<PAGE> 1
VANGUARD
BOND INDEX
FUND
ANNUAL REPORT 1995
<PAGE> 2
In this Annual Report, I am delighted to formally introduce you to John J.
Brennan, who, on January 31, 1996, will assume my responsibilities as Chief
Executive Officer of Vanguard Bond Index Fund and the other Funds in The
Vanguard Group. Mr. Brennan will continue to serve as President of the Funds,
and I will continue to serve as Chairman of the Board.
As a shareholder of the Fund since its inception and as Chairman of
all the Vanguard Funds, I want to tell you that I am enthusiastic and confident
that Jack Brennan is exactly the right person to succeed me as Chief Executive
Officer. To use yet another Vanguard nautical metaphor, he will be the new
captain. He has the qualities of leadership, integrity, intelligence, and
vision that must continue to be Vanguard's hallmark as we move toward, and then
into, the 21st century.
I know that he has these qualities, because Jack Brennan and I have
been working closely together since he joined Vanguard in 1982. He is a
graduate of Dartmouth College and Harvard Business School. He started as
Assistant to the Chairman and, rising like a rocket, became President in 1989.
While, at age 41, he may seem young, he is in fact older than I was when I
became Chief Executive Officer of Vanguard's predecessor organization in 1967,
at the age of 38. Most important of all, Jack is completely dedicated to the
Vanguard character, and believes in our basic mission: serving solely the
shareholder, free of any conflict of interest. He believes in holding our costs
of operation to a minimum, and in retaining our position as the lowest-cost
provider of financial services in the world. He is a true competitor, who
shares Vanguard's dedication to providing highly competitive returns to our
investors relative to the returns provided by other mutual funds with
comparable objectives. He also believes in reporting our results to
shareholders with complete candor. He has the full support of the Board of
Directors and our crew, and is committed to staying the course we have set for
Vanguard. You need have no doubt that the essential elements that drew you to
Vanguard in the first place will remain intact.
[FIGURE 1]
As for me, I expect to fill a useful, if less demanding, role as
Chairman of the Board. I shall keep a watchful eye over the interests of our
shareholders, our crew, and our investment policies. I shall also speak out on
industry affairs, reminding all who will listen of the primacy of the interests
of mutual fund shareholders. I will be readily available to provide Jack
Brennan with whatever wisdom I may have acquired during my lifetime of
experience in this wonderful industry and in my service as captain of Vanguard
since I founded this unique organization more than two decades ago.
In short, I'll still be around. Thank you for all your confidence in
me in the past and, in advance, for your continued confidence in Vanguard under
Jack Brennan's leadership.
/s/ JOHN C. BOGLE
- -----------------
VANGUARD BOND INDEX FUND CONSISTS OF FOUR PORTFOLIOS--TOTAL BOND MARKET,
SHORT-TERM BOND, INTERMEDIATE-TERM BOND, AND LONG-TERM BOND--WITH PRESCRIBED
MATURITY AND QUALITY STANDARDS, EACH OF WHICH SEEKS TO MATCH THE INVESTMENT
PERFORMANCE OF ITS COMPARABLE LEHMAN BOND INDEX.
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
With a total return of +18.2% during 1995--as our tenth anniversary year
begins--the Total Bond Market Portfolio of Vanguard Bond Index Fund enjoyed the
largest gain in its history. In their first full year of operations, the new
Short-Term, Intermediate-Term, and Long-Term Bond Portfolios also staged
impressive gains. Our outstanding absolute returns were the product of a strong
bull market in bonds; our exceptional relative returns simply reaffirm the
value of indexing in the bond arena.
The table below presents the total return (capital change plus
reinvested dividends) for each Portfolio during the past twelve months,
compared to the unmanaged bond market index it emulates. These Indexes are
difficult benchmark standards, because they are calculated "on paper," without
the real world expenses of fund operations, advisory fees, portfolio
transaction costs, and the impact of cash reserves.
Our results in 1995 offer as good an example as you are likely to find
of the relationship between interest rates and bond returns. When interest
rates decrease sharply, as in 1995, returns rise hand in hand with the length
of bond maturities. But I would underscore that, when interest rates increase,
returns will show greater declines as maturities lengthen. In such an
environment, negative total returns are possible. Nonetheless, as you can see,
our Portfolios' total returns were simply outstanding during this past year:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
TOTAL RETURN
--------------------------
YEAR ENDED
DECEMBER 31, 1995
--------------------------
VANGUARD BENCHMARK*
- ---------------------------------------------------------------------
<S> <C> <C>
TOTAL BOND MARKET +18.2% +18.5%
SHORT-TERM BOND +12.9 +12.9
INTERMEDIATE-TERM BOND +21.1 +21.4
LONG-TERM BOND +29.7 +30.0
- ---------------------------------------------------------------------
</TABLE>
* Respectively, the Lehman Aggregate Bond Index and its Short-Term Bond,
Intermediate-Term Bond, and Long-Term Bond components.
Detailed per share figures for each Portfolio, including net asset values,
income dividends, and any capital gains distributions are presented in a table
at the conclusion of this letter.
THE BOND MARKET IN 1995
Simply put, the bond market during 1995 was just as good (very) as 1994 was bad
(also very). Indeed, bond prices not only recouped last year's lost ground, but
achieved gains that were more than compensatory. Looking at it from the
perspective of yield levels, interest rates at the close of 1995 had returned
to levels not seen since the close of 1993--before their quantum leap that
began in February 1994.
Interest rates on long-term (30-year) U.S. Treasury bonds opened 1995
at 7.8% and declined during the year to just below 6.0%. Other maturities
followed suit: the yield on intermediate-term (10-year) U.S. Treasury bonds
fell from 7.8% to 5.6%, and the yield on short-term (3-year) U.S. Treasury
bonds fell from 7.8% to 5.3%. This table shows the components of return for
each of these three maturity classes:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
TOTAL RETURN
---------------------------------
YEAR ENDED
YEAR-END DECEMBER 31, 1995
YIELDS ---------------------------------
U.S. TREASURY --------------- PRICE INTEREST TOTAL
BOND MATURITY 1994 1995 INCREASE INCOME RETURN
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHORT-TERM 7.8% 5.3% + 4.2% +7.8% +12.0%
INTERMEDIATE-TERM 7.8 5.6 +14.6 +7.8 +22.4
LONG-TERM 7.8 6.0 +24.3 +7.8 +32.1
- -------------------------------------------------------------------------------------
</TABLE>
This table is presented to reinforce two principal points: (1) price volatility
increases as maturity increases (last year, enhancing bond returns; in 1994,
hampering returns); and (2) interest income is a vital component of total
return. In the 1994 bear market, income helped to mitigate the sharp decline in
bond prices; in the 1995 bull market, income provided an important increment to
the large price increases.
To say that the 1995 rate decline was unexpected is to understate the
cautious market sentiment as the year began. A year ago, The Wall Street
Journal published its regular poll of some 50
1
<PAGE> 4
[FIGURE 2]
learned economists and senior bond managers of large investment firms. As a
group, they forecast a year-end yield of 7.6% on long-term U.S. Treasury bonds
(a decline of 20 basis points). In fact, as we now know, the closing yield was
6.0%, a decline of 180 basis points. They were also wide of the mark in
forecasting the yield on 90-day U.S. Treasury bills, indeed predicting a large
increase in Treasury bill rates only to see rates fall sharply. This table
compares the forecast yields with actual yields at year end:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
YIELD
-----------------------------
BASIS POINT
12/31/94 12/31/95 CHANGE IN YIELD
-------- ------------------ -------------------
ACTUAL FORECAST ACTUAL FORECAST ACTUAL
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
90-DAY U.S.
TREASURY BILLS 5.6% 6.4% 5.0% +80 - 60
LONG-TERM U.S.
TREASURY BONDS 7.8 7.6 6.0 -20 -180
- -------------------------------------------------------------------------------------
</TABLE>
This example of failed economic forecasting is far from rare. It suggests that
bond investors should be leery of taking action on the basis of conventional
(and "professional") wisdom.
In all, as the earlier table shows, it was a splendid year for bonds
of all maturities, the culmination of a three-year period that contains
an important slice of U.S. economic history. The low level of short-term
interest rates that prevailed from September 1992 through January 1994 reflected
an economy that was at first in recession, and then recovered sluggishly. But,
by February 1994, the economy had moved into higher gear, and the Federal
Reserve decided it was time to put on the brakes to avoid the risk that
inflation would again rear its ugly head. The Fed intervened by raising the
Federal funds rate (the short-term rate at which banks borrow from one another)
an unprecedented seven times in the 13 ensuing months. Taken together, these
increases doubled this key rate, from 3.0% in February 1994 to 6.0% in February
1995.
This series of increases was designed to rein in a vibrant economy
and quell inflationary fears. The Fed apparently achieved its objective,
as inflation remained at low levels throughout this period. However, with the
economy again showing evidence of weakness by mid-1995, the Fed went back on the
offensive and lowered the Federal funds rate in July (to 5.75%) and again in
December (to 5.5%).
The dramatic swings in interest rates that have marked the first six
years of the 1990s were accompanied by enormous fluctuations in the
prices of long-term Treasuries, more moderate fluctuations in the prices of
intermediate-term Treasuries, and very modest price fluctuations for short-term
issues. For example, the upward rate swing in 1994 drove long-bond prices down
by -16%; the ensuing recovery in 1995 sent prices right back up by +24%. To
mitigate this volatility that is indigenous to long-term bonds, investors should
hold some bonds with shorter maturities. Of course, 90-day U.S. Treasury bills
(Vanguard Money Market Reserves offers a Portfolio that invests solely in U.S.
Treasury bills) are essentially devoid of principal volatility, but only at the
price of much less income and income durability.
2
<PAGE> 5
THE FUND IN FISCAL 1995
It's a bit difficult to avoid superlatives when discussing the results of our
four Portfolios during the past year. While it would have been virtually
impossible for any bond fund not to be swept along by the Bay-of-Fundy-type
flood tide that carried the bond market upward, our Index Portfolios far
exceeded the norms established by conventionally managed fixed-income funds
with comparable quality and maturity characteristics.(1)
In particular, it is a pleasure to report on the achievement of such
success in our Short-Term, Intermediate-Term, and Long-Term Bond
Portfolios, given that 1995 was their first full calendar year of operations.
They were formed on March 1, 1994, and our confidence in this new approach to
bond indexing has proved to be fully justified. This table shows the total
returns of our four Portfolios compared to their competitive norms:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
TOTAL RETURN
-----------------------------------------------------------
YEAR ENDED
DECEMBER 31, 1995
-----------------------------------------------------------
AVERAGE
COMPARABLE VANGUARD
PORTFOLIO VANGUARD FUND* ADVANTAGE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL BOND MARKET +18.2% +15.0% +3.2%
- ----------------------------------------------------------------------------------------
SHORT-TERM BOND +12.9% +10.8% +2.1%
INTERMEDIATE-TERM
BOND +21.1 +15.8 +5.3
LONG-TERM BOND +29.7 +20.6 +9.1
- ----------------------------------------------------------------------------------------
</TABLE>
* Represents a blended weighting of bond funds with similar quality and
maturity characteristics.
As wonderful as these relative returns were, we should note that they reflect
three independent factors. First, we believe that our Portfolios, while
properly placed in their maturity and quality groups, carry somewhat longer
maturities than our peers. (Not that our peers lack the ability to lengthen
their maturities if they wish to do so.) To the extent that our Portfolios hold
longer maturities than our peers, our net asset values will rise more when
interest rates fall (as in 1995), but decline more when interest rates rise (as
in 1994).
Second, we gain, I believe, a significant advantage by matching our
maturities to the market indexes we emulate, without guessing at the
future course of interest rates and without adjusting the Portfolios to reflect
our humble opinions. (As noted in the table on page 2, interest rate seers
almost universally failed to forecast, even with vague accuracy, the sharp
decline in interest rates that transpired during 1995.)
Third, we hold what has been a durable advantage in terms of our low
costs--a strong enhancement for our relative returns. Our Portfolios pay
no advisory fees and are administered on an "at-cost" basis, as are all of the
mutual funds in The Vanguard Group. They operated at an expense ratio (expenses
as a percentage of average net assets) of only 0.20% in 1995, compared to an
expense ratio of 0.97% for the average fixed-income mutual fund. This advantage,
other factors held equal, enhances our returns by 0.77% annually, equivalent to
an almost 15% increase in income in a bond portfolio when yields are running in
the area of 7%.
AS OUR TENTH YEAR BEGINS
To be sure, one year--especially a bull market year like 1995--is an awkwardly
short period for sound evaluation. Nonetheless, the three principles above are
reflected in the lifetime history of our original Total Bond Market Portfolio,
which began operations on December 11, 1986. The chart on page 4 reflects our
cumulative total return during this period, and compares our Portfolio's
results with the returns of the Lehman Aggregate Bond Index and the average
fixed-income mutual fund, which we define as a composite of bond mutual funds
weighted according to the structure of our unmanaged performance standard, the
Lehman Aggregate Bond Index. The table on the following page summarizes the
record of the Total Bond Market Portfolio relative to these two competitive
standards.
(continued)
- ---------------
(1) When we published our booklet The Triumph Of Indexing in early 1995, little
did we know that the year would work out so favorably for index funds.
3
<PAGE> 6
[FIGURE 3]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended December 31, 1995
- ---------------------------------------------------------------------------------
1 Year 5 Years Since Inception*
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
VANGUARD TOTAL BOND MARKET
PORTFOLIO** +18.15% +9.24% +8.41%
AVERAGE FIXED INCOME FUND +14.98 +7.65 +7.35
LEHMAN AGGREGATE BOND INDEX +18.47 +9.48 +8.94
</TABLE>
* Inception, December 11, 1986.
** Performance figures are adjusted for the $10 annual account maintenance fee.
Note: Past performance is not predictive of future performance.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
TOTAL RETURN
------------------------------
DECEMBER 11, 1986, TO
DECEMBER 31, 1995
------------------------------
FINAL VALUE
AVERAGE OF INITIAL
ANNUAL INVESTMENT
RATE OF $10,000
- -----------------------------------------------------------
<S> <C> <C>
TOTAL BOND MARKET PORTFOLIO +8.4% $20,770
- -----------------------------------------------------------
AVERAGE FIXED INCOME FUND +7.3% $19,010
LEHMAN BOND INDEX +8.9 21,710
- -----------------------------------------------------------
</TABLE>
The absolute returns depicted in the table above, of course, represent past
results achieved during a rather favorable climate for fixed-income securities.
They are in no way representative of the returns that should be expected in the
future. Results in the years ahead may be better or worse than those of the
past, although it is probably fair to predict that future total returns for
bonds will be lower than in this past period. Why? Because the yield on
intermediate-term bonds today is 5.6%, compared with 7.3% at the close of 1986.
As a result, it seems unlikely that we will enjoy a repeat of the yield-driven
price increases that marked this period.
I would also like to call your attention to the five-year returns
shown in the chart above. During this period, the average annual return of the
Total Bond Market Portfolio has closely mirrored the performance of the Lehman
Aggregate Bond Index. In fact, the difference in return of 24 basis points per
year is almost entirely accounted for by the Portfolio's expense ratio (0.20%).
A BIT OF BACKGROUND
Back in 1986, at the tenth anniversary of Vanguard Index Trust, the first stock
index mutual fund, Vanguard was carefully considering the issue of bond
indexing. At about that time, FORBES magazine, in an article about the
sub-average performance of most bond funds, plaintively pleaded with us to
start the first bond index fund for individual investors, asking: "Vanguard,
what are you waiting for?"
4
<PAGE> 7
Given that we had determined that a high-quality, low-cost, no-load
bond index fund with an intermediate-term maturity would come to be a sound
vehicle for fixed-income investors--and, of course, not wanting to disappoint
FORBES--we began the operations of the Total Bond Market Portfolio of Vanguard
Bond Index Fund in December 1986.
It has been an artistic success, consistently providing fine
performance relative to actively managed bond funds with comparable investment
characteristics. It also seems fair to describe it as a commercial success. As
we enter 1996, this Portfolio has garnered assets of more than $2.8 billion.
Encouraged by its acceptance, we decided to introduce three more narrowly
focused bond index portfolios in March 1994. (Typically, for Vanguard, at a
time when interest rates were rising and bond prices were falling.)
These portfolios were designed to closely track the Lehman Short-Term,
Intermediate-Term, and Long-Term Bond Indexes. All three are composed largely
of U.S. Treasury and agency obligations and high-grade corporate bonds; their
combined assets had risen to nearly $600 million at the close of 1995.(2) While
the Total Bond Market Portfolio also has an intermediate-term maturity
structure, unlike the Intermediate-Term Bond Portfolio it also includes GNMAs
and other mortgage-backed securities. (The pie charts below show the
composition of each Index.)
We have included in the charts a figure for the "duration" of each
Index, as an aid to help you determine the expected price volatility of each
Vanguard Portfolio. I won't get into the specific calculation of duration, but
I will describe its usefulness: it measures the expected sensitivity of a
bond's price to any change in interest rates. For instance, if a bond's
duration were 10 years, a one-percentage-point increase in interest rates would
cause its price to decline by approximately -10%; a one-percentage-point
decrease in rates would raise its
- ----------------
(2) Our new low-cost index Portfolios would have been revolutionary if only
Vanguard did not itself already offer a series of roughly comparable
actively managed Portfolios with very low costs and clearly defined
maturity and quality standards.
COMPOSITION OF LEHMAN BOND INDEXES
AGGREGATE BOND
[FIGURE 4]
YIELD TO MATURITY: 6.08%
AVERAGE QUALITY: Aaa/Aa1
AVERAGE MATURITY: 8.5 YEARS
AVERAGE DURATION: 4.5 YEARS
SHORT-TERM BOND
[FIGURE 5]
YIELD TO MATURITY: 5.39%
AVERAGE QUALITY: Aaa+/Aaa
AVERAGE MATURITY: 2.7 YEARS
AVERAGE DURATION: 2.3 YEARS
INTERMEDIATE-TERM BOND
[FIGURE 6]
YIELD TO MATURITY: 5.95%
AVERAGE QUALITY: Aa1/Aa2
AVERAGE MATURITY: 7.6 YEARS
AVERAGE DURATION: 5.4 YEARS
LONG-TERM BOND
[FIGURE 7]
YIELD TO MATURITY: 6.50%
AVERAGE QUALITY: Aaa/Aa1
AVERAGE MATURITY: 23.3 YEARS
AVERAGE DURATION: 10.2 YEARS
5
<PAGE> 8
price by about +10%. Another advantage of duration is its proportionality
(i.e., a bond with a duration of two years is half as volatile as a bond with a
duration of four years). The right-hand table on the first page of my letter
illustrates the relative price volatility for long-, intermediate-, and
short-term bonds.
IN SUMMARY
The past year has been an extraordinarily productive period for each of our
four Index Portfolios. It is the capstone of a near-perfect decade in which
returns on bond portfolios were well above historical norms. This is in itself
a reason for caution. But I feel confident that investors who use the Fund's
Index Portfolios as they are intended to be used will earn returns that not
only virtually match the bond market segments on which they focus, but exceed
the competitive norms of other similarly situated bond portfolios.
A year ago, near the depths of the bond market plunge, I expressed to
you the thought that, "the probabilities favor better total returns in the
coming year." That cautious pronouncement proved to be an understatement, and
we enjoyed 1995 returns that were outstanding. With the Fund's three new
Portfolios, you now are able to select your maturity target--ranging in
duration from the Long-Term Portfolio, for investors who want to receive yields
that are more durable and are willing to accept greater price volatility, to
the Short-Term Portfolio, for investors who can accept lower yields and in
return expect lower price volatility. In that regard, it seems to me that the
Short-Term Portfolio represents a sound option for money market fund investors
with a slightly longer time horizon, who seek enhanced yield in return for
fairly small variations in principal value.
As by far the largest bond index mutual fund in the field, we
appreciate the investor confidence represented by our $3.4 billion asset base.
We shall not let you down. What's more, we shall, of course, maintain the
carefully structured, high-quality, low-cost, index-oriented philosophy you
have every right to expect. In short, we shall "stay the course." A year ago,
with the bond market in a state of disarray, we urged you to stay the course as
well. We reiterate that advice today.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board
January 9, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
TOTAL PER SHARE
NET ASSETS -------------------- TWELVE MONTHS CURRENT
(MILLIONS) AVERAGE AVERAGE DEC. 31, DEC. 31, ----------------------- SEC
PORTFOLIO DEC. 31, 1995 MATURITY QUALITY 1994 1995 DIVIDENDS TOTAL RETURN* YIELD
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL BOND MARKET $2,405 8.8 YEARS Aa1 $9.17 $10.14 $.650 +18.2% 6.12%
INSTITUTIONAL SHARES 413 8.8 YEARS Aa1 9.87** 10.14 .174 + 4.5*** 6.22
SHORT-TERM BOND 208 2.7 YEARS Aaa 9.50 10.07 .623 +12.9 5.49
INTERMEDIATE-TERM BOND 346 7.4 YEARS Aa1 9.18 10.37 .661 +21.0+ 5.87
LONG-TERM BOND 24 21.6 YEARS Aaa 8.96 10.82 .692 +29.7++ 6.27
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Performance figures are adjusted for the $10 annual account maintenance
fee.
** Net asset value on September 18, 1995.
*** Performance figure since inception.
+ Includes capital gains distribution of $.027.
++ Includes capital gains distribution of $.024.
6
<PAGE> 9
[FIGURE 8]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended December 31, 1995
- --------------------------------------------------------------------
1 Year Since Inception*
- --------------------------------------------------------------------
<S> <C> <C>
VANGUARD SHORT-TERM PORTFOLIO** +12.87% +6.60%
AVERAGE SHORT-TERM BOND FUND +10.78 +5.72
LEHMAN SHORT-TERM BOND INDEX +12.88 +6.69
- --------------------------------------------------------------------
</TABLE>
[FIGURE 9]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended December 31, 1995
- --------------------------------------------------------------------
1 Year Since Inception*
- --------------------------------------------------------------------
<S> <C> <C>
VANGUARD INTERMEDIATE-TERM
PORTFOLIO** +21.05% +9.21%
AVERAGE INTERMEDIATE-TERM
BOND FUND +15.85 +6.60
LEHMAN INTERMEDIATE-TERM
BOND INDEX +21.43 +9.48
- --------------------------------------------------------------------
</TABLE>
[FIGURE 10]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended December 31, 1995
- --------------------------------------------------------------------
1 Year Since Inception*
- --------------------------------------------------------------------
<S> <C> <C>
VANGUARD LONG-TERM PORTFOLIO** +29.67% +12.31%
AVERAGE LONG-TERM BOND FUND +20.63 + 7.52
LEHMAN LONG-TERM BOND INDEX +29.95 +12.53
- --------------------------------------------------------------------
</TABLE>
* Inception, March 1, 1994.
** Performance figures are adjusted for the $10 annual account maintenance fee.
Past performance is not predictive of future performance.
7
<PAGE> 10
VANGUARD BOND INDEX FUND INSTITUTIONAL SHARES
The Board of Trustees of Vanguard Bond Index Fund has approved a new
institutional class of shares for the Total Bond Market Portfolio. The new
institutional shares have a lower operating expense ratio (0.10% versus 0.20%)
and a higher minimum initial investment requirement ($10,000,000 versus $3,000)
than the regular shares of the Total Bond Market Portfolio.
The investment objectives of the two classes of shares are identical:
to provide investors with a low-cost method of consistently capturing the
return of the U.S. bond market, as defined by the Lehman Aggregate Bond Index.
Both also operate under the same investment policies and credit quality
standards and are managed by the same investment adviser, Vanguard Fixed Income
Group.
The new class of shares is designed to take advantage of a
multiple-class structure, which reduces some of the expense that would be
incurred if we were to offer a separate institutional bond portfolio. What's
more, the multiple-class structure allows Institutional Bond Index shareholders
to participate in a bond fund--the Total Bond Market Portfolio--with aggregate
assets of nearly $3 billion.
The total investment return to our institutional shareholders for the
period from September 18, 1995, through December 31, 1995, was +4.53%. At year
end, the yield of the Total Bond Market Portfolio Institutional Shares was
6.22%.
AVERAGE ANNUAL TOTAL RETURNS--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE
PORTFOLIOS (PERIODS ENDED DECEMBER 31, 1995) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SINCE INCEPTION
--------------------------------
INCEPTION TOTAL INCOME CAPITAL
PORTFOLIO DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
- --------- ---- ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
TOTAL BOND MARKET* 12/11/86 +18.15% +9.24% + 8.41% +7.99% +0.42%
INSTITUTIONAL SHARES 9/18/95 + 4.53** -- -- -- --
SHORT-TERM BOND* 3/1/94 +12.87 -- + 6.60 +6.22 +0.38
INTERMEDIATE-TERM BOND* 3/1/94 +21.05 -- + 9.21 +7.07 +2.14
LONG-TERM BOND* 3/1/94 +29.67 -- +12.31 +7.80 +4.51
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
* PERFORMANCE FIGURES ARE ADJUSTED FOR THE $10 ANNUAL ACCOUNT MAINTENANCE FEE.
** PERFORMANCE FIGURE SINCE INCEPTION.
8
<PAGE> 11
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD BOND INDEX FUND-TOTAL BOND MARKET PORTFOLIO since inception through
December 31, 1995. During the period illustrated, long-term bond prices
fluctuated widely; these results should not be considered a representation of
the dividend income or capital gain or loss that may be realized from an
investment made in the Portfolio today.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN*
- -------------------------------------------------------------------------------------------------------------------------
Total Bond Market Portfolio Lehman
Value with Income ----------------------------- Aggregate
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total Bond Index
December 31 Value Distributions Dividends Gains Reinvested Return Return Return Total Return
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (12/86) $10.00 -- -- $10.00 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
1986 9.94 -- $.028 9.98 - 0.6% +0.4% - 0.2% - 0.2%
- -------------------------------------------------------------------------------------------------------------------------
1987 9.20 -- .834 10.09 - 7.4 +8.5 + 1.1 + 2.8
- -------------------------------------------------------------------------------------------------------------------------
1988 9.05 -- .807 10.84 - 1.6 +8.9 + 7.3 + 7.9
- -------------------------------------------------------------------------------------------------------------------------
1989 9.44 -- .797 12.31 + 4.3 +9.3 +13.6 +14.5
- -------------------------------------------------------------------------------------------------------------------------
1990 9.41 -- .796 13.38 - 0.3 +8.9 + 8.6 + 9.0
- -------------------------------------------------------------------------------------------------------------------------
1991 9.99 $.025 .766 15.42 + 6.4 +8.8 +15.2 +16.0
- -------------------------------------------------------------------------------------------------------------------------
1992 9.88 .092 .699 16.52 - 0.2 +7.3 + 7.1 + 7.4
- -------------------------------------------------------------------------------------------------------------------------
1993 10.06 .120 .638 18.12 + 3.0 +6.7 + 9.7 + 9.8
- -------------------------------------------------------------------------------------------------------------------------
1994 9.17 .002 .622 17.64 - 8.8 +6.1 - 2.7 - 2.9
- -------------------------------------------------------------------------------------------------------------------------
1995 10.14 -- .650 20.84 +10.6 +7.6 +18.2 +18.5
- -------------------------------------------------------------------------------------------------------------------------
LIFETIME +107.7% +117.1%
- -------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +8.4% +8.9%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes reinvestment of income dividends and any capital gains distributions
for both the Portfolio and the Index. Portfolio performance adjusted for the
$10 annual account maintenance fee.
Note: No adjustment has been made for income taxes payable by shareholders on
reinvested income dividends and capital gains distributions.
9
<PAGE> 12
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
December 31, 1995
<TABLE>
<CAPTION>
Face Market
TOTAL BOND MARKET Amount Value
PORTFOLIO (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT &
AGENCY OBLIGATIONS (62.8%)
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (32.2%)
U.S. Treasury Bonds
7.25%, 5/15/16 $ 680 $ 776
7.50%, 11/15/16 2,135 2,503
7.625%, 2/15/07 670 737
7.875%, 11/15/07-2/15/21 15,095 18,577
8.125%, 8/15/19-8/15/21 39,120 49,353
8.50%, 2/15/20 38,670 50,525
8.75%, 5/15/17-8/15/20 71,725 95,170
8.875%, 8/15/17-2/15/19 74,215 99,492
9.125%, 5/15/09-5/15/18 56,340 77,357
9.25%, 2/15/16 435 598
9.375%, 2/15/06 110 141
9.875%, 11/15/15 4,890 7,073
10.00%, 5/15/10 2,000 2,608
10.375%, 11/15/09-11/15/12 48,995 66,813
10.75%, 2/15/03-8/15/05 40,880 56,143
11.125%, 8/15/03 1,135 1,523
11.25%, 2/15/15 200 320
11.625%, 11/15/02-11/15/04 13,650 18,413
11.75%, 2/15/10-11/15/14 1,085 1,661
12.00%, 8/15/13 350 539
12.375%, 5/15/04 100 145
12.75%, 11/15/10 380 579
13.375%, 8/15/01 2,600 3,586
14.00%, 11/15/11 5,420 8,990
U.S. Treasury Notes
4.75%, 8/31/98 4,560 4,507
5.125%, 4/30/98 1,950 1,946
5.25%, 7/31/98 5,600 5,602
5.375%, 5/31/98 1,800 1,806
5.875%, 7/31/97 7,550 7,626
6.00%, 11/30/97 1,900 1,928
6.75%, 2/28/97-6/30/99 19,350 20,170
6.875%, 7/31/99 18,710 19,646
7.25%, 8/31/96-8/15/04 13,620 15,095
7.50%, 2/29/96-10/31/99 19,075 20,448
7.75%, 3/31/96-2/15/01 45,985 49,878
7.875%, 4/15/98-11/15/04 19,950 21,576
8.00%, 1/15/97 850 873
8.50%, 5/15/97-2/15/00 106,855 113,081
8.625%, 8/15/97 24,850 26,155
8.75%, 10/15/97 1,000 1,060
8.875%, 11/15/98-2/15/99 24,875 27,410
9.125%, 5/15/99 3,000 3,348
9.25%, 8/15/98 1,000 1,097
U.S. Treasury Strip
0.00%, 8/15/01 1,000 740
---------
GROUP TOTAL 907,614
---------
- --------------------------------------------------------------------------------
AGENCY BONDS AND NOTES (1.7%)
Federal Home Loan Bank
6.85%, 2/25/97 560 569
6.99%, 4/25/97 390 398
8.10%, 3/25/96 115 116
8.25%, 6/25/96 335 340
8.60%, 1/25/00 110 122
Federal Home Loan Mortgage Corp.
4.125%, 10/21/96 515 510
6.09%, 3/1/00 285 284
Federal Land Bank
7.95%, 10/21/96 175 178
Federal National Mortgage Assn.
4.95%, 9/30/98 2,350 2,315
5.30%, 3/11/98 10,400 10,322
5.35%, 8/12/98 12,350 12,263
5.80%, 12/10/03 2,300 2,285
6.20%, 7/10/03 625 622
6.40%, 3/25/03 5,000 5,028
8.10%, 8/12/19 110 133
8.20%, 3/10/98 225 238
8.35%, 11/10/99 170 186
8.45%, 7/12/99 110 120
8.625%, 10/18/21 1,170 1,262
8.70%, 6/10/99 110 121
9.55%, 3/10/99 225 252
Government Trust Certificate
9.625%, 5/15/02 550 612
Private Export Funding Corp.
7.70%, 1/31/97 500 511
8.40%, 7/31/01 225 253
Resolution Funding Corp.
8.125%, 10/15/19 550 677
8.625%, 1/15/30 110 147
8.875%, 7/15/20 280 371
Small Business Administration
Variable Rate Interest Only
Custodial Receipts
2.719%, 6/25/00 27,091 3,564
Tennessee Valley Authority
8.375%, 10/1/99 610 668
8.625%, 11/15/29 4,000 4,536
---------
GROUP TOTAL 49,003
---------
- --------------------------------------------------------------------------------
MORTGAGE OBLIGATIONS (28.9%)
Bear Stearns Collateralized Mortgage
Obligation Series 1988-4B
(Secured by Federal Home Loan
Mortgage Corp.)
9.20%, 11/1/18 152 160
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Federal Home Loan Mortgage Corp.
5.50%, 12/1/98-11/1/08 $ 5,334 $ 5,272
6.00%, 6/1/98-1/1/25 24,114 23,904
6.50%, 2/1/98-11/1/25 54,192 54,097
7.00%, 1/1/98-12/1/25 62,114 62,938
7.50%, 6/1/97-12/1/25 45,697 46,943
8.00%, 6/1/96-12/1/25 33,642 34,885
8.50%, 2/1/96-9/1/25 18,514 19,320
9.00%, 8/1/01-6/1/25 11,978 12,619
9.50%, 6/1/16-12/1/22 6,112 6,511
10.00%, 7/1/00-3/1/21 1,999 2,185
10.50%, 9/1/00-12/1/15 889 939
11.25%, 8/1/14 49 54
Federal Housing Administration
7.43%, 10/1/20 551 565
Federal National Mortgage Assn.
5.50%, 1/1/01-6/1/09 2,716 2,655
6.00%, 10/1/00-9/1/24 19,143 18,903
6.50%, 2/1/00-9/1/25 53,975 53,816
7.00%, 9/1/99-12/1/25 70,045 70,868
7.50%, 1/1/00-12/1/25 51,624 52,991
7.75%, 10/1/02 1,722 1,754
8.00%, 8/1/99-12/1/25 43,094 44,673
8.50%, 12/1/98-8/1/25 20,734 21,655
9.00%, 6/1/97-11/1/25 14,762 15,561
9.50%, 10/1/01-2/1/25 8,895 9,486
10.00%, 8/1/05-6/1/22 4,541 4,914
10.50%, 11/1/00-8/1/20 1,678 1,844
(Collateralized Mortgage Obligation)
9.50%, 7/25/07 129 130
Government National Mortgage Assn.
6.00%, 3/1/09-5/15/24 3,870 3,803
6.50%, 9/15/08-9/15/25 20,170 20,105
7.00%, 6/15/08-9/15/25 44,456 45,085
7.50%, 1/15/08-11/15/25 41,846 43,120
8.00%, 11/15/01-8/15/25 42,826 44,692
8.50%, 5/15/10-12/15/25 22,498 23,672
9.00%, 8/15/01-6/15/25 28,558 30,353
9.50%, 1/1/04-4/15/25 14,636 15,744
10.00%, 3/15/00-8/15/25 5,280 5,805
10.50%, 11/15/10-1/15/21 5,742 6,371
11.00%, 4/15/13 20 23
11.50%, 3/15/10-11/15/17 534 604
12.00%, 4/15/15 4 4
Resolution Trust Corp.
Collaterialized Mortgage
Obligations
7.75%, 12/25/18 4,462 4,442
10.40%, 8/25/21 1,753 1,835
---------
GROUP TOTAL 815,300
---------
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (Cost $1,681,595) 1,771,917
- --------------------------------------------------------------------------------
CORPORATE BONDS (31.7%)
- --------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (3.2%)
Banc One Credit Card Master Trust
7.55%, 12/15/99 8,850 9,174
Chase Manhattan Credit Card Trust
7.40%, 5/15/00 3,850 3,925
7.65%, 11/15/98 375 375
8.75%, 8/15/99 3,850 3,902
Discover Card Master Trust
5.40%, 11/16/01 8,850 8,822
First Chicago Master Trust
6.25%, 8/15/99 5,400 5,457
8.40%, 6/15/98 5,700 5,766
MBNA Master Credit Card Trust
6.20%, 8/15/99 5,700 5,755
7.75%, 10/15/98 3,850 3,909
Sears Credit Card Trust
5.90%, 11/15/98 1,902 1,906
7.25%, 7/16/01 8,850 9,093
7.75%, 9/15/98 3,850 3,907
Signet Credit Card Master Trust
4.85%, 4/15/00 5,615 5,580
Standard Credit Card Trust
6.80%, 4/7/01 8,850 9,157
8.00%, 10/7/97 5,700 5,780
8.50%, 8/7/97 5,700 5,769
9.375%, 9/10/98 2,000 2,106
---------
GROUP TOTAL 90,383
---------
- --------------------------------------------------------------------------------
FINANCE (14.7%)
American Express Credit Corp.
8.50%, 6/15/99 2,325 2,519
American General Finance
5.875%, 7/1/00 3,770 3,725
7.15%, 5/15/97 4,350 4,438
7.45%, 7/1/02 1,575 1,689
8.00%, 2/15/00 11,700 12,596
8.50%, 8/15/98 700 748
Associates Corp.
5.875%, 8/15/97 300 302
6.25%, 3/15/99 7,500 7,617
6.875%, 1/15/97 1,000 1,012
7.25%, 5/15/98 4,800 4,975
7.50%, 4/15/02 4,800 5,170
8.75%, 2/1/96 210 210
9.70%, 5/1/97 3,050 3,211
AVCO Financial Services
5.50%, 5/1/98 750 749
7.50%, 11/15/96 200 203
8.85%, 2/1/96 2,520 2,525
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
TOTAL BOND MARKET Amount Value
PORTFOLIO (continued) (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
BankAmerica Corp.
6.00%, 7/15/97 $ 1,000 $ 1,007
7.50%, 3/15/97 9,200 9,407
7.50%, 10/15/02 400 430
7.625%, 6/15/04 1,050 1,135
9.625%, 2/13/01 1,100 1,274
10.00%, 2/1/03 4,900 5,971
Bankers Trust New York Corp.
4.70%, 7/1/96 250 249
7.25%, 11/1/96 4,155 4,209
Bear Stearns Co.
6.625%, 1/15/04 3,150 3,179
6.75%, 8/15/00 2,000 2,057
9.125%, 4/15/98 2,100 2,250
Beneficial Corp.
9.125%, 2/15/98 5,710 6,109
CIT Group Holdings
6.625%, 6/15/05 7,900 8,152
CNA Financial Corp.
8.625%, 3/1/96 6,000 6,025
Chase Manhattan Corp.
7.875%, 1/15/97 700 715
8.50%, 3/1/96 2,150 2,160
Chemical Banking Corp.
6.625%, 1/15/98 200 204
7.25%, 9/15/02 500 523
7.375%, 6/15/97 150 154
Chrysler Finance Corp.
5.375%, 10/15/98 850 838
5.625%, 1/15/99 2,725 2,711
6.50%, 6/15/98 4,000 4,075
6.625%, 8/15/00 2,550 2,610
Citicorp
8.625%, 12/1/02 1,500 1,707
9.75%, 8/1/99 4,000 4,499
10.15%, 2/15/98 6,500 7,078
Commercial Credit Corp.
5.90%, 9/1/03 550 542
6.375%, 1/1/96 2,000 2,000
6.75%, 1/15/97 2,400 2,427
7.375%, 11/15/96 1,250 1,269
CoreStates Capital
9.375%, 4/15/03 1,250 1,480
Countrywide Funding
8.25%, 7/15/02 3,750 4,099
Dean Witter Discover & Co.
6.00%, 3/1/98 19,350 19,512
6.75%, 8/15/00 4,000 4,141
6.75%, 10/15/13 800 795
6.875%, 3/1/03 1,600 1,667
First Chicago Corp.
6.875%, 6/15/03 5,000 5,206
7.625%, 1/15/03 2,400 2,608
9.25%, 11/15/01 1,225 1,417
10.25%, 5/1/01 2,750 3,259
First Fidelity Bancorp
9.625%, 8/15/99 700 787
First Interstate Bancorp
8.625%, 4/1/99 8,295 8,992
10.875%, 4/15/01 2,750 3,346
First Union Corp.
8.00%, 11/15/02 100 110
8.125%, 6/24/02 2,900 3,214
Fleet Financial Group, Inc.
7.25%, 9/1/99 1,000 1,048
7.25%, 10/15/97 3,580 3,682
Fleet/Norstar Group
8.125%, 7/1/04 4,600 5,138
Ford Motor Credit Corp.
5.625%, 3/3/97 3,000 2,999
6.25%, 2/26/98 1,000 1,015
6.75%, 5/15/05 1,385 1,433
7.875%, 1/15/97 6,100 6,240
8.25%, 7/15/96 4,665 4,726
8.625%, 4/15/96 750 756
8.875%, 8/1/96 3,000 3,053
9.375%, 12/15/97 125 133
General Electric Capital Corp.
8.30%, 9/20/09 275 329
General Motors Acceptance Corp.
6.625%, 10/1/02 5,800 5,959
7.00%, 8/15/97 4,000 4,086
7.125%, 6/1/99 2,950 3,063
7.75%, 4/15/97 3,900 4,001
8.00%, 10/1/99 5,000 5,357
8.375%, 5/1/97 800 828
8.40%, 10/15/99 2,190 2,379
8.625%, 6/15/99 4,250 4,605
9.625%, 12/15/01 1,000 1,176
Great Western Bank
9.50%, 7/1/97 3,500 3,697
Great Western Finance
6.375%, 7/1/00 16,100 16,332
Household Finance Corp.
6.45%, 2/1/09 2,430 2,435
7.50%, 3/15/97 2,700 2,761
7.65%, 5/15/07 3,250 3,581
7.75%, 6/15/97 1,500 1,544
7.75%, 6/1/99 1,000 1,057
8.95%, 9/15/99 3,000 3,309
International Lease Finance
5.50%, 4/1/97 2,000 1,994
6.375%, 11/1/96 3,540 3,557
6.50%, 7/15/97 1,300 1,318
7.90%, 10/1/96 670 681
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Lehman Brothers, Inc.
5.50%, 6/15/96 $ 365 $ 363
5.75%, 2/15/98 3,000 2,991
6.625%, 11/15/00 5,000 5,062
9.75%, 4/1/96 2,500 2,523
Manufacturers Hanover Corp.
8.125%, 1/15/97 5,000 5,127
Mellon Bank
6.75%, 6/1/03 2,775 2,858
Mellon Financial Corp.
7.625%, 11/15/99 850 904
Merrill Lynch & Co., Inc.
7.25%, 5/15/97 900 919
8.00%, 2/1/02 2,600 2,848
8.30%, 11/1/02 2,735 3,062
9.00%, 5/1/98 2,450 2,620
Morgan Stanley Group, Inc.
7.32%, 1/15/97 950 966
9.25%, 3/1/98 4,625 4,945
NCNB Corp.
9.50%, 6/1/04 1,725 2,084
NationsBank, Inc.
6.625%, 1/15/98 3,900 3,979
6.75%, 8/15/00 9,600 9,951
6.875%, 2/15/05 580 606
7.25%, 10/15/25 875 908
Norwest Financial, Inc.
6.65%, 10/15/23 40 39
7.10%, 11/15/96 4,950 5,018
8.875%, 7/1/96 4,000 4,062
PaineWebber Inc.
7.00%, 3/1/00 4,350 4,441
7.875%, 2/15/03 2,250 2,398
Pitney Bowes Credit Corp.
9.25%, 6/15/08 2,000 2,509
Republic Bank of New York
7.75%, 5/15/02 3,000 3,283
Salomon Inc.
9.25%, 5/30/96 4,000 4,048
Smith Barney Holdings, Inc.
5.50%, 1/15/99 5,000 4,958
6.625%, 6/1/00 10,000 10,272
7.00%, 5/15/00 6,000 6,234
7.98%, 3/1/00 2,000 2,144
Suntrust Banks
8.875%, 2/1/98 115 122
Tenneco Credit
9.625%, 8/15/01 5,500 6,404
10.125%, 12/1/97 1,500 1,618
Transamerica Financial Corp.
6.75%, 1/15/98 1,200 1,227
8.375%, 2/15/98 100 105
U.S. Leasing International
6.625%, 5/15/03 195 198
Wachovia Corp.
6.375%, 4/15/03 110 112
---------
GROUP TOTAL 413,468
---------
- --------------------------------------------------------------------------------
INDUSTRIAL (10.2%)
AMAX, Inc.
9.875%, 6/13/01 1,000 1,168
American Airlines
(Equipment Trust Certificate)
9.71%, 1/2/07 2,993 3,470
American Brands, Inc.
7.875%, 1/15/23 1,900 2,139
Amoco Canada
6.75%, 2/15/05 145 152
Anheuser Busch Co., Inc.
7.375%, 7/1/23 800 847
8.625%, 12/1/16 2,900 3,042
Applied Materials, Inc.
8.00%, 9/1/04 1,625 1,803
Archer-Daniels-Midland Co.
6.25%, 5/15/03 1,000 1,018
8.875%, 4/15/11 3,745 4,582
Auburn Hills
12.00%, 5/1/20 800 1,259
BP America, Inc.
7.875%, 5/15/02 2,700 2,983
8.50%, 4/15/01 3,000 3,360
8.875%, 12/1/97 4,350 4,613
9.375%, 11/1/00 1,500 1,725
9.50%, 1/1/98 800 860
Baxter International, Inc.
9.25%, 12/15/99 100 111
Boeing Co.
8.375%, 3/1/96 500 502
8.75%, 8/15/21 1,800 2,262
CSX Corp.
8.25%, 11/1/96 5,050 5,156
8.40%, 8/1/96 2,625 2,664
8.625%, 5/15/22 875 1,063
9.00%, 8/15/06 700 834
Caterpillar, Inc.
9.00%, 4/15/06 1,600 1,940
Chrysler Corp.
10.40%, 8/1/99 3,550 3,782
Conrail Corp.
9.75%, 6/15/20 1,680 2,272
Cyprus AMAX Minerals Co.
7.375%, 5/15/07 3,950 4,239
Deere & Co.
8.50%, 1/9/22 985 1,195
</TABLE>
13
<PAGE> 16
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
TOTAL BOND MARKET Amount Value
PORTFOLIO (continued) (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Delta Airlines, Inc.
(Equipment Trust Certificates)
8.54%, 1/2/07 $ 4,297 $ 4,710
Dow Chemical Co.
8.50%, 6/8/10 2,500 3,013
Eastman Chemical Co.
6.375%, 1/15/04 4,975 5,053
7.25%, 1/15/24 600 632
Federal Express Corp.
10.00%, 9/1/98 1,500 1,652
Ford Capital BV
9.00%, 6/1/96 3,300 3,343
9.00%, 8/15/98 6,300 6,799
9.125%, 5/1/98 6,500 6,984
9.50%, 7/1/01 1,925 2,237
9.50%, 6/1/10 825 1,047
9.875%, 5/15/02 1,250 1,494
Ford Holdings
9.25%, 7/15/97 1,050 1,107
9.25%, 3/1/00 5,700 6,380
Ford Motor Corp.
7.50%, 11/15/99 2,000 2,113
9.00%, 9/15/01 3,250 3,677
9.95%, 2/15/32 835 1,167
Gannett Co.
5.25%, 3/1/98 190 189
General Motors Corp.
7.00%, 6/15/03 2,000 2,110
7.625%, 2/15/97 15,000 15,327
9.125%, 7/15/01 7,900 9,007
9.625%, 12/1/00 5,750 6,622
W.R. Grace & Co.
7.40%, 2/1/00 3,200 3,340
7.75%, 10/1/02 500 541
8.00%, 8/15/04 2,900 3,204
H.J. Heinz Co.
6.875%, 1/15/03 100 105
International Business Machines Corp.
6.375%, 11/1/97 100 102
International Paper Co.
7.625%, 1/15/07 1,765 1,939
Kellogg Co.
5.90%, 7/15/97 120 121
May Department Stores Co.
9.75%, 2/15/21 1,680 2,147
9.875%, 12/1/02 1,775 2,144
McDonald's Corp.
6.75%, 2/15/03 945 986
Mobil Corp.
7.625%, 2/23/33 920 1,003
Occidental Petroleum
8.50%, 11/9/01 2,600 2,913
10.125%, 11/15/01 7,000 8,372
J.C. Penney Co.
6.125%, 11/15/03 2,000 2,006
6.875%, 6/15/99 3,000 3,109
7.125%, 11/15/23 1,855 1,940
9.05%, 3/1/01 625 713
PepsiCo, Inc.
5.00%, 2/24/97 6,500 6,465
6.125%, 1/15/98 3,550 3,586
7.875%, 8/15/96 1,700 1,722
Philip Morris Co.
6.00%, 7/15/01 110 109
8.25%, 10/15/03 1,900 2,118
Phillips Petroleum Co.
8.49%, 1/1/23 3,000 3,381
9.00%, 6/1/01 2,900 3,286
Quaker State Corp.
6.625%, 10/15/05 3,275 3,344
Rockwell International
8.875%, 9/15/99 110 121
Sears, Roebuck & Co.
6.25%, 1/15/04 1,200 1,203
6.50%, 6/15/00 9,360 9,576
8.55%, 8/1/96 125 127
9.25%, 8/1/97 6,800 7,170
9.25%, 4/15/98 8,550 9,199
9.375%, 11/1/11 1,845 2,322
Tenneco Inc.
8.00%, 11/15/99 12,500 13,373
9.25%, 11/1/96 2,189 2,247
9.875%, 2/1/01 1,850 2,152
10.00%, 8/1/98 2,250 2,473
10.375%, 11/15/00 4,900 5,783
Texaco Capital Corp.
7.50%, 3/1/43 850 912
8.25%, 10/1/06 1,000 1,166
8.875%, 9/1/21 705 899
9.00%, 12/15/99 300 333
Union Carbide Corp.
6.75%, 4/1/03 3,500 3,633
7.875%, 4/1/23 1,955 2,175
Union Oil of California
9.125%, 2/15/06 1,935 2,335
9.25%, 2/1/03 1,045 1,226
9.75%, 12/1/00 5,840 6,748
Union Pacific Corp.
8.625%, 5/15/22 2,865 3,299
Waste Management Inc.
4.625%, 4/14/96 290 289
7.875%, 8/15/96 2,975 3,015
Whirlpool Corp.
9.00%, 3/1/03 2,250 2,618
9.10%, 2/1/08 940 1,148
---------
GROUP TOTAL 287,942
---------
- --------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES--ELECTRIC & GAS (2.5%)
Alabama Power Co.
6.00%, 3/1/00 $ 1,950 $ 1,963
8.75%, 12/1/21 1,147 1,224
Arizona Public Service Co.
7.625%, 3/15/98 12,700 13,196
8.00%, 2/1/25 2,510 2,667
Baltimore Gas & Electric Co.
8.375%, 8/15/01 5,570 6,187
Carolina Power & Light Co.
6.875%, 8/15/23 2,550 2,591
8.20%, 7/1/22 110 119
Cincinnati Gas & Electric Co.
6.45%, 2/15/04 1,000 1,020
8.125%, 8/1/03 2,250 2,304
Connecticut Power and Light Co.
7.625%, 4/1/97 493 503
Consolidated Edison Co. of
New York, Inc.
6.625%, 2/1/02 1,000 1,025
Enron Corp.
7.125%, 5/15/07 6,100 6,456
7.625%, 9/10/04 2,000 2,180
9.65%, 5/15/01 4,150 4,821
Georgia Power Co.
4.75%, 3/1/96 330 329
Houston Lighting and Power Co.
8.75%, 3/1/22 1,050 1,267
Pacific Gas and Electric Co.
6.75%, 10/1/23 150 143
Pennsylvania Power & Light Co.
6.50%, 4/1/05 135 138
Public Service Electric & Gas Co.
6.50%, 5/1/04 170 171
South Carolina Electric & Gas
9.00%, 7/15/06 145 174
Southern California Gas
7.375%, 3/1/23 120 123
Tennessee Gas Pipeline
9.25%, 5/15/96 2,000 2,024
Texas Utilities Co.
5.75%, 7/1/98 1,200 1,202
5.875%, 4/1/98 4,200 4,215
7.125%, 6/1/97 800 816
7.375%, 8/1/01 2,800 2,970
7.875%, 3/1/23 2,975 3,194
8.25%, 4/1/04 3,250 3,658
8.75%, 11/1/23 180 198
Union Electric Power Co.
6.75%, 5/1/08 40 42
7.65%, 7/15/03 2,000 2,194
Virginia Electric & Power Co.
6.625%, 4/1/03 2,300 2,370
Wisconsin Electric Power
7.70%, 12/15/27 65 69
---------
GROUP TOTAL 71,553
---------
- --------------------------------------------------------------------------------
UTILITIES--TELEPHONE (1.1%)
GTE Corp.
8.75%, 11/1/21 750 922
8.85%, 3/1/98 2,300 2,452
9.10%, 6/1/03 225 262
MCI Communications Corp.
7.50%, 8/20/04 4,050 4,419
Michigan Bell Telephone Co.
6.375%, 2/1/05 155 157
7.50%, 2/15/23 2,510 2,681
New England Telephone &
Telegraph Co.
6.875%, 10/1/23 890 895
8.625%, 8/1/01 2,000 2,259
New Jersey Bell Telephone Co.
6.625%, 4/1/08 190 192
New York Telephone Co.
7.00%, 8/15/25 1,925 1,911
7.75%, 12/15/06 120 122
Pacific Bell Corp.
7.00%, 7/15/04 2,275 2,410
7.25%, 7/1/02 250 268
Southern Bell Telephone Co.
7.625%, 3/15/13 4,950 5,090
Southwestern Bell Telephone Co.
7.625%, 10/1/13 1,620 1,663
7.625%, 3/1/23 3,780 4,009
U S WEST Communications
6.875%, 9/15/33 165 162
---------
GROUP TOTAL 29,874
---------
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $869,079) 893,220
- --------------------------------------------------------------------------------
FOREIGN & INTERNATIONAL AGENCY
BONDS (DOLLAR DENOMINATED) (4.2%)
- --------------------------------------------------------------------------------
Province of Alberta
9.20%, 11/1/97 145 154
9.25%, 4/1/00 5,075 5,744
Asian Development Bank
9.125%, 6/1/00 740 836
Bayerische Landesbank
7.375%, 12/14/02 145 157
British Aerospace
8.50%, 6/10/02 3,000 3,321
Province of British Columbia
7.00%, 1/15/03 2,550 2,713
</TABLE>
15
<PAGE> 18
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
TOTAL BOND MARKET Amount Value
PORTFOLIO (continued) (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
British Columbia Hydro
12.50%, 9/1/13 $ 400 $ 481
European Investment Bank
8.875%, 3/1/01 4,300 4,905
10.125%, 10/1/00 125 147
Export Import Bank Japan
7.50%, 3/9/97 110 112
9.00%, 4/15/98 600 644
Finland Global Bond
6.75%, 11/24/97 200 204
Grand Metropolitan
Investment Corp.
9.00%, 8/15/11 2,225 2,748
Hanson Overseas
5.50%, 1/15/96 345 345
7.375%, 1/15/03 6,500 6,939
Inter American Development Bank
7.125%, 3/15/23 975 1,002
8.50%, 3/15/11 2,705 3,288
9.50%, 10/15/97 5,400 5,762
International Bank for
Reconstruction & Development
8.125%, 3/1/01 800 890
9.25%, 7/15/17 1,615 2,145
12.375%, 10/15/02 966 1,317
KFW, Inc.
7.625%, 2/15/04 6,025 6,652
8.85%, 6/15/99 1,025 1,128
9.125%, 5/15/01 2,400 2,769
Province of Manitoba
7.75%, 2/1/02 3,600 3,937
8.75%, 5/15/01 5,700 6,445
9.25%, 4/1/20 2,645 3,472
9.50%, 10/1/00 1,560 1,793
9.625%, 3/15/99 2,500 2,788
National Westminster Bancorp Inc.
9.375%, 11/15/03 2,800 3,351
Province of New Brunswick
6.75%, 8/15/13 210 214
New Zealand Government
8.75%, 12/15/06 1,175 1,422
9.125%, 9/25/16 1,180 1,526
9.875%, 1/15/11 1,450 1,936
10.625%, 11/15/05 400 535
Province of Ontario
7.375%, 1/27/03 915 991
7.75%, 6/4/02 1,175 1,279
8.25%, 4/8/96 7,185 7,233
Philips Electronics
7.75%, 4/15/04 2,000 2,191
8.375%, 9/15/06 5,050 5,824
Republic of Portugal
5.75%, 10/8/03 2,150 2,134
Province of Saskatchewan
7.125%, 3/15/08 1,200 1,280
7.375%, 7/15/13 1,800 1,936
8.00%, 7/15/04 6,800 7,580
Sweden Global Bond
6.50%, 3/4/03 145 150
Kingdom of Thailand
8.25%, 3/15/02 4,100 4,550
Tokyo Metro Govt.
10.375%, 10/20/97 135 146
- --------------------------------------------------------------------------------
TOTAL FOREIGN & INTERNATIONAL
AGENCY BONDS (Cost $111,583) 117,116
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.1%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 5.89%, 1/2/96
(Cost $30,061) 30,061 30,061
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.8%)
(Cost $2,692,318) 2,812,314
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.2%)
- --------------------------------------------------------------------------------
Other Assets--Notes B and E 107,849
Liabilities--Note E (101,946)
---------
5,903
- --------------------------------------------------------------------------------
NET ASSETS (100%) $2,818,217
================================================================================
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT DECEMBER 31, 1995,
NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Amount
(000)
----------
<S> <C>
Paid in Capital $2,706,001
Undistributed Net
Investment Income --
Accumulated Net
Realized Losses--Note D (7,780)
Unrealized Appreciation
of Investments--Note D 119,996
- --------------------------------------------------------------------------------
NET ASSETS $2,818,217
- --------------------------------------------------------------------------------
INDIVIDUAL CLASS--
Net Assets Applicable to
237,211,788 outstanding
$.001 par value shares
(authorized 300,000,000 shares) $2,405,032
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--
INDIVIDUAL CLASS $10.14
================================================================================
INSTITUTIONAL CLASS--
Net Assets Applicable to
40,753,042 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $413,185
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--
INSTITUTIONAL CLASS $10.14
================================================================================
</TABLE>
+ See Note A to Financial Statements.
<TABLE>
<CAPTION>
Face Market
Amount Value
SHORT-TERM BOND PORTFOLIO (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT &
AGENCY OBLIGATIONS (65.4%)
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (63.8%)
U.S. Treasury Notes
4.75%, 8/31/98 $ 1,575 $ 1,557
5.125%, 4/30/98-6/30/98 1,675 1,672
5.25%, 7/31/98 3,925 3,926
5.375%, 5/31/98 3,250 3,261
5.875%, 7/31/97 4,850 4,899
6.25%, 8/31/00 9,400 9,725
6.375%, 1/15/00-8/15/02 450 470
6.75%, 2/28/97-6/30/99 7,440 7,644
6.875%, 2/28/97-3/31/00 16,825 17,720
7.25%, 2/15/98 1,000 1,040
7.50%, 1/31/96-10/31/99 4,450 4,770
7.75%, 11/30/99-1/31/00 13,710 14,879
7.875%, 1/15/98-11/15/99 1,185 1,255
8.25%, 7/15/98 11,670 12,491
8.50%, 4/15/97-7/15/97 31,950 33,412
8.625%, 8/15/97 4,450 4,684
8.75%, 10/15/97 2,700 2,862
8.875%, 11/15/98-2/15/99 3,590 3,948
9.125%, 5/15/99 2,050 2,288
---------
GROUP TOTAL 132,503
---------
- --------------------------------------------------------------------------------
AGENCY NOTES (1.6%)
Federal National Mortgage Assn.
4.95%, 9/30/98 700 690
5.30%, 3/11/98 1,075 1,067
5.35%, 8/12/98 700 695
8.625%, 9/10/96 900 919
---------
GROUP TOTAL 3,371
---------
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT &
AGENCY OBLIGATIONS (Cost $132,599) 135,874
- --------------------------------------------------------------------------------
CORPORATE BONDS (31.1%)
- --------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (2.3%)
Banc One Credit Card Master Trust
7.55%, 12/15/99 650 674
Chase Manhattan Credit Card Trust
7.40%, 5/15/00 300 306
8.75%, 8/15/99 300 304
Discover Card Master Trust
5.40%, 11/16/01 650 648
First Chicago Master Trust
6.25%, 8/15/99 300 303
MBNA Master Credit Card Trust
7.75%, 10/15/98 300 305
Sears Credit Account Trust
7.25%, 7/16/01 650 668
7.75%, 9/15/98 300 304
</TABLE>
17
<PAGE> 20
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
SHORT-TERM BOND Amount Value
PORTFOLIO (continued) (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Signet Credit Card Master Trust
4.85%, 4/15/00 $ 650 $ 646
Standard Credit Card Master Trust
6.80%, 4/7/01 650 673
---------
GROUP TOTAL 4,831
---------
- --------------------------------------------------------------------------------
FINANCE (16.9%)
American General Finance Corp.
8.00%, 2/15/00 1,400 1,507
8.50%, 8/15/98 300 321
Associates Corp.
5.875%, 8/15/97 200 201
6.25%, 3/15/99 500 508
6.875%, 1/15/97 250 253
7.25%, 5/15/98 200 207
9.125%, 4/1/00 1,000 1,119
AVCO Financial Services
5.50%, 5/1/98 250 250
7.50%, 11/15/96 300 305
BankAmerica Corp.
6.00%, 7/15/97 250 252
7.50%, 3/15/97 1,980 2,024
Bankers Trust New York Corp.
4.70%, 7/1/96 250 249
Bear Stearns Co.
7.625%, 4/15/00 750 796
9.125%, 4/15/98 650 696
Chase Manhattan Corp.
8.50%, 3/1/96 250 251
Chemical Bank Corp.
6.625%, 1/15/98 200 204
7.375%, 6/15/97 200 205
Chrysler Finance Corp.
5.375%, 10/15/98 400 394
6.50%, 6/15/98 250 255
Citicorp
9.75%, 8/1/99 1,000 1,125
10.15%, 2/15/98 1,000 1,089
Commercial Credit Corp.
6.75%, 1/15/97 200 202
7.375%, 11/15/96 250 254
Dean Witter Discover & Co.
6.00%, 3/1/98 1,800 1,815
First Fidelity Bancorp
9.625%, 8/15/99 800 899
First Interstate Bancorp
8.625%, 4/1/99 900 976
Fleet Financial Group, Inc.
7.25%, 10/15/97 1,500 1,543
Ford Motor Credit Corp.
6.25%, 2/26/98 250 254
7.875%, 1/15/97 750 767
8.625%, 4/15/96 495 499
General Motors
Acceptance Corp.
7.125%, 6/1/99 500 519
7.75%, 4/15/97 700 718
8.375%, 5/1/97 500 517
8.625%, 6/15/99 750 813
Great Western Finance
6.375%, 7/1/00 1,400 1,420
Household Finance Corp.
7.50%, 3/15/97 300 307
7.75%, 6/15/97 750 772
7.80%, 11/1/96 135 137
International Lease Finance Corp.
6.375%, 11/1/96 150 151
6.50%, 7/15/97 200 203
7.90%, 10/1/96 300 305
Lehman Brothers Inc.
5.75%, 2/15/98 750 748
Manufacturers Hanover Corp.
8.50%, 2/15/99 900 969
Mellon Financial Corp.
6.50%, 12/1/97 300 305
7.625%, 11/15/99 150 159
Merrill Lynch & Co., Inc.
7.25%, 5/15/97 200 204
9.00%, 5/1/98 300 321
Morgan Stanley Group, Inc.
7.32%, 1/15/97 300 305
9.25%, 3/1/98 200 214
NCNB Corp.
8.50%, 11/1/96 170 174
NationsBank, Inc.
6.625%, 1/15/98 350 357
6.75%, 8/15/00 700 725
7.50%, 2/15/97 1,000 1,021
PaineWebber Inc.
7.00%, 3/1/00 700 714
Smith Barney Holdings, Inc.
5.50%, 1/15/99 500 496
5.625%, 11/15/98 700 697
7.98%, 3/1/00 1,000 1,072
Suntrust Banks
8.875%, 2/1/98 500 532
Transamerica Financial Corp.
6.75%, 1/15/98 300 307
8.375%, 2/15/98 400 422
---------
GROUP TOTAL 35,024
---------
- --------------------------------------------------------------------------------
INDUSTRIAL (10.2%)
BP America, Inc.
8.875%, 12/1/97 800 848
9.50%, 1/1/98 810 870
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
CSX Corp.
8.25%, 11/1/96 $ 200 $ 204
8.40%, 8/1/96 250 254
Chrysler Corp.
10.40%, 8/1/99 350 373
Federal Express Corp.
10.00%, 9/1/98 600 661
Ford Capital BV
9.00%, 6/1/96 200 203
9.00%, 8/15/98 535 577
9.125%, 5/1/98 1,215 1,305
9.375%, 1/1/98 750 803
Ford Holdings
9.25%, 7/15/97 500 527
9.25%, 3/1/00 1,000 1,119
General Motors Corp.
7.625%, 2/15/97 1,500 1,533
9.125%, 7/15/01 750 855
W.R. Grace & Co.
7.40%, 2/1/00 800 835
Mobil Corp.
8.375%, 2/12/01 1,000 1,113
J.C. Penney Co., Inc.
6.875%, 6/15/99 750 777
PepsiCo, Inc.
6.125%, 1/15/98 200 202
7.875%, 8/15/96 300 304
Philip Morris Co.
8.875%, 7/1/96 110 112
Phillips Petroleum Co.
9.00%, 6/1/01 1,000 1,133
Sears, Roebuck & Co.
9.25%, 8/1/97 555 585
9.25%, 4/15/98 1,300 1,399
Tenneco Inc.
8.00%, 11/15/99 350 374
10.00%, 8/1/98 1,750 1,924
10.375%, 11/15/00 1,400 1,652
Texaco Capital Corp.
9.00%, 11/15/97 105 111
9.00%, 12/15/99 250 278
WMX Technologies Inc.
7.875%, 8/15/96 200 202
---------
GROUP TOTAL 21,133
---------
- --------------------------------------------------------------------------------
UTILITIES (1.7%)
Alabama Power Co.
6.00%, 3/1/00 300 302
Arizona Public Service Co.
7.625%, 3/15/98 800 832
GTE Corp.
8.85%, 3/1/98 700 746
Texas Utilities Co.
5.75%, 7/1/98 300 301
5.875%, 4/1/98 800 803
7.125%, 6/1/97 480 490
---------
GROUP TOTAL 3,474
---------
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $63,427) 64,462
- --------------------------------------------------------------------------------
FOREIGN & INTERNATIONAL AGENCY
BONDS (DOLLAR DENOMINATED) (1.1%)
- --------------------------------------------------------------------------------
Export Import Bank Japan
9.00%, 4/15/98 500 537
Inter American Development Bank
9.50%, 10/15/97 600 640
Province of Manitoba
8.75%, 5/15/01 500 565
9.625%, 3/15/99 500 558
- --------------------------------------------------------------------------------
TOTAL FOREIGN & INTERNATIONAL
AGENCY BONDS (Cost $2,208) 2,300
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (.9%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 5.89%, 1/2/96
(Cost $1,879) 1,879 1,879
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.5%)
(Cost $200,113) 204,515
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.5%)
- --------------------------------------------------------------------------------
Other Assets--Notes B and E 20,580
Liabilities--Note E (17,498)
---------
3,082
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 20,613,793 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $207,597
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.07
================================================================================
</TABLE>
+ See Note A to Financial Statements.
19
<PAGE> 22
STATEMENT OF NET ASSETS (continued)
SHORT-TERM BOND
PORTFOLIO (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT DECEMBER 31, 1995,
NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Amount Per
(000) Share
--------- ---------
<S> <C> <C>
Paid in Capital $203,103 $ 9.85
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Gains 92 --
Unrealized Appreciation
of Investments--Note D 4,402 .22
- --------------------------------------------------------------------------------
NET ASSETS $207,597 $10.07
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
INTERMEDIATE-TERM Amount Value
BOND PORTFOLIO (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT &
AGENCY OBLIGATIONS (52.1%)
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (50.9%)
U.S. Treasury Bonds
10.375%, 11/15/09-11/15/12 $ 12,085 $ 16,391
10.75%, 8/15/05 21,890 30,075
U.S. Treasury Notes
4.75%, 8/31/98 500 494
5.25%, 7/31/98 750 750
5.75%, 8/15/03 23,745 24,031
5.875%, 7/31/97-2/15/04 3,325 3,373
6.25%, 2/15/03 8,624 8,997
6.375%, 8/15/02 9,795 10,271
6.875%, 3/31/00 4,050 4,278
7.125%, 2/29/00 100 106
7.25%, 5/15/04-8/15/04 28,308 31,469
7.50%, 11/15/01 4,935 5,435
7.75%, 2/15/01 5,575 6,156
7.875%, 8/15/01-11/15/04 21,550 24,567
8.00%, 5/15/01 2,025 2,267
8.25%, 7/15/98 3,000 3,211
8.50%, 7/15/97 2,500 2,621
8.625%, 8/15/97 1,000 1,053
8.75%, 10/15/97 550 583
---------
GROUP TOTAL 176,128
---------
- --------------------------------------------------------------------------------
AGENCY NOTES (1.2%)
Federal National Mortgage Assn.
5.80%, 12/10/03 900 894
7.00%, 8/12/02 2,900 2,943
Tennessee Valley Authority
6.875%, 1/15/02 200 205
---------
GROUP TOTAL 4,042
---------
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT &
AGENCY OBLIGATIONS (Cost $171,145) 180,170
- --------------------------------------------------------------------------------
CORPORATE BONDS (34.7%)
- --------------------------------------------------------------------------------
FINANCE (13.4%)
American General Finance Corp.
5.875%, 7/1/00 450 445
7.45%, 7/1/02 250 268
Associates Corp.
7.50%, 4/15/02 2,000 2,154
BankAmerica Corp.
7.50%, 10/15/02 400 430
7.625%, 6/15/04 250 270
7.75%, 7/15/02 250 271
9.625%, 2/13/01 400 463
10.00%, 2/1/03 700 853
Bear Stearns Co.
6.625%, 1/15/04 250 252
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Chase Manhattan Corp.
7.75%, 11/1/99 $ 135 $ 144
Chemical Banking Corp.
7.25%, 9/15/02 3,165 3,313
8.625%, 5/1/02 1,000 1,131
Chrysler Finance Corp.
5.625%, 1/15/99 350 348
6.625%, 8/15/00 450 461
Citicorp
7.125%, 6/1/03 135 142
8.625%, 12/1/02 1,500 1,707
Commercial Credit Corp.
5.90%, 9/1/03 450 444
7.875%, 7/15/04 2,000 2,223
CoreStates Capital Corp.
9.375%, 4/15/03 500 592
Countrywide Funding
8.25%, 7/15/02 250 273
Dean Witter Discover & Co.
6.25%, 3/15/00 210 214
6.875%, 3/1/03 400 417
First Chicago Corp.
7.625%, 1/15/03 250 272
9.875%, 8/15/00 150 173
10.25%, 5/1/01 250 296
First Interstate Bancorp
10.875%, 4/15/01 250 304
First Union Corp.
8.00%, 11/15/02 2,000 2,202
8.125%, 6/24/02 1,600 1,773
Fleet Financial Group, Inc.
6.875%, 3/1/03 600 623
Fleet/Norstar Group
8.125%, 7/1/04 750 838
Ford Motor Credit Corp.
6.625%, 6/30/03 3,000 3,072
8.20%, 2/15/02 900 997
General Motors Acceptance Corp.
5.50%, 12/15/01 750 724
6.625%, 10/1/02 2,600 2,671
9.625%, 12/15/01 1,200 1,412
Household Finance Corp.
7.625%, 1/15/03 3,500 3,803
7.65%, 5/15/07 500 551
International Lease Finance Corp.
6.20%, 5/1/00 3,000 3,037
Mellon Bank
6.75%, 6/1/03 225 232
Mellon Financial Corp.
7.625%, 11/15/99 450 478
Merrill Lynch & Co., Inc.
8.00%, 2/1/02 400 438
8.30%, 11/1/02 250 280
NCNB Corp.
9.50%, 6/1/04 2,000 2,416
NationsBank, Inc.
6.875%, 2/15/05 325 340
7.75%, 8/15/04 500 548
8.125%, 6/15/02 300 332
Norwest Financial Inc.
7.00%, 1/15/03 110 116
Paine Webber Inc.
7.00%, 3/1/00 450 459
7.875%, 2/15/03 250 266
Republic Bank of New York
7.75%, 5/15/02 700 766
---------
GROUP TOTAL 46,234
---------
- --------------------------------------------------------------------------------
INDUSTRIAL (14.1%)
AMAX, Inc.
9.875%, 6/13/01 600 701
Air Products & Chemicals, Inc.
6.25%, 6/15/03 125 126
American Airlines
(Equipment Trust Certificates)
9.71%, 10/25/02 499 579
Applied Materials, Inc.
8.00%, 9/1/04 150 167
Archer-Daniels-Midland Co.
6.25%, 5/15/03 250 255
BP America, Inc.
7.875%, 5/15/02 650 718
8.50%, 4/15/01 3,000 3,360
CSX Corp.
9.00%, 8/15/06 275 328
Caterpillar, Inc.
9.00%, 4/15/06 500 606
Cyprus AMAX Minerals Co.
7.375%, 5/15/07 850 912
Cyprus Minerals Co.
10.125%, 4/1/02 1,500 1,800
Delta Airlines, Inc.
(Equipment Trust Certificates)
8.54%, 1/2/07 540 592
Eastman Chemical Co.
6.375%, 1/15/04 2,625 2,666
First Data Corp.
6.625%, 4/1/03 2,000 2,073
Ford Capital BV
9.50%, 7/1/01 675 784
9.875%, 5/15/02 2,120 2,533
Ford Motor Corp.
9.00%, 9/15/01 1,750 1,980
General Motors Corp.
7.00%, 6/15/03 500 527
9.125%, 7/15/01 2,700 3,078
9.625%, 12/1/00 1,400 1,612
</TABLE>
21
<PAGE> 24
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
INTERMEDIATE-TERM BOND Amount Value
PORTFOLIO (continued) (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
W.R. Grace & Co.
7.75%, 10/1/02 $ 500 $ 541
8.00%, 8/15/04 1,850 2,044
Johnson & Johnson
7.375%, 6/29/02 200 216
Kimberly-Clark
8.625%, 5/1/01 100 112
Lockheed Martin
6.50%, 4/15/03 2,000 2,065
May Department Stores Co.
9.875%, 12/1/02 225 272
McDonald's Corp.
6.75%, 2/15/03 450 470
Mobil Corp.
8.375%, 2/21/01 1,238 1,378
Occidental Petroleum
8.50%, 11/9/01 1,000 1,120
J.C. Penney & Co.
6.125%, 11/15/03 130 130
9.05%, 3/1/01 375 428
Philip Morris Co.
8.25%, 10/15/03 250 279
Phillips Petroleum Co.
9.00%, 6/1/01 1,500 1,700
Quaker State
6.625%, 10/15/05 800 817
Sears, Roebuck & Co.
6.25%, 1/15/04 650 652
Tenneco Inc.
9.875%, 2/1/01 3,300 3,838
Texaco Capital Inc.
9.00%, 12/15/99 450 500
Union Carbide Corp.
6.75%, 4/1/03 3,050 3,166
Union Oil of California
6.375%, 2/1/04 2,000 2,013
9.125%, 2/15/06 200 241
9.25%, 2/1/03 550 645
9.75%, 12/1/00 210 243
Whirlpool Corp.
9.00%, 3/1/03 400 465
Xerox Corp.
8.125%, 4/15/02 150 166
---------
GROUP TOTAL 48,898
---------
- --------------------------------------------------------------------------------
UTILITIES--ELECTRIC & GAS (5.3%)
Alabama Power Co.
6.00%, 3/1/00 750 755
Baltimore Gas & Electric Co.
7.25%, 7/1/02 200 214
Cincinnati Gas & Electric Co.
6.45%, 2/15/04 800 816
8.125%, 8/1/03 250 256
Consolidated Edison Co.
of New York, Inc.
6.625%, 2/1/02 500 512
Enron Corp.
7.125%, 5/15/07 2,300 2,434
7.625%, 9/10/04 800 872
Florida Power & Light Co.
6.625%, 2/1/03 210 214
Pacific Gas & Electric
7.875%, 3/1/02 3,000 3,272
Public Service Electric & Gas Co.
6.00%, 1/1/01 1,000 1,003
Texas Utilities Co.
7.375%, 8/1/01 450 477
8.125%, 2/1/02 600 660
8.25%, 4/1/04 1,500 1,688
Union Electric Corp.
7.65%, 7/15/03 1,000 1,097
Virginia Electric & Power Co.
6.625%, 4/1/03 4,000 4,123
---------
GROUP TOTAL 18,393
---------
- --------------------------------------------------------------------------------
UTILITIES--TELEPHONE (1.9%)
MCI Communications Corp.
7.50%, 8/20/04 1,150 1,255
New England Telephone
& Telegraph Co.
8.625%, 8/1/01 3,500 3,953
Pacific Bell Corp.
7.00%, 7/15/04 800 847
7.25%, 7/1/02 450 482
---------
GROUP TOTAL 6,537
---------
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $113,782) 120,062
- --------------------------------------------------------------------------------
FOREIGN & INTERNATIONAL AGENCY
BONDS (DOLLAR DENOMINATED) (10.3%)
- --------------------------------------------------------------------------------
Asian Development Bank
9.125%, 6/1/00 700 791
Province of British Columbia
7.00%, 1/15/03 400 426
European Investment Bank
8.875%, 3/1/01 1,100 1,255
Hanson Overseas
7.375%, 1/15/03 2,500 2,669
International Bank for
Reconstruction & Development
8.125%, 3/1/01 700 778
12.375%, 10/15/02 1,000 1,363
KFW, Inc.
7.625%, 2/15/04 3,875 4,279
9.125%, 5/15/01 400 461
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Province of Manitoba
7.75%, 2/1/02 $ 4,875 $ 5,331
8.75%, 5/15/01 1,000 1,131
9.50%, 10/1/00 450 517
National Westminster Bancorp Inc.
9.375%, 11/15/03 1,000 1,197
9.45%, 5/1/01 250 290
New Zealand Government
8.75%, 12/15/06 125 151
10.625%, 11/15/05 600 803
Noranda Inc.
8.625%, 7/15/02 500 563
Bank of Nova Scotia
6.875%, 5/1/03 500 522
Province of Ontario
7.75%, 6/4/02 550 599
Philips Electronics NV
8.375%, 9/15/06 2,400 2,768
Republic of Portugal
5.75%, 10/8/03 600 595
Province of Saskatchewan
7.125%, 3/15/08 500 533
8.00%, 7/15/04 3,700 4,124
Kingdom of Thailand
8.25%, 3/15/02 4,000 4,439
- --------------------------------------------------------------------------------
TOTAL FOREIGN & INTERNATIONAL
AGENCY BONDS (Cost $33,894) 35,585
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.5%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 5.89%, 1/2/96
(Cost $5,135) 5,135 5,135
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.6%)
(Cost $323,956) 340,952
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.4%)
- --------------------------------------------------------------------------------
Other Assets--Notes B and E 22,632
Liabilities--Note E (17,952)
---------
4,680
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 33,335,270 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $345,632
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.37
================================================================================
</TABLE>
+ See Note A to Financial Statements.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT DECEMBER 31, 1995,
NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Amount Per
(000) Share
-------- --------
<S> <C> <C>
Paid in Capital $328,478 $ 9.85
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Gains 158 .01
Unrealized Appreciation
of Investments--Note D 16,996 .51
- --------------------------------------------------------------------------------
NET ASSETS $345,632 $10.37
- --------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 26
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
LONG-TERM BOND PORTFOLIO (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT &
AGENCY OBLIGATIONS (65.6%)
- --------------------------------------------------------------------------------
U.S. Treasury Bonds
7.875%, 2/15/21 $ 145 $ 179
8.125%, 8/15/19 1,635 2,056
8.50%, 2/15/20 570 745
8.75%, 5/15/17 3,695 4,887
8.875%, 8/15/17-2/15/19 3,225 4,326
9.125%, 5/15/18 2,820 3,876
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT &
AGENCY OBLIGATIONS
(Cost $14,448) 16,069
- --------------------------------------------------------------------------------
CORPORATE BONDS (24.1%)
- --------------------------------------------------------------------------------
FINANCE (5.4%)
BankAmerica Corp.
7.625%, 6/15/04 200 216
Chemical Bank Corp
6.125%, 11/1/08 100 98
Dean Witter Discover & Co.
6.75%, 10/15/13 200 199
Fleet Norstar Financial Corp.
8.125%, 7/1/04 150 168
Ford Motor Credit Corp.
6.75%, 5/15/05 115 119
Household Finance Corp.
6.45%, 2/1/09 70 70
7.65%, 5/15/07 150 165
NationsBank, Inc.
6.875%, 2/15/05 95 99
7.25%, 10/15/25 125 130
Norwest Corp.
6.65%, 10/15/23 60 59
---------
GROUP TOTAL 1,323
---------
- --------------------------------------------------------------------------------
INDUSTRIAL (9.0%)
Archer-Daniels-Midland Co.
8.875%, 4/15/11 80 98
Auburn Hills
12.00%, 5/1/20 60 94
CSX Corp.
8.625%, 5/15/22 25 30
9.00%, 8/15/06 25 30
Caterpillar, Inc.
9.00%, 4/15/06 100 121
Cyprus AMAX Minerals Co.
7.375%, 5/15/07 200 215
Deere & Co.
8.50%, 1/9/22 40 48
Eastman Chemical Co.
7.25%, 1/15/24 75 79
Ford Capital BV
9.50%, 6/1/10 180 228
International Paper Co.
7.625%, 1/15/07 35 38
May Department Stores Co.
9.75%, 2/15/21 40 51
Mobil Corp.
7.625%, 2/23/33 80 87
J.C. Penney Co.
7.125%, 11/15/23 170 178
Quaker State
6.625%, 10/15/05 150 153
Sears, Roebuck & Co.
9.375%, 11/1/11 195 245
Texaco Capital Corp.
8.875%, 9/1/21 155 198
Union Carbide Corp.
7.875%, 4/1/23 70 78
Union Oil of California
9.125%, 2/15/06 90 108
Union Pacific Corp.
8.625%, 5/15/22 35 40
Whirlpool Corp.
9.10%, 2/1/08 60 73
---------
GROUP TOTAL 2,192
---------
- --------------------------------------------------------------------------------
UTILITIES--ELECTRIC & GAS (6.2%)
Alabama Power Co.
8.75%, 12/1/21 140 149
Arizona Public Service Co.
8.00%, 2/1/25 315 335
Cincinnati Gas & Electric Co.
6.45%, 2/15/04 200 204
Enron Corp.
7.125%, 5/15/07 246 260
7.625%, 9/10/04 200 218
Texas Utilities Co.
7.875%, 3/1/23 90 97
8.75%, 11/1/23 50 55
Union Electric Power Co.
6.75%, 5/1/08 120 125
Wisconsin Electric Power Co.
7.70%, 12/15/27 75 79
---------
GROUP TOTAL 1,522
---------
- --------------------------------------------------------------------------------
UTILITIES--TELEPHONE (3.5%)
GTE Corp.
8.75%, 11/1/21 250 307
MCI Communications Corp.
7.50%, 8/20/04 100 109
Michigan Bell Telephone Co.
7.50%, 2/15/23 40 43
New England Telephone &
Telegraph Co.
6.875%, 10/1/23 110 111
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Pacific Bell Corp.
7.00%, 7/15/04 $ 100 $ 106
Southern Bell Telephone Co.
7.625%, 3/15/13 50 51
Southwestern Bell Telephone Co.
7.625%, 10/1/13 80 82
7.625%, 3/1/23 45 48
---------
GROUP TOTAL 857
---------
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $5,451) 5,894
- --------------------------------------------------------------------------------
FOREIGN & INTERNATIONAL AGENCY
BONDS (DOLLAR DENOMINATED) (9.7%)
- --------------------------------------------------------------------------------
British Columbia Hydro
12.50%, 9/1/13 100 120
Grand Metropolitan Investment Corp.
9.00%, 8/15/11 75 93
Inter-American Development Bank
7.125%, 3/15/23 25 26
8.50%, 3/15/11 110 134
International Bank for Reconstruction
& Development
9.25%, 7/15/17 135 179
KFW, Inc.
7.625%, 2/15/04 350 386
Province of Manitoba
9.25%, 4/1/20 105 138
National Westminster Bancorp Inc.
9.375%, 11/15/03 150 180
New Zealand Government
8.75%, 12/15/06 200 242
9.125%, 9/25/16 20 26
9.875%, 1/15/11 100 134
Philips Electronics NV
8.375%, 9/15/06 150 173
Province of Saskatchewan
7.125%, 3/15/08 100 107
7.375%, 7/15/13 400 430
- --------------------------------------------------------------------------------
TOTAL FOREIGN & INTERNATIONAL
AGENCY BONDS (Cost $2,191) 2,368
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.9%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 5.89%, 1/2/96
(Cost $708) 708 708
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (102.3%)
(Cost $22,798) 25,039
- --------------------------------------------------------------------------------
<CAPTION>
Market
Value
(000)+
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-2.3%)
- --------------------------------------------------------------------------------
Other Assets--Note B $ 481
Liabilities (1,038)
---------
(557)
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 2,262,171 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $24,482
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.82
================================================================================
</TABLE>
+ See Note A to Financial Statements.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT DECEMBER 31, 1995,
NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Amount Per
(000) Share
-------- --------
<S> <C> <C>
Paid in Capital $22,215 $ 9.82
Undistributed Net
Investment Income -- --
Accumulated Net Realized Gains 26 .01
Unrealized Appreciation
of Investments--Note D 2,241 .99
- --------------------------------------------------------------------------------
NET ASSETS $24,482 $10.82
- --------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 28
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
TOTAL BOND SHORT-TERM
MARKET PORTFOLIO BOND PORTFOLIO
- ------------------------------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1995 December 31, 1995
(000) (000)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . . . . $151,035 $ 9,539
- ------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . 151,035 9,539
- ------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services . . . . . $ 276 $ 16
Management and Administrative . . . . . 1,728 156
Shareholder Account Maintenance+ . . . 1,336 46
Marketing and Distribution+ . . . . . . 550 3,890 32 250
------ -----
Taxes (other than income taxes) . . . . . 171 11
Custodian Fees . . . . . . . . . . . . . . 127 17
Auditing Fees . . . . . . . . . . . . . . 10 8
Shareholders' Reports+ . . . . . . . . . . 75 2
Annual Meeting and Proxy Costs+ . . . . . 28 1
Directors' Fees and Expenses . . . . . . . 8 --
- ------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . 4,309 289
- ------------------------------------------------------------------------------------------------------
Net Investment Income . . . . 146,726 9,250
- ------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT
SECURITIES SOLD . . . . . . . . . . . . . . 4,808 539
- ------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . 210,856 6,934
- ------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . $362,390 $16,723
======================================================================================================
</TABLE>
+ Expenses of the Total Bond Market Portfolio are:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
(000)
---------------------------------------
Individual Institutional
Class Class Total
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Class-Specific Expenses:
Shareholder Account Maintenance $1,327 $ 9 $1,336
Marketing and Distribution 550 -- 550
Shareholders' Reports 75 -- 75
Annual Meeting and Proxy Costs 28 -- 28
------ ------
Total Class-Specific Expenses 1,980 9 1,989
All Other Portfolio Expenses 2,248 72 2,320
------ ------
Total Expenses $4,228 $81 $4,309
- ------------------------------------------------------------------------
</TABLE>
The Institutional Class commenced operations September 18, 1995. See Note C.
26
<PAGE> 29
<TABLE>
<CAPTION>
INTERMEDIATE-TERM LONG-TERM
BOND PORTFOLIO BOND PORTFOLIO
- ------------------------------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1995 December 31, 1995
(000) (000)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . . . . $13,640 $1,002
- ------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . 13,640 1,002
- ------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services . . . . . $ 18 $2
Management and Administrative . . . . . 205 --
Shareholder Account Maintenance . . . . 90 2
Marketing and Distribution . . . . . . 39 352 2 6
----- --
Taxes (other than income taxes) . . . . . 15 1
Custodian Fees . . . . . . . . . . . . . . 19 13
Auditing Fees . . . . . . . . . . . . . . 8 7
Shareholders' Reports . . . . . . . . . . 4 1
Annual Meeting and Proxy Costs . . . . . . 1 --
Directors' Fees and Expenses . . . . . . . 1 --
- ------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . 400 28
- ------------------------------------------------------------------------------------------------------
Net Investment Income . . . . 13,240 974
- ------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT
SECURITIES SOLD . . . . . . . . . . . . . . 1,817 134
- ------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . 20,339 2,639
- ------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . $35,396 $3,747
======================================================================================================
</TABLE>
27
<PAGE> 30
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
TOTAL BOND MARKET PORTFOLIO
- ---------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended
DECEMBER 31, December 31,
1995 1994
(000) (000)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . $ 146,726 $ 108,270
Realized Net Gain (Loss) . . . . . . . . . . . . . . . . . . . . . . . 4,808 (10,960)
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . . 210,856 (139,346)
- ---------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . . . . . . 362,390 (42,036)
- ---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income
Individual Class . . . . . . . . . . . . . . . . . . . . . . . . . . (141,500) (108,270)
Institutional Class . . . . . . . . . . . . . . . . . . . . . . . . (5,226) --
Realized Net Gain
Individual Class . . . . . . . . . . . . . . . . . . . . . . . . . . -- (311)
- ---------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . (146,726) (108,581)
- ---------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS--INDIVIDUAL CLASS (1)
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,132,841 801,705
Issued In Lieu of Cash Distributions . . . . . . . . . . . . . . . . . 121,731 89,968
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (787,427) (550,589)
- ---------------------------------------------------------------------------------------------------------
Net Increase--Individual Class . . . . . . . . . . . . . . . . 467,145 341,084
- ---------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS--INSTITUTIONAL CLASS (2)
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 403,027 --
Issued In Lieu of Cash Distributions . . . . . . . . . . . . . . . . . 3,862 --
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,189) --
- ---------------------------------------------------------------------------------------------------------
Net Increase--Institutional Class . . . . . . . . . . . . . . 404,700 --
- ---------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . . . . 1,087,509 190,467
- ---------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . . . 1,730,708 1,540,241
- ---------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,818,217 $1,730,708
=========================================================================================================
(1) Shares Issued and Redeemed--Individual Class
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,319 84,134
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . 12,465 9,518
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . (80,354) (57,903)
- ---------------------------------------------------------------------------------------------------------
48,430 35,749
- ---------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed--Institutional Class
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,585 --
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . 384 --
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . (216) --
- ---------------------------------------------------------------------------------------------------------
40,753 --
- ---------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
SHORT-TERM BOND PORTFOLIO
- ---------------------------------------------------------------------------------------------------------
YEAR ENDED March 1 to
DECEMBER 31, December 31,
1995 1994
(000) (000)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,250 $ 2,943
Realized Net Gain (Loss) . . . . . . . . . . . . . . . . . . . . . . . 539 (447)
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . . 6,934 (2,532)
- ---------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . . . . . . 16,723 (36)
- ---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . (9,250) (2,943)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
- ---------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . (9,250) (2,943)
- ---------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1)
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,245 88,437
Issued In Lieu of Cash Distributions . . . . . . . . . . . . . . . . . 8,107 2,476
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,210) (10,952)
- ---------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . . . . 123,142 79,961
- ---------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . . . . 130,615 76,982
- ---------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . . . 76,982 --
- ---------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $207,597 $76,982
=========================================================================================================
(1) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,263 8,976
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . 818 256
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,567) (1,132)
- ---------------------------------------------------------------------------------------------------------
12,514 8,100
- ---------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS (continued)
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
INTERMEDIATE-TERM LONG-TERM
BOND PORTFOLIO BOND PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------
YEAR ENDED March 1 to YEAR ENDED March 1 to
DECEMBER 31, December 31, DECEMBER 31, December 31,
1995 1994 1995 1994
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . $ 13,240 $ 3,026 $ 974 $ 361
Realized Net Gain (Loss) . . . . . . . . . . . . 1,817 (771) 134 (54)
Change in Unrealized Appreciation (Depreciation) 20,339 (3,343) 2,639 (398)
- ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . 35,396 (1,088) 3,747 (91)
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income . . . . . . . . . . . . . . (13,240) (3,026) (974) (361)
Realized Net Gain . . . . . . . . . . . . . . . . (888) -- (54) --
- ------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . (14,128) (3,026) (1,028) (361)
- ------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1)
Issued . . . . . . . . . . . . . . . . . 294,078 81,755 18,312 11,072
Issued In Lieu of Cash Distributions . . . . . . 12,148 2,387 741 257
Redeemed . . . . . . . . . . . . . . . . . (53,262) (8,628) (5,884) (2,283)
- ------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions 252,964 75,514 13,169 9,046
- -------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . 274,232 71,400 15,888 8,594
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . 71,400 -- 8,594 --
- ------------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . $345,632 $71,400 $24,482 $ 8,594
==================================================================================================================
(1) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . 29,647 8,449 1,816 1,180
Issued in Lieu of Cash Distributions . . . 1,208 254 73 28
Redeemed . . . . . . . . . . . . . . . . . (5,300) (922) (586) (249)
- ------------------------------------------------------------------------------------------------------------------
25,555 7,781 1,303 959
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 33
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
TOTAL BOND MARKET PORTFOLIO--INDIVIDUAL CLASS
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------
For a Share Outstanding Throughout Each Year . . . . 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . $ 9.17 $10.06 $ 9.88 $9.99 $9.41
------- ------ ------ ----- -----
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . .650 .622 .638 .699 .766
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . .970 (.888) .300 (.018) .605
------- ------ ------ ----- -----
TOTAL FROM INVESTMENT OPERATIONS . . . . . 1.620 (.266) .938 .681 1.371
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . (.650) (.622) (.638) (.699) (.766)
Distributions from Realized Capital Gains . . . . -- (.002) (.120) (.092) (.025)
------- ------ ------ ----- -----
TOTAL DISTRIBUTIONS . . . . . . . . . . . (.650) (.624) (.758) (.791) (.791)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . $10.14 $ 9.17 $10.06 $9.88 $9.99
=======================================================================================================================
TOTAL RETURN(1) . . . . . . . . . . . . . . . . . . +18.18% -2.66% +9.68% +7.14% +15.25%
- -----------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . $2,405 $1,731 $1,540 $1,066 $849
Ratio of Expenses to Average Net Assets . . . . . . . .20% .18% .18% .20% .16%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . 6.66% 6.57% 6.24% 7.06% 7.95%
Portfolio Turnover Rate . . . . . . . . . . . . . . . 36% 33% 50% 49% 31%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return figures do not reflect the annual account maintenance fee of
$10.
<TABLE>
<CAPTION>
TOTAL BOND MARKET PORTFOLIO--INSTITUTIONAL CLASS
- -----------------------------------------------------------------------------------------------------------------------
SEPTEMBER 18, 1995+, TO
For a Share Outstanding Throughout Each Period December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . $ 9.87
-------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . .174
Net Realized and Unrealized Gain (Loss) on Investments . . . . . . . . . . . . .270
-------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . . . . . . . . . . . .444
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . . . . . . . . . . (.174)
Distributions from Realized Capital Gains . . . . . . . . . . . . . . . . . . --
-------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . (.174)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . $ 10.14
=======================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +4.53%
- -----------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . . . . . . . . . . . . . $413
Ratio of Expenses to Average Net Assets . . . . . . . . . . . . . . . . . . . . . .10%*
Ratio of Net Investment Income to Average Net Assets . . . . . . . . . . . . . . 6.48%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
+ Commencement of Operations.
31
<PAGE> 34
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
SHORT-TERM INTERMEDIATE-TERM
BOND PORTFOLIO BOND PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------
Year Ended March 1+ to Year Ended March 1+ to
December 31, December 31, December 31, December 31
For a Share Outstanding Throughout Each Period 1995 1994 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . $ 9.50 $10.00 $ 9.18 $10.00
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . .623 .463 .661 .533
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . .570 (.500) 1.217 (.820)
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . 1.193 (.037) 1.878 (.287)
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . (.623) (.463) (.661) (.533)
Distributions from Realized Capital Gains . . . . -- -- (.027) --
------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . (.623) (.463) (.688) (.533)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . $10.07 $ 9.50 $10.37 $ 9.18
=======================================================================================================================
TOTAL RETURN(1) . . . . . . . . . . . . . . . . . . +12.88% -0.37% +21.07% -2.88%
- -----------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . $208 $77 $346 $71
Ratio of Expenses to Average Net Assets . . . . . . . .20% .18%* .20% .18%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . 6.28% 5.77%* 6.55% 6.88%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . 65% 53% 71% 63%
- -----------------------------------------------------------------------------------------------------------------------
</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.
32
<PAGE> 35
<TABLE>
<CAPTION>
LONG-TERM BOND PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------
YEAR ENDED March 1+ to
For a Share Outstanding Throughout Each Period DECEMBER 31, 1995 December 31, 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . . . $ 8.96 $10.00
------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . .692 .586
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . . . . . 1.884 (1.040)
------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . . 2.576 (.454)
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . (.692) (.586)
Distributions from Realized Capital Gains . . . . . . . . . (.024) --
------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . (.716) (.586)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . . $10.82 $ 8.96
=======================================================================================================================
TOTAL RETURN(1) . . . . . . . . . . . . . . . . . . . . . . . . +29.72% -4.53%
- -----------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . . . . $24 $9
Ratio of Expenses to Average Net Assets . . . . . . . . . . . . .20% .18%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . . . . 6.90% 7.70%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . 45% 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.
NOTES TO FINANCIAL STATEMENTS
Vanguard Bond Index Fund is registered under the Investment Company Act of 1940
as a diversified open-end investment company and consists of the Total Bond
Market, Short-Term Bond, Intermediate-Term Bond, and Long-Term Bond Portfolios.
Certain of the Fund's investments are in corporate debt instruments; the
issuers' abilities to meet these obligations may be affected by economic
developments in their respective industries.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Securities are valued utilizing the latest bid prices
and on the basis of a matrix system (which considers such factors as
security prices, yields, maturities and ratings), both as furnished by
independent pricing services. Temporary cash investments are valued at cost
which approximates market.
2. FEDERAL INCOME TAXES: Each Portfolio of the Fund intends to continue to
qualify as a regulated
33
<PAGE> 36
NOTES TO FINANCIAL STATEMENTS (continued)
investment company and distribute all of its taxable income. Accordingly, no
provision for Federal income taxes is required in the financial statements.
3. REPURCHASE AGREEMENTS: Each Portfolio of the Fund, along with other members
of The Vanguard Group of Investment Companies, transfers uninvested cash
balances into a Pooled Cash Account, the daily aggregate of which is
invested in repurchase agreements secured by U.S. Government obligations.
Securities pledged as collateral for repurchase agreements are held by a
custodian bank until maturity of each repurchase agreement. Provisions of
the agreement require that the market value of this collateral is sufficient
in the event of default; however, in the event of default or bankruptcy by
the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
4. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on the sale of investment securities are those of specific securities sold.
Distributions from net investment income are declared on a daily basis
payable on the first business day of the following month. Discounts and
premiums on securities purchased are amortized to interest income over the
lives of the respective securities.
B. The Vanguard Group, Inc. furnishes at cost investment advisory, corporate
management, administrative, shareholder accounting, marketing, and distribution
services. The costs of such services are allocated to the Fund under methods
approved by the Board of Trustees. At December 31, 1995, the Fund had
contributed capital of $388,000 to Vanguard (included in Other Assets),
representing 1.9% of Vanguard's capitalization. The Fund's trustees and
officers are also directors and officers of Vanguard.
C. The Total Bond Market Portfolio offers two classes of shares, the
Individual Class and the Institutional Class. Institutional shares are designed
primarily for institutional investors that meet certain administrative and
servicing criteria and have a minimum investment of $10 million. Individual
shares are offered to all other investors. Both classes of shares have equal
rights as to assets and earnings, except that each class bears certain
class-specific expenses related to its shareholder activity.
D. During the year ended December 31, 1995, purchases and sales of investment
securities, other than U.S. Government securities and temporary cash
investments, were:
<TABLE>
<CAPTION>
- -------------------------------------------------------
(000)
------------------------
Portfolio Purchases Sales
- -------------------------------------------------------
<S> <C> <C>
TOTAL BOND MARKET $522,435 $58,266
SHORT-TERM BOND 46,906 508
INTERMEDIATE-TERM BOND 117,252 569
LONG-TERM BOND 4,574 136
- -------------------------------------------------------
</TABLE>
Purchases and sales of U.S. Government securities were:
<TABLE>
<CAPTION>
- -------------------------------------------------------
(000)
------------------------
Portfolio Purchases Sales
- -------------------------------------------------------
<S> <C> <C>
TOTAL BOND MARKET $1,211,026 $732,488
SHORT-TERM BOND 166,630 92,506
INTERMEDIATE-TERM BOND 268,787 140,453
LONG-TERM BOND 15,123 6,268
- -------------------------------------------------------
</TABLE>
At December 31, 1995, the Total Bond Market Portfolio had available a capital
loss carryforward of $7,307,000 to offset future net capital gains through
December 31, 2002.
At December 31, 1995, unrealized appreciation of investment securities for
financial reporting and Federal income tax purposes were:
34
<PAGE> 37
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(000)
--------------------------------------------
Appreciated Depreciated Net Unrealized
Portfolio Securities Securities Appreciation
- -------------------------------------------------------------
<S> <C> <C> <C>
TOTAL BOND MARKET $122,992 $(2,996) $119,996
SHORT-TERM BOND 4,408 (6) 4,402
INTERMEDIATE-TERM
BOND 16,996 -- 16,996
LONG-TERM BOND 2,244 (3) 2,241
- -------------------------------------------------------------
</TABLE>
E. The market values of securities on loan to broker/dealers at December 31,
1995, and collateral received with respect to such loans, were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(000)
--------------------------------------------
Collateral Received
--------------------------
Market Value Market Value
of Loaned of U.S. Treasury
Portfolio Securities Cash Securities
- -------------------------------------------------------------
<S> <C> <C> <C>
TOTAL BOND MARKET $43,519 $40,794 $3,497
SHORT-TERM BOND 12,947 13,177 --
INTERMEDIATE-TERM
BOND 21,621 14,867 7,219
</TABLE>
Security loans are required to be secured at all times by collateral at least
equal to the market value of securities loaned; however, in the event of
default or bankruptcy by the other party to the agreement, realization and/or
retention of the collateral may be subject to legal proceedings.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
Vanguard Bond Index Fund
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the Total Bond Market, Short-Term Bond, Intermediate-Term Bond, and Long-Term
Bond Portfolios of Vanguard Bond Index Fund (the "Fund") at December 31, 1995,
and the results of each of their operations, the changes in each of their net
assets and the financial highlights for each of the respective periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities by correspondence with the custodian and brokers and the application
of alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 31, 1996
35
<PAGE> 38
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The
Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman of Rhone-Poulenc
Rorer Inc.; Director of Sun Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great
Atlantic and Pacific Tea Co., Alco Standard Corp.,
Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BRUCE K. MacLAURY, President of The Brookings
Institution; Director of American Express Bank Ltd. and
The St. Paul Companies, Inc.
BURTON G. MALKIEL, Chemical Bank Chairman's
Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern
New England Communications Co.
ALFRED M. RANKIN, JR., Chairman, President, and
Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co.,
and The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer
of The Nature Conservancy; formerly, Director and
Senior Partner of McKinsey & Co. and President of New
York University; Director of Pacific Gas and Electric Co.
and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco
Brands, Inc.; retired Vice Chairman and Director of RJR
Nabisco; Director of TECO Energy, Inc. and Kmart Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive
Officer of Rohm & Haas Co.; Director of Cummins
Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice
President and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The
Vanguard Group.
RICHARD F. HYLAND, Treasurer; Treasurer of The
Vanguard Group, Inc., and of each of the investment
companies in The Vanguard Group.
KAREN E. WEST, Controller; Vice President of The
Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
ROBERT A. DiSTEFANO IAN A. MacKINNON
Senior Vice President Senior Vice President
Information Technology Fixed Income Group
JEREMY G. DUFFIELD F. WILLIAM McNABB III
Senior Vice President Senior Vice President
Planning & Development Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
36
<PAGE> 39
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard Convertible
Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LIFEStrategy Funds
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
500 Portfolio
Total Stock Market Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Total Bond Market Portfolio
Short-Term Bond Portfolio
Intermediate-Term Bond Portfolio
Long-Term Bond Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Fund
U.S. Treasury Money Market Portfolio
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Fixed Income
Securities Fund
Vanguard Admiral Fund
Vanguard Preferred Stock Fund
[THE VANGUARD GROUP LOGO]
This Report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information:
1 (800) 662-7447
Shareholder Account Services:
1 (800) 662-2739
Q840-12/95
ON OUR COVER: On the evening of August 1, 1798, Lord Horatio Nelson sailed
his flagship, HMS Vanguard, into Egypt's Aboukir Bay. In a night encounter,
the British fleet annihilated Napoleon Bonaparte's ships of the line in what
is still considered to be the most complete victory ever recorded in naval
history. Our Report's cover illustration is Thomas Luny's 1830 painting, The
Battle Of The Nile, in which the French flagship, L'Orient, is shown as it
exploded at 10:00 p.m. under a gibbous moon.
<PAGE> 40
VANGUARD BOND INDEX FUND
EDGAR APPENDIX
This appendix describes the components of the printed version of this report
that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features Thomas Luny's 1830
painting "The Battle Of The Nile"
A photograph of John C. Brennan and John C. Bogle appears on the inside cover
top-center.
A running head featuring a sword, helmet, gloves and battleships in the
background appear at the top of pages one through eight.
Yield chart between Three-Year U.S. Treasury Note, Ten-Year U.S. Treasury Bond
and Thirty-Year U.S. Treasury Bond for the fiscal years 1990 through 1995
appears at the top of page two.
Line charts illustrating cumulative performance between the Total Bond Market
Portfolio, Lehman Aggregate Bond Index and Average Fixed Income Fund, average
Annual Total Returns for the period December 11, 1986, to December 31, 1995
appears at the top of page four.
Pie charts illustrating the Composition of Lehman Bond Indexes appears at the
bottom of page five.
Line charts illustrating cumulative performance between the Vanguard Short-Term
Portfolio, Average Short-Term Bond Fund and Lehman Short-Term Bond Index,
average Annual Total Returns for the period March 1, 1994, to December 31, 1995
appears at the top of page seven.
Line charts illustrating cumulative performance between the Vanguard
Intermediate-Term Portfolio, Lehman Intermediate-Term Bond Index, and Average
Intermediate-Term Bond Fund, average Annual Total Returns for the period March
1, 1994, to December 31, 1995 appears in the middle of page seven.
Line charts illustrating cumulative performance between the Vanguard Long-Term
Portfolio, Lehman Long-Term Bond Index, and Average Long-Term Bond Fund, average
Annual Total Returns of the period March 1, 1994, to December 31, 1995 appears
at the bottom of page seven.
A running head featuring a cannon and battleships in the background appears at
the top of page nine.
A running head featuring open log book, pen and battleships in the background
appears at the top of pages ten through thirty four.
A running head featuring a sextant, a map, and battleships in the background
appears at the top of page thirty six.
A running head featuring birds flying and ships in the background appears at the
top of the inside back cover.
