio securities that are listed on a securities
exchange are valued at the latest quoted sale prices on
the day the valuation is made. Price information on listed
securities is taken from the exchange where the security
is primarily traded. Listed securities that are not traded
on the valuation date and for which market quotations are
not readily available are valued at the mean between the
bid and asked prices. Unlisted securities for which market
quotations are readily available are valued at the latest
quoted bid price.
However, bonds and other fixed-income securities may be
valued on the basis of prices provided by a pricing
service when such prices are believed to reflect the fair
market value of such securities. The prices provided by a
pricing service may be determined without regard to bid or
last sale prices of each security but take into account
institutional size transactions in similar groups of
securities as well as any developments related to specific
securities. Other securities, including restricted
securities for which no quotations are readily available,
are valued at fair value as determined in good faith by
the Board of Directors.
The share price for each Portfolio can be found daily in
the mutual fund listings of most major newspapers under
the heading of The Vanguard Group.
--------------------------------------------------------------------------------
GENERAL
INFORMATION The Fund is a Maryland corporation. The Articles of
Incorporation permit the Directors to issue 1,000,000,000
shares of common stock, with a $.001 par value. The Board
of Directors has the power to designate one or more
Portfolios and classes of shares of common stock of such
Portfolios and to classify or reclassify any unissued
shares with respect to such Portfolios and classes.
Currently the Fund is offering shares of four series. The
Total Bond Market Portfolio offers two separate classes of
shares; the Total Bond Market Portfolio, which is open to
investors with a minimum investment of $3,000, and the
Total Bond Market Portfolio Institutional Shares which are
designed for investors who meet certain administrative
criteria and a minimum initial investment of $10 million.
The shares of each Portfolio are fully paid and
non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and
have no
20
<PAGE> 23
pre-emptive rights. Such shares have non-cumulative voting
rights, meaning that the holders of more than 50% of the
shares voting for the election of Directors can elect 100%
of the Directors if they so choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Director or Directors of the Fund if
requested in writing by the holders of not less than 10%
of the outstanding shares of the Fund.
All securities and cash for the Total Bond Market
Portfolio are held by Morgan Guaranty Trust Company, New
York, NY. All securities and cash for the Short-Term Bond,
Intermediate-Term Bond and Long-Term Bond Portfolios are
held by State Street Bank and Trust Company, Boston, MA.
The Vanguard Group, Inc., Valley Forge, PA, serves as the
Fund's Transfer and Dividend Disbursing Agent. Price
Waterhouse LLP, serves as independent accountants for the
Fund and will audit its financial statements annually. The
Fund is not involved in any litigation.
--------------------------------------------------------------------------------
21
<PAGE> 24
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES You may open a regular (non-retirement) account, either by
mail or wire. Simply complete and return an Account
Registration Form and any required legal documentation,
indicating the Portfolio you have chosen and amount you
wish to invest. Your purchase must be equal to or greater
than the $3,000 minimum initial investment requirement in
any Portfolio ($500 for Uniform Gifts/Transfers to Minors
Act accounts). You must open a new Individual Retirement
Account by mail (IRAs may not be opened by wire) using a
Vanguard IRA Adoption Agreement. Your purchase must be
equal to or greater than the $500 minimum initial
investment requirement, but no more than $2,000 if you are
making a regular IRA contribution. Rollover contributions
are generally limited to the amount withdrawn within the
past 60 days from an IRA or other qualified Retirement
Plan. If you need assistance with the Account Registration
Form or have any questions about the Fund, please call our
Investor Information Department (1-800-662-7447). NOTE:
For other types of account registrations (e.g.,
corporations, associations, other organizations, trusts or
powers of attorney), please call us to determine which
additional forms you may need.
Because of the risks associated with bond investments,
each Portfolio is intended to be a long-term investment
vehicle and is not designed to provide investors with a
means of speculating on short-term bond market movements.
Excessive trading results in higher transaction costs paid
for by the remaining shareholders. Consequently, the Fund
reserves the right to assess a transaction fee (payable to
the Portfolio) or to reject any specific purchase (and
exchange purchase) request. Shareholders subject to any
transaction fee will be notified by the Fund. The Fund
also reserves the right to suspend the offering of shares
for a period of time.
Each Portfolio's shares are purchased at the
next-determined net asset value after your investment has
been received in the form of Federal Funds. See "When Your
Account Will Be Credited". The Fund is offered on a
no-load basis (i.e., there are no sales commissions or
12b-1 fees).
ADDITIONAL
INVESTMENTS Subsequent investments may be made by mail ($100 minimum
per Portfolio), wire ($1,000 minimum), exchange from
another Vanguard Fund account ($100 minimum per
Portfolio), or Vanguard Fund Express. Subsequent
investments to Individual Retirement Accounts may be made
by mail ($100 minimum) or exchange from another Vanguard
Fund account. In some instances, contributions may be made
by wire or Vanguard Fund Express. Please call us for more
information on these options.
--------------------------------------------------------------------------------
22
<PAGE> 25
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount of Additional investments should
your initial investment and the include the Invest-by-Mail
Complete and sign the name of the Portfolios you have remittance form attached to your
enclosed Account selected on the registration Fund confirmation statements.
Registration Form form, make your check payable to Please make your check payable
The Vanguard Group (Portfolio to The Vanguard Group (Portfolio
Number), see below for the Number), write your account
appropriate number and mail to: number on your check, and using
the return envelope provided,
VANGUARD FINANCIAL CENTER mail to the address indicated on
P.O. BOX 2600 the Invest-by-Mail Form. See
VALLEY FORGE, PA 19482 below for the appropriate
Portfolio number.
For express or VANGUARD FINANCIAL CENTER All written requests should be
registered mail, 455 DEVON PARK DRIVE mailed to one of the addresses
send to: WAYNE, PA 19087 indicated for new accounts. Do
not send registered or express
mail to the post office box
address.
VANGUARD BOND INDEX FUND
Total Bond Market Portfolio -- 84
Short-Term Bond Portfolio -- 132
Intermediate-Term Bond Portfolio -- 314
Long-Term Bond Portfolio -- 522
------------------------------------------------------------------------
PURCHASING BY WIRE CORESTATES BANK, N.A.
ABA 031000011
Money should be CORESTATES ACCT NO 0101 9897
wired to: ATTN VANGUARD
VANGUARD BOND INDEX FUND
BEFORE WIRING NAME OF PORTFOLIO
ACCOUNT NUMBER
Please contact ACCOUNT REGISTRATION
Client Services
(1-800-662-2739)
</TABLE>
To assure proper receipt, please be sure your bank
includes the name of the Portfolio, the account number
Vanguard has assigned to you and the eight digit
CoreStates number. If you are opening a new account,
please complete the Account Registration Form and mail it
to the "New Account" address above after completing your
wire arrangement. NOTE: Federal Funds wire purchase orders
will be accepted only when the Fund and Custodian Bank are
open for business.
--------------------------------------------------------------------------------
PURCHASING BY
EXCHANGE (from a
Vanguard account) You may open an account or purchase additional shares by
making an exchange from an existing Vanguard Fund account.
However, the Fund reserves the right to refuse any
exchange purchase request. Call our Client Services
Department
23
<PAGE> 26
(1-800-662-2739) for assistance. The new account will have
the same registration as the existing account.
--------------------------------------------------------------------------------
PURCHASING BY
FUND EXPRESS
Special Purchase and
Automatic Investment The Fund Express Special Purchase option lets you move
money from your bank account to your Vanguard account on
an "as needed" basis. Or if you choose the Automatic
Investment option, money will be moved automatically from
your bank account to your Vanguard account on the schedule
(monthly, bimonthly [every other month], quarterly or
yearly) you select. To establish these Fund Express
options, please provide the appropriate information on the
Account Registration Form. We will send you a confirmation
of your Fund Express enrollment; please wait three weeks
before using the service.
--------------------------------------------------------------------------------
CHOOSING A
DISTRIBUTION
OPTION You must select one of three distribution options:
1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and
capital gains distributions will be reinvested in
additional Fund shares. This option will be selected
for you automatically unless you specify one of the
other options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid in
cash and your capital gains will be reinvested in
additional Fund shares.
3. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client Services
Department (1-800-662-2739).
In addition, an option to invest your cash dividends
and/or capital gains distributions in another Vanguard
Fund account is available. Please call our Client Services
Department (1-800-662-2739) for information. You may also
elect Vanguard Dividend Express which allows you to
transfer your cash dividends and/or capital gains
distributions automatically to your bank account. Please
see "Other Vanguard Services" for more information.
--------------------------------------------------------------------------------
TAX CAUTION
INVESTORS SHOULD ASK
ABOUT THE TIMING OF
CAPITAL GAINS AND
DIVIDEND DISTRIBUTIONS
BEFORE INVESTING Under Federal tax laws, the Fund is required to distribute
net capital gains and dividend income to Fund
shareholders. These distributions are made to all
shareholders who own Fund shares as of the distribution's
record date, regardless of how long the shares have been
owned. Purchasing shares just prior to the record date
could have a significant impact on your tax liability for
the year. For example, if you purchase shares immediately
prior to the record date of a sizable capital gain
distribution, you will be assessed taxes on the amount of
the capital gain distribution later paid even though you
owned the Fund shares for just a short period of time.
(Taxes are due on the distributions even if the dividend
or gain is reinvested in additional Fund shares.) While
the total value of your investment will be the same after
the capital gain distribution -- the amount of the capital
gain distribution will offset the drop in the net asset
value of the shares -- you should be aware of the tax
implications the timing of your purchase may have.
24
<PAGE> 27
Prospective investors should, therefore, inquire about
potential distributions before investing. The Fund's
annual capital gains distributions normally occur in
December, while income dividends are generally paid on the
first day of each month. For additional information on
distributions and taxes, see the section titled
"Dividends, Capital Gains, and Taxes."
--------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ESTABLISHING OPTIONAL
SERVICES The easiest way to establish optional Vanguard services on
your account is to select the options you desire when you
complete your Account Registration Form. IF YOU WISH TO
ADD OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD WITH
ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE. PLEASE
CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR
FURTHER ASSISTANCE.
SIGNATURE
GUARANTEES For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers and any
other guarantor that Vanguard deems acceptable. A
SIGNATURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES Share certificates will be issued upon request. If a
certificate is lost, you may incur an expense to replace
it.
BROKER-DEALER
PURCHASES If you purchase shares in Vanguard Funds through a
registered broker-dealer or investment adviser, the
broker-dealer or adviser may charge a service fee.
CANCELLING TRADES The Fund will not cancel any trade (e.g., a purchase,
exchange or redemption) believed to be authentic, received
in writing or by telephone, once the trade request has
been received.
ELECTRONIC
PROSPECTUS
DELIVERY If you would prefer to receive a prospectus for the Fund
or any of the Vanguard Funds in an electronic format,
please call 1-800-231-7870 for additional information. If
you elect to do so, you may also receive a paper copy of
the prospectus, by calling 1-800-662-7447.
--------------------------------------------------------------------------------
WHEN YOUR
ACCOUNT WILL
BE CREDITED The trade date is the date on which your account is
credited. It is generally the day on which the Fund
receives your investment in the form of Federal Funds
(monies credited to the Fund's Custodian Bank by a Federal
Reserve Bank). Your trade date varies according to your
method of payment for your shares.
Purchases of Fund shares by check will receive a trade
date the day the funds are received in Good Order by
Vanguard. Thus, if your purchase by check is received by
the close of regular trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time), your trade
date is the business day your check is received in good
order. If your purchase is received after the close of the
Exchange your trade date is the business day following
receipt of your check. Vanguard will not accept third-
party checks to open an account. Please be sure your
purchase check is made payable to the Vanguard Group.
For purchases by Federal Funds wire or exchange, the Fund
is credited immediately with Federal Funds. Thus, if your
purchase by Federal Funds wire or exchange is
25
<PAGE> 28
received by the close of the Exchange, your trade date is
the day of receipt. If your purchase is received after the
close of the Exchange, your trade date is the business day
following receipt of your wire or exchange.
Your shares are purchased at the next-determined net asset
value after your investment has been received in the form
of Federal Funds. You will begin to earn dividends on the
calendar day following the trade date. (For a Friday trade
date, you will begin earning dividends on Saturday.)
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only accept
a foreign check which has been drawn in U.S. dollars and
has been issued by a foreign bank with a U.S.
correspondent bank. The name of the U.S. correspondent
bank must be printed on the face of the foreign check.
--------------------------------------------------------------------------------
SELLING YOUR
SHARES You may withdraw any portion of the funds in your account
by redeeming shares at any time. You may initiate a
request by writing or by telephoning. Your redemption
proceeds are normally mailed, credited or
wired -- depending upon the method of withdrawal you have
PREVIOUSLY chosen -- within two business days after the
receipt of the request in Good Order.
--------------------------------------------------------------------------------
SELLING BY WRITING
A CHECK You may withdraw funds from your account by writing a
check payable in the amount of $250 or more. When a check
is presented for payment to the Fund's agent, CoreStates
Bank, the Fund will redeem sufficient shares in your
account at the next-determined net asset value to cover
the amount of the check.
In order to establish the checkwriting option on your
account, all registered shareholders must sign a signature
card. After your completed signature card is received by
the Fund, an initial supply of checks will be mailed
within 10 business days. There is no charge for checks or
for their clearance. CORPORATIONS, TRUSTS AND OTHER
ORGANIZATIONS SHOULD CALL OR WRITE OUR CLIENT SERVICES
DEPARTMENT (1-800-662-2739) BEFORE SUBMITTING SIGNATURE
CARDS, AS ADDITIONAL DOCUMENTS MAY BE REQUIRED TO
ESTABLISH THE CHECKWRITING SERVICE.
Before establishing the checkwriting option, you should be
aware that:
1. Writing a check (a redemption of shares) is a taxable
event.
2. The Fund does not allow an account to be closed through
the checkwriting option.
3. Vanguard cannot guarantee a stop payment on any check.
If you wish to reverse a stop payment order, you must
do so in writing.
4. Shares held in certificate form cannot be redeemed
using the checkwriting option.
5. The Fund reserves the right to terminate or alter this
service at any time.
--------------------------------------------------------------------------------
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD BOND INDEX FUND, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your request
to Vanguard Financial Center, Vanguard Bond Index Fund,
455 Devon Park Drive, Wayne, PA 19087.)
26
<PAGE> 29
The redemption price of shares will be the Portfolio's net
asset value next determined after Vanguard has received
all required documents in Good Order.
--------------------------------------------------------------------------------
DEFINITION OF
GOOD ORDER GOOD ORDER means that the request includes the following:
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars or
shares).
3. The signatures of all owners EXACTLY as they are
registered on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required in the case of estates, corporations, trusts,
and certain other accounts.
6. Any certificates you are holding for the account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS
TO YOUR REQUEST, PLEASE CALL CLIENT SERVICES
(1-800-662-2739).
--------------------------------------------------------------------------------
SELLING BY TELEPHONE To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department at
1-800-662-2739. For telephone redemptions, you may have
the proceeds sent to you either by mail or by wire. In
addition to the details below, please see "Important
Information About Telephone Transactions."
BY MAIL: Telephone mail redemption is automatically
established on your account unless you indicate otherwise
on your Account Registration Form. You may redeem any
amount by calling Vanguard. The proceeds will be paid to
the registered shareholders and mailed to the address of
record.
BY WIRE: Telephone wire redemption must be specifically
elected for your account. The best time to elect telephone
wire redemption is at the time you complete your Account
Registration Form. If you do not presently have telephone
wire redemption and wish to establish it, please contact
Client Services.
With the wire redemption option, you may withdraw a
minimum of $1,000 and have the amount wired directly to
your bank account. Wire redemptions less than $5,000 are
subject to a $5 charge deducted by Vanguard. There is no
Vanguard charge for wire redemptions of $5,000 or more.
However, your bank may assess a separate fee to accept
incoming wires.
A request to change the bank associated with your wire
redemption option must be received in writing, signed by
each registered shareholder, and accompanied by a voided
check or preprinted deposit slip. A signature guarantee is
required if your bank registration is not identical to
your Vanguard Fund account registration.
--------------------------------------------------------------------------------
SELLING BY FUND
EXPRESS
Automatic Withdrawal
& Special Redemption If you select the Fund Express Automatic Withdrawal
option, money will be automatically moved from your
Vanguard Fund account to your bank account according to
the schedule you have selected. The Special Redemption
option lets you move money from your Vanguard account to
your bank account on an "as needed" basis. To establish
these Fund Express options, please provide the appropriate
27
<PAGE> 30
information on the Account Registration Form. We will send
you a confirmation of your Fund Express service; please
wait three weeks before using the service.
--------------------------------------------------------------------------------
SELLING BY EXCHANGE You may sell shares of the Portfolio by making an exchange
into another Vanguard Fund account. Please see "Exchanging
Your Shares" for details.
--------------------------------------------------------------------------------
IMPORTANT REDEMPTION
INFORMATION Shares purchased by check or Fund Express may be redeemed
at any time. However, your redemption proceeds will not be
paid until payment for the purchase is collected, which
may take up to ten calendar days.
--------------------------------------------------------------------------------
DELIVERY OF
REDEMPTION
PROCEEDS Redemption requests received by telephone prior to the
close of the New York Stock Exchange (generally 4:00 p.m.
Eastern time), are processed on the day of receipt and the
redemption proceeds are normally sent on the following
business day.
Redemption requests received by telephone after the close
of the Exchange are processed on the business day
following receipt and the proceeds are normally sent on
the second business day following receipt.
Redemption proceeds must be sent to you within seven days
of receipt of your request in Good Order.
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular or
express mail. It will be implemented at the net asset
value next determined after your request has been received
by Vanguard in Good Order. The Fund reserves the right to
revise or terminate the telephone redemption privilege at
any time.
The Fund may suspend the redemption right or postpone
payment at times when the New York Stock Exchange is
closed or under any emergency circumstances as determined
by the United States Securities and Exchange Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of the Fund's remaining
shareholders to make payment in cash, the Fund may pay
redemption proceeds in whole or in part by a distribution
in kind of readily marketable securities.
--------------------------------------------------------------------------------
VANGUARD'S AVERAGE
COST STATEMENT If you make a redemption from a qualifying account,
Vanguard will send you an Average Cost Statement which
provides you with the tax basis of the shares you
redeemed. Please see "Other Vanguard Services" for
additional information.
--------------------------------------------------------------------------------
MINIMUM ACCOUNT
BALANCE REQUIREMENT Due to the relatively high cost of maintaining smaller
accounts, the Fund reserves the right to redeem shares in
any account that is below the minimum initial investment
amount of $3,000. If at any time the total investment does
not have a value of at least $3,000, you may be notified
that your account is below the Fund's minimum account
balance requirement. You would then be allowed 60 days to
make an additional investment before the account is
liquidated. Proceeds would be promptly paid to the
registered shareholder. (This minimum requirement does not
28
<PAGE> 31
apply to IRAs, other retirement accounts, and Uniform
Gifts/Transfers to Minors Act accounts.)
The Fund's minimum account balance requirement will not
apply if your account falls below $3,000 solely as a
result of declining markets (i.e., a decline in a
Portfolio's net asset value).
--------------------------------------------------------------------------------
EXCHANGING YOUR
SHARES Should your investment goals change, you may exchange your
shares of Vanguard Bond Index Fund for those of other
available Vanguard Funds.
EXCHANGING BY
TELEPHONE
Call Client Services
(1-800-662-2739) When exchanging shares by telephone, please have ready the
Fund name, account number, Social Security Number or
Employer Identification number listed on the account, the
exact name and address in which the account is registered.
Only the registered shareholder may complete such an
exchange. Requests for telephone exchanges received prior
to the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) are processed at the
close of business that same day. Requests received after
the close of the Exchange are processed the next business
day. TELEPHONE EXCHANGES ARE NOT ACCEPTED INTO OR FROM
VANGUARD BALANCED INDEX FUND, VANGUARD INDEX TRUST,
VANGUARD INTERNATIONAL EQUITY INDEX FUND, AND VANGUARD
QUANTITATIVE PORTFOLIOS. If you experience difficulty in
making a telephone exchange, your exchange request may be
made by regular or express mail, and it will be
implemented at the closing net asset value on the date
received by Vanguard provided the request is received in
Good Order.
--------------------------------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the
name and account number of your current Portfolio, the
name of the Fund you wish to exchange into, the amount you
wish to exchange, and the signatures of all registered
account holders. Send your request to VANGUARD FINANCIAL
CENTER, VANGUARD BOND INDEX FUND, P.O. BOX 1120, VALLEY
FORGE, PA 19482. (For express or registered mail, send
your request to Vanguard Financial Center, Vanguard Bond
Index Fund, 455 Devon Park Drive, Wayne, PA 19087.)
--------------------------------------------------------------------------------
IMPORTANT EXCHANGE
INFORMATION Before you make an exchange, you should consider the
following:
- Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions
you may have, call our Investor Information Department
(1-800-662-7447).
- An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on
the transaction.
- Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
- New accounts are not currently accepted in
Vanguard/Windsor Fund or Vanguard/PRIMECAP Fund.
29
<PAGE> 32
- The redemption price of shares redeemed by exchange is
the net asset value next determined after Vanguard has
received all required documentation in Good Order.
- When opening a new account by exchange, you must meet
the minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange
privilege. However, the Fund reserves the right to revise
or terminate its provisions, limit the amount of or reject
any exchange, as deemed necessary, at any time.
The exchange privilege is only available in states in
which the shares of the Fund are registered for sale. The
Fund's shares are currently registered for sale in all 50
states and the Fund intends to maintain such registration.
--------------------------------------------------------------------------------
EXCHANGE
PRIVILEGE
LIMITATIONS The Fund's exchange privilege is not intended to afford
shareholders a way to speculate on short-term movements in
the market. Accordingly, in order to prevent excessive use
of the exchange privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the
Fund has established a policy of limiting excessive
exchange activity.
Exchange activity generally will not be deemed excessive
if limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT
LEAST 30 DAYS APART) from a Portfolio of the Fund during
any twelve month period. Notwithstanding these
limitations, the Fund reserves the right to reject any
purchase request (including exchange purchases from other
Vanguard portfolios) that is reasonably deemed to be
disruptive to efficient portfolio management.
--------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ABOUT TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire
redemptions) and exchanges by telephone is automatically
established on your account unless you request in writing
that telephone transactions on your account not be
permitted. The ability to initiate wire redemptions by
telephone will be established on your account only if you
specifically elect this option in writing.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone,
the caller must know (i) the name of the Portfolio;
(ii) the 10-digit account number; (iii) the exact name
and address used in the registration; and (iv) the
Social Security or Employer Identification number
listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone
redemption by mail will be made payable to the
registered shareowner and mailed to the address of
record, only. In the case of a telephone redemption by
wire, the wire transfer will be made only in accordance
with the shareowner's prior written instructions.
Neither the Fund nor Vanguard will be responsible for the
authenticity of transaction instructions received by
telephone, provided that reasonable security procedures
have been followed. Vanguard believes that the security
procedures
30
<PAGE> 33
described above are reasonable, and that if such
procedures are followed, you will bear the risk of any
losses resulting from unauthorized or fraudulent telephone
transactions on your account.
--------------------------------------------------------------------------------
TRANSFERRING
REGISTRATION You may transfer the registration of any of your Fund
shares to another person by completing a transfer form and
sending it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110,
VALLEY FORGE, PA 19482, ATTENTION: TRANSFER DEPARTMENT.
The request must be in Good Order. To obtain a transfer
form, please call our Client Services Department
(1-800-662-2739).
--------------------------------------------------------------------------------
STATEMENTS AND
REPORTS Vanguard will send you a confirmation statement each time
you initiate a transaction in your account. You will also
receive a comprehensive account statement at the end of
each calendar quarter. The fourth-quarter statement will
be a year-end statement, listing all transaction activity
for the entire calendar year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account, using
the average cost single category method. This service is
available for most taxable accounts opened since January
1, 1986. In general, investors who redeemed shares from a
qualifying Vanguard account may expect to receive their
Average Cost Statement in February of the following year.
Please call our Client Services Department
(1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you
semi-annually, according to the Fund's fiscal year-end.
--------------------------------------------------------------------------------
OTHER VANGUARD
SERVICES For more information about any of these services, please
call our Investor Information Department at
1-800-662-7447.
VANGUARD DIRECT
DEPOSIT SERVICE With Vanguard's Direct Deposit Service, most U.S.
Government checks (including Social Security and military
pension checks) and private payroll checks may be
automatically deposited into your Vanguard Fund account.
Separate brochures and forms are available for direct
deposit of U.S. Government and private payroll checks.
VANGUARD AUTOMATIC
EXCHANGE SERVICE Vanguard's Automatic Exchange Service allows you to move
money automatically among your Vanguard Fund accounts. For
instance, the service can be used to "dollar cost average"
from a money market portfolio into a stock or bond fund or
to contribute to an IRA or other retirement plan. Please
contact our Client Services Department at 1-800-662-2739
for additional information.
VANGUARD FUND
EXPRESS Vanguard's Fund Express allows you to transfer money
between your Fund account and your account at a bank,
savings and loan association, or a credit union that is a
member of the Automated Clearing House (ACH) system. You
may elect this service on the Account Registration Form or
call our Investor Information Department (1-800-662-7447)
for a Fund Express application.
The minimum amount that can be transferred by telephone is
$100. However, if you have established one of the
automatic options, the minimum amount is $50. The maximum
amount that can be transferred using any of the options is
$100,000.
31
<PAGE> 34
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition,
some services of Fund Express cannot be used with specific
Vanguard Funds. For more information, please refer to the
Vanguard Fund Express brochure.
VANGUARD DIVIDEND
EXPRESS Vanguard's Dividend Express allows you to transfer your
dividends and/or capital gains distributions automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our
Investor Information Department (1-800-662-7447) for a
Vanguard Dividend Express application.
VANGUARD
TELE-ACCOUNT Vanguard Tele-Account is a convenient, automated service
that provides share price, price change and yield
quotations on Vanguard Funds through any TouchTone(TM)
telephone. This service also lets you obtain information
about your account balance, your last transaction, and
your most recent dividend or capital gains payment. To
contact Vanguard's Tele-Account service, dial
1-800-ON-BOARD (1-800-662-6273). A brochure offering
detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
--------------------------------------------------------------------------------
32
<PAGE> 35
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 36
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 37
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 38
<TABLE>
<S> <C> <C> <C>
[VANGUARD BOND INDEX FUND LOGO] [VANGUARD BOND INDEX FUND LOGO]
---------------------------
THE VANGUARD GROUP
OF INVESTMENT P R O S P E C T U S
COMPANIES SEPTEMBER 18, 1995
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
[VANGUARD GROUP LOGO]
</TABLE>
P084
<PAGE> 39
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
[VANGUARD BOND INDEX FUND LOGO] A Member of The Vanguard Group
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PROSPECTUS -- SEPTEMBER 18, 1995
--------------------------------------------------------------------------------
FUND INFORMATION: PARTICIPANT SERVICES -- 1-800-523-1188
--------------------------------------------------------------------------------
INVESTMENT
OBJECTIVE
AND POLICIES Vanguard Bond Index Fund, Inc. (the "Fund"), is an open-end,
diversified investment company designed as an "index fund."
The Fund consists of four distinct portfolios, each of which
invests in fixed-income securities with prescribed maturity
and credit quality standards. The objective of each
Portfolio is to duplicate the total return (income plus
capital change) of publicly-traded investment grade
fixed-income securities in the aggregate by attempting to
duplicate the investment performance of certain investment
grade bond indexes. The Fund invests in a diversified
portfolio of U.S. Government and corporate bonds and
mortgage-backed securities. There is no assurance that a
Portfolio will achieve its stated objective. Shares of the
Fund are neither insured nor guaranteed by any agency of the
U.S. Government, including the FDIC.
--------------------------------------------------------------------------------
IMPORTANT NOTE This Prospectus is intended exclusively for participants in
employer-sponsored retirement or savings plans, such as
tax-qualified pension and profit-sharing plans and 401(k)
thrift plans, as well as 403(b) custodial accounts for
non-profit educational and charitable organizations. Another
version of this Prospectus, containing information on how to
open a personal investment account with the Fund, is
available for individual investors. To obtain a copy of that
version of the Prospectus, please call 1-800-662-7447. For
investors investing $10 million or more in the Total Bond
Market Portfolio and who meet certain administrative
criteria, the Fund offers a second class of shares, Total
Bond Market Portfolio Institutional Shares, which are
offered through a separate prospectus. To obtain information
on the Total Bond Market Portfolio Institutional Shares,
please call 1-800-523-1188.
--------------------------------------------------------------------------------
OPENING AN
ACCOUNT The Fund is an investment option under a retirement or
savings program sponsored by your employer. The
administrator of your retirement plan or your employee
benefits office can provide you with detailed information on
how to participate in your plan and how to elect the Fund as
an investment option.
If you have any questions about the Fund, please contact
Participant Services at 1-800-523-1188. If you have any
questions about your plan account, contact your plan
administrator or the organization that provides
recordkeeping services for your plan.
--------------------------------------------------------------------------------
ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Fund before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing additional
information about the Fund has been filed with the
Securities and Exchange Commission. This Statement is dated
September 18, 1995 and has been incorporated by reference
into this Prospectus. A copy may be obtained without charge
by writing to the Fund or by calling the Investor
Information Department.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page Page
<S> <C> <C>
Highlights ....................... 2 Investment Risks ................. 10 Dividends, Capital Gains and Taxes 18
Fund Expenses .................... 4 Who Should Invest ................. 13 The Share Price of Each
Financial Highlights ...............6 Implementation of Policies ........ 13 Portfolio ....................... 18
Yield and Total Return .............7 Investment Limitations ............ 16 General Information .............. 19
Management of the Fund ............ 16
FUND INFORMATION Investment Adviser ................ 17 SERVICE GUIDE
Investment Objective ............. 8 Performance Record ................ 17 Participating in Your Plan ....... 20
Investment Policies ................8
</TABLE>
--------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 40
HIGHLIGHTS
OBJECTIVES AND
POLICIES The Fund is a no-load, open-end diversified investment
company designed as an "index" fund. The Fund consists of
four distinct Portfolios, each of which invests in
fixed-income securities with prescribed maturity and
credit quality standards in order to match the investment
performance of certain investment grade bond indexes.
There is no assurance that any of the Fund's Portfolios
will achieve its stated objective. PAGE 8
--------------------------------------------------------------------------------
FOUR SEPARATE
PORTFOLIOS Investors may choose to invest in any of four Portfolios
of the Fund:
TOTAL BOND MARKET PORTFOLIO -- seeks to match the
investment performance of the Lehman Brothers Aggregate
Bond Index, a broad market weighted index which
encompasses U.S. Treasury and agency securities,
investment grade corporate bonds, international
(dollar-denominated) investment grade bonds, and mortgage-
backed securities.
SHORT-TERM BOND PORTFOLIO -- seeks to match the investment
performance of the Lehman Brothers Mutual Fund Short (1-5)
Government/Corporate Index, a market weighted index which
encompasses U.S. Treasury and agency securities and
investment grade corporate and international
(dollar-denominated) bonds, with maturities between 1 and
5 years.
INTERMEDIATE-TERM BOND PORTFOLIO -- seeks to match the
investment performance of the Lehman Brothers Mutual Fund
Intermediate (5-10) Government/Corporate Index, a market
weighted index which encompasses U.S. Treasury and agency
securities and investment grade corporate and
international (dollar-denominated) bonds, with maturities
between 5 and 10 years.
LONG-TERM BOND PORTFOLIO -- seeks to match the investment
performance of the Lehman Brothers Mutual Fund Long (10+)
Government/Corporate Index, a market weighted index which
encompasses U.S. Treasury and agency securities and
investment grade corporate and international
(dollar-denominated) bonds, with maturities greater than
10 years. PAGE 8
--------------------------------------------------------------------------------
RISK
CHARACTERISTICS Investors in the Fund are exposed to four types of risk
from fixed-income securities. (1) INTEREST RATE RISK is
the potential for fluctuations in bond prices due to
changing interest rates. (2) INCOME RISK is the potential
for a decline in a Portfolio's income due to falling
market interest rates. (3) CREDIT RISK is the possibility
that a bond issuer will fail to make timely payments of
either interest or principal to a Portfolio. (4)
PREPAYMENT RISK (applicable to the Total Bond Market
Portfolio which invests in mortgage-backed securities) or
CALL RISK (for corporate bonds) is the likelihood that,
during periods of falling interest rates, securities with
high stated interest rates will be prepaid (or "called")
prior to maturity, requiring a Portfolio to invest the
proceeds at generally lower interest rates.
2
<PAGE> 41
The following chart summarizes interest rate, income,
credit and prepayment/call risks for the four Portfolios
of the Fund. As shown, interest rate risk should be low
for the Short-Term Bond Portfolio, moderate for the Total
Bond Market and Intermediate-Term Bond Portfolios, and
high for the Long-Term Bond Portfolio. PAGE 10
--------------------------------------------------------------------------------
RISK SUMMARY
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
INTEREST INCOME CREDIT PREPAYMENT/
PORTFOLIO RATE RISK RISK RISK CALL RISK
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Bond Market Medium Medium Low Medium
Short-Term Bond Low High Low Low
Intermediate-Term Bond Medium Medium Low Low
Long-Term Bond High Low Low Medium
---------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
THE VANGUARD
GROUP The Fund is a member of The Vanguard Group of Investment
Companies, a group of more than 30 investment companies
with more than 80 distinct investment portfolios and total
assets in excess of $160 billion. The Vanguard Group, Inc.
("Vanguard"), a subsidiary jointly owned by the Vanguard
Funds, provides all corporate management, administrative,
distribution, and shareholder accounting services on an
at-cost basis to the Funds in the Group. As a result,
Vanguard's operating expenses are substantially lower than
those of the mutual fund industry. PAGE 16
--------------------------------------------------------------------------------
INVESTMENT
ADVISER Vanguard's Fixed Income Group provides investment advisory
services on an at-cost basis to the Fund's four
Portfolios. PAGE 17
--------------------------------------------------------------------------------
DIVIDENDS, CAPITAL
GAINS AND TAXES Each Portfolio declares a dividend each business day based
on its ordinary income. Dividends are paid on the first
business day of each month. Capital gain net income, if
any, will be distributed annually. Each Portfolio's
dividend and capital gains distributions are automatically
reinvested in additional shares.
If you utilize the Fund's Portfolios as an investment
option in an employer-sponsored retirement savings plan,
dividend and capital gains distributions from the
Portfolios will generally not be subject to current
taxation, but will accumulate on a tax-deferred
basis. PAGE 18
--------------------------------------------------------------------------------
SPECIAL
CONSIDERATIONS (1) Each Portfolio may invest a portion of its assets in
bond (interest rate) futures contracts and options.
(2) Each Portfolio may lend its securities. PAGE 15
--------------------------------------------------------------------------------
3
<PAGE> 42
FUND EXPENSES The following table illustrates ALL expenses and fees that
a shareholder of the Fund would incur. The expenses and
fees set forth in the table for the Total Bond Market
Portfolio are for the 1994 fiscal year. The expenses and
fees set forth in the table for the Short-Term Bond,
Intermediate-Term Bond, and Long-Term Bond Portfolios are
estimates for the first full year of operations.
<TABLE>
<CAPTION>
TOTAL BOND SHORT-TERM INTERMEDIATE- LONG-TERM
SHAREHOLDER MARKET BOND TERM BOND BOND
TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------
Sales Load Imposed on
Purchases*.................... None None None None
Sales Load Imposed on
Reinvested Dividends.......... None None None None
Redemption Fees**............... None None None None
Exchange Fees................... None None None None
</TABLE>
<TABLE>
<CAPTION>
TOTAL BOND SHORT-TERM INTERMEDIATE- LONG-TERM
ANNUAL FUND MARKET BOND TERM BOND BOND
OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management & Administrative
Expenses...................... 0.12% 0.12% 0.12% 0.12%
Investment Advisory Fees........ 0.01 0.01 0.01 0.01
12b-1 Fees...................... None None None None
Other Expenses
Distribution Costs.......... 0.02 0.01 0.01 0.01
Miscellaneous Expenses...... 0.03 0.04 0.04 0.04
---- ----- ------ -----
Total Other Expenses............ 0.05 0.05 0.05 0.05
------ ------- -------- -------
TOTAL OPERATING
EXPENSES............. 0.18% 0.18% 0.18% 0.18%
------- ------- -------- -------
------- ------- -------- -------
* The Fund reserves the right to deduct a portfolio transaction fee, ranging from
0.15% to 0.25% and payable directly to the Portfolio, from purchases of a size
that is reasonably deemed to be disruptive to efficient portfolio management. See
text below.
** Wire redemptions of less than $5,000 are subject to a $5 processing fee.
</TABLE>
The purpose of this table is to assist you in
understanding the various costs and expenses that an
investor would bear directly or indirectly as a
shareholder in the Fund.
TRANSACTION FEE The Fund reserves the right to deduct a portfolio
transaction fee from purchases of the shares of each
Portfolio. Fees will not be charged on any investment less
than $30 million for the Total Bond Market Portfolio, $10
million for the Short-Term Bond Portfolio; $10 million for
the Intermediate-Term Bond Portfolio; and $2 million for
the Long-Term Portfolio. Fees may be charged on the entire
lump-sum purchase for transactions that exceed the amount
indicated for each Portfolio if such purchases are
reasonably deemed to be disruptive to efficient portfolio
management. Lump-sum purchases exceeding the indicated
amount for each Portfolio may be considered disruptive,
for example, if the portfolio manager incurs significant
transaction costs in purchasing portfolio securities
needed to match the investment performance of the
respective benchmark index. If such purchases can be
offset by redemptions of shares by other shareholders,
such fee may be waived or reduced. A prospective investor
may determine whether a fee will be charged by calling
their client representative or plan sponsor in advance of
their purchase. The fee, if imposed, will be 0.18% for the
Total Bond Market Portfolio; 0.23% for the
4
<PAGE> 43
Intermediate-Term Bond Portfolio; 0.15% for the Short-Term
Bond Portfolio; and 0.20% for the Long-Term Bond
Portfolio. The fees are based on the portfolio manager's
estimate of transaction costs, which depends on the types
of securities in which each Portfolio invests.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2) redemption
at the end of each period. As noted in the table above,
the Portfolios charge no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Total Bond Market Portfolio.............. $ 12 $36 $60 $122
Short-Term Bond Portfolio................ $ 12 $36 $60 $122
Intermediate-Term Bond Portfolio......... $ 12 $36 $60 $122
Long-Term Bond Portfolio................. $ 12 $36 $60 $122
</TABLE>
Included in these expenses are account maintenance fees of
$10, $30, $50 and $100 for the respective periods shown.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
--------------------------------------------------------------------------------
5
<PAGE> 44
FINANCIAL
HIGHLIGHTS The following financial highlights information with
respect to the Total Bond Market, Short-Term Bond,
Intermediate-Term Bond and Long-Term Bond Portfolios, for
a share outstanding throughout each period presented,
insofar as they relate to each of the five years in the
period ended December 31, 1994, have been audited by Price
Waterhouse LLP, independent accountants, whose report
thereon was unqualified. This information should be read
in conjunction with the Fund's financial statements and
notes thereto, which, together with the remaining portions
of the Fund's 1994 Annual Report to Shareholders, are
incorporated by reference in the Statement of Additional
Information and this Prospectus, and which appear, along
with the report of Price Waterhouse LLP, in the Fund's
1994 Annual Report to the Shareholders. For a more
complete discussion of the Fund's performance, please see
the Fund's 1994 Annual Report to Shareholders which may be
obtained without charge by writing to the Fund or calling
Participant Services at 1-800-523-1188.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
TOTAL BOND MARKET PORTFOLIO
-----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------- DEC. 11+
1994 1993 1992 1991 1990 1989 1988 1987 TO 31, 1986
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD.............................. $10.06 $ 9.88 $ 9.99 $ 9.41 $ 9.44 $ 9.05 $ 9.20 $ 9.94 $10.00
------ ------ ------ ------ ------ ------ ------ ------ ---------
INVESTMENT OPERATIONS
Net Investment Income............... .622 .638 .699 .766 .796 .797 .807 .834 .028
Net Realized and Unrealized Gain
(Loss) on Investments............. (.888) .300 (.018) .605 (.030) .390 (.150) (.740) (.060)
------ ------ ------ ------ ------ ------ ------ ------ -------
TOTAL FROM INVESTMENT
OPERATIONS.................... (.266) .938 .681 1.371 .766 1.187 .657 .094 (.032)
--------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income............................ (.622) (.638) (.699) (.766) (.796) (.797) (.807) (.834) (.028)
Distributions from Realized Capital
Gains............................. (.002) (.120) (.092) (.025) -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ -------
TOTAL DISTRIBUTIONS............. (.624) (.758) (.791) (.791) (.796) (.797) (.807) (.834) (.028)
--------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD........ $ 9.17 $10.06 $ 9.88 $ 9.99 $ 9.41 $ 9.44 $ 9.05 $ 9.20 $ 9.94
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (1)...................... (2.66)% 9.68% 7.14% 15.25% 8.65% 13.65% 7.35% 1.14% (0.21)%
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions).......................... $1,731 $1,540 $1,066 $849 $277 $139 $58 $43 $3
Ratio of Expenses to Average
Net Assets.......................... .18% .18% .20% .16% .21% .24% .30% .14% 0%
Ratio of Net Investment Income to
Average Net Assets.................. 6.57% 6.24% 7.06% 7.95% 8.60% 8.49% 8.84% 9.01% 6.82%*
Portfolio Turnover Rate............... 33% 50% 49% 31% 29% 33% 21% 77% 0%
</TABLE>
* Annualized.
+ Commencement of operations.
(1) Total return figures are adjusted to reflect the annual account
maintenance fee of $10 (charged to individual investors).
6
<PAGE> 45
<TABLE>
<CAPTION>
-------------------------------------------------------------
SHORT-TERM INTERMEDIATE-TERM LONG-TERM
BOND PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO
-------------------------------------------------------------
MARCH 1+ TO MARCH 1+ TO
DECEMBER 31, MARCH 1+ TO DECEMBER 31,
1994 DECEMBER 31, 1994 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>
* 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.
(1) Total return figures do not reflect the annual account maintenance fee of
$10.
--------------------------------------------------------------------------------
YIELD AND
TOTAL RETURN From time to time each Portfolio may advertise its yield
and total return. Both yield and total return figures are
based on historical earnings and are not intended to
indicate future performance. The "total return" of a
Portfolio refers to the average annual compounded rates of
return over one-, five- and ten-year periods or for the
life of the Portfolio (as stated in the advertisement)
that would equate an initial amount invested at the
beginning of a stated period to the ending redeemable
value of the investment, assuming the reinvestment of all
dividend and capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of a Portfolio is calculated by dividing the net
investment income per share earned during a 30-day period
by the net asset value per share on the last day of the
period. Net investment income includes interest and
dividend income earned on the Portfolio's securities; it
is net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder
accounts. The yield calculation assumes that the net
investment income earned over 30 days is compounded
monthly for six months and then annualized. Methods used
to calculate advertised yields are standardized for all
stock and bond mutual funds. However, these methods differ
from the accounting methods used by a Portfolio to
maintain its books and records, and so the advertised
30-day yield may not fully reflect the income paid to your
own account.
--------------------------------------------------------------------------------
7
<PAGE> 46
INVESTMENT
OBJECTIVE
EACH PORTFOLIO
SEEKS TO MATCH
THE INVESTMENT
PERFORMANCE OF ITS
RESPECTIVE INDEX The Fund is an open-end diversified investment company
designed as an "index" fund. The Fund consists of four
Portfolios, each of which seeks to match the investment
results of a particular investment grade bond index
through the use of index sampling techniques. The Total
Bond Market Portfolio seeks to replicate the performance
of a broad market weighted bond index, while the
Short-Term Bond, Intermediate-Term Bond and Long-Term Bond
Portfolios attempt to replicate the performance of market
weighted bond indexes with prescribed maturity standards.
There is no assurance that any of the Fund's Portfolios
will achieve its stated objective.
The investment objective of each Portfolio is fundamental
and so cannot be changed without the approval of a
majority of a Portfolio's shareholders.
--------------------------------------------------------------------------------
INVESTMENT
POLICIES
EACH PORTFOLIO USES A
"PASSIVE" APPROACH
TO INVEST IN FIXED-
INCOME SECURITIES The four Portfolios of the Fund are not managed according
to traditional methods of "active" investment management,
which involve the buying and selling of securities based
upon economic, financial, and market analyses and
investment judgment. Instead, the Portfolios, utilizing a
"passive" or "indexing" investment approach, will attempt
to duplicate the investment performance of their
respective indexes through statistical sampling
procedures. Each Portfolio will invest in a group of
fixed-income securities selected from its respective index
which, when taken together, are expected to perform
similarly to the index as a whole. This sampling technique
is expected to enable each Portfolio to track the dividend
income and price movements of its respective index, while
minimizing brokerage, custodial and accounting costs. The
Portfolios are managed without regard to tax
ramifications.
The TOTAL BOND MARKET PORTFOLIO will invest in a portfolio
of fixed-income securities selected to match the Lehman
Brothers Aggregate Bond Index (the "Aggregate Bond
Index"). The Aggregate Bond Index is a broad market
weighted index which encompasses four major classes of
investment grade fixed-income securities in the United
States: U.S. Treasury and agency securities, corporate
bonds, international (dollar-denominated) bonds, and
mortgage-backed securities, with maturities greater than
one year.
The SHORT-TERM BOND PORTFOLIO will invest in a portfolio
of fixed-income securities selected to match the Lehman
Brothers Mutual Fund Short (1-5) Government/ Corporate
Index (the "Short-Term Index"). The Short-Term Index is a
market weighted index which encompasses three major
classes of investment grade fixed-income securities: U.S.
Treasury and agency securities, corporate bonds and
international (dollar-denominated) bonds, all with
maturities between 1 and 5 years.
The INTERMEDIATE-TERM BOND PORTFOLIO will invest in a
portfolio of fixed-income securities selected to match the
Lehman Brothers Mutual Fund Intermediate (5-10)
Government/ Corporate Index (the "Intermediate-Term
Index"). The Intermediate-Term Index is a market weighted
index which encompasses three major classes of investment
grade fixed-income securities: U.S. Treasury and agency
securities,
8
<PAGE> 47
corporate bonds and international (dollar-denominated)
bonds, all with maturities between 5 and 10 years.
The LONG-TERM BOND PORTFOLIO will invest in a portfolio of
fixed-income securities selected to match the Lehman
Brothers Mutual Fund Long (10+) Government/ Corporate
Index (the "Long-Term Index"). The Long-Term Index is a
market-weighted index which encompasses three major
classes of investment grade fixed-income securities: U.S.
Treasury and agency securities, corporate bonds and
international (dollar-denominated) bonds, all with
maturities greater than 10 years.
Each Portfolio will invest 80% or more of its assets in
securities included in its respective index. As of
December 31, 1994, the major classes of fixed-income
securities represented the following proportions of the
respective indexes total market values:
<TABLE>
<CAPTION>
AGGREGATE SHORT-TERM INTERMEDIATE- LONG-TERM
BOND INDEX INDEX TERM INDEX INDEX
---------- ---------- ------------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury and agency
securities 54% 88% 62% 68%
Corporate bonds 14% 10% 29% 26%
International (dollar-
denominated) bonds 3% 2% 9% 6%
Mortgage-backed securities 29% 0% 0% 0%
Dollar-weighted average
maturity (Years) 8.8 yrs 2.7 yrs 7.6 yrs 23.2 yrs
</TABLE>
The Portfolios of the Fund may, from time to time,
substitute one type of investment grade bond for another.
For instance, a Portfolio may hold more short-term
corporate bonds (fewer short U.S. Treasury bonds) than
represented in the Index so as to increase income. This
corporate substitution strategy will entail the assumption
of additional credit risk; however, substantial
diversification within the corporate sector should
moderate issue-specific credit risk. In addition, current
investment policy restricts corporate substitutions to
issues with less than 4 years remaining to maturity and in
aggregate no more than 15% of net assets. Overall, credit
risk is expected to be very low for each of the
Portfolios.
Fixed-income securities will be primarily of investment
grade quality -- i.e., those rated at least Baa3 by
Moody's Investors Service, Inc. or BBB- by Standard &
Poor's Corporation. Securities rated Baa or BBB are
considered as medium grade obligations. Interest payments
and principal are regarded as adequate for the present but
certain protective elements found in higher rated bonds
may be lacking. Such bonds lack outstanding investment
characteristics and, in fact, have speculative
characteristics as well.
In its effort to duplicate the investment performance of
the Index, each Portfolio will invest in fixed-income
securities approximating its relative proportion of the
9
<PAGE> 48
Index's total market value. For the Total Bond Market
Portfolio, these investments will include U.S. Treasury
and agency securities, mortgage-backed securities and
corporate and international (dollar-denominated) bonds.
For the Short-Term Bond, Intermediate-Term Bond and
Long-Term Bond Portfolios, these investments include U.S.
Treasury and agency securities, corporate debt and
international (dollar-denominated) debt. The Portfolios
may invest in U.S. Treasury bills, notes and bonds and
other "full faith and credit" obligations of the U.S.
Government. The Portfolios may also invest in U.S.
Government agency securities, which are debt obligations
issued or guaranteed by agencies or instrumentalities of
the U.S. Government. Such "agency" securities may not be
backed by the "full faith and credit" of the U.S.
Government. Such U.S. Government agencies may include the
Federal Farm Credit Banks, the Resolution Trust
Corporation and in the case of the Total Bond Market
Portfolio, the Government National Mortgage Association.
Even though they all carry top (AAA) credit ratings,
"agency" obligations are not explicitly guaranteed by the
U.S. Government and so are perceived as somewhat riskier
than comparable Treasury bonds.
Each Portfolio may also invest up to 20% of its assets in
short-term money market instruments, and may invest in
bond (interest rate) futures contracts and options to a
limited extent. Such securities will be held only to
invest uncommitted cash balances, to maintain liquidity to
meet shareholder redemptions, or to minimize trading
costs. The Portfolios will not invest in such securities
as part of a temporary defensive strategy (such as
altering the aggregate maturity of a Portfolio) to protect
the Fund against potential bond market declines. Each
Portfolio intends to remain fully invested, to the extent
practicable, in a pool of securities which will duplicate
the investment characteristics of the respective index.
See "Implementation of Policies" for a description of
other investment practices of the Fund.
These investment policies are not fundamental and so may
be changed by the Board of Directors without shareholder
approval. However, shareholders would be notified prior to
any material change in either.
--------------------------------------------------------------------------------
INVESTMENT
RISKS As mutual funds investing primarily in fixed-income
securities, the Portfolios are subject to interest rate,
income, call and credit risks. Since the Total Bond Market
Portfolio also invests in mortgage-backed securities, the
Portfolio is also subject to prepayment risk.
THE PORTFOLIOS ARE
SUBJECT TO INTEREST
RATE RISK INTEREST RATE RISK is the potential for fluctuations in
bond prices due to changing interest rates. As a rule,
bond prices vary inversely with interest rates. If
interest rates rise, bond prices generally decline; if
interest rates fall, bond prices generally rise. In
addition, for a given change in interest rates,
longer-maturity bonds fluctuate more in price than
shorter-maturity bonds. To compensate investors for these
larger fluctuations, longer-maturity bonds usually offer
higher yields than shorter-maturity bonds, other factors,
including credit quality, being equal.
These basic principles of bond prices also apply to U.S.
Government securities. A security backed by the "full
faith and credit" of the U.S. Government is guaranteed
only as to its stated interest rate and face value at
maturity, not its current market
10
<PAGE> 49
price. Just like other fixed-income securities,
government-guaranteed securities will fluctuate in value
when interest rates change.
The TOTAL BOND MARKET and INTERMEDIATE-TERM BOND
PORTFOLIOS maintain an intermediate-term dollar-weighted
average maturity, and are therefore subject to a moderate
to high level of interest rate risk. Interest rate risk
for the SHORT-TERM BOND PORTFOLIO should be modest.
Because of the short-term dollar-weighted average
maturities, the Portfolio is expected to exhibit low to
moderate price fluctuations as interest rates change. The
LONG-TERM BOND PORTFOLIO is exposed to substantial
interest rate risk. The Portfolio is expected to have a
dollar-weighted average maturity in excess of 15 years
which exposes it to high to very high price fluctuations
due to changing interest rates.
As an illustration of interest rate risk, the chart below
depicts the effect of a two percentage point change in
interest rates on three bonds of varying maturities:
PERCENTAGE CHANGE IN PRICE OF A PAR BOND YIELDING 7.5%
----------------------------------------------------------
<TABLE>
<CAPTION>
2 PERCENTAGE POINT 2 PERCENTAGE POINT
INCREASE IN DECREASE IN
STATED MATURITY INTEREST RATES INTEREST RATES
------------------------------- ------------------ ------------------
<S> <C> <C>
Short-Term (2.5 years) - 4.33% + 4.63%
Intermediate-Term (10 years) -12.71% +15.24%
Long-Term (20 years) -17.75% + 24.1%
</TABLE>
This chart is intended to provide you with guidelines for
determining the degree of interest rate risk you may be
willing to assume. The yield and price changes shown
should not be taken as representative of a Portfolio's
current or future yield or expected changes in a
Portfolio's share price.
THE PORTFOLIOS ARE
SUBJECT TO INCOME INCOME RISK is the potential for a decline in a
RISK Portfolio's income due to falling market interest rates.
In relative terms, income risk will be higher for the
Fund's shorter-term Portfolios and lower for the Fund's
longer-term Portfolios.
THE LONG-TERM BOND
PORTFOLIO IS SUBJECT
TO CALL RISK An additional risk associated with long-term corporate
bonds is call risk. CALL RISK is the possibility that
corporate bonds held by the Portfolio will be repaid prior
to maturity. Call provisions, common in many corporate
bonds, allow bond issuers to redeem bonds prior to
maturity (at a specific price). When interest rates are
falling, bond issuers often exercise these call
provisions, paying off bonds that carry high stated
interest rates and often issuing new bonds at lower rates.
For the Portfolio, the result would be that bonds with
high interest rates are "called" and must be replaced with
lower-yielding instruments. In these circumstances, the
income of the Portfolio would decline. Reflecting these
additional credit and call risks, the corporate portion of
the portfolio will generally offer higher yields than the
government portion.
11
<PAGE> 50
THE TOTAL BOND
MARKET PORTFOLIO
IS SUBJECT TO
PREPAYMENT RISK As a mutual fund investing a portion of its assets in
mortgage-backed securities (see chart on page 9), the
Total Bond Market Portfolio is subject to prepayment risk
to a limited extent. PREPAYMENT RISK is the possibility
that, during periods of declining interest rates, the
principal invested in high-yielding mortgage-backed
securities will be repaid earlier than scheduled, and the
Fund will be forced to reinvest the unanticipated payments
at generally lower interest rates.
Prepayment risk has two important effects on the
Portfolio. First, when interest rates fall and principal
prepayments are reinvested at lower interest rates, the
income that the Portfolio derives from mortgage-backed
securities is reduced. Second, like other fixed-income
securities, mortgage-backed securities generally decline
in price when interest rates rise. However, because of
prepayment risk, mortgage-backed securities (and thus in
part the share price of the Portfolio and the value of the
Index) will not enjoy as large a gain in market value as
ordinary bonds when interest rates fall. In part to
compensate for prepayment risk, mortgage-backed securities
generally offer higher yields than bonds of comparable
credit quality and maturity.
CREDIT RISK IS
EXPECTED TO BE LOW CREDIT RISK is the possibility that an issuer of
securities held by a Portfolio will be unable to make
payments of either interest or principal. The credit risk
of a Portfolio is a function of the credit quality of its
underlying securities.
The credit quality of each Portfolio is expected to be
very high, and thus credit risk should be low. As of
December 31, 1994, the average quality, as rated by
Moody's Investors Service, Inc., of each Portfolio's
benchmark index was as follows:
<TABLE>
<S> <C>
Aggregate Bond Index........................................ AAA
Short-Term Bond Index....................................... AAA
Intermediate-Term Bond Index................................ AA2
Long-Term Bond Index........................................ AA1
</TABLE>
To a limited extent, the Portfolios are also exposed to
event risk, the possibility that corporate fixed-income
securities held by the Portfolios may suffer a substantial
decline in credit quality and market value due to a
corporate restructuring. Corporate restructurings, such as
mergers, leveraged buyouts, takeovers or similar events,
are often financed by a significant expansion of corporate
debt. As a result of the added debt burden, the credit
quality and market value of a firm's existing debt
securities may decline significantly. While event risk may
be high for certain corporate and international
(dollar-denominated) securities held by the Portfolios,
event risk for each Portfolio in the aggregate should be
low because of each Portfolios diversified holdings and
the small percentage of the Portfolio assets invested in
these securities.
The corporate substitution strategy will increase credit
risk somewhat, as short-term investment grade corporate
bonds are substituted for U.S. Treasury bonds and notes;
however, owing to the diversified nature of the
Portfolio's, and policies limiting the maturity and
maximum amount of substitutions, the overall credit and
event risk of the Portfolio is expected to be low.
12
<PAGE> 51
NO CURRENCY RISK
IN ANY PORTFOLIO
While each of the chosen Lehman Index benchmarks do have
limited exposure to international bonds, there is no
currency risk associated with the investments since they
are all dollar denominated.
--------------------------------------------------------------------------------
WHO SHOULD
INVEST
INVESTORS SEEKING TO
PARTICIPATE IN THE
"BOND MARKET" AS A
WHOLE OR ITS VARIOUS
MATURITY SEGMENTS The Portfolios are designed for individual and
institutional investors seeking well-diversified, low-cost
ways to participate in the U.S. fixed-income markets. The
Portfolios will be essentially fully invested at all
times. Because the Total Bond Market Portfolio will
represent all major sectors of the investment grade fixed-
income securities market, the Portfolio is a suitable
vehicle for those investors seeking ownership in the "bond
market" as a whole, without regard to particular sectors.
The Short-Term Bond, Intermediate-Term Bond and Long-Term
Bond Portfolios are suitable vehicles for those investors
seeking ownership in specific maturity segments of the
"bond market." Each Portfolio concentrates on bonds of
various maturities as illustrated in the chart on page 9.
Because of the risks associated with bond investments,
each Portfolio is intended to be a long-term investment
vehicle and is not designed to provide investors with a
means of speculating on short-term bond market movements.
As with all longer-term, fixed-income investments, the
share price of the Total Bond Market, Intermediate-Term
Bond and Long-Term Bond Portfolios will vary, with the
Long-Term Bond Portfolio expected to exhibit the greatest
volatility. Share price volatility should be significantly
less for the Short-Term Bond Portfolio. Credit risk should
be minimal for each Portfolio. The investment risks are
described on page 10.
The Portfolios are also suitable for those investors with
existing common stock holdings who are seeking a
complementary fixed-income investment to create a more
balanced asset mix. Because of potential share price
fluctuations, the Portfolios may be inappropriate for
investors who have short-term objectives or who require
stability of principal.
--------------------------------------------------------------------------------
IMPLEMENTATION
OF POLICIES The Portfolios follow a variety of investment practices in
an effort to duplicate the total return of their
respective indexes.
THE PORTFOLIOS INVEST
IN FIXED INCOME
SECURITIES Each Portfolio will invest at least 80% or more of its
assets in securities included in its benchmark Index. The
Indexes measure the total investment return (capital
change plus income) provided by a universe of fixed-income
securities, weighted by the market value outstanding of
each security. The securities included in each Index
generally meet the following criteria, as defined by
Lehman Brothers: an outstanding market value of at least
$100 million; and investment grade quality -- i.e., rated
a minimum of Baa3 by Moody's Investors Service, Inc. or
BBB- by Standard & Poor's Corporation. The maturities of
securities included in each Index will vary as described
on page 9.
THE PORTFOLIOS USE A
"SAMPLING" TECHNIQUE The Portfolios will be unable to hold all of the
individual issues which comprise the Indexes because of
the large number of securities involved. Instead, each
Portfolio will hold a representative sample of the
securities in its respective Index, selecting one or two
issues to represent entire "classes" or types of
securities in the Index.
13
<PAGE> 52
Each Portfolio will be constructed so as to match the
composition of its benchmark index as described below.
At the broadest level, each Portfolio will seek to hold
securities which reflect the weighting of the major asset
classes in its respective index. For the Total Bond Market
Portfolio, these classes include U.S. Treasury and agency
securities, corporate bonds, and mortgage-backed
securities. For the Short-Term Bond, Intermediate-Term
Bond and Long-Term Bond Portfolios, the two major classes
of securities include U.S. Treasury and agency securities
and corporate bonds. For example, if U.S. Treasury and
agency securities represent approximately 60% of an
Index's interest rate risk, then approximately 60% of the
respective Portfolio's interest rate risk will come from
such securities. Similarly, if corporate bonds represent
20% of the interest rate risk of an Index, then they will
represent approximately 20% of the interest rate risk of
the Portfolio.
Such a sampling technique is expected to be an effective
means of substantially duplicating the income and capital
returns provided by each Index. Over time, the correlation
between the performance of the Fund and the Index is
expected to be 0.95 or higher. A correlation of 1.00 would
indicate perfect correlation, which would be achieved when
the net asset value of a Portfolio, including the value of
its dividend and capital gain distributions, increases or
decreases in exact proportion to changes in the Index.
Because the Portfolios of the Fund incur operating
expenses, as opposed to their respective indexes, which do
not, a perfect correlation of 1.00 is unlikely to be
achieved. The performance of a Portfolio versus that of
its respective index is monitored daily. If a tracking
error develops, the Portfolio is rebalanced to bring it in
line with the index.
THE TOTAL BOND
MARKET PORTFOLIO
MAY INVEST IN
MORTGAGE-BACKED
SECURITIES As part of its effort to duplicate the investment
performance of its Index, the Total Bond Market Portfolio
may invest in mortgage-backed securities. Mortgage-backed
securities represent an interest in an underlying pool of
mortgages. Unlike ordinary fixed-income securities, which
generally pay a fixed rate of interest and return
principal upon maturity, mortgage-backed securities repay
both interest income and principal as part of their
periodic payments. Because the mortgages underlying
mortgage-backed certificates can be prepaid at any time by
homeowners or corporate borrowers, mortgage-backed
securities give rise to certain unique "prepayment" risks.
See "Investment Risks."
The Total Bond Market Portfolio may purchase
mortgage-backed securities issued by the Government
National Mortgage Association (GNMA), the Federal Home
Loan Mortgage Corporation (FHLMC), the Federal National
Mortgage Association (FNMA), and the Federal Housing
Authority (FHA). GNMA securities are guaranteed by the
U.S. Government as to the timely payment of principal and
interest; securities from other Government-sponsored
entities are generally not secured by an explicit pledge
of the U.S. Government. The Portfolio may also invest in
conventional mortgage securities, which are packaged by
private corporations and are not guaranteed by the U.S.
Government. Mortgage securities that are guaranteed by the
U.S. Government are guaranteed only as to the timely
payment of
14
<PAGE> 53
principal and interest. The market value of such
securities is not guaranteed and may fluctuate.
EACH PORTFOLIO MAY
INVEST IN SHORT-TERM
MONEY MARKET
INSTRUMENTS Although they normally seek to remain substantially fully
invested in securities in the respective indexes, each
Portfolio may invest temporarily in certain short-term
money market instruments. Such securities may be used to
invest uncommitted cash balances or to maintain liquidity
to meet shareholder redemptions. These securities include:
obligations of the United States Government and its
agencies or instrumentalities; commercial paper, bank
certificates of deposit, and bankers' acceptances; and
repurchase agreements collateralized by these securities.
THE PORTFOLIOS MAY
USE FUTURES CONTRACTS
AND OPTIONS The Portfolios may utilize bond (interest rate) futures
contracts and options to a limited extent. Specifically,
the Portfolios may enter into futures contracts provided
that not more than 5% of their assets are required as a
futures contract deposit. In addition, the Portfolios may
enter into futures contracts and options transactions only
to the extent that obligations under such contracts or
transactions represent not more than 20% of a Portfolio's
assets. Futures contracts and options may be used for
several reasons: to maintain cash reserves while
simulating full investment, to facilitate trading or to
reduce transaction costs. While futures contracts and
options can be used as leveraged investments, a Portfolio
may not use futures contracts or options transactions to
leverage its net assets.
FUTURES CONTRACTS AND
OPTIONS POSE CERTAIN
RISKS The primary risks associated with the use of futures
contracts and options are: (i) imperfect correlation
between the change in market value of the bonds held by
the Portfolio and the prices of futures contracts and
options; and (ii) possible lack of a liquid secondary
market for a futures contract and the resulting inability
to close a futures position prior to its maturity date.
The risk of imperfect correlation will be minimized by
investing only in those contracts whose behavior is
expected to resemble that of the Portfolios underlying
securities. The risk that a Portfolio will be unable to
close out a futures position will be minimized by entering
into such transactions on a national exchange with an
active and liquid secondary market.
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of
leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may
result in immediate and substantial loss (or gain) to the
investor. When investing in futures contracts, a Portfolio
will segregate cash or cash equivalents in the amount of
the underlying obligation.
EACH PORTFOLIO MAY
LEND ITS SECURITIES Each Portfolio may lend its investment securities to
qualified institutional investors for either short-term or
long-term purposes of realizing additional income. Loans
of securities by a Portfolio will be collateralized by
cash, letters of credit, or securities issued or
guaranteed by the U.S. Government or its agencies. The
collateral will equal at least 100% of the current market
value of the loaned securities.
PORTFOLIO TURNOVER
IS NOT EXPECTED TO
EXCEED 50% Although it generally seeks to invest for the long term,
each Portfolio retains the right to sell securities
irrespective of how long they have been held. It is
anticipated that the annual portfolio turnover of each
Portfolio will not exceed 50%. A turnover
15
<PAGE> 54
rate of 50% would occur, for example, if one half of the
securities of a Portfolio were replaced within one year. A
portfolio turnover rate of 100% may be considered high for
a bond index fund and would result in additional expenses.
--------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS
EACH PORTFOLIO HAS
ADOPTED CERTAIN
FUNDAMENTAL
LIMITATIONS Each Portfolio has adopted certain limitations on its
investment practices. Specifically, a Portfolio will not:
(a) invest more than 5% of its assets in the securities of
any single issuer except obligations of the United
States Government;
(b) purchase more than 5% of the voting securities of any
issuer;
(c) borrow money except from banks for temporary or
emergency purposes, and then only in an amount not in
excess of 15% of its total assets;
(d) pledge, mortgage or hypothecate its assets to an
extent greater than 5% of the value of its total
assets; and
(e) invest more than 25% of its assets in any one
industry.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information may be changed only with the approval of a
majority of a Portfolio's shareholders.
--------------------------------------------------------------------------------
MANAGEMENT
OF THE FUND
VANGUARD ADMINISTERS
AND DISTRIBUTES THE
FUND The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies
with more than 80 distinct portfolios and total assets in
excess of $160 billion. Through their jointly-owned
subsidiary, The Vanguard Group, Inc. ("Vanguard"), the
Fund and the other funds in the Group obtain at cost
virtually all of their corporate management,
administrative, shareholder accounting and distribution
services. Vanguard also provides investment advisory
services on an at-cost basis to certain Vanguard funds. As
a result of Vanguard's unique corporate structure, the
Vanguard funds have costs substantially lower than those
of most competing mutual funds. In 1994, the average
expense ratio (annual costs including advisory fees
divided by total net assets) for the Vanguard funds
amounted to approximately .30% compared to an average of
1.05% for the mutual fund industry (data provided by
Lipper Analytical Services).
The Officers of the Fund manage its day-to-day operations
and are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. A list of the Directors and Officers of the Fund
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each
fund pays its share of Vanguard's net expenses, which are
allocated among the funds under methods approved by the
Board of Directors (Trustees) of each fund. In addition,
each fund bears its own direct expenses, such as legal,
auditing and custodian fees.
16
<PAGE> 55
Vanguard also provides distribution and marketing services
to the Vanguard funds. The funds are available on a
no-load basis (i.e., there are no sales commissions or
12b-1 fees). However, each fund bears its share of the
Group's distribution costs.
--------------------------------------------------------------------------------
INVESTMENT
ADVISER
VANGUARD MANAGES
THE FUND'S
INVESTMENTS Each Portfolio receives all investment advisory services
from Vanguard's Fixed Income Group. The Fixed Income Group
provides investment advisory services to more than 40
Vanguard money market and bond portfolios, both taxable
and tax-exempt. Total assets under management by
Vanguard's Fixed Income Group were $55 billion as of
December 31, 1994. The Portfolios are not actively
managed, but are instead administered by the Fixed Income
Group using computerized, quantitative techniques. The
Fixed Income Group is supervised by the Officers of the
Fund. Ian A. MacKinnon, Senior Vice President of Vanguard,
has been in charge of the Group since its inception in
1981.
Mr. MacKinnon is responsible for setting the broad
investment strategies employed by the Fund, and for
overseeing the portfolio manager who implements these
strategies on a day-to-day basis.
The Fund's portfolio manager is Kenneth E. Volpert, Vice
President of Vanguard, who serves as portfolio manager of
the Vanguard Variable Insurance Fund -- High-Grade Bond
Portfolio and the bond portion of the Vanguard Balanced
Index Fund. Mr. Volpert began managing the Vanguard Bond
Index Fund in December, 1992. For six years prior to
joining Vanguard, Mr. Volpert was associated with Mellon
Bond Associates.
The Fixed Income Group places all orders for purchases and
sales of portfolio securities. Purchases of portfolio
securities are made either directly from the issuer or
from securities dealers. The Fixed Income Group may sell
portfolio securities prior to their maturity if
circumstances and considerations warrant and if it
believes such dispositions advisable. The Group seeks to
obtain the best available net price and most favorable
execution for all portfolio transactions.
--------------------------------------------------------------------------------
PERFORMANCE
RECORD The table in this section provides investment results for
the Total Bond Market Portfolio for several periods
throughout its lifetime. The results shown represent
"total return" investment performance, which assumes the
reinvestment of all capital gains and income dividends for
the indicated periods. Also included is comparative
information with respect to the unmanaged Aggregate Bond
Index described on page 8, and the Consumer Price Index, a
statistical measure of changes in the prices of goods and
services. The table does not make any allowance for
federal, state or local income taxes, which shareholders
must pay on a current basis. The other three Portfolios of
the Fund did not commence operations until January 18,
1994.
The results shown should not be considered a
representation of the total return from an investment made
in the Portfolio today. This information is provided to
help investors better understand the Portfolio and may not
provide a basis for compari-
17
<PAGE> 56
son with other investments or mutual funds which use a
different method to calculate performance.
AVERAGE ANNUAL RETURN
------------------------------------------------
<TABLE>
<CAPTION>
FISCAL PERIODS TOTAL BOND AGGREGATE CONSUMER
ENDED 12/31/94 MARKET PORTFOLIO BOND INDEX PRICE INDEX
-------------- ---------------- ---------- -----------
<S> <C> <C> <C>
1 Year -2.7% -2.9% +2.7%
3 Years +4.6 +4.6 +2.8
5 Years +7.5 +7.7 +3.5
Lifetime* +7.3 N/A N/A
* December 11, 1986 to December 31, 1994.
</TABLE>
--------------------------------------------------------------------------------
DIVIDENDS,
CAPITAL GAINS
AND TAXES
EACH PORTFOLIO PAYS
MONTHLY DIVIDENDS Dividends consisting of virtually all of the ordinary
income of each Portfolio are declared daily and are
payable to shareholders of record at the time of
declaration. Such dividends are paid on the first business
day of each month. Capital gains distributions, if any,
are made annually. Each Portfolio's dividend and capital
gains distributions are automatically reinvested in
additional shares. The Fund intends to continue to qualify
as a "regulated investment company" under the Internal
Revenue Code so that it will not be subject to federal
income tax to the extent that its income is distributed to
its shareholders.
If you utilize the Fund's Portfolios as an investment
option in an employer-sponsored retirement savings plan,
dividend and capital gains distributions from the
Portfolios will generally not be subject to current
taxation, but will accumulate on a tax-deferred basis. In
general, employer-sponsored retirement and savings plans
are governed by a complex set of tax rules. If you
participate in such a plan, consult your plan
administrator, your plan's Summary Plan Description, or a
professional tax adviser regarding the tax consequences of
your participation in the plan and of any plan
contributions or withdrawals.
--------------------------------------------------------------------------------
THE SHARE PRICE OF
EACH PORTFOLIO A Portfolio's share price or "net asset value" per share
is determined by dividing the total market value of its
investments and other assets, less any liabilities, by the
total number of outstanding shares of the Portfolio. The
net asset value per share is calculated as of the close of
regular trading on the New York Stock Exchange (generally
4:00 p.m. Eastern time) on each day that the Exchange is
open for business. A Portfolio's net asset value includes
interest on fixed-income securities, which is accrued
daily.
Portfolio securities that are listed on a securities
exchange are valued at the latest quoted sale prices on
the day the valuation is made. Price information on listed
securities is taken from the exchange where the security
is primarily traded. Listed securities that are not traded
on the valuation date and for which market quotations are
available are valued at the mean between the bid and asked
prices. Unlisted securities for which market quotations
are readily available are valued at the latest quoted bid
price.
18
<PAGE> 57
However, bonds and other fixed-income securities may be
valued on the basis of prices provided by a pricing
service when such prices are believed to reflect the fair
market value of such securities. The prices provided by a
pricing service may be determined without regard to bid or
last sale prices of each security but take into account
institutional size transactions in similar groups of
securities as well as any developments related to specific
securities. Other securities, including restricted
securities for which no quotations are readily available,
are valued at fair value as determined in good faith by
the Board of Directors.
Each Portfolio's share price can be found daily in the
mutual fund listings of most major newspapers under the
heading of The Vanguard Group.
--------------------------------------------------------------------------------
GENERAL
INFORMATION The Fund is a Maryland corporation. The Articles of
Incorporation permit the Directors to issue 1,000,000,000
shares of common stock, with a $.001 par value. The Board
of Directors has the power to designate one or more
Portfolios and classes of shares of common stock of such
Portfolios and to classify or reclassify any unissued
shares with respect to such Portfolios and classes.
Currently the Fund is offering shares of four series. The
Total Bond Market Portfolio offers two separate classes of
shares; the Total Bond Market Portfolio which is open to
investors with a minimum investment of $3,000, and the
Total Bond Market Portfolio Institutional Shares which are
designed for investors who meet certain administrative
criteria and a minimum initial investment of $10 million.
The shares of each Portfolio are fully paid and
non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and
have no pre-emptive rights. Such shares have
non-cumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors if they so
choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Director or Directors of the Fund if
requested in writing by the holders of not less than 10%
of the outstanding shares of the Fund.
All securities and cash for the Total Bond Market
Portfolio are held by Morgan Guaranty Trust Company, New
York, NY. All securities and cash for the Short-Term Bond,
Intermediate-Term Bond and Long-Term Bond Portfolios are
held by State Street Bank and Trust Company, Boston, MA.
The Vanguard Group, Inc., Valley Forge, PA, serves as the
Fund's Transfer and Dividend Disbursing Agent. Price
Waterhouse LLP, serves as independent accountants for the
Fund and will audit its financial statements annually. The
Fund is not involved in any litigation.
--------------------------------------------------------------------------------
19
<PAGE> 58
SERVICE GUIDE
PARTICIPATING IN
YOUR PLAN The Portfolios are available as an investment option in
your retirement or savings plan. The administrator of your
plan or your employee benefits office can provide you with
detailed information on how to participate in your plan
and how to elect the Fund as an investment option.
If you have any questions about the Fund, including the
Portfolio's investment objective, policies, risk
characteristics or historical performance, please contact
Participant Services (1-800-523-1188).
If you have questions about your account, contact your
plan administrator or the organization which provides
recordkeeping services for your plan.
--------------------------------------------------------------------------------
INVESTMENT OPTIONS
AND ALLOCATIONS You may be permitted to elect different investment
options, alter the amounts contributed to your plan, or
change how contributions are allocated among your
investment options in accordance with your plan's specific
provisions. See your plan administrator or employee
benefits office for more details.
--------------------------------------------------------------------------------
TRANSACTIONS IN
FUND SHARES Purchases, exchanges or redemptions of a Portfolio's
shares are effective when received in "good order" by
Vanguard. "Good order" means that complete information on
the purchase, exchange or redemption and the appropriate
monies have been received by Vanguard.
--------------------------------------------------------------------------------
MAKING EXCHANGES Your plan may allow you to exchange monies from one
investment option to another. Check with your plan
administrator for details on the rules governing exchanges
in your plan. Certain investment options, particularly
company stock or guaranteed investment contracts (GICs),
may be subject to unique restrictions.
Before making an exchange, you should consider the
following:
- If you are making an exchange to another Vanguard Fund
option, please read the Fund's prospectus. Contact
Participant Services (1-800-523-1188) for a copy.
- Exchanges are accepted by Vanguard only as permitted by
your plan. Your plan administrator can explain how
frequently exchanges are allowed.
--------------------------------------------------------------------------------
20
<PAGE> 59
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<PAGE> 60
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[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 62
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
[VANGUARD BOND INDEX FUND LOGO]
--------------------------- [VANGUARD BOND INDEX FUND LOGO]
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center I N S T I T U T I O N A L
P.O. Box 2900 P R O S P E C T U S
Valley Forge, PA 19482 SEPTEMBER 18, 1995
INSTITUTIONAL PARTICIPANT
SERVICES DEPARTMENT:
1-800-523-1188
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
[VANGUARD GROUP LOGO]
</TABLE>
I084
--------------------------------------------------------------------------------
<PAGE> 63
[VANGUARD BOND INDEX FUND -- TOTAL BOND MARKET PORTFOLIO LOGO]
P R O S P E C T U S
SEPTEMBER 18, 1995
[VANGUARD GROUP LOGO]
<PAGE> 64
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
[VANGUARD BOND INDEX FUND - TOTAL BOND MARKET PORTFOLIO LOGO]
A Member of The Vanguard Group
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PROSPECTUS -- SEPTEMBER 18, 1995
--------------------------------------------------------------------------------
FUND INFORMATION: PARTICIPANT SERVICES -- 1-800-523-1188
--------------------------------------------------------------------------------
INVESTMENT
OBJECTIVE
AND POLICIES The Total Bond Market Portfolio of Vanguard Bond Index
Fund, Inc. (the "Portfolio"), is an open-end, diversified
investment company designed as an "index fund." The
objective of the Portfolio is to duplicate the total
return (income plus capital change) of publicly-traded
investment grade fixed-income securities in the aggregate
by attempting to duplicate the investment performance of a
certain investment grade bond index. The Portfolio invests
in a diversified portfolio of U.S. Government and
corporate bonds and mortgage-backed securities. There is
no assurance that the Portfolio will achieve its stated
objective. Shares of the Portfolio are neither insured nor
guaranteed by any agency of the U.S. Government, including
the FDIC.
--------------------------------------------------------------------------------
INVESTMENT
ALTERNATIVES The Total Bond Market Portfolio of Vanguard Bond Index
Fund, Inc. offers two separate classes of shares to
investors. The "Total Bond Market Portfolio Institutional
Shares" are designed primarily for investors who meet
certain administrative requirements and a minimum initial
investment of $10 million. Only the Institutional class of
shares are offered through this prospectus. The second
class of shares, "Total Bond Market Portfolio" are
available to all institutional and individual investors
and are offered through a separate prospectus. To obtain
information on the "Total Bond Market Portfolio" class of
shares, please call 1-800-662-7447 (SHIP), Monday through
Friday, from 8:00 a.m. to 9:00 p.m. and Saturday from 9
a.m. to 4:00 p.m. (Eastern time).
--------------------------------------------------------------------------------
OPENING AN
ACCOUNT Shares of the Portfolio may be purchased by Federal Funds
wire. The minimum initial investment is $10 million.
--------------------------------------------------------------------------------
ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Fund before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing
additional information about the Fund has been filed with
the Securities and Exchange Commission. This Statement is
dated September 18, 1995 and has been incorporated by
reference into this Prospectus. A copy may be obtained
without charge by writing to the Fund or by calling the
Investor Information Department.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page Page
<S> <C> <C>
Portfolio Expenses ................ 2 Who Should Invest ................. 7 Dividends, Capital Gains and Taxes .... 12
Yield and Total Return ............ 3 Implementation of Policies ........ 8 The Share Price of The Portfolio ...... 13
Investment Limitations ............ 10 General Information ................... 13
FUND INFORMATION Management of the Fund ............ 10 Shareholder Guide ..................... 15
Investment Objective .............. 3 Investment Adviser ................ 11
Investment Policies ............... 4
Investment Risks .................. 5
</TABLE>
--------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 65
PORTFOLIO
EXPENSES The following table illustrates ALL expenses and fees that
you would incur as a shareholder of the Portfolio's
"Institutional Shares." The expenses and fees set forth in
the table for the "Institutional Shares" are estimates for
its first full year of operation.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
--------------------------------------------------------------------------------
Sales Load Imposed on Purchases*......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Redemption Fees**........................................................ None
Exchange Fees............................................................ None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
<S> <C>
--------------------------------------------------------------------------------
Management & Administrative Expenses................................. 0.05%
Investment Advisory Fees............................................. 0.01
12b-1 Fees........................................................... None
Other Expenses
Distribution Costs............................................... 0.02
Miscellaneous Expenses........................................... 0.02
----
Total Other Expenses................................................. 0.04
------
TOTAL OPERATING EXPENSES.................................... 0.10%
------
------
</TABLE>
* The Portfolio reserves the right to deduct a portfolio
transaction fee of 0.18% payable directly to the
Portfolio, from purchases of a size that is reasonably
deemed to be disruptive to efficient portfolio
management. See text below.
** Wire redemptions of less than $5,000 are subject to a
$5 processing fee.
The purpose of this table is to assist you in
understanding the various costs and expenses that an
investor in the Portfolio would bear directly or
indirectly.
TRANSACTION FEE The Portfolio reserves the right to deduct a portfolio
transaction fee from purchases of the shares of the
Portfolio. Fees will not be charged on any investment less
than $30 million. Fees may be charged on the entire
lump-sum purchase for transactions that exceed $30 million
if such purchases are reasonably deemed to be disruptive
to efficient portfolio management. Lump-sum purchases over
$30 million may be considered disruptive, for example, if
the portfolio manager incurs significant transaction costs
in purchasing portfolio securities needed to match the
investment performance of the benchmark index. If such
purchases can be offset by redemptions of shares by other
shareholders, such fee may be waived or reduced. A
prospective investor may determine whether a fee will be
charged by calling their Institutional Investor Service
Representative in advance of their purchase. The fee, if
imposed, will be 0.18% of the purchase. The fee is based
on the portfolio manager's estimate of transaction costs,
which depends on the types of securities in which the
Portfolio invests.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2) redemption
at the end of each period. As noted in the table above,
the Portfolio charges no redemption fees of any kind.
2
<PAGE> 66
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------ --------
<S> <C> <C> <C> <C>
Total Bond Market Portfolio.............. $1 $ 3 $ 6 $ 14
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
--------------------------------------------------------------------------------
YIELD AND
TOTAL RETURN From time to time the Portfolio may advertise its yield
and total return. Both yield and total return figures are
based on historical earnings and are not intended to
indicate future performance. The "total return" of a
Portfolio refers to the average annual compounded rates of
return over one-, five- and ten-year periods or for the
life of the Portfolio (as stated in the advertisement)
that would equate an initial amount invested at the
beginning of a stated period to the ending redeemable
value of the investment, assuming the reinvestment of all
dividend and capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of a Portfolio is calculated by dividing the net
investment income per share earned during a 30-day period
by the net asset value per share on the last day of the
period. Net investment income includes interest and
dividend income earned on the Portfolio's securities; it
is net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder
accounts. The yield calculation assumes that the net
investment income earned over 30 days is compounded
monthly for six months and then annualized. Methods used
to calculate advertised yields are standardized for all
stock and bond mutual funds. However, these methods differ
from the accounting methods used by the Portfolio to
maintain its books and records, and so the advertised
30-day yield may not fully reflect the income paid to your
own account.
--------------------------------------------------------------------------------
INVESTMENT
OBJECTIVE The Institutional Shares are designed primarily for
institutional investors. The Total Bond Market Portfolio
is a no-load, open-end diversified investment company
designed as an "index" fund. The Portfolio invests in
fixed-income securities with prescribed maturity and
credit quality standards in order to match the investment
performance of the Lehman Brothers Aggregate Bond Index.
The Index is a broad market weighted index which
encompasses U.S. Treasury and agency securities, corporate
investment grade bonds, international (dollar-denominated)
investment grade bonds, and mortgage-backed securities.
There is no assurance that the Portfolio will achieve its
stated objective.
The investment objective of the Portfolio is fundamental
and so cannot be changed without the approval of a
majority of a Portfolio's shareholders.
--------------------------------------------------------------------------------
3
<PAGE> 67
INVESTMENT
POLICIES
THE PORTFOLIO USES A
"PASSIVE" APPROACH
TO INVEST IN FIXED-
INCOME SECURITIES The Portfolio is not managed according to traditional
methods of "active" investment management, which involve
the buying and selling of securities based upon economic,
financial, and market analyses and investment judgment.
Instead, the Portfolio, utilizing a "passive" or
"indexing" investment approach, will attempt to duplicate
the investment performance of its respective index through
statistical sampling procedures. The Portfolio will invest
in a group of fixed-income securities selected from its
respective index which, when taken together, are expected
to perform similarly to the index as a whole. This
sampling technique is expected to enable the Portfolio to
track the dividend income and price movements of its
respective index, while minimizing brokerage, custodial
and accounting costs. The Portfolio is managed without
regard to tax ramifications.
The TOTAL BOND MARKET PORTFOLIO will invest in a portfolio
of fixed-income securities selected to match the Lehman
Brothers Aggregate Bond Index (the "Aggregate Bond
Index"). The Aggregate Bond Index is a broad market
weighted index which encompasses four major classes of
investment grade fixed-income securities in the United
States: U.S. Treasury and agency securities, corporate
bonds, international (dollar-denominated) bonds, and
mortgage-backed securities, with maturities greater than
one year.
The Portfolio will invest 80% or more of its assets in
securities included in its respective index. As of
December 31, 1994, the major classes of fixed-income
securities represented the following proportions of the
respective indexes total market value:
<TABLE>
<CAPTION>
AGGREGATE
BOND INDEX
----------
<S> <C>
U.S. Treasury and agency securities 54%
Corporate bonds 14%
International (dollar-denominated) bonds 3%
Mortgage-backed securities 29%
Dollar-weighted average maturity (Years) 8.8 yrs
</TABLE>
The Portfolio may, from time to time, substitute one type
of investment grade bond for another. For instance, a
Portfolio may hold more short-term corporate bonds (fewer
short U.S. Treasury bonds) than represented in the Index
so as to increase income. This corporate substitution
strategy will entail the assumption of additional credit
risk; however, substantial diversification within the
corporate sector should moderate issue-specific credit
risk. In addition, current investment policy restricts
corporate substitutions to issues with less than 4 years
remaining to maturity and in aggregate no more than 15% of
net assets. Overall, credit risk is expected to be very
low.
Fixed-income securities will be primarily of investment
grade quality -- i.e., those rated at least Baa3 by
Moody's Investors Service, Inc. or BBB- by Standard &
Poor's Corporation. Securities rated Baa or BBB are
considered as medium grade obliga-
4
<PAGE> 68
tions. Interest payments and principal are regarded as
adequate for the present but certain protective elements
found in higher rated bonds may be lacking. Such bonds
lack outstanding investment characteristics and, in fact,
have speculative characteristics as well.
In its effort to duplicate the investment performance of
the Index, the Portfolio will invest in fixed-income
securities approximating its relative proportion of the
Index's total market value. For the Total Bond Market
Portfolio, these investments will include U.S. Treasury
and agency securities, mortgage-backed securities and
corporate and international (dollar-denominated) bonds.
The Portfolio may invest in U.S. Treasury bills, notes and
bonds and other "full faith and credit" obligations of the
U.S. Government. The Portfolio may also invest in U.S.
Government agency securities, which are debt obligations
issued or guaranteed by agencies or instrumentalities of
the U.S. Government. Such "agency" securities may not be
backed by the "full faith and credit" of the U.S.
Government. Such U.S. Government agencies may include the
Federal Farm Credit Banks, the Resolution Trust
Corporation and the Government National Mortgage
Association. Even though they all carry top (AAA) credit
ratings, "agency" obligations are not explicitly
guaranteed by the U.S. Government and so are perceived as
somewhat riskier than comparable Treasury bonds.
The Portfolio may also invest up to 20% of its assets in
short-term money market instruments, and may invest in
bond (interest rate) futures contracts and options to a
limited extent. Such securities will be held only to
invest uncommitted cash balances, to maintain liquidity to
meet shareholder redemptions, or to minimize trading
costs. The Portfolio will not invest in such securities as
part of a temporary defensive strategy (such as altering
the aggregate maturity of the Portfolio) to protect the
Fund against potential bond market declines. The Portfolio
intends to remain fully invested, to the extent
practicable, in a pool of securities which will duplicate
the investment characteristics of the benchmark index. See
"Implementation of Policies" for a description of other
investment practices of the Portfolio.
These investment policies are not fundamental and so may
be changed by the Board of Directors without shareholder
approval. However, shareholders would be notified prior to
any material change in either.
--------------------------------------------------------------------------------
INVESTMENT
RISKS As a mutual fund investing primarily in fixed-income
securities, the Portfolio is subject to interest rate,
income, call and credit risks. Since the Total Bond Market
Portfolio also invests in mortgage-backed securities, the
Portfolio is also subject to prepayment risk.
THE PORTFOLIO IS
SUBJECT TO INTEREST
RATE RISK INTEREST RATE RISK is the potential for fluctuations in
bond prices due to changing interest rates. As a rule,
bond prices vary inversely with interest rates. If
interest rates rise, bond prices generally decline; if
interest rates fall, bond prices generally rise. In
addition, for a given change in interest rates,
longer-maturity bonds fluctuate more in price than
shorter-maturity bonds. To compensate investors for
5
<PAGE> 69
these larger fluctuations, longer-maturity bonds usually
offer higher yields than shorter-maturity bonds, other
factors, including credit quality, being equal.
These basic principles of bond prices also apply to U.S.
Government securities. A security backed by the "full
faith and credit" of the U.S. Government is guaranteed
only as to its stated interest rate and face value at
maturity, not its current market price. Just like other
fixed-income securities, government-guaranteed securities
will fluctuate in value when interest rates change.
The TOTAL BOND MARKET PORTFOLIO maintains an
intermediate-term dollar-weighted average maturity, and is
therefore subject to a moderate to high level of interest
rate risk. As an illustration of interest rate risk, the
chart below depicts the effect of a two percentage point
change in interest rates on three bonds of varying
maturities:
PERCENTAGE CHANGE IN PRICE OF A PAR BOND YIELDING 7.5%
----------------------------------------------------------
<TABLE>
<CAPTION>
2 PERCENTAGE POINT 2 PERCENTAGE POINT
INCREASE IN DECREASE IN
STATED MATURITY INTEREST RATES INTEREST RATES
------------------------------- ------------------ ------------------
<S> <C> <C>
Short-Term (2.5 years) - 4.33% + 4.63%
Intermediate-Term (10 years) -12.71% +15.24%
Long-Term (20 years) -17.75% + 24.1%
</TABLE>
This chart is intended to provide you with guidelines for
determining the degree of interest rate risk you may be
willing to assume. The yield and price changes shown
should not be taken as representative of the Portfolio's
current or future yield or expected changes in the
Portfolio's share price.
THE PORTFOLIO IS
SUBJECT TO INCOME INCOME RISK is the potential for a decline in the
RISK Portfolio's income due to falling market interest rates.
In relative terms, income risk will be higher for the
Fund's shorter-term Portfolios and lower for the Fund's
longer-term Portfolios.
THE PORTFOLIO
IS SUBJECT TO
PREPAYMENT RISK As a mutual fund investing a portion of its assets in
mortgage-backed securities (see chart on page 4), the
Total Bond Market Portfolio is subject to prepayment risk
to a limited extent. PREPAYMENT RISK is the possibility
that, during periods of declining interest rates, the
principal invested in high-yielding mortgage-backed
securities will be repaid earlier than scheduled, and the
Portfolio will be forced to reinvest the unanticipated
payments at generally lower interest rates.
Prepayment risk has two important effects on the
Portfolio. First, when interest rates fall and principal
prepayments are reinvested at lower interest rates, the
income that the Portfolio derives from mortgage-backed
securities is reduced. Second, like other fixed-income
securities, mortgage-backed securities generally decline
in price when interest rates rise. However, because of
prepayment risk, mortgage-backed securities (and thus in
part the share price of the Portfolio and the value of the
Index) will not enjoy as large a gain in market value as
ordinary bonds when interest rates fall. In part to
compensate for prepayment risk, mortgage-backed securities
generally offer higher yields than bonds of comparable
credit quality and maturity.
6
<PAGE> 70
CREDIT RISK IS EXPECTED
TO BE LOW CREDIT RISK is the possibility that an issuer of
securities held by the Portfolio will be unable to make
payments of either interest or principal. The credit risk
of the Portfolio is a function of the credit quality of
its underlying securities.
The credit quality of the Portfolio is expected to be very
high, and thus credit risk should be low. As of December
31, 1994, the average quality, as rated by Moody's
Investors Service, Inc., was AAA for the Aggregate Bond
Index.
To a limited extent, the Portfolio is also exposed to
event risk, the possibility that corporate fixed-income
securities held by the Portfolio may suffer a substantial
decline in credit quality and market value due to a
corporate restructuring. Corporate restructurings, such as
mergers, leveraged buyouts, takeovers or similar events,
are often financed by a significant expansion of corporate
debt. As a result of the added debt burden, the credit
quality and market value of a firm's existing debt
securities may decline significantly. While event risk may
be high for certain corporate and international
(dollar-denominated) securities held by the Portfolio,
event risk for the Portfolio in the aggregate should be
low because of the Portfolio's diversified holdings and
the small percentage of the Portfolio's assets invested in
these securities.
The corporate substitution strategy will increase credit
risk somewhat, as short-term investment grade corporate
bonds are substituted for U.S. Treasury bonds and notes;
however, owing to the diversified nature of the Portfolio,
and policies limiting the maturity and maximum amount of
substitutions, the overall credit and event risk of the
Portfolio is expected to be low.
NO CURRENCY RISK
IN THE PORTFOLIO
While the Aggregate Bond Index does have limited exposure
to international bonds, there is no currency risk
associated with the investments since they are all dollar
denominated.
--------------------------------------------------------------------------------
WHO SHOULD
INVEST
INVESTORS SEEKING TO
PARTICIPATE IN THE
"BOND MARKET"
AS A WHOLE The Portfolio is designed for individual and institutional
investors seeking well-diversified, low-cost ways to
participate in the U.S. fixed-income markets. The
Portfolio will be essentially fully invested at all times.
Because the Total Bond Market Portfolio will represent all
major sectors of the investment grade fixed-income
securities market, the Portfolio is a suitable vehicle for
those investors seeking ownership in the "bond market" as
a whole, without regard to particular sectors. The
Portfolio concentrates on bonds of various maturities.
Because of the risks associated with bond investments, the
Portfolio is intended to be a long-term investment vehicle
and is not designed to provide investors with a means of
speculating on short-term bond market movements. Investors
seeking to temporarily (less than two years) gain broad
bond market exposure at a low cost can generate excessive
transaction costs resulting in a risk of poor index
tracking.
As with all longer-term, fixed-income investments, the
share price of the Total Bond Market Portfolio will vary.
Credit risk should be minimal for the Portfolio. The
investment risks are described on page 5.
The Portfolio is also suitable for those investors with
existing common stock holdings who are seeking a
complementary fixed-income investment to create a
7
<PAGE> 71
more balanced asset mix. Because of potential share price
fluctuations, the Portfolio may be inappropriate for
investors who have short-term objectives or who require
stability of principal.
--------------------------------------------------------------------------------
IMPLEMENTATION
OF POLICIES The Portfolio follows a variety of investment practices in
an effort to duplicate the total return of its benchmark
index.
THE PORTFOLIO INVESTS
IN FIXED INCOME
SECURITIES The Portfolio will invest at least 80% or more of its
assets in securities included in its benchmark Index. The
Index measures the total investment return (capital change
plus income) provided by a universe of fixed-income
securities with maturities greater than one year, weighted
by the market value outstanding of each security. The
securities included in the Index generally meet the
following criteria, as defined by Lehman Brothers: an
outstanding market value of at least $100 million; and
investment grade quality -- i.e., rated a minimum of Baa3
by Moody's Investors Service, Inc. or BBB- by Standard &
Poor's Corporation.
THE PORTFOLIO USES A
"SAMPLING" TECHNIQUE The Portfolio will be unable to hold all of the individual
issues which comprise the Index because of the large
number of securities involved. Instead, the Portfolio will
hold a representative sample of the securities in its
benchmark index, selecting one or two issues to represent
entire "classes" or types of securities in the Index. The
Portfolio will be constructed so as to match the
composition of its benchmark index as described below.
At the broadest level, the Portfolio will seek to hold
securities which reflect the weighting of the major asset
classes in its benchmark index. These classes include U.S.
Treasury and agency securities, corporate bonds, and
mortgage-backed securities. If U.S. Treasury and agency
securities represent approximately 60% of an Index's
interest rate risk, then approximately 60% of the
Portfolio's interest rate risk will come from such
securities. Similarly, if corporate bonds represent 20% of
the interest rate risk of the Index, then they will
represent approximately 20% of the interest rate risk of
the Portfolio.
Such a sampling technique is expected to be an effective
means of substantially duplicating the income and capital
returns provided by the Index. Over time, the correlation
between the performance of the Portfolio and the Index is
expected to be 0.95 or higher. A correlation of 1.00 would
indicate perfect correlation, which would be achieved when
the net asset value of the Portfolio, including the value
of its dividend and capital gain distributions, increases
or decreases in exact proportion to changes in the Index.
Because the Portfolio incurs operating expenses, as
opposed to its respective index, which does not, a perfect
correlation of 1.00 is unlikely to be achieved. The
performance of a Portfolio versus that of its respective
index is monitored daily. If a tracking error develops,
the Portfolio is rebalanced to bring it in line with the
index.
THE PORTFOLIO
MAY INVEST IN
MORTGAGE-BACKED
SECURITIES As part of its effort to duplicate the investment
performance of its Index, the Portfolio may invest in
mortgage-backed securities. Mortgage-backed securities
represent an interest in an underlying pool of mortgages.
Unlike ordinary fixed-income securities, which generally
pay a fixed rate of interest and return principal
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<PAGE> 72
upon maturity, mortgage-backed securities repay both
interest income and principal as part of their periodic
payments. Because the mortgages underlying mortgage-backed
certificates can be prepaid at any time by homeowners or
corporate borrowers, mortgage-backed securities give rise
to certain unique "prepayment" risks. See "Investment
Risks."
The Total Bond Market Portfolio may purchase
mortgage-backed securities issued by the Government
National Mortgage Association (GNMA), the Federal Home
Loan Mortgage Corporation (FHLMC), the Federal National
Mortgage Association (FNMA), and the Federal Housing
Authority (FHA). GNMA securities are guaranteed by the
U.S. Government as to the timely payment of principal and
interest; securities from other Government-sponsored
entities are generally not secured by an explicit pledge
of the U.S. Government. The Portfolio may also invest in
conventional mortgage securities, which are packaged by
private corporations and are not guaranteed by the U.S.
Government. Mortgage securities that are guaranteed by the
U.S. Government are guaranteed only as to the timely
payment of principal and interest. The market value of
such securities is not guaranteed and may fluctuate.
THE PORTFOLIO MAY
INVEST IN SHORT-TERM
MONEY MARKET
INSTRUMENTS Although the Portfolio normally seeks to remain
substantially fully invested in securities in the Index,
the Portfolio may invest temporarily in certain short-term
money market instruments. Such securities may be used to
invest uncommitted cash balances or to maintain liquidity
to meet shareholder redemptions. These securities include:
obligations of the United States Government and its
agencies or instrumentalities; commercial paper, bank
certificates of deposit, and bankers' acceptances; and
repurchase agreements collateralized by these securities.
THE PORTFOLIO MAY
USE FUTURES CONTRACTS
AND OPTIONS The Portfolio may utilize bond (interest rate) futures
contracts and options to a limited extent. Specifically,
the Portfolio may enter into futures contracts provided
that not more than 5% of its assets are required as a
futures contract deposit. In addition, the Portfolio may
enter into futures contracts and options transactions only
to the extent that obligations under such contracts or
transactions represent not more than 20% of the
Portfolio's assets. Futures contracts and options may be
used for several reasons: to maintain cash reserves while
simulating full investment, to facilitate trading or to
reduce transaction costs. While futures contracts and
options can be used as leveraged investments, the
Portfolio may not use futures contracts or options
transactions to leverage its net assets.
FUTURES CONTRACTS AND
OPTIONS POSE CERTAIN
RISKS The primary risks associated with the use of futures
contracts and options are: (i) imperfect correlation
between the change in market value of the bonds held by
the Portfolio and the prices of futures contracts and
options; and (ii) possible lack of a liquid secondary
market for a futures contract and the resulting inability
to close a futures position prior to its maturity date.
The risk of imperfect correlation will be minimized by
investing only in those contracts whose behavior is
expected to resemble that of the Portfolios underlying
securities. The risk that the Portfolio will be unable to
close out a futures position will be minimized by entering
into such transactions on a national exchange with an
active and liquid secondary market.
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<PAGE> 73
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of
leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may
result in immediate and substantial loss (or gain) to the
investor. When investing in futures contracts, the
Portfolio will segregate cash or cash equivalents in the
amount of the underlying obligation.
THE PORTFOLIO MAY
LEND ITS SECURITIES The Portfolio may lend its investment securities to
qualified institutional investors for either short-term or
long-term purposes of realizing additional income. Loans
of securities by a Portfolio will be collateralized by
cash, letters of credit, or securities issued or
guaranteed by the U.S. Government or its agencies. The
collateral will equal at least 100% of the current market
value of the loaned securities.
PORTFOLIO TURNOVER
IS NOT EXPECTED TO
EXCEED 50% Although it generally seeks to invest for the long term,
the Portfolio retains the right to sell securities
irrespective of how long they have been held. It is
anticipated that the annual portfolio turnover of the
Portfolio will not exceed 50%. A turnover rate of 50%
would occur, for example, if one half of the securities of
the Portfolio were replaced within one year. A portfolio
turnover rate of 100% may be considered high for a bond
index fund and would result in additional expenses.
--------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS
THE PORTFOLIO HAS
ADOPTED CERTAIN
FUNDAMENTAL
LIMITATIONS The Portfolio has adopted certain limitations on its
investment practices. Specifically, the Portfolio will
not:
(a) invest more than 5% of its assets in the securities of
any single issuer except obligations of the United
States Government;
(b) purchase more than 5% of the voting securities of any
issuer;
(c) borrow money except from banks for temporary or
emergency (not leveraging) purposes, including the
meeting of redemption requests which might otherwise
require the untimely disposition of securities, in an
amount not in excess of 15% of the value of the
Portfolio's net assets (including the amount borrowed
and the value of any outstanding reverse repurchase
agreements) at the time the borrowing is made.
Whenever borrowings exceed 5% of the value of the
Portfolio's net assets, the Portfolio will not make
any additional investments;
(d) pledge, mortgage or hypothecate its assets to an
extent greater than 5% of the value of its total
assets; and
(e) invest more than 25% of its assets in any one
industry.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information may be changed only with the approval of a
majority of the Portfolio's shareholders.
--------------------------------------------------------------------------------
MANAGEMENT
OF THE PORTFOLIO
VANGUARD ADMINISTERS
AND DISTRIBUTES THE
PORTFOLIO The Portfolio is a member of The Vanguard Group of
Investment Companies, a family of more than 30 investment
companies with more than 80 distinct portfolios and total
assets in excess of $160 billion. Through their
jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and the other funds in the Group
obtain at cost virtually all of their corporate
management, administrative, shareholder accounting and
distribution services. Vanguard also provides investment
10
<PAGE> 74
advisory services on an at-cost basis to certain Vanguard
funds. As a result of Vanguard's unique corporate
structure, the Vanguard funds have costs substantially
lower than those of most competing mutual funds. In 1994,
the average expense ratio (annual costs including advisory
fees divided by total net assets) for the Vanguard funds
amounted to approximately .30% compared to an average of
1.05% for the mutual fund industry (data provided by
Lipper Analytical Services).
The Officers of the Fund manage its day-to-day operations
and are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. A list of the Directors and Officers of the Fund
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each
fund pays its share of Vanguard's net expenses, which are
allocated among the funds under methods approved by the
Board of Directors (Trustees) of each fund. In addition,
each fund bears its own direct expenses, such as legal,
auditing and custodian fees.
Vanguard also provides distribution and marketing services
to the Vanguard funds. The funds are available on a
no-load basis (i.e., there are no sales commissions or
12b-1 fees). However, each fund bears its share of the
Group's distribution costs.
--------------------------------------------------------------------------------
INVESTMENT
ADVISER
VANGUARD MANAGES
THE FUND'S
INVESTMENTS The Portfolio receives all investment advisory services
from Vanguard's Fixed Income Group. The Fixed Income Group
provides investment advisory services to more than 40
Vanguard money market and bond portfolios, both taxable
and tax-exempt. Total assets under management by
Vanguard's Fixed Income Group were $55 billion as of
December 31, 1994. The Portfolio is not actively managed,
but is instead administered by the Fixed Income Group
using computerized, quantitative techniques. The Fixed
Income Group is supervised by the Officers of the Fund.
Ian A. MacKinnon, Senior Vice President of Vanguard, has
been in charge of the Group since its inception in 1981.
Mr. MacKinnon is responsible for setting the broad
investment strategies employed by the Fund, and for
overseeing the portfolio manager who implements these
strategies on a day-to-day basis.
The Fund's portfolio manager is Kenneth E. Volpert, Vice
President of Vanguard, who serves as portfolio manager of
the Vanguard Variable Insurance Fund -- High-Grade Bond
Portfolio and the bond portion of the Vanguard Balanced
Index Fund. Mr. Volpert began managing the Vanguard Bond
Index Fund in December, 1992. For six years prior to
joining Vanguard, Mr. Volpert was associated with Mellon
Bond Associates.
The Fixed Income Group places all orders for purchases and
sales of portfolio securities. Purchases of portfolio
securities are made either directly from the issuer or
from securities dealers. The Fixed Income Group may sell
portfolio securities prior to their maturity if
circumstances and considerations warrant and if it
believes
11
<PAGE> 75
such dispositions advisable. The Group seeks to obtain the
best available net price and most favorable execution for
all portfolio transactions.
--------------------------------------------------------------------------------
DIVIDENDS,
CAPITAL GAINS
AND TAXES
THE PORTFOLIO PAYS
MONTHLY DIVIDENDS Dividends consisting of virtually all of the ordinary
income of the Portfolio are declared daily and are payable
to shareholders of record at the time of declaration. Such
dividends are paid on the first business day of each
month. Capital gains distributions, if any, are made
annually.
The Portfolio's dividend and capital gains distributions
may be reinvested in additional shares or received in
cash. See "Choosing a Distribution Option" for a
description of these distribution methods. Shareholders
who choose to reinvest their dividend distributions will
receive a quarterly (not monthly) confirmation statement.
Pursuant to the Internal Revenue Code, certain dividend
and capital gains distributions declared by the Portfolio
during December, if received by shareholders by January
31, are deemed to have been paid by the Portfolio and
received by shareholders on December 31 of the prior year.
The Portfolio intends to continue to qualify for taxation
as a "regulated investment company" under the Internal
Revenue Code so that it will not be subject to federal
income tax to the extent its income is distributed to
shareholders. Dividends paid by the Portfolio from net
investment income and net short-term capital gains,
whether received in cash or reinvested in additional
shares, will be taxable to shareholders as ordinary
income. For corporate investors, dividends paid by the
Portfolio from net investment income will generally not
qualify for the intercorporate dividends-received
deduction.
Distributions paid by the Portfolio from long-term capital
gains, whether received in cash or reinvested in
additional shares, are taxable as long-term capital gains,
regardless of the length of time you have owned shares in
the Portfolio. Capital gains distributions are made when
the Portfolio realizes net capital gains on sales of
portfolio securities during the year. Realized capital
gains are not expected to be a significant or predictable
part of investment return of the Portfolio.
The Portfolio will notify you annually as to the tax
status of dividend and capital gains distributions paid by
the Portfolio.
A CAPITAL GAIN OR
LOSS MAY BE REALIZED
UPON EXCHANGE
OR REDEMPTION A sale of shares of the Portfolio is a taxable event and
may result in a capital gain or loss. A capital gain or
loss may be realized from an ordinary redemption of
shares, a checkwriting redemption, or an exchange of
shares between two mutual funds (or two portfolios of a
mutual fund).
Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges may
be subject to state and local taxes.
The Portfolio is required to withhold 31% of taxable
dividends, capital gains distributions, and redemptions
paid to shareholders who have not complied with IRS
taxpayer identification regulations. You may avoid this
withholding requirement by certifying on your Account
Registration Form your Social Security or Taxpayer
Identification Number and by certifying that you are not
subject to backup withholding.
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<PAGE> 76
The Portfolio has obtained a Certificate of Authority to
do business as a foreign corporation in Pennsylvania and
does business and maintains an office in that state. In
the opinion of counsel, the shares of the Portfolio are
exempt from Pennsylvania personal property taxes.
The tax discussion set forth above is included for general
information only. Prospective investors should consult
their own tax advisers concerning the tax consequences of
an investment in the Portfolio.
--------------------------------------------------------------------------------
THE SHARE PRICE OF
THE PORTFOLIO The Total Bond Market Portfolio's share price or "net
asset value" per share is determined by dividing the total
market value of its investments and other assets, less any
liabilities, by the total number of outstanding shares of
the Portfolio. The net asset value per share is calculated
as of the close of regular trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on each day
that the Exchange is open for business. The Portfolio's
net asset value includes interest on fixed-income
securities, which is accrued daily.
Portfolio securities that are listed on a securities
exchange are valued at the latest quoted sale prices on
the day the valuation is made. Price information on listed
securities is taken from the exchange where the security
is primarily traded. Listed securities that are not traded
on the valuation date and for which market quotations are
available are valued at the mean between the bid and asked
prices. Unlisted securities for which market quotations
are readily available are valued at the latest quoted bid
price.
However, bonds and other fixed-income securities may be
valued on the basis of prices provided by a pricing
service when such prices are believed to reflect the fair
market value of such securities. The prices provided by a
pricing service may be determined without regard to bid or
last sale prices of each security but take into account
institutional size transactions in similar groups of
securities as well as any developments related to specific
securities. Other securities, including restricted
securities for which no quotations are readily available,
are valued at fair value as determined in good faith by
the Board of Directors.
The Portfolio's share price can be found daily in the
mutual fund listings of most major newspapers under the
heading of The Vanguard Group.
--------------------------------------------------------------------------------
GENERAL
INFORMATION The Total Bond Market Portfolio Institutional Shares is a
class of shares offered by the Vanguard Bond Index Fund,
Inc., a Maryland Corporation. The Articles of
Incorporation permit the Directors to issue 1,000,000,000
shares of common stock, with a $.001 par value. The Board
of Directors has the power to designate one or more
Portfolios and classes of shares of common stock of such
Portfolios and to classify or reclassify any unissued
shares with respect to such Portfolios and classes.
Currently the Fund is offering shares of four series. The
Total Bond Market Portfolio offers two separate classes of
shares; the Total Bond Market Portfolio which is open to
investors with a minimum investment of $3,000, and the
Total Bond Market Portfolio Institutional Shares which are
designed for investors who
13
<PAGE> 77
meet certain administrative criteria and a minimum initial
investment of $10 million.
The shares of the Portfolio are fully paid and
non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and
have no pre-emptive rights. Such shares have
non-cumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors if they so
choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Director or Directors of the Fund if
requested in writing by the holders of not less than 10%
of the outstanding shares of the Fund.
All securities and cash for the Total Bond Market
Portfolio are held by Morgan Guaranty Trust Company, New
York, NY. The Vanguard Group, Inc., Valley Forge, PA,
serves as the Fund's Transfer and Dividend Disbursing
Agent. Price Waterhouse LLP, serves as independent
accountants for the Fund and will audit its financial
statements annually. The Fund is not involved in any
litigation.
--------------------------------------------------------------------------------
14
<PAGE> 78
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES To open a new account, complete an Account Registration
Form and mail it to:
VANGUARD FINANCIAL CENTER
VANGUARD TOTAL BOND MARKET PORTFOLIO INSTITUTIONAL
SHARES
ATTN: INSTITUTIONAL INVESTOR SERVICES
P.O. BOX 1472
VALLEY FORGE, PA 19482
For express or registered mail, send your registration
form to: Vanguard Financial Center, Vanguard Total Bond
Market Portfolio Institutional Shares, Attn: Institutional
Investor Services, 100 Vanguard Boulevard, Malvern, PA
19355.
Once the account has been opened, Vanguard will assign an
Institutional Investor Services Representative for future
account transactions.
Shares of the Portfolio may be purchased by Federal Funds
wire. The minimum initial investment for the Portfolio is
$10 million. Please contact your Institutional Investor
Services Representative or call the Vanguard Group at
1-800-523-1188 to notify the Portfolio of the intended
investment and to receive an account number. Wiring
instructions are provided below.
Because of the risks associated with bond investments, the
Portfolio is intended to be a long-term investment vehicle
and is not designed to provide investors with a means of
speculating on short-term bond market movements. Excessive
trading results in higher transaction costs paid for by
the remaining shareholders. Consequently, the Fund
reserves the right to assess a transaction fee (payable to
the Portfolio) or to reject any specific purchase (and
exchange purchase) request. Shareholders subject to any
transaction fee will be notified by the Fund. The Fund
also reserves the right to suspend the offering of shares
for a period of time.
The Portfolio's shares are purchased at the
next-determined net asset value after your investment has
been received in the form of Federal Funds. See "When Your
Account Will be Credited". The Fund is offered on a
no-load basis (i.e., there are no sales commissions or
12b-1 fees).
IMPORTANT NOTE
ON EXPENSES The Portfolio reserves the right to deduct a portfolio
transaction fee of 0.18% of the entire purchase from
purchases of the shares of the Portfolio which exceed $30
million if such purchases are reasonably deemed to be
disruptive to efficient portfolio management. The fee will
be paid to the Portfolio to offset transaction costs of
buying securities. The fee is not paid to Vanguard and is
not a sales charge. Purchasers of shares of a Portfolio
may determine whether a fee will be charged by calling
their Institutional Investor Service Representative in
advance of their purchase.
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<PAGE> 79
<TABLE>
<S> <C> <C>
ADDITIONAL Please contact your Additional investments may be made at any
INVESTMENTS Institutional Investor time by wiring monies to Vanguard. To
Services Representative ensure prompt investment, please notify
your Institutional Investor Services
Representative in advance of the wire.
-----------------------------------------------------------------------
PURCHASING BY WIRE CORESTATES BANK, N.A.
Money should be ABA 031000011
wired to: CORESTATES ACCT NO 0101 9897
ATTN VANGUARD
BEFORE WIRING VANGUARD BOND INDEX FUND
Please contact your TOTAL BOND MARKET PORTFOLIO INSTITUTIONAL SHARES
Institutional Investor ACCOUNT NUMBER
Services Representative ACCOUNT REGISTRATION
</TABLE>
To assure proper receipt, please be sure your bank
includes the name of the Portfolio, the account number
Vanguard has assigned to you and the eight digit
CoreStates number. If you are opening a new account,
please complete the Account Registration Form and mail it
to the "New Account" address above after completing your
wire arrangement. NOTE: Federal Funds wire purchase orders
will be accepted only when the Fund and Custodian Bank are
open for business.
PURCHASING BY
EXCHANGE (FROM A
VANGUARD ACCOUNT) Purchases may also be made by exchange from an existing
Vanguard Fund account. However, the Portfolio reserves the
right to refuse any exchange purchase request. Please call
your Institutional Investor Services Representative or
call Participant Services at 1-800-523-1188 for more
information.
DIVIDEND
DISTRIBUTIONS
Dividend distributions paid by the Portfolio will be
automatically reinvested in additional Portfolio shares. A
cash dividend option is also available from the Portfolio.
Please contact your Institutional Investor Services
Representative for further information.
CERTIFICATES
Share certificates will not be issued for the Portfolio.
ELECTRONIC
PROSPECTUS
DELIVERY
If you would prefer to receive a prospectus for the Fund
or any of the Vanguard Funds in an electronic format.
Please call 1-800-231-7870 for additional information. If
you elect to do so, you may also receive a paper copy of
the prospectus, by calling 1-800-523-1188.
--------------------------------------------------------------------------------
WHEN YOUR
ACCOUNT WILL
BE CREDITED The trade date is the date on which your account is
credited. It is generally the day on which the Fund
receives your investment in the form of Federal Funds
(monies credited to the Fund's Custodian Bank by a Federal
Reserve Bank). Your trade date varies according to your
method of payment for your shares.
Purchases of Fund shares by check will receive a trade
date the day the funds are received in good order by
Vanguard. Thus, if your purchase by check is received by
the close of regular trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time), your trade
date is the business day your check is received in good
16
<PAGE> 80
order. If your purchase is received after the close of the
Exchange your trade date is the business day following
receipt of your check. Vanguard will not accept third-
party checks to open an account. Please be sure your
purchase check is made payable to the Vanguard Group.
For purchases by Federal Funds wire or exchange, the Fund
is credited immediately with Federal Funds. Thus, if your
purchase by Federal Funds wire or exchange is received by
the close of the Exchange, your trade date is the day of
receipt. If your purchase is received after the close of
the Exchange, your trade date is the business day
following receipt of your wire or exchange.
Your shares are purchased at the next-determined net asset
value after your investment has been received in the form
of Federal Funds, You will begin to earn dividends on the
calendar day following the trade date. (For a Friday trade
date, you will begin earning dividends on Saturday.)
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only accept
a foreign check which has been drawn in U.S. dollars and
has been issued by a foreign bank with a U.S.
correspondent bank. The name of the U.S. correspondent
bank must be printed on the face of the foreign check.
--------------------------------------------------------------------------------
SELLING SHARES
WIRE PROCEEDS Any portion of an account may be withdrawn by contacting
your Institutional Investor Services Representative. The
redemption proceeds will be wired to the bank account
indicated on the Account Registration Form on the business
day following receipt of a request.
For a redemption of an entire account balance, accrued
dividends will not be included in the initial redemption
wire, but will be sent separately by check or wire.
Wire redemptions of less than $5,000 are subject to a $5
charge deducted from the principal in your account. There
is no charge for wire redemptions of $5,000 or more, or
for subsequent dividend wires.
For our mutual protection, wiring instructions must be on
file at Vanguard prior to executing any redemption
request. A request to change the bank account associated
with the wire redemption feature or a request to wire
funds to a bank other than that on file must be received
in writing. A signature guarantee of an authorized officer
is required if the bank registration is not identical to
the Vanguard Fund account registration.
--------------------------------------------------------------------------------
SELLING BY EXCHANGE Shares may also be sold by making an exchange to another
Vanguard Fund account. For further information, please
contact your Institutional Investor Services
Representative.
--------------------------------------------------------------------------------
OTHER REDEMPTION
INFORMATION
The Portfolio may suspend the redemption rights or
postpone payment at times when the New York Stock Exchange
is closed or under any emergency circumstances as
determined by the United States Securities and Exchange
Commission.
17
<PAGE> 81
The Portfolio reserves the right, for any account with a
balance of less than $10 million, either to redeem shares
or to transfer the account balance to the other class of
shares in the Portfolio as an identically registered
account. Shareholders will be provided with 60 days'
notice before any action is taken.
--------------------------------------------------------------------------------
EXCHANGING
SHARES Shares of the Portfolio may be exchanged for those of
other available Vanguard Portfolios or classes of
Portfolios either by telephone or mail. Contact your
Institutional Investor Services Representative for further
information. Telephone exchange requests must ordinarily
be received by the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) in order to be
processed on the date of receipt. The new Fund account
will bear the identical registration of the Vanguard Total
Bond Market Portfolio Institutional Shares account.
Telephone exchanges are not permitted for several Vanguard
Funds, and there also may be restrictions on new
investments in certain Funds. Large exchange requests
(i.e., those over $250,000) require prior approval by
Vanguard on behalf of the Fund. Contact your Institutional
Investor Services Representative for full information,
including a prospectus.
Neither the Portfolio nor Vanguard is responsible for the
authenticity of exchange instructions received by
telephone. Every effort will be made to maintain the
exchange privilege. However, the Portfolio reserves the
right to revise or terminate its provisions, limit the
amount of or reject any exchange, as deemed necessary, at
any time.
--------------------------------------------------------------------------------
TAX CAUTION
INVESTORS SHOULD ASK
ABOUT THE TIMING OF
CAPITAL GAINS AND
DIVIDEND DISTRIBUTIONS
BEFORE INVESTING
Under Federal tax laws, the Fund is required to distribute
net capital gains and dividend income to Fund
shareholders. These distributions are made to all
shareholders who own Fund shares as of the distribution's
record date, regardless of how long the shares have been
owned. Purchasing shares just prior to the record date
could have a significant impact on your tax liability for
the year. For example, if you purchase shares immediately
prior to the record date of a sizable capital gain
distribution, you will be assessed taxes on the amount of
the capital gain distribution later paid even though you
owned the Fund shares for just a short period of time.
(Taxes are due on the distributions even if the dividend
or gain is reinvested in additional Fund shares.) While
the total value of your investment will be the same after
the capital gain distribution -- the amount of the capital
gain distribution will offset the drop in the net asset
value of the shares -- you should be aware of the tax
implications the timing of your purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. The Fund's
annual capital gains distribution normally occurs in
December, while income dividends are generally paid on the
first day of each month. For additional information on
distributions and taxes, see the section titled
"Dividends, Capital Gains, and Taxes."
--------------------------------------------------------------------------------
18
<PAGE> 82
IMPORTANT
INFORMATION
ABOUT TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire
redemptions) and exchanges by telephone is automatically
established on your account unless you request in writing
that telephone transactions on your account not be
permitted. The ability to initiate wire redemptions by
telephone will be established on your account only if you
specifically elect this option in writing.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone,
the caller must know (i) the name of the Portfolio;
(ii) the 10-digit account number; (iii) the exact name
and address used in the registration; and (iv) the
Social Security or Employer Identification number
listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone
redemption by mail will be made payable to the
registered shareowner and mailed to the address of
record, only. In the case of a telephone redemption by
wire, the wire transfer will be made only in accordance
with the shareowner's prior written instructions.
Neither the Portfolio nor Vanguard will be responsible for
the authenticity of transaction instructions received by
telephone, provided that reasonable security procedures
have been followed. Vanguard believes that the security
procedures described above are reasonable, and that if
such procedures are followed, you will bear the risk of
any losses resulting from unauthorized or fraudulent
telephone transactions on your account.
--------------------------------------------------------------------------------
OTHER ACCOUNT
INFORMATION For corporate investors, a current corporate resolution
must be maintained on file at Vanguard at all times. The
initial application serves as a corporate resolution. Any
revisions to a corporate resolution must be submitted to
your Institutional Investor Services Representative at
Vanguard.
To change the registration of an account, a request must
be submitted in writing to Vanguard and include the
following information: the account number and portfolio
name; authorized signatures; any applicable signature
guarantees; and other supporting legal documents as
necessary.
All requests should be mailed to the following address:
VANGUARD FINANCIAL CENTER
ATTN: INSTITUTIONAL INVESTOR SERVICES
P.O. BOX 1472
VALLEY FORGE, PA 19482
--------------------------------------------------------------------------------
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<PAGE> 85
[VANGUARD BOND INDEX FUND --
TOTAL BOND MARKET PORTFOLIO LOGO]
---------------------------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Institutional Investor Center
Vanguard Financial Center
P.O. Box 2900
Valley Forge, PA 19482
INSTITUTIONAL PARTICIPANT
SERVICES DEPARTMENT:
1-800-523-1188
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
IC84
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PART B
VANGUARD BOND INDEX FUND
(FORMERLY, VANGUARD BOND MARKET FUND)
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 18, 1995
This Statement is not a prospectus, but should be read in conjunction with
the Fund's current Prospectus (dated September 18, 1995). To obtain the
Prospectus please call:
VANGUARD INVESTOR INFORMATION CENTER
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Investment Policies....................................................................... 1
Investment Limitations.................................................................... 5
Yield and Total Return.................................................................... 6
Purchase of Shares........................................................................ 6
Redemption of Shares...................................................................... 7
Management of the Fund.................................................................... 8
Portfolio Transactions.................................................................... 10
Performance Measures...................................................................... 11
Financial Statements...................................................................... 12
Appendix -- Description of Bond Ratings................................................... 12
</TABLE>
INVESTMENT POLICIES
REPURCHASE AGREEMENTS Each Portfolio of the Fund may invest in repurchase
agreements with commercial banks, brokers or dealers to generate income from its
excess cash balances. A repurchase agreement is an agreement under which a
Portfolio acquires a money market instrument (generally a security issued by the
U.S. Government or an agency thereof, a banker's acceptance or a certificate of
deposit) from a Federal Reserve member bank with minimum assets of at least $2
billion or a registered securities dealer, subject to resale to the seller at an
agreed upon price and date (normally, the next business day). A repurchase
agreement may be considered a loan collateralized by securities. The resale
price reflects an agreed upon interest rate effective for the period the
instrument is held by a Portfolio and is unrelated to the interest rate on the
underlying instrument. In these transactions, the securities acquired by a
Portfolio (including accrued interest earned thereon) must have a total value in
excess of the value of the repurchase agreement and are held by the Portfolio's
custodian bank until repurchased. In addition, the Fund's Board of Directors
will monitor each Portfolio's repurchase agreement transactions generally and
will establish guidelines and standards for review of the creditworthiness of
any bank, broker or dealer party to a repurchase agreement with a Portfolio. No
more than an aggregate of 15% of a Portfolio's assets, at the time of
investment, will be invested in repurchase agreements having maturities longer
than seven days and securities subject to legal or contractual restrictions on
resale, or for which there are no readily available market quotations.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, a
Portfolio may incur a loss upon disposition of the security. If the other party
to the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by a Portfolio not within its
control and therefore the Portfolio may not be able to substantiate its interest
in the underlying security and may be deemed an unsecured creditor of the other
party to the agreement. While the Fund's management acknowledges these risks, it
is expected that they can be controlled through careful monitoring procedures.
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LENDING OF SECURITIES Each Portfolio of the Fund may lend its securities
to qualified institutional investors who need to borrow securities in order to
complete certain transactions, such as covering short sales, avoiding failures
to deliver securities or completing arbitrage operations. By lending its
portfolio securities, a Portfolio attempts to increase its net investment income
through the receipt of interest on the loan. Any gain or loss in the market
price of the securities loaned that might occur during the term of the loan
would be for the account of the Portfolio. A Portfolio may lend its portfolio
securities to qualified brokers, dealers, banks or other financial institutions,
so long as the terms, the structure and the aggregate amount of such loans are
not inconsistent with the Investment Company Act of 1940, or the Rules and
Regulations or interpretations of the Securities and Exchange Commission (the
"Commission") thereunder, which currently require that (a) the borrower pledge
and maintain with a Portfolio collateral consisting of cash, a letter of credit
issued by a domestic U.S. bank, or securities issued or guaranteed by the United
States Government having at all times not less than 100% of the value of the
securities loaned, (b) the borrower add to such collateral whenever the price of
the securities loaned rises (i.e. the borrower "marks to the market" on a daily
basis), (c) the loan be made subject to termination by a Portfolio at any time
and (d) the Portfolio receive reasonable interest on the loan (which may include
the Portfolio's investing any cash collateral in interest bearing short-term
investments), any distribution on the loaned securities and any increase in
their market value. Loan arrangements made by a Portfolio will comply with all
other applicable regulatory requirements, including the rules of the New York
Stock Exchange, which rules presently require the borrower, after notice, to
redeliver the securities within the normal settlement time of five business
days. All relevant facts and circumstances, including the creditworthiness of
the broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Fund's Board of
Directors.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Directors. In addition, voting rights may
pass with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
FUTURES CONTRACTS AND OPTIONS Each Portfolio of the Fund may enter into
futures contracts, options, and options on futures contracts for the purpose of
remaining fully invested and reducing transactions costs. Futures contracts
provide for the future sale by one party and purchase by another party of a
specified amount of a specific security at a specified future time and at a
specified price. Futures contracts which are standardized as to maturity date
and underlying financial instrument are traded on national futures exchanges.
Futures exchanges and trading are regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission ("CFTC"), a U.S. Government Agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith initial margin deposit in
cash or securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold with deposits
that may range upward from less than 5% of the value of the contract being
traded. A Portfolio's initial margin requirement is ordinarily in the form of
portfolio securities. These securities are segregated in a separate custody
account at the Portfolio's custodian bank; they are not delivered to the futures
dealer.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may
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reduce the required margin, resulting in a repayment of excess margin to the
contract holder. Variation margin payments are made to and from the futures
broker for as long as the contract remains open. A Portfolio expects to earn
interest income on its initial margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities. The Portfolio's intend to use futures
contracts only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions. A Portfolio will
only sell futures contracts to protect securities it owns against price declines
or purchase contracts to protect against an increase in the price of securities
it intends to purchase. As evidence of this hedging interest, a Portfolio
expects that approximately 75% of its futures contract purchases will be
"completed," that is, equivalent amounts of related securities will have been
purchased or are being purchased by a Portfolio upon sale of open futures
contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control a Portfolio's exposure to market fluctuations, the use
of futures contracts may be a more effective means of hedging this exposure.
While a Portfolio will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS A Portfolio will not enter
into futures contract transactions to the extent that, immediately thereafter,
the sum of its initial margin deposits on open contracts exceeds 5% of the
market value of its total assets. In addition, a Portfolio will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of its total assets. Assets
committed to futures contracts or options will be held in a segregated account
at the Portfolio's custodian bank.
RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts may be
closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Portfolio would continue to be required to make daily cash payments
to maintain its required margin. In such situations, if a Portfolio has
insufficient cash, it may have to sell portfolio securities to meet daily margin
requirements at a time when it may be disadvantageous to do so. In addition, a
Portfolio may be required to make delivery of the instruments underlying futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on the ability to effectively hedge it.
A Portfolio will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of the Fund are engaged in only for hedging purposes, the Adviser
does not believe that the Portfolios are subject to the risks of loss frequently
associated with futures
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transactions. A Portfolio would presumably have sustained comparable losses if,
instead of the futures contract, it had invested in the underlying financial
instrument and sold it after the decline.
Utilization of futures transactions by a Portfolio does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that a Portfolio could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by a Portfolio of margin deposits in the event of bankruptcy of a
broker with whom a Portfolio has an open position in a futures contract or
related option. Additionally, investments in futures contracts and options
involve the risk that the investment adviser will incorrectly predict stock
market and interest rate trends.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS A Portfolio is required for
federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts as of the end of the
year as well as those actually realized during the year. In most cases, any gain
or loss recognized with respect to a futures contract is considered to be 60%
long-term capital gain or loss and 40% short-term capital gain or loss, without
regard to the holding period of the contract. Furthermore, sales of futures
contracts which are intended to hedge against a change in the value of
securities held by a Portfolio may affect the holding period of such securities
and, consequently, the nature of the gain or loss on such securities upon
disposition. A Portfolio may be required to defer the recognition of losses on
futures contracts to the extent of any unrecognized gains on related positions
held by the Portfolio.
In order for a Portfolio to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or of foreign currencies or other income derived with respect to a
Portfolio's business of investing in securities. In addition, gains realized on
the sale or other disposition of securities held for less than three months must
be limited to less than 30% of a Portfolio's annual gross income. It is
anticipated that any net gain realized from the closing out of futures contracts
will be considered gain from the sale of securities and therefore be qualifying
income for purposes of the 90% requirement. In order to avoid realizing
excessive gains on securities held less than three months, a Portfolio may be
required to defer the closing out of futures contracts beyond the time when it
would otherwise be advantageous to do so. It is anticipated that unrealized
gains on futures contracts, which have been open for less than three months as
of the end of a Portfolio's fiscal year and which are recognized for tax
purposes, will not be considered gains on sales of securities held less than
three months for the purpose of the 30% test.
A Portfolio will distribute to shareholders annually any net capital gains
which have been recognized for federal income tax purposes (including unrealized
gains at the end of a Portfolio's fiscal year) on futures transactions. Such
distributions will be combined with distributions of capital gains realized on a
Portfolio's other investments and shareholders will be advised on the nature of
the distributions.
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INVESTMENT LIMITATIONS
The following restrictions and fundamental policies cannot be changed
without approval of the holders of a majority of the outstanding shares of a
Portfolio (as defined in the Investment Company Act of 1940). Each Portfolio may
not:
1) change its investment objective without shareholder approval, which is
to duplicate the total investment return (capital change plus income)
of publicly-traded investment grade fixed-income securities by
attempting to duplicate the investment performance of an investment
grade bond index using index matching and index sampling techniques;
2) invest in commodities or purchase real estate, although it may purchase
and sell interest rate futures contracts;
3) purchase securities on margin or sell securities short (the deposit or
payment by a Portfolio of initial or variation margin in order to
engage in an interest-rate futures contract is not considered the
purchase of a security on margin);
4) purchase more than 5% of the outstanding voting securities of any
company;
5) invest more than 5% of the value of its total assets in the securities
of any single issuer except obligations of the U.S. Government and its
instrumentalities;
6) borrow money, except that a Portfolio may borrow from banks (or through
reverse repurchase agreements), for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests
which might otherwise require the untimely disposition of securities,
in an amount not exceeding 15% of the value of a Portfolio's total
assets (including the amount borrowed) at the time the borrowing is
made. Whenever borrowings exceed 5% of the value of a Portfolio's total
assets, a Portfolio will not make any additional investments;
7) pledge, mortgage, or hypothecate any of its assets to an extent greater
than 5% of the value of its total assets;
8) issue senior securities. Collateral arrangements with regard to initial
and variation margin on interest-rate futures contracts shall not be
considered issuance of a senior security;
9) engage in the business of underwriting securities issued by other
persons, except to the extent that a Portfolio may technically be
deemed to be an underwriter under the Securities Act of 1933, as
amended, in disposing of portfolio securities;
10) purchase or otherwise acquire any security if, as a result, more than
15% of its net assets (including any investment in The Vanguard Group,
Inc.) would be invested in securities that are illiquid;
11) invest for the purpose of controlling management of any company;
12) invest in securities of other investment companies, except as they may
be acquired as a part of a merger, consolidation or acquisition of
assets or otherwise to the extent permitted by Section 12 of the 1940
Act. A Portfolio will invest only in investment companies which have
investment objectives and investment policies consistent with those of
the Portfolio;
13) have dealing on behalf of a Portfolio with officers and directors of
the Fund, except for the purchase or sale of securities on an agency or
commission basis;
14) make loans to any officers, directors or employees of the Fund;
15) invest in assessable securities or securities involving unlimited
liability on the part of the holders thereof;
16) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, which are either publicly
distributed or customarily purchased by institutional investors) and
(ii) by lending its securities to banks, brokers, dealers and other
financial institutions so
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long as such loans are not inconsistent with the Investment Company Act
or the Rules and Regulations or interpretations of the Commission
thereunder;
17) invest directly in oil, gas or other mineral exploration or development
programs.
The investment limitations set forth above are considered at the time that
a Portfolio purchases securities. Notwithstanding these limitations, a Portfolio
may own all or any portion of the securities of, or make loans to, or contribute
to the costs or other financial requirements of any company which will be wholly
owned by the Fund and one or more other investment companies and is primarily
engaged in the business of providing, at-cost, management, administrative,
distribution or related services to the Fund and other investment companies. See
"The Vanguard Group." As a non-fundamental policy, the Fund will not invest more
than 5% of its assets in the securities of companies that, together with
predecessors, have been in continuous operation for less than three years.
YIELD AND TOTAL RETURN
The yield of the Total Bond Market Portfolio for the 30-day period ended
December 31, 1994 was +7.82%. The yield of the Short-Term Bond,
Intermediate-Term Bond and the Long-Term Bond Portfolios for the 30-day period
ended December 31, 1994 was +7.79%, +8.07% and +8.20%, respectively. Yields are
calculated daily and premiums and discounts on asset-backed securities are not
amortized.
The average annual total return of the Total Bond Market Portfolio* for the
one- and five-year periods ended December 31, 1994 and since its inception on
December 11, 1986 was -2.69%, +7.42% and +7.26%, respectively. Total return is
computed by finding the average compounded rates of return over the one-year and
since inception periods set forth above that would equate an initial amount
invested at the beginning of the periods to the ending redeemable value of the
investment.
The total return of the Short-Term Bond, Intermediate-Term Bond and
Long-Term Bond Portfolios for the period March 1, 1994 (end of subscription
period) to December 31, 1994 was -0.37%, -2.88% and -4.53% respectively.
*Performance figures are adjusted for the annual account maintenance fee of
$10.
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the
offerings of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum for initial and subsequent investments as well as
redemption fees for certain fiduciary accounts or under circumstances where
certain economies can be achieved in sales of a Portfolio's shares. The Fund
reserves the right to impose a transaction fee on purchases of Portfolio shares
totaling more than $5 million made during any six-month period. Such fee would
be payable to the Portfolio to offset the transaction cost associated with
securities investments.
The Fund reserves the right to deduct a portfolio transaction fee from
purchases of the shares of each Portfolio. Fees will not be charged on any
investment less than $30 million for the Total Bond Market Portfolio; $10
million for the Short-Term Bond Portfolio; $10 million for the Intermediate-Term
Bond Portfolio; and $2 million for the Long-Term Bond Portfolio. Fees may be
charged on the entire lump-sum purchase for transactions that exceed the amount
indicated for each Portfolio if such purchases are reasonably deemed to be
disruptive to efficient portfolio management. Lump-sum purchases exceeding the
indicated amount for each Portfolio may be considered disruptive, for example,
if the portfolio manager incurs significant transaction costs in purchasing
portfolio securities needed to match the investment performance of the
respective benchmark index. If such purchases can be offset by redemptions of
shares by other shareholders, such fee may be waived or reduced. A prospective
investor may determine whether a fee will be charged by calling their client
representative or plan sponsor in advance of their purchase. The fee, if
imposed, will be 0.18% for the Total Bond Market Portfolio; 0.23% for the
Intermediate-Term Bond Portfolio; 0.15% for the Short-Term Bond Portfolio; and
0.20% for the Long-Term Bond Portfolio. The fees are based on the portfolio
manager's estimate of transaction costs, which depends on the types of
securities in which each Portfolio invests.
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REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the Securities and Exchange
Commission (the "Commission"), (ii) during any period when an emergency exists
as defined by the rules of the Commission as a result of which it is not
reasonably practicable for the Portfolio to dispose of securities owned by it,
or fairly to determine the value of its assets, and (iii) for such other periods
as the Commission may permit.
Each Portfolio has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Portfolio
at the beginning of such period. Such commitment is irrevocable without the
prior approval of the Commission. Redemptions in excess of the above limits may
be paid in whole or in part, in investment securities or in cash, as the
Directors may deem advisable; however, payment will be made wholly in cash
unless the Directors believe that economic or market conditions exist which
would make such a practice detrimental to the best interests of the Fund. If
redemptions are paid in investment securities, such securities will be valued as
set forth in the Prospectus under "The Share Price of Each Portfolio" and a
redeeming shareholder would normally incur brokerage expenses if he converted
these securities to cash.
No charge is made by the Portfolio for redemptions. Any redemption may be
more or less than the shareholder's cost depending on the market value of the
securities held by a Portfolio.
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MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board of Directors. The Directors set broad policies
for the Fund and choose its Officers. The following is a list of the Directors
and Officers of the Fund and a statement of their present positions and
principal occupations during the past five years. The mailing address of the
Directors and Officers of the Fund is Post Office Box 876, Valley Forge, PA
19482.
JOHN C. BOGLE, Chairman, Chief Executive Officer and Director*
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The Vanguard Group; Director of The
Mead Corporation and General Accident Insurance.
JOHN J. BRENNAN, President & Director*
President and Director of The Vanguard Group, Inc. and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Director
Chairman of Rhone-Poulenc Rorer, Inc.; Director of Sun Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director
Director of The Great Atlantic and Pacific Tea Company. ALCO Standard Corp.,
Raytheon Company, Knight-Ridder Inc., and Massachusetts Mutual Life Insurance
Co. and Trustee Emerita of Wellesley College.
BRUCE K. MACLAURY, Director
President, The Brookings Institution; Director of American Express Bank, Ltd.,
The St. Paul Companies, Inc., and Scott Paper Co.
BURTON G. MALKIEL, Director
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., Director
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of The BFGoodrich Company, The Standard Products Company and The
Reliance Electric Company.
JOHN C. SAWHILL, Director
President and Chief Executive Officer, The Nature Conservancy; formerly,
Director and Senior Partner, McKinsey & Co.; President, New York University;
Director of Pacific Gas and Electric Company and NACCO Industries.
JAMES O. WELCH, JR., Director
Retired Chairman of Nabisco Brands, Inc., retired Vice Chairman and Director
of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Director
Chairman and Chief Executive Officer of Rohm & Haas Company; Director of
Cummins Engine Company; Trustee of Vanderbilt University and The Culver
Educational Foundation.
RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary of
each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, Treasurer*
Treasurer of The Vanguard Group, Inc. and of each of the investment companies
in The Vanguard Group.
KAREN E. WEST, Controller*
Vice President of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
---------------
*Officers of the Fund are "interested persons" as defined in the Investment
Company Act of 1940.
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THE VANGUARD GROUP Vanguard Bond Index Fund is a member of The Vanguard
Group of Investment Companies which consists of more than 30 investment
companies.
Through their jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and the other Funds in the Group obtain at cost virtually
all of their corporate management, administrative and distribution services.
Vanguard also provides investment advisory services on an at-cost basis to
certain Vanguard Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment. Each
Fund pays its share of Vanguard's net expenses which are allocated among the
Funds under methods approved by the Board of Directors (Trustees) of each Fund.
In addition, each Fund bears its own direct expenses such as legal, auditing and
custodian fees.
The Fund's officers are also officers and employees of Vanguard. No officer
or employee owns, or is permitted to own, any securities of any external adviser
for the Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines substantially similar to
those recommended by the mutual fund industry and approved by the U.S.
Securities and Exchange Commission.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds have invested are adjusted from time to time in
order to maintain the proportionate relationship between each Fund's relative
net assets and its contribution to Vanguard's capital. At December 31, 1994 the
Fund had contributed capital of $291,000 to Vanguard representing 1.5% of its
capitalization. The Fund's Service Agreement provides as follows: (a) each
Vanguard Fund may invest up to .40% of its current net assets in Vanguard; and
(b) there is no other limitation on the aggregate amount that the Vanguard Funds
may contribute to Vanguard's capitalization.
MANAGEMENT Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
year ended December 31, 1994 the Fund paid approximately $2,157,000 in
management and administration expenses.
DISTRIBUTION Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for the shares of
the Funds in connection with any sales made directly to investors in the states
of Florida, Missouri, New York, Ohio, Texas and such other states as it may be
required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The directors and
officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon relative net assets. The remaining one
half of those expenses is allocated among the Funds based upon each Fund's sales
for the preceding 24 months relative to the total sales of the Funds as a Group,
provided, however, that no Fund's aggregate quarterly rate of contribution for
distribution expenses of a marketing and promotional nature shall exceed 125% of
average distribution expense rate for the Group, and that no Fund shall incur
annual distribution expenses in excess of 20/100 of 1% of its average month-end
net assets. During the year ended December 31, 1994 the Fund paid approximately
$403,000 in distribution and marketing expenses which represented 2/100 of 1% of
its average month-end net assets.
INVESTMENT ADVISORY SERVICES Vanguard also provides investment advisory
services to Vanguard Municipal Bond Fund, Vanguard Money Market Reserves,
several Portfolios of Vanguard Fixed Income Securities Fund, Vanguard California
Tax-Free Fund, Vanguard New York Insured Tax-Free Fund, Vanguard New Jersey
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Tax-Free Fund, Vanguard Ohio Tax-Free Fund, Vanguard Pennsylvania Tax-Free Fund,
Vanguard Florida Insured Tax-Free Fund, Vanguard Admiral Funds, Vanguard
Institutional Index Fund, Vanguard Index Trust, Vanguard International Equity
Index Fund, Vanguard Institutional Portfolios, Money Market Portfolio, Vanguard
Balanced Index Fund, Vanguard Tax-Managed Fund, several Portfolios of Vanguard
Variable Insurance Fund, a portion of Vanguard/Windsor II, a portion of
Vanguard/Morgan Growth Fund as well as several indexed separate accounts. These
services are provided on an at-cost basis from a money management staff employed
directly by Vanguard. The compensation and other expenses of this staff are paid
by the Funds utilizing these services. During the fiscal year ended December 31,
1994, the Fund paid approximately $187,000 of Vanguard's expenses relating to
investment advisory services.
REMUNERATION OF DIRECTORS AND OFFICERS The Fund pays each Director, who is
not also an officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. The Fund's officers and employees are paid by Vanguard
which, in turn, is reimbursed by the Fund and each other Fund in Group, for its
proportionate share of officers' and employees' salaries and retirement
benefits. During the year ended December 31, 1994, the Fund's share of
remuneration paid to its Officers and Directors was approximately $69,122.
Under its retirement plan, Vanguard contributes annually an amount equal to
10% of each officer's annual compensation plus 7% of that part of the officer's
compensation during the year, if any, that exceeds the Social Security Taxable
Wage Base then in effect. Directors who are not Officers are paid an annual fee
based on the number of years of service on the board, up to fifteen years of
service, upon retirement. The fee is equal to $1,000 for each year of service.
During the year ended December 31, 1994 the Fund's share of retirement benefits
paid to its Officers was approximately $9,000.
The following table provides detailed information with respect to the
amounts paid or accrued for the Directors for the fiscal year ended December 31,
1994.
VANGUARD BOND INDEX FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAMES OF DIRECTORS FROM FUND PART OF FUND EXPENSES UPON RETIREMENT PAID TO DIRECTORS(2)
--------------------------- ------------ --------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) -- -- -- --
John J. Brennan(1) -- -- -- --
Barbara Barnes Hauptfuhrer $662 $ 162 $15,000 $50,000
Robert E. Cawthorn $662 $ 122 $13,000 $50,000
Bruce K. MacLaury $765 $ 166 $12,000 $45,000
Burton G. Malkiel $662 $ 82 $15,000 $50,000
Alfred M. Rankin, Jr. $662 $ 49 $15,000 $50,000
John C. Sawhill $662 $ 72 $15,000 $50,000
James O. Welch, Jr. $636 $ 110 $15,000 $48,000
J. Lawrence Wilson $649 $ 57 $15,000 $49,000
</TABLE>
(1) As "Interested Directors," Messrs. Bogle and Brennan receive no compensation
for their service as Directors.
(2) The amounts reported in this column reflect the total compensation paid to
each Director for their service as Director or Trustee of 33 Vanguard Funds
(26 in the case of Mr. MacLaury).
PORTFOLIO TRANSACTIONS
In placing portfolio transactions, the Fund uses its best judgment to
choose the broker most capable of providing the brokerage services necessary to
obtain best available price and most favorable execution. The full range and
quality of brokerage services available are considered in making these
determinations. In those instances where it is reasonably determined that more
than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration will be given to
those brokers which supply statistical information and provide other services in
addition to execution services to the Fund.
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<PAGE> 96
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Fund may place portfolio orders with qualified
broker-dealers who recommend the Fund to clients, and may, when a number of
brokers and dealers can provide best price and execution on a particular
transaction, consider the sale of Fund shares by a broker or dealer in selecting
among broker-dealers.
PERFORMANCE MEASURES
Each of the investment company members of the Vanguard Group, including
Vanguard Bond Index Fund, may from time to time, use one or more of the
following unmanaged indexes for comparative perfor-
mance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEXES -- consists of more than 6,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
RUSSELL 3000 STOCK INDEX -- a diversified portfolio of approximately 3,000
common stocks accounting for over 90% of the market value of publicly traded
stocks in the U.S.
RUSSELL 2000 STOCK INDEX -- a subset of approximately 2,000 of the smallest
stocks contained in the Russell 3000, a widely-used benchmark for small
capitalization common stocks.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 67 bonds and 33
preferreds. The original list of names was generated by screening for
convertible issues of 100 million or greater in market capitalization. The index
is priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued,
non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND -- consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.
LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND -- is a yield index on current coupon
high-grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield for four high-grade, non-callable preferred stock issues.
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<PAGE> 97
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 35% Standard & Poor's 500 Index and 65% Salomon Brothers
High-Grade Bond Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Salomon Brothers
High-Grade Bond Index.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX -- is
a market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate securities rated BBB- or better with maturities greater than 10 years.
The index has a market value of over $900 billion.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average performance
and/or the average expense ratio of the small company growth funds. (This fund
category was first established in 1982. For years prior to 1982, the results of
the Lipper Small Company Growth category were estimated using the returns of the
Funds that constituted the Group at its inception.)
LIPPER BALANCED FUND AVERAGE -- An industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- An industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
FINANCIAL STATEMENTS
The Fund's financial statements for the year ended December 31, 1994,
including the financial highlights for each of the five years in the period
ended December 31, 1994, appearing in the Fund's 1994 Annual Report to
Shareholders, and the report thereon of Price Waterhouse LLP, independent
accountants, also appearing therein, are incorporated by reference in this
Statement of Additional Information.
The Fund's 1994 Annual Report to Shareholders is enclosed with this
Statement of Additional Information.
APPENDIX -- DESCRIPTION OF BOND RATINGS
The Fund will invest primarily in investment grade bonds (i.e., those rated
at least Baa3 by Moody's Investor Service, Inc. or those rated BBB- by Standard
& Poor's Corporation.) In the event that a Bond held by the Fund is downgraded,
the adviser, may continue to hold such bond. Excerpts from Moody's Investors
Service, Inc. description of its four highest preferred bond ratings:
AAA -- judged to be the best quality by all standards. Together with the
Aaa group they comprise what are generally known as high grade bonds;
A -- possess many favorable investment attributes and are to be considered as
"upper medium grade obligations"; BAA -- considered as medium grade obligations;
i.e., they
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<PAGE> 98
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Moody's also supplies numerical indicators 1, 2 and 3 to rating categories.
The modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and 3 indicates a
ranking toward the lower end of the category.
Excerpts from Standard & Poor's Corporation description of its four highest
stock ratings:
AAA -- highest grade obligations. Capacity to pay interest and repay
principal is extremely strong; AA -- also qualify as high grade obligations, a
very strong capacity to pay interest and repay principal and differs from AAA --
issues only in small degree; A -- regarded as upper medium grade. They have a
strong capacity to pay interest and repay principal although it is somewhat
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories; BBB -- regarded as having an
adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories. This
group is the lowest which qualifies for commercial bank investment.
Standard & Poor's applies indicators "+", no character and "-" to its
rating categories. The indicators show relative standing within the major rating
categories.
13
