<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT (NO. 33-6001) UNDER
THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. [_]
Post-Effective Amendment No. 20 [X]
and
REGISTRATION STATEMENT (NO. 811-4681) UNDER THE INVESTMENT COMPANY
ACT OF 1940
Amendment No. 22 [X]
VANGUARD BOND INDEX FUNDS
(Exact Name of Registrant as Specified in Declaration of Trust)
P.O. Box 2600,
Valley Forge, PA 19482
(Address of Principal Executive Office)
Registrant's Telephone Number (610) 669-1000
R. Gregory Barton, Esquire
P.O. Box 876
Valley Forge, PA 19482
It is proposed that this filing become effective: April 30, 1999, pursuant
to paragraph (b) of Rule 485.
Approximate Date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes effective.
We have elected to register an indefinite number of shares pursuant to Regu-
lation 24f-2 under the Investment Company Act of 1940. Registrant filed its
Rule 24f-2 Notice for the year ended December 31, 1998 on March 29, 1999.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
VANGUARD BOND INDEX FUNDS
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Form N-1A
Item Number Location in Prospectus
<C> <C> <S>
Item 1. Front and Back Cover Pages ........... Front and Back Cover Pages
Item 2. Risk/Return Summary: Investments,
Risks, and Performance................ Fund Profiles
Item 3. Risk/Return Summary: Fee Table........ Fee Table
Item 4. Investment Objectives, Principal
Investment Strategies, and Related
Risks................................. More on the Funds
Item 5. Management's Discussion of Fund
Performance........................... Herein incorporated by
reference to Registrant's
Annual Report to
Shareholders dated December
31, 1998, filed with the
Securities and Exchange
Commission's EDGAR system
on March 3, 1999
Item 6. Management, Organization, and Capital
Structure............................. The Funds and Vanguard;
Investment Adviser
Item 7. Shareholder Information............... Share Price; Dividends,
Capital Gains, and Taxes;
Investing with Vanguard
Item 8. Distribution Arrangements............. Inside Front Cover Page
Item 9. Financial Highlights Information...... Financial Highlights
<CAPTION>
Form N-1A Location in Statement
Item Number of Additional Information
<C> <C> <S>
Item 10. Cover Page and Table of Contents...... Cover Page; Table of
Contents
Item 11. Fund History.......................... Description of the Trust
Item 12. Description of the Fund and its
Investments and Risks................. Investment Policies;
Description of the Trust;
and Fundamental Investment
Limitations
Item 13. Management of the Fund................ Management of the Trust
Item 14. Control Persons and Principal Holders
of Securities......................... Management of the Trust
Item 15. Investment Advisory and Other
Services.............................. Investment Advisory
Services
Item 16. Brokerage Allocation and Other
Practices............................. Portfolio Transactions
Item 17. Capital Stock and Other Securities.... Description of the Trust
Item 18. Purchase, Redemption, and Pricing of
Shares ............................... Purchase of Shares;
Redemption of Shares; and
Share Price
Item 19. Taxation of the Fund.................. Description of the Trust
Item 20. Underwriters.......................... Not Applicable
Item 21. Calculation of Performance Data....... Yield and Total Return
Item 22. Financial Statements.................. Financial Statements
</TABLE>
<PAGE>
Vanguard Bond Index Funds
Prospectus
April 30, 1999
A Group of Bond Index Mutual Funds
- --------------------------------------------------------------------------------
Contents
1 An Introduction to Index Funds
2 Fund Profiles
2 Vanguard Total Bond Market Index Fund
5 Vanguard Short-Term Bond Index Fund
8 Vanguard Intermediate-Term Bond Index Fund
11 Vanguard Long-Term Bond Index Fund
14 More on the Funds
19 The Funds and Vanguard
20 Investment Adviser
20 Year 2000 Challenge
21 Dividends, Capital Gains, and Taxes
22 Share Price
23 Financial Highlights
26 Investing with Vanguard
26 Services and Account Features
27 Types of Accounts
27 Buying Shares
29 Redeeming Shares
32 Transferring Registration
33 Fund and Account Updates
Glossary (inside back cover)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Why Reading This Prospectus Is Important
This prospectus explains the objective, risks, and strategies of each of the
Vanguard Bond Index Funds. To highlight terms and concepts important to mutual
fund investors, we have provided "Plain Talk(R)" explanations along the way.
Reading the prospectus will help you to decide which Funds, if any, are the
right investments for you. We suggest that you keep it for future
reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Important Note
The Total Bond Market Index Fund features two separate classes of shares:
Investor and Institutional. Total Bond Market Index Fund Investor Shares have an
investment minimum of $3,000, and are available through this prospectus (for
individual investors) and a separate prospectus (for participants in
employer-sponsored retirement or savings plans). Total Bond Market Index Fund
Institutional Shares have an investment minimum of $10 million, and are
available through a separate prospectus. Investor Shares and Institutional
Shares do not have the same expenses; as a result, the performance of these
separate classes could differ.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
<PAGE>
1
An Introduction to Index Funds
What is indexing?
An index is an unmanaged group of securities whose overall performance is used
as a standard to measure investment performance. An index (or "passively
managed") fund tries to match, as closely as possible, the performance of an
established target index. The fund does this by holding either all or a
representative sample of the securities in the index. Keep in mind that an index
fund has operating expenses and transaction costs, while a market index does
not. Therefore, an index fund, while expected to track its target index closely,
typically will be unable to match the performance of the index exactly.
Bond index funds may seek to track indexes that hold a certain type of
bond--such as short-term or long-term bonds--or they may seek to track indexes
that consist of a broader range of bonds--for example, the entire U.S. bond
market.
Index funds are not actively managed by investment advisers who buy and sell
securities based on research and analysis in an attempt to outperform the market
as a whole. Rather, index funds simply mirror what the target index does, for
better or worse.
What index funds does Vanguard offer?
Vanguard offers a variety of stock (both U.S. and international), bond, and
balanced index funds. This prospectus provides information about Vanguard's Bond
Index Funds. There are four such funds, each of which seeks to track a different
segment of the U.S. bond market:
---------------------------------------------------------------------------
Fund Seeks to Track
---------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund The overall bond market
Vanguard Short-Term Bond Index Fund Short-term bonds
Vanguard Intermediate-Term Bond Index Fund Intermediate-term bonds
Vanguard Long-Term Bond Index Fund Long-term bonds
---------------------------------------------------------------------------
This prospectus contains profiles that summarize key features of each Fund.
Following the profiles, there is important additional information about the
Funds.
<PAGE>
2
Fund Profile--Vanguard Total Bond Market Index Fund
The following profile summarizes key features of Vanguard Total Bond Market
Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a broad, market-weighted bond index.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"-- or index--investment approach, by
holding a mix of bonds that seeks to match the performance of the Lehman
Brothers Aggregate Bond Index. This index measures the total universe of
investment-grade fixed-income securities in the U.S.--including government,
corporate, mortgage-backed, asset-backed, and international dollar-denominated
bonds, all with maturities of over one year. The Fund primarily holds bonds
represented in the Index. For more information about passive management, see
"Indexing Methods" under More on the Funds.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause investors to lose
money. These include:
. Interest rate risk, which is the chance that bond prices overall will decline
over short or even long periods due to rising interest rates. Interest rate
risk should be least for shorter-term bonds, and greatest for longer-term
bonds.
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally higher for short-term
bonds, and lower for long-term bonds.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, reducing the Fund's return. Credit risk
should be low for the Fund.
. Prepayment risk, which is the chance that during periods of falling interest
rates, a mortgage-backed bond issuer will repay a higher-yielding bond before
its maturity date. Forced to reinvest the unanticipated proceeds at lower
rates, the Fund would experience a decline in income and lose the opportunity
for additional price appreciation associated with falling rates.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
-------------------------------------------------------------------
Annual Total Returns*
-------------------------------------------------------------------
1989 13.64%
1990 8.65%
1991 15.25%
1992 7.14%
1993 9.68%
1994 -2.66%
1995 18.18%
1996 3.58%
1997 9.44%
1998 8.58%
-------------------------------------------------------------------
*Total return figures do not reflect the annual account maintenance
fee of $10.
-------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 7.60% (quarter ended June 30, 1989) and the lowest return for a
quarter was -2.71% (quarter ended March 31, 1994).
<PAGE>
3
---------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
---------------------------------------------------------------------------
1 Year 5 Years 10 Years
---------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund* 8.58% 7.21% 9.00%
Lehman Brothers Aggregate Bond Index 8.69 7.27 9.26
---------------------------------------------------------------------------
*Total return figures do not reflect the annual account maintenance fee of
$10.
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1998.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Account Maintenance Fee (for accounts under $10,000): $2.50/quarter**
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.16%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.20%
*A portfolio transaction fee of 0.18% may apply to aggregate purchases
over $250 million by a single investor.
**Vanguard will deduct an account maintenance fee from your dividends four
times per year. If your distribution that month is less than the fee,
fractional shares will be automatically redeemed to make up the
difference.
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year and that operating expenses remain the same. The results apply whether or
not you redeem your investment at the end of each period.
---------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
$20 $64 $113 $255
---------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
<PAGE>
4
Fund Profile--Vanguard Total Bond Market Index Fund (continued)
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
Inception Date
December 11, 1986
Net Assets as of December 31, 1998
$7.77 billion (for Investor Shares)
Suitable for IRAs
Yes
Minimum Initial Investment
$3,000; $1,000 for IRAs and custodial accounts for minors
Newspaper Abbreviation
TotBd
Vanguard Fund Number
084
Cusip Number
921937108
Ticker Symbol
VBMFX
<PAGE>
5
Fund Profile--Vanguard Short-Term Bond Index Fund
The following profile summarizes key features of Vanguard Short-Term Bond Index
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a market-weighted bond index with a
short-term dollar-weighted average maturity.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
holding a mix of bonds that seeks to match the performance of the Lehman
Brothers 1-5 Year Government/Corporate Bond Index. This index is made up of all
U.S. government, investment-grade corporate, and international
dollar-denominated bonds, all with maturities between one and five years. The
Fund primarily holds bonds represented in the Index. For more information about
passive management, see "Indexing Methods" under More on the Funds.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause investors to lose
money. These include:
. Interest rate risk, which is the chance that bond prices overall will decline
over short or even long periods due to rising interest rates. Interest rate
risk should be modest for short-term bonds.
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally high for short-term bonds.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, reducing the Fund's return. Credit risk
should be low for the Fund.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual returns for one
calendar year and since inception compare with those of a market-weighted bond
index. Keep in mind that the Fund's past performance does not indicate how it
will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns*
- --------------------------------------------------------------------------------
1995 12.88%
1996 4.55%
1997 7.04%
1998 7.63%
- --------------------------------------------------------------------------------
*Total return figures do not reflect the annual account maintenance fee of $10.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 3.96% (quarter ended March 31, 1995) and the lowest return for a
quarter was -0.12% (quarter ended March 31, 1996).
<PAGE>
6
Fund Profile--Vanguard Short-Term Bond Index Fund (continued)
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year Since Inception*
- --------------------------------------------------------------------------------
Vanguard Short-Term Bond Index Fund** 7.63% 6.48%
Lehman Brothers 1-5 Year
Government/Corporate Bond Index 7.63 6.56
- --------------------------------------------------------------------------------
*March 1, 1994.
**Total return figures do not reflect the annual account maintenance fee of $10.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1998.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Account Maintenance Fee (for accounts under $10,000): $2.50/quarter**
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.16%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.20%
*A portfolio transaction fee of 0.15% may apply to aggregate purchases over
$50 million by a single investor.
**Vanguard will deduct an account maintenance fee from your dividends four
times per year. If your distribution that month is less than the fee,
fractional shares will be automatically redeemed to make up the
difference.
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year and that operating expenses remain the same. The results apply whether or
not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$20 $64 $113 $255
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
<PAGE>
7
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
Inception Date
March 1, 1994
Net Assets as of December 31, 1998
$709 million
Suitable for IRAs
Yes
Minimum Initial Investment
$3,000; $1,000 for IRAs and custodial accounts for minors
Newspaper Abbreviation
STBond
Vanguard Fund Number
132
Cusip Number
921937207
Ticker Symbol
VBISX
<PAGE>
8
Fund Profile--Vanguard Intermediate-Term Bond Index Fund
The following profile summarizes key features of Vanguard Intermediate-Term Bond
Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a market-weighted bond index with an
intermediate-term dollar-weighted average maturity.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
holding a mix of bonds that seeks to match the performance of the Lehman
Brothers 5-10 Year Government/Corporate Bond Index. This index includes all U.S.
government, investment-grade corporate, and international dollar-denominated
bonds, all with maturities between five and ten years. The Fund primarily holds
bonds represented in the Index. For more information about passive management,
see "Indexing Methods" under More on the Funds.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause investors to lose
money. These include:
. Interest rate risk, which is the chance that bond prices overall will decline
over short or even long periods due to rising interest rates. Interest rate
risk should be moderate for intermediate-term bonds.
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk should be moderate for intermediate-term
bonds.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, reducing the Fund's return. Credit risk
should be low for the Fund.
. Call risk, which is the chance that during periods of falling interest rates,
a bond issuer will "call"--or repay--a higher-yielding bond before the bond's
maturity date. Forced to reinvest the unanticipated proceeds at lower interest
rates, the Fund would experience a decline in income and lose the opportunity
for additional price appreciation associated with falling rates. Call risk is
generally moderate for intermediate-term bonds.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual returns for one
calendar year and since inception compare with those of a market-weighted bond
index. Keep in mind that the Fund's past performance does not indicate how it
will perform in the future.
-------------------------------------------------------------------------------
Annual Total Returns*
-------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
1995 21.07%
1996 2.55%
1997 9.41%
1998 10.09%
-------------------------------------------------------------------------------
*Total return figures do not reflect the annual account maintenance fee of $10.
-------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 7.37% (quarter ended June 30, 1995) and the lowest return for a
quarter was -2.52% (quarter ended March 31, 1996).
<PAGE>
9
---------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
---------------------------------------------------------------------------
1 Year Since Inception*
---------------------------------------------------------------------------
Vanguard Intermediate-Term Bond Index Fund** 10.09% 8.02%
Lehman Brothers 5-10 Year
Government/Corporate Bond Index 10.14 8.12
---------------------------------------------------------------------------
*March 1, 1994.
**Total return figures do not reflect the annual account maintenance fee of
$10.
---------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1998.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Account Maintenance Fee (for accounts under $10,000): $2.50/quarter**
Annual Fund Operating Expenses (expenses deducted from the Fund's
assets)
Management Expenses: 0.16%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.20%
*A portfolio transaction fee of 0.23% may apply to aggregate purchases over
$50 million by a single investor.
**Vanguard will deduct an account maintenance fee from your dividends four
times a year. If your distribution is less than the fee, fractional shares
will be automatically redeemed to make up the difference.
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year and that operating expenses remain the same. The results apply whether or
not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$20 $64 $113 $255
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
<PAGE>
10
Fund Profile--Vanguard Intermediate-Term Bond Index Fund (continued)
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
Inception Date
March 1, 1994
Net Assets as of December 31, 1998
$1.1 billion
Suitable for IRAs
Yes
Minimum Initial Investment
$3,000; $1,000 for IRAs and custodial accounts for minors
Newspaper Abbreviation
ITBond
Vanguard Fund Number
314
Cusip Number
921937306
Ticker Symbol
VBIIX
<PAGE>
11
Fund Profile--Vanguard Long-Term Bond Index Fund
The following profile summarizes key features of Vanguard Long-Term Bond Index
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a market-weighted bond index with a
long-term dollar-weighted average maturity.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
holding a mix of bonds that seeks to match the performance of the Lehman
Brothers Long Government/Corporate Bond Index. This index is made up of all U.S.
government, investment-grade corporate, and international dollar-denominated
bonds, all with maturities greater than 10 years. The Fund primarily holds bonds
represented in the Index. For more information about passive management, see
"Indexing Methods" under More on the Funds.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause investors to lose
money. These include:
. Interest rate risk, which is the chance that bond prices overall will
decline over short or even long periods due to rising interest rates.
Interest rate risk is generally high for long-term bonds.
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally low for long-term bonds.
. Credit risk, which is the chance that a bond issuer will fail to pay
interest and principal in a timely manner, reducing the Fund's return.
Credit risk should be low for the Fund.
. Call risk, which is the chance that during periods of falling interest
rates, a bond issuer will "call"--or repay--a higher-yielding bond before
the bond's maturity date. Forced to reinvest the unanticipated proceeds at
lower interest rates, the Fund would experience a decline in income and lose
the opportunity for additional price appreciation associated with falling
rates. Call risk is generally moderate for long-term bonds.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual returns for one
calendar year and since inception compare with those of a market-weighted bond
index. Keep in mind that the Fund's past performance does not indicate how it
will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns*
- --------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
1995 29.72%
1996 -0.26%
1997 14.30%
1998 11.96%
- --------------------------------------------------------------------------------
*Total return figures do not reflect the annual account maintenance fee of $10.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 10.26% (quarter ended June 30, 1995) and the lowest return for a
quarter was -6.17% (quarter ended March 31, 1996).
<PAGE>
12
Fund Profile--Vanguard Long-Term Bond Index Fund (continued)
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year Since Inception*
- --------------------------------------------------------------------------------
Vanguard Long-Term Bond Index Fund** 11.98% 9.93%
Lehman Brothers Long
Government/Corporate Bond Index 11.77 10.04
- --------------------------------------------------------------------------------
* March 1, 1994.
** Total return figures do not reflect the annual account maintenance fee of
$10.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1998.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Account Maintenance Fee (for accounts under $10,000): $2.50/quarter**
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.15%
12b-1 Distribution Fees: None
Other Expenses: 0.05%
Total Annual Fund Operating Expenses: 0.20%
* A portfolio transaction fee of 0.21% may apply to aggregate purchases over
$10 million by a single investor.
** Vanguard will deduct an account maintenance fee from your dividends four
times a year. If your distribution that month is less than the fee,
fractional shares will be automatically redeemed to make up the
difference.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year and that operating expenses remain the same. The results apply whether or
not you redeem your investment at the end of each period.
---------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------
$20 $64 $113 $255
---------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
<PAGE>
13
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
Inception Date
March 1, 1994
Net Assets as of December 31, 1998
$210 million
Suitable for IRAs
Yes
Minimum Initial Investment
$3,000; $1,000 for IRAs and custodial accounts for minors
Newspaper Abbreviation
LTBond
Vanguard Fund Number
522
Cusip Number
921937405
Ticker Symbol
VBLTX
<PAGE>
14
More on the Funds
The following sections discuss other important features of Vanguard Bond Index
Funds, including indexing methods, security selection, additional risk
information, costs and market-timing, turnover rate, and other investment
policies and risks.
Why invest in index funds?
Index funds appeal to many investors for a number of reasons:
. Diversification. Index funds generally invest in a diversified mix of
companies and industries.
. Low cost. Index funds do not have many of the expenses of an actively
managed fund--such as research--and keep trading activity, and thus
brokerage commissions, to a minimum.
. Low realization of capital gains. Because an index fund typically sells
securities only to respond to redemption requests or to adjust the number of
shares it holds to reflect a change in its target index, the fund's turnover
rate--and thus its realization of taxable capital gains--is usually very
low.
Indexing Methods
In seeking to track a particular index, a fund generally uses one of two methods
to select the stocks or bonds in which it invests.
Some index funds hold each stock or bond found in their target indexes in
about the same proportions as represented in the indexes themselves. This is
called a "replication" method. For example, if 5% of the S&P 500 Index were made
up of the stock of a specific company, a fund tracking that index would invest
about 5% of its assets in that company.
Other index funds may use a different security selection process. Because it
would be very expensive to buy and sell all of the securities held in certain
indexes (the Lehman Brothers Aggregate Bond Index, for example, includes more
than 7,200 bonds), funds tracking these larger indexes use a "sampling"
technique. Using sophisticated computer programs, these funds select securities
that will recreate their target indexes in terms of industry weightings, market
capitalization, and other characteristics. For instance, if 30% of the Lehman
Brothers Aggregate Bond Index were made up of mortgage-backed securities, the
Total Bond Market Index Fund would invest about 30% of its assets in
mortgage-backed securities that have similar characteristics as a group to those
in the Index. Each of the Vanguard Bond Index Funds employs this method of
indexing.
The following table shows the number of bonds held by each of the Funds as of
December 31, 1998.
---------------------------------------------------------------------------
Fund Number of Bonds Held Number of Bonds in Target Index
---------------------------------------------------------------------------
Total Bond Market 737 7,257
Short-Term Bond 213 2,608
Intermediate-Term Bond 201 2,087
Long-Term Bond 165 1,865
---------------------------------------------------------------------------
Corporate Substitution Strategy
In "sampling" its target index, each Fund has the flexibility to overweight
particular types of bonds relative to their representation in the index.
Normally, this involves substituting corporate bonds for government bonds of the
same maturity. The corporate substitution strategy may increase a Fund's income,
but it may also marginally increase exposure to credit risk, which is explained
on page 17. The Funds limit corporate substitutions to bonds with less than 4
years remaining maturity, and each Fund will limit corporate substitutions to
approximately 15% of its net assets.
<PAGE>
15
Security Selection
Each Fund invests at least 80% of its assets in securities included in its
target index. As of December 31, 1998, each Fund and its target index was
composed of the following types of bonds:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Type of Bond
-------------------------------------------------
International
Vanguard Fund/ U.S. Mortgage- Dollar-
Target Index Government Corporate Backed Denominated Total
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Bond Market Index 27.9% 35.8% 33.2% 3.1% 100%
Lehman Brothers
Aggregate Bond Index 45.0 19.0 32.0 4.0 100
---------------------------------------------------------------------------------------
Short-Term Bond Index 57.1% 39.7% 0.0% 3.2% 100%
Lehman Brothers 1-5 Year
Gov't./Corp. Bond Index 76.0 20.0 0.0 4.0 100
---------------------------------------------------------------------------------------
Intermediate-Term
Bond Index 54.5% 38.9% 0.0% 6.6% 100%
Lehman Brothers 5-10 Year
Gov't./Corp. Bond Index 56.0 34.0 0.0 10.0 100
---------------------------------------------------------------------------------------
Long-Term Bond Index 63.2% 31.9% 0.0% 4.9% 100%
Lehman Brothers Long
Gov't./Corp. Bond Index 62.0 32.0 0.0 6.0 100
---------------------------------------------------------------------------------------
</TABLE>
An explanation of each type of bond follows.
. U.S. government securities include U.S. Treasury and agency bonds, which
represent loans by investors to the U.S. Treasury Department or a wide
variety of governmental agencies and instrumentalities. Timely payment of
principal and interest on U.S. Treasury bonds is always guaranteed by the
full faith and credit of the U.S. government; many (but not all) agency
bonds have the same guarantee.
. Corporate bonds are IOUs issued by businesses that want to borrow money for
some purpose--often to develop a new product or service, to expand into a
new market, or to buy another company. As with other types of bonds, the
issuer promises to repay the principal on a specific date and to make
interest payments in the meantime. The amount of interest offered depends on
market conditions and also on the financial health of the corporation
issuing the bonds; a company whose credit rating is not strong will have to
offer a higher interest rate to obtain buyers for its bonds. (Note: The Bond
Index Funds expect to invest only in investment-grade corporate bonds, which
are corporate bonds rated in one of the four highest rating categories by
independent bond-rating agencies).
. Mortgage-backed securities represent interests in underlying pools of
mortgages. Unlike ordinary bonds, which generally pay a fixed rate of
interest at regular intervals and then pay principal upon maturity,
mortgage-backed securities pay both interest and principal as part of their
regular payments. Because the mortgages underlying the securities can be
prepaid at any time by homeowners or corporate borrowers, mortgage-backed
securities are subject to prepayment risk, discussed later in this
prospectus. These types of securities are issued by a number of government
agencies, including the Government National Mortgage Association (GNMA or
"Ginnie Mae"), the Federal Home Loan Mortgage Corporation (FHLMC), and the
Federal National Mortgage Association (FNMA or "Fannie Mae"). GNMAs are
guaranteed by the full faith and credit of the U.S. government as to the
timely payment of principal and interest; mortgage securities issued by
other government agencies or private corporations are not.
(Note: The Total Bond Market Index Fund may also invest to a lesser
extent in conventional mortgage securities, which are packaged by private
corporations and are not guaranteed by the U.S. government.)
. International dollar-denominated bonds (or yankee bonds) are bonds
denominated in U.S. dollars issued by foreign governments and companies.
Because the bond's value is designated in dollars rather than the currency
of the issuer's country, the investor is not exposed to currency risk;
rather, the issuer assumes that risk, usually in order to attract U.S.
investors.
<PAGE>
16
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
Bonds and Interest Rates
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--causing you to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you should be able to sell your 5% bond for more than you
paid.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
Bond Maturities
A bond is issued with a specific maturity date--the date when the bond's issuer,
or seller, must pay back the bond's initial value (known as its "face value").
Bond maturities generally range from less than one year (short-term) to 30 years
(long-term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise--but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks in hope of higher yields; short-term bond investors should be willing to
accept lower yields in return for less fluctuation in the value of their
investment.
- --------------------------------------------------------------------------------
Additional Risk Information
The Funds are subject to several risks associated with investments in bonds.
[GRAPHIC APPEARS HERE] Each Fund is subject to interest rate risk, which is the
possibility that bond prices overall will decline over
short or even long periods due to rising interest rates.
Interest rate risk should be low for shorter-term bonds,
moderate for intermediate-term bonds, and high for
longer-term bonds.
Changes in interest rates will affect bond income as well as bond prices.
[GRAPHIC APPEARS HERE] Each Fund is subject to income risk, which is the
possibility that a Fund's dividends (income) will decline
due to falling interest rates. Income risk is generally
higher for short-term bonds and lower for long-term
bonds.
In the past, bond investors have seen the value of their investment rise
and fall--sometimes significantly--with changes in interest rates. Between
December 1976 and September 1981, for instance, rising interest rates caused
long-term bond prices to fall by almost 48%.
Because each Fund invests mainly in bonds, changes in interest rates will
impact, to varying degrees, the value of each Fund's assets. To illustrate how
much of an impact, the following table shows the effect of a 2% change (both up
and down) in interest rates on three bonds with a face value of $1,000; each has
a different maturity.
- --------------------------------------------------------------------------------
How Interest Rate Changes Affect Bonds*
- --------------------------------------------------------------------------------
Value of a $1,000 Bond Value of a $1,000 Bond
After a 2% Increase After a 2% Decrease
Type of Bond (Maturity) in Interest Rates in Interest Rates
- --------------------------------------------------------------------------------
Short-Term (2.5 years) $956 $1,046
Intermediate-Term (10 years) 870 1,156
Long-Term (20 years) 816 1,251
- --------------------------------------------------------------------------------
* Assuming a 7% yield.
- --------------------------------------------------------------------------------
These figures are for illustration only; you should not regard them as an
indication of future returns from the bond market as a whole or any Fund in
particular.
While falling interest rates tend to strengthen bond prices, they can cause
other sorts of problems for bond fund investors--bond calls and prepayments.
<PAGE>
17
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
Callable Bonds
Although bonds are issued with clearly defined maturities, a bond issuer may be
able to redeem, or call, a bond earlier than its maturity date. The bondholder
must now replace the called bond with a bond that may have a lower yield than
the original. One way for bond investors to protect themselves against call risk
is to purchase a bond early in its lifetime, long before its call date. The
other way is to buy bonds with low coupons, which makes them less likely to be
called.
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE] Because they invest in corporate bonds that are callable,
the Intermediate-Term and Long-Term Bond Index Funds are
subject to call risk, which is the possibility that
during periods of falling interest rates, a bond issuer
will "call"--or repay--a higher-yielding bond before its
maturity date. Forced to reinvest the unanticipated
proceeds at lower interest rates, a Fund would experience
a decline in income and lose the opportunity for
additional price appreciation associated with falling
rates.
Call risk is generally moderate for longer-term bonds, and consequently it
should be moderate for the Intermediate-Term and Long-Term Bond Index
Funds.
[GRAPHIC APPEARS HERE] Because it invests in mortgage-backed securities, the
Total Bond Market Index Fund is subject to prepayment
risk, which is the possibility that during periods of
falling interest rates, a homeowner will repay a higher-
yielding mortgage earlier than scheduled. Forced to
reinvest the unanticipated proceeds at lower rates, the
Fund would experience a decline in income and lose the
opportunity for additional price appreciation associated
with falling rates.
With only a portion of its assets invested in mortgage-backed securities,
prepayment risk for the Total Bond Market Index Fund is moderate.
[GRAPHIC APPEARS HERE] Each Fund is subject to credit risk, which is the
possibility that a bond issuer will fail to pay interest
and principal in a timely manner.
The credit quality of each Fund is expected to be very high, and thus
credit risk should be low. The following table shows the weighted average credit
quality of each Fund's holdings and that of its target index, as rated by
Moody's Investors Service, as of December 31, 1998.
- --------------------------------------------------------------------
Average Credit Quality
-----------------------------------
Fund Fund's Holdings Target Index
- --------------------------------------------------------------------
Total Bond Market Aa1 Aaa
Short-Term Bond Aa1 Aaa
Intermediate-Term Bond Aa1 Aaa
Long-Term Bond Aa1 Aa1
- --------------------------------------------------------------------
To a limited extent, the Funds are also exposed to event risk, which is the
possibility that corporate fixed-income securities held by the Funds may suffer
a substantial decline in credit quality and market value due to a corporate
restructuring.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
Credit Quality
A bond's credit quality depends on the issuer's ability to pay interest on the
bond and, ultimately, to repay the debt. The lower the rating by one of the
independent bond-rating agencies (for example, Moody's or Standard & Poor's),
the greater the chance (in the rating agency's opinion) that the bond issuer
will default, or fail to meet its payment obligations. All things being equal,
the lower a bond's credit rating, the higher its yield should be to compensate
investors for assuming additional risk. Bonds rated in one of the four highest
rating categories are considered "investment grade."
- --------------------------------------------------------------------------------
<PAGE>
18
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
The Costs of Investing
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in fund expenses can, over time,
have a dramatic effect on a fund's performance.
- --------------------------------------------------------------------------------
The Funds are generally managed without regard to tax ramifications.
To help you distinguish between the Funds and their various risks, a
summary table is provided below.
---------------------------------------------------------------------------
Risks of the Funds
---------------------------------------------------------------------------
Prepayment/
Income Interest Call Credit
Fund Risk Rate Risk Risk Risk
---------------------------------------------------------------------------
Total Bond Market Moderate Moderate Moderate Low
Short-Term Bond High Low Low Low
Intermediate-Term Bond Moderate Moderate Moderate Low
Long-Term Bond Low High Moderate Low
---------------------------------------------------------------------------
Account Maintenance Fee
Vanguard assesses an account maintenance fee on index fund shareholders whose
account balances are below $10,000 (for any reason, including a decline in the
value of a Fund's shares) on the date a dividend is distributed. This fee is
intended to allocate the costs of maintaining accounts more equitably among
shareholders. The account maintenance fee is $2.50 per quarter, deducted from
dividends, if your account balance is below $10,000 during the last week of
January, April, July, and October. If the fee is deducted from your dividend
distribution, you will still be taxed on the full amount of your dividend
(unless you hold your shares through a non-taxable account). If you are due a
dividend that is less than the fee, fractional shares will be automatically
redeemed to make up the difference.
Costs and Market-Timing
Some investors try to profit from a strategy called market-timing--switching
money into investments when they expect prices to rise, and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, Vanguard Bond Index Funds have adopted the following policies, among
others, to discourage short-term trading:
. Each Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of the
investment or because of a history of excessive trading by the investor.
. There is a limit on the number of times you can exchange into or out of a
Fund (see "Redeeming Shares" in the Investing with Vanguard section).
. Each Fund reserves the right to stop offering shares at any time.
The Vanguard funds do not permit market-timing. Do not invest in these
Funds if you are a market-timer.
<PAGE>
19
Turnover Rate
Although the Funds generally seek to invest for the long term, they may sell
securities regardless of how long the securities have been held. Shorter-term
bonds will mature or be sold, and need to be replaced, more frequently than
longer-term bonds. As a result, shorter-term bond funds tend to have higher
turnover rates than longer-term bond funds.
Other Investment Policies and Risks
Besides investing in fixed-income securities comprising its target index, each
Fund may invest up to 20% of its assets in short-term money market instruments
and certain derivatives in order to manage cash flow into and out of the Fund.
[GRAPHIC APPEARS HERE] The Funds may invest, to a limited extent, in
derivatives.
The Funds may invest, to a limited extent, in bond (interest rate) futures
and options contracts and other types of derivatives. Losses (or gains)
involving futures can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. The Funds will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The value of all futures and options contracts in which
a Fund acquires an interest cannot exceed 20% of the Fund's total assets. The
reasons for which a Fund will invest in futures and options are:
. To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in bonds.
. To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Funds may also invest in a relatively conservative class of
collateralized mortgage obligations (CMOs), which offer a high degree of cash-
flow predictability and less vulnerability to mortgage prepayment risk. To
reduce credit risk, a Fund may purchase these less-risky classes of CMOs only if
they are issued by agencies of the U.S. government or, if issued by private
companies, carry high-quality investment-grade ratings.
The Funds and Vanguard
Vanguard Bond Index Funds are members of The Vanguard Group, a family of more
than 35 investment companies with more than 100 distinct investment portfolios
holding assets with more than $470 billion. All of the Vanguard funds share in
the expenses associated with business operations, such as personnel, office
space, equipment, and advertising.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
Turnover Rate
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. The average turnover rate for passively managed domestic bond
funds is roughly 69%; for all domestic bond funds, the average turnover rate is
approximately 90%, according to Morningstar, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
Derivatives
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
- --------------------------------------------------------------------------------
<PAGE>
20
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
Vanguard's Unique Corporate Structure
The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
- --------------------------------------------------------------------------------
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
Investment Adviser
Vanguard's Fixed Income Group (the Group), P.O. Box 2600, Valley Forge, PA
19482, provides advisory services on an at-cost basis to Vanguard Bond Index
Funds. For the fiscal year ended December 31, 1998, the Funds' advisory fees
represented an effective annual rate of 0.01% of each Fund's average net
assets.
The Funds have authorized the Group to choose brokers or dealers to handle
the purchase and sale of securities for the Funds, and to get the best available
price and most favorable execution from these brokers or dealers with respect to
all transactions. The Funds may direct the Group to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Funds.
Year 2000 Challenge
The common practice in computer programming of using just two digits to identify
a year has resulted in the Year 2000 challenge throughout the information
technology industry. If unchanged, many computer applications and systems could
misinterpret dates occurring after December 31, 1999, leading to errors or
failure. Such failure could adversely affect a fund's operations, including
pricing, securities trading, and the servicing of shareholder accounts.
The Vanguard Group is dedicated to providing uninterrupted, high-quality
performance from our computer systems before, during, and after 2000. In July
1998, we completed the renovation and initial testing of our internal systems.
Vanguard is diligently working with external partners, suppliers, and vendors,
including fund managers and other service providers, to assure that the systems
with which we interact remain operational at all times.
In addition to taking every reasonable step to secure our internal systems
and external relationships, Vanguard is further developing contingency plans
intended to assure that unexpected systems failures will not adversely affect
the Funds' operations. Vanguard intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternate solutions if
necessary.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
The Funds' Adviser
Vanguard Fixed Income Group provides investment advisory services to many
Vanguard funds; as of December 31, 1998, the Group managed more than $127
billion in total assets.
The individuals responsible for overseeing the implementation of the Funds'
investment strategies are:
Ian A. MacKinnon, Managing Director of Vanguard; has worked in investment
management since 1974; primary responsibility for Vanguard's internal
fixed-income policy and strategy since 1981; B.A., Lafayette College; M.B.A.,
Pennsylvania State University.
Kenneth E. Volpert, CFA, Principal, and head of Vanguard's Bond Index
Group; Fund Manager of the Total Bond Market and Intermediate-Term Bond Index
Funds since their inception; has worked in investment management since 1981; has
managed portfolio investments since 1982; B.S., University of Illinois; M.B.A.,
University of Chicago.
Christopher W. Alwine, CFA, and (since 1998) Fund Manager of the Short-Term
and Long-Term Bond Index Funds; has worked in investment management since
joining Vanguard in 1991, holding trading and research positions up until 1996;
has managed portfolio investments since 1996; B.B.A., Temple University; M.S.,
Drexel University.
- --------------------------------------------------------------------------------
<PAGE>
21
However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on a Fund's business,
operations, or financial condition. Additionally, a Fund's performance could be
hurt if a computer-system failure at a company or governmental unit affects the
price of securities the Fund owns.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
Distributions
As a shareholder, you are entitled to your share of the fund's income from
interest, and gains from the sale of investments. You receive such earnings as
either an income dividend or a capital gains distribution. Income dividends come
from interest the fund earns from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term depending
on whether the fund held the securities for less than or more than one
year.
- --------------------------------------------------------------------------------
Dividends, Capital Gains, and Taxes
As a shareholder, you are entitled to your share of a Fund's net income
(interest less expenses). The Funds' income dividends accrue daily and are
distributed monthly; capital gains distributions generally occur in December. In
addition, the Funds may occasionally be required to make supplemental capital
gains distributions at some other time during the year.
You can receive distributions of income or capital gains in cash, or you
can have them automatically invested in more shares of the Funds. In either
case, these distributions are taxable to you. It is important to note that
distributions of dividends and capital gains that are declared in December--if
paid to you by the end of January--are taxed as if they had been paid to you in
December.
If you have chosen to receive dividend and/or capital gains distributions
in cash, and the postal or other delivery service is unable to deliver checks to
your address of record, we will change the distribution option so that all
dividends and other distributions are automatically invested in additional
shares. We will not pay interest on uncashed distribution checks.
Vanguard will send you a statement each year showing the tax status of all
your distributions.
. The dividends and short-term capital gains that you receive are considered
ordinary income for tax purposes.
. Any distributions of net long-term capital gains by a Fund are taxable to
you as long-term capital gains, no matter how long you've owned shares in
the Fund.
. Although the Funds do not seek to realize capital gains, such gains are
realized from time to time as by-products of their ordinary investment
activities. Consequently, distributions may vary from year to year.
. If you sell or exchange shares, any gain or loss you have is a taxable
event. This means that you may have a capital gain to report as income, or a
capital loss to report as a deduction, when you complete your federal income
tax return.
. Distributions of dividends or capital gains, and capital gains or losses
from your sale or exchange of Fund shares, may be subject to state and local
income taxes as well.
The tax information in this prospectus is provided as general information
and will not apply to you if you are investing through a tax-deferred account
such as an IRA or a qualified employee benefit plan. (Non-U.S. investors may be
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"Buying a Capital Gain"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), it is not to your advantage to buy shares of a fund shortly before it
makes a capital gains distribution, because doing so can cost you money in
taxes. This is known as "buying a capital gain." For example: On December 15,
you invest $5,000, buying 250 shares for $20 each. If the fund pays a capital
gains distribution of $1 per share on December 16, its share price would drop to
$19 (not counting market change). You still have only $5,000 (250 shares x $19 =
$4,750 in share value, plus 250 shares x $1 = $250 in capital gains
distributions), but you owe tax on the $250 distribution you received, even if
you had reinvested it in more shares. To avoid "buying a capital gain," check a
fund's distribution schedule before you invest.
- --------------------------------------------------------------------------------
<PAGE>
22
subject to U.S. withholding and estate tax.) You should consult your tax adviser
about the tax consequences of an investment in any of the Funds.
Important Note: By law, each Fund must withhold 31% of your taxable
distributions and any redemption proceeds if you do not provide your correct
taxpayer identification number, or certify that it is correct, or if the IRS
instructs the Fund to do so.
Share Price
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of trading on the New York Stock Exchange (the NAV
is not calculated on holidays or other days the Exchange is closed). Net asset
value per share for the Short-, Intermediate-, and Long-Term Bond Index Funds is
computed by adding up the total value of the Fund's investments and other
assets, subtracting any of its liabilities (debts), and then dividing by the
number of Fund shares outstanding:
Total Assets - Liabilities
Net Asset Value = ---------------------------------------
Number of Shares Outstanding
Net asset value per share for the Total Bond Market Index Fund is computed
in a similar way, by dividing the net assets attributed to each class by the
number of Fund shares outstanding for each class.
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. A Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A Note on Pricing: Each Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Funds' Board of Trustees.
Each Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Index Funds." Different
newspapers use different abbreviations for each Fund, but the most common are
TotBd, STBond, ITBond, and LTBond.
<PAGE>
23
Financial Highlights
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years or since inception,
and certain information reflects financial results for a single Fund share in
each case. The total returns in each table represent the rate that an investor
would have earned or lost each year on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
derived from the financial statements audited by PricewaterhouseCoopers LLP,
independent accountants, whose report--along with each Funds' financial
statements--is included in the Funds' most recent annual report to shareholders.
You may have the annual report sent to you without charge by contacting
Vanguard.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund
Investor Shares
Year Ended December 31,
----------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.09 $ 9.84 $10.14 $ 9.17 $ 10.06
- --------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .624 .645 .640 .650 .622
Net Realized and Unrealized Gain
(Loss) on Investments .218 .250 (.300) .970 (.888)
----------------------------------------------
Total from Investment Operations .842 .895 .340 1.620 (.266)
----------------------------------------------
Distributions
Dividends from Net Investment Income (.624) (.645) (.640) (.650) (.622)
Distributions from Realized Capital Gains (.038) -- -- -- (.002)
----------------------------------------------
Total Distributions (.662) (.645) (.640) (.650) (.624)
- --------------------------------------------------------------------------------------------
Net Asset Value, End of Year $10.27 $10.09 $ 9.84 $10.14 $ 9.17
============================================================================================
Total Return* 8.58% 9.44% 3.58% 18.18% -2.66%
============================================================================================
Ratios/Supplemental Data
Net Assets, End of Year (Millions) $7,765 $5,129 $2,962 $2,405 $ 1,731
Ratio of Total Expenses to Average
Net Assets 0.20% 0.20% 0.20% 0.20% 0.18%
Ratio of Net Investment Income to
Average Net Assets 6.10% 6.54% 6.54% 6.66% 6.57%
Turnover Rate 57%** 39% 39% 36% 33%
============================================================================================
</TABLE>
* Total return figures do not reflect the annual account maintenance fee of
$10.
** Turnover rate excluding in-kind redemptions was 56%.
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a measure of past dividend income. Total return includes both
past dividend income (assuming that it has been reinvested) plus realized and
unrealized capital appreciation (or depreciation). Neither yield nor total
return should be used to predict the future performance of a fund.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
How to Read the Financial Highlights Tables
This explanation uses the Total Bond Market Index Fund Investor Shares as an
example. The Fund began fiscal 1998 with a net asset value (price) of $10.09 per
share. During the year, the Fund earned $.624 per share from investment income
(interest and dividends) and $.218 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $.662 per share in the form of dividend and capital
gains distributions. A portion of each year's distributions may come from the
prior year's income or capital gains.
The earnings ($.842 per share) minus the distributions ($.662 per share)
resulted in a share price of $10.27 at the end of the year. This was an increase
of $.18 per share (from $10.09 at the beginning of the year to $10.27 at the end
of the year). For a shareholder who reinvested the distributions in the purchase
of more shares, the total return from the Fund was 8.58% for the year.
As of December 31, 1998, the Fund had $7.77 billion in net assets. For the
year, its expense ratio was 0.20% ($2.00 per $1,000 of net assets); and its net
investment income amounted to 6.10% of its average net assets. It sold and
replaced securities valued at 57% of its net assets.
- --------------------------------------------------------------------------------
<PAGE>
24
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Vanguard Short-Term Bond Index Fund
Year Ended December 31,
---------------------------------------- Mar. 1* to
1998 1997 1996 1995 Dec. 31, 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.00 $ 9.92 $10.07 $ 9.50 $ 10.00
- --------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .574 .597 .587 .623 .463
Net Realized and Unrealized Gain (Loss) on Investments .168 .080 (.146) .570 (.500)
---------------------------------------------------------
Total from Investment Operations .742 .677 .441 1.193 (.037)
---------------------------------------------------------
Distributions
Dividends from Net Investment Income (.574) (.597) (.587) (.623) (.463)
Distributions from Realized Capital Gains (.068) -- (.004) -- --
---------------------------------------------------------
Total Distributions (.642) (.597) (.591) (.623) (.463)
- --------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.10 $10.00 $ 9.92 $10.07 $ 9.50
====================================================================================================================
Total Return** 7.63% 7.04% 4.55% 12.88% -0.37%
====================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) $ 709 $ 446 $ 328 $ 208 $ 77
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.18%+
Ratio of Net Investment Income to Average Net Assets 5.68% 6.03% 5.93% 6.28% 5.77%+
Turnover Rate 112% 88% 65% 65% 53%
====================================================================================================================
</TABLE>
* Subscription period for the Fund was from January 18, 1994, through February
28, 1994, during which time all assets were held in money market instruments.
** Total return figures do not reflect the annual account maintenance fee of
$10.
+ Annualized.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Vanguard Intermediate-Term Bond Index Fund
Year Ended December 31,
------------------------------------------ Mar. 1* to
1998 1997 1996 1995 Dec. 31, 1994
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.20 $ 9.96 $10.37 $ 9.18 $ 10.00
- ----------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .647 .661 .648 .661 .533
Net Realized and Unrealized Gain (Loss) on Investments .353 .240 (.406) 1.217 (.820)
-----------------------------------------------------
Total from Investment Operations 1.000 .901 .242 1.878 (.287)
-----------------------------------------------------
Distributions
Dividends from Net Investment Income (.647) (.661) (.648) (.661) (.533)
Distributions from Realized Capital Gains (.073) -- (.004) (.027) --
-----------------------------------------------------
Total Distributions (.720) (.661) (.652) (.688) (.533)
- ----------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.48 $10.20 $ 9.96 $10.37 $ 9.18
================================================================================================================
Total Return** 10.09% 9.41% 2.55% 21.07% -2.88%
================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) $1,102 $ 687 $ 460 $ 346 $ 71
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.18%+
Ratio of Net Investment Income to Average Net Assets 6.23% 6.64% 6.54% 6.55% 6.88%+
Turnover Rate 77% 56% 80% 71% 63%
================================================================================================================
</TABLE>
* Subscription period for the Fund was from January 18, 1994, through February
28, 1994, during which time all assets were held in money market instruments.
** Total return figures do not reflect the annual account maintenance fee of
$10.
+ Annualized.
<PAGE>
25
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Vanguard Long-Term Bond Index Fund
Year Ended December 31,
--------------------------------------- Mar. 1* to
1998 1997 1996 1995 Dec. 31, 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.78 $10.08 $ 10.82 $ 8.96 $ 10.00
- ----------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .666 .678 .674 .692 .586
Net Realized and Unrealized Gain (Loss) on Investments .588 .700 (.731) 1.884 (1.040)
----------------------------------------------------
Total from Investment Operations 1.254 1.378 (.057) 2.576 (.454)
----------------------------------------------------
Distributions
Dividends from Net Investment Income (.666) (.678) (.674) (.692) (.586)
Distributions from Realized Capital Gains (.048) -- (.009) (.024) --
----------------------------------------------------
Total Distributions (.714) (.678) (.683) (.716) (.586)
- ----------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.32 $10.78 $ 10.08 $10.82 $ 8.96
================================================================================================================
Total Return** 11.98% 14.30% -0.26% 29.72% -4.53%
================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) $ 210 $ 88 $ 44 $ 24 $ 9
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.18%+
Ratio of Net Investment Income to Average Net Assets 6.01% 6.66% 6.75% 6.90% 7.70%+
Turnover Rate 57% 58% 46% 45% 70%
================================================================================================================
</TABLE>
* Subscription period for the Fund was from January 18, 1994, through February
28, 1994, during which time all assets were held in money market instruments.
** Total return figures do not reflect the annual account maintenance fee of
$10.
+ Annualized.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE>
26
Investing with Vanguard
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services
we offer. Booklets providing detailed information are available on the services
marked with a [GRAPHIC OF BOOK APPEARS HERE]. Please call us to request copies.
Services and Account Features
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
Telephone Redemptions (Sales and Exchanges)
Automatically set up for these Funds unless you notify us otherwise.
- --------------------------------------------------------------------------------
Checkwriting [GRAPHIC APPEARS HERE]
Method for drawing money from your account by writing a check for $250 or more.
- --------------------------------------------------------------------------------
Vanguard Direct Deposit Service(TM) [GRAPHIC APPEARS HERE]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
Vanguard Automatic Exchange Service(TM) [GRAPHIC APPEARS HERE]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
Vanguard Fund Express(R) [GRAPHIC APPEARS HERE]
Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule or whenever you wish.
- --------------------------------------------------------------------------------
Vanguard Dividend Express(TM) [GRAPHIC APPEARS HERE]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
- --------------------------------------------------------------------------------
Vanguard Tele-Account(R) 1-800-662-6273 (ON-BOARD) [GRAPHIC APPEARS HERE]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange fund shares.
- --------------------------------------------------------------------------------
Access Vanguard(TM) www.vanguard.com [GRAPHIC APPEARS HERE]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through the website. We will then send to you, by mail, an account
access password that allows you to process the following financial and
administrative transactions online:
[_] Open a new account.*
[_] Buy, sell, or exchange shares of most funds.
[_] Change your name/address.
[_] Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
* Only current Vanguard shareholders can open a new account online, by
exchanging shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
Investor Information Department: 1-800-662-7447 (SHIP) Text Telephone:
1-800-952-3335 Call Vanguard for information on our funds, fund services, and
retirement accounts, and to request literature.
- --------------------------------------------------------------------------------
Client Services Department: 1-800-662-2739 (CREW) Text Telephone: 1-800-662-2738
Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------
<PAGE>
27
- --------------------------------------------------------------------------------
Services for Clients of Vanguard's Institutional Division: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------
Types of Accounts
Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
For One or More People
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
For Holding Personal Trust Assets [GRAPHIC APPEARS HERE]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
For Individual Retirement Accounts [GRAPHIC APPEARS HERE]
Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).
- --------------------------------------------------------------------------------
For an Organization [GRAPHIC APPEARS HERE]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
For Third-Party Trustee Retirement Investments
Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.
- --------------------------------------------------------------------------------
Vanguard Prototype Plans
Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A Note on Investing with Vanguard Through Other Firms
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------
Buying Shares
You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value. You may convert Investor Shares
of the Total Bond Market Index Fund into Institutional Shares provided that you
meet the minimum initial requirements for Institutional Shares.
- --------------------------------------------------------------------------------
Minimum Investment to . . .
open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A Note on Low Balances
Each Fund reserves the right to close any nonretirement account whose balance
falls below the minimum initial investment. The Fund will deduct a $10 annual
fee in June if your nonretirement account balance at that time is below $2,500.
The fee is waived if your total Vanguard account assets are $50,000 or more.
- --------------------------------------------------------------------------------
<PAGE>
28
Buying Shares (continued)
- --------------------------------------------------------------------------------
By Mail to . . . [GRAPHIC APPEARS HERE]
open a new account
Complete and sign the application form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form.
Make your check payable to: The Vanguard Group-(insert appropriate Fund number;
see below)
Vanguard Total Bond Market Index Fund-84;
Vanguard Short-Term Bond Index Fund-132;
Vanguard Intermediate-Term Bond Index Fund-314;
Vanguard Long-Term Bond Index Fund-522
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2600 455 Devon Park Drive
Valley Forge, PA 19482-2600 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
By Telephone to . . . [GRAPHIC APPEARS HERE]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type).
add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). Use Vanguard
Fund Express (see "Services and Account Features") to transfer assets from your
bank account. Call Client Services before your first use to verify that this
option is in place.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
* You must obtain a Personal Identification Number through Tele-Account at least
seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you've requested a telephone transaction and a confirmation
number has been assigned, the transaction cannot be revoked. We reserve the
right to refuse any purchase request.
- --------------------------------------------------------------------------------
By Wire to Open a New Account or Add to an Existing Account [GRAPHIC APPEARS
HERE]
Call Client Services to arrange your wire transaction. Wire transactions are not
available for retirement accounts, except for asset transfers and direct
rollovers.
Wire to:
FRB ABA 021001088
HSBC Bank USA
<PAGE>
29
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
Vanguard Total Bond Market Index Fund-84;
Vanguard Short-Term Bond Index Fund-132;
Vanguard Intermediate-Term Bond Index Fund-314;
Vanguard Long-Term Bond Index Fund-522
[Account number, or temporary number for a new account]
[Registered account owner/s]
[Registered address]
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check or
Vanguard Fund Express at any time. However, while your redemption request will
be processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
- --------------------------------------------------------------------------------
A Note on Large Purchases
It is important that you call Vanguard before you invest a large dollar amount.
We must consider the interests of all Fund shareholders and so reserve the right
to refuse any purchase that will disrupt the Fund's operation or performance.
- --------------------------------------------------------------------------------
Redeeming Shares
This section describes how you can redeem--that is, sell or exchange--a Fund's
shares.
When Selling Shares:
. Vanguard sends the redemption proceeds to you or a designated third party.*
. You can sell all or part of your Fund shares at any time.
* May require a signature guarantee; see footnote on page 32.
When Exchanging Shares:
. The redemption proceeds are used to purchase shares of a different Vanguard
fund.
. You must meet the receiving fund's minimum investment requirements.
. Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus. For
exchanges, the purchase side of the transaction will be based on the receiving
fund's next-determined share price, again subject to any special rules discussed
in this prospectus.
- --------------------------------------------------------------------------------
Note: Once a redemption is requested and a confirmation number given, the
transaction cannot be canceled.
- --------------------------------------------------------------------------------
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail. You can also sell shares by check.
- --------------------------------------------------------------------------------
Online Requests [GRAPHIC APPEARS HERE]
Access Vanguard at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through the website. We will then send you, by mail, an account access password
that will enable you to sell or exchange shares online (as well as perform other
transactions).
<PAGE>
30
Redeeming Shares (continued)
Note: The Vanguard funds whose shares you cannot exchange online or by
telephone are Vanguard U.S. Stock Index Funds, Vanguard Balanced Index Fund,
Vanguard International Stock Index Funds, Vanguard REIT Index Fund, Vanguard
Total International Stock Index Fund, and Vanguard Growth and Income Fund. These
funds do, however, permit online and telephone exchanges within IRAs and other
retirement accounts. If you sell shares of these funds online, you will
receive a redemption check at your address of record.
- --------------------------------------------------------------------------------
Telephone Requests [GRAPHIC APPEARS HERE]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours--to sell or exchange shares. You can exchange shares from a Fund to open
an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.
Retirement Accounts:
You can exchange--but not sell--shares by calling Tele-Account or Client
Services.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
. The ten-digit account number.
. The name and address exactly as registered on the account.
. The primary Social Security or employer identification number as
registered on the account.
. The Personal Identification Number, if applicable.
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A Note on Unusual Circumstances
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.
- --------------------------------------------------------------------------------
Mail Requests [GRAPHIC APPEARS HERE]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
<PAGE>
31
Vanguard Retirement Accounts:
For information on how to request distributions from:
. Traditional IRAs and Roth IRAs--call Client Services.
. SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans--call Individual Retirement Plans at 1-
800-662-2003.
Depending on your account registration type, additional documentation may be
required.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1120 455 Devon Park Drive
Valley Forge, PA 19482-1120 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
Check Requests
You can sell shares by writing a check for $250 or more.
- --------------------------------------------------------------------------------
A Note On Large Redemptions
It is important that you call Vanguard before you redeem a large dollar amount.
We must consider the interests of all fund shareholders and so reserve the right
to delay delivery of your redemption proceeds--up to seven days--if the amount
will disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in kind, i.e., in securities, rather than in cash. If
payment is made in kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check, wire
(money market funds and other daily dividend funds only), or exchange to another
Vanguard fund.
- --------------------------------------------------------------------------------
Check Redemptions
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
Wire Redemptions [GRAPHIC APPEARS HERE]
The wire redemption option is not automatic; you must establish it by completing
a special form or the appropriate section of your account application. Wire
redemptions can be initiated by mail or by telephone during Vanguard's business
hours, but not online.
For Money Market Funds:
For telephone requests made by 10:30 a.m. EST, the wire will arrive at your bank
by the close of business that same day. Requests made by 4 p.m. EST will arrive
at your bank by the close of business on the following business day.
For Other Daily Dividend Funds:
For telephone requests made by 4 p.m. EST, the wire will arrive at your bank by
the close of business on the following business day.
- --------------------------------------------------------------------------------
Note: Wire redemptions of less than $5,000 are subject to a $5 processing
fee.
- --------------------------------------------------------------------------------
Exchange Redemptions
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
<PAGE>
32
Redeeming Shares (continued)
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions.
Request in "Good Order"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
. The Fund name and account number.
. The amount of the transaction (in dollars or shares).
. Signatures of all owners exactly as registered on the account (for mail
requests).
. Signature guarantees (if required).*
. Any supporting legal documentation that may be required.
. Any outstanding certificates representing shares to be redeemed.
* For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most banks, credit unions,
and licensed brokers.
Transactions are processed at the next-determined share price after Vanguard has
received all required information.
- --------------------------------------------------------------------------------
Limits on Account Activity
Because excessive account transactions can disrupt management of a Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
. You may make no more than two substantive "round trips" through the Fund
during any 12-month period.
. Your round trips through the Fund must be at least 30 days apart.
. The Fund may refuse a share purchase at any time, for any reason.
. Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also, "round trip" covers transactions accomplished by any combination
of methods, including transactions conducted by check, wire, or exchange to/from
another Vanguard fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
- --------------------------------------------------------------------------------
Return Your Share Certificates
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
All Trades Final
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been received
and a confirmation number assigned.
- --------------------------------------------------------------------------------
Transferring Registration
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
<PAGE>
33
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
Fund and Account Updates
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about the Fund twice a
year. These comprehensive reports include an assessment of the Fund's
performance (and a comparison to its industry benchmark), an overview of the
markets, a report from the advisers, and the Fund's financial statements which
include a listing of the Fund's holdings.
To keep each Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When we find that two or
more Fund shareholders have the same last name and address, we send just one
Fund report to that address--instead of mailing separate reports to each
shareholder. If you want us to send separate reports, however, you may notify
our Client Services Department at 1-800-662-2739.
- --------------------------------------------------------------------------------
Confirmation Statement
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
Portfolio Summary [GRAPHIC APPEARS HERE]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
Fund Financial Reports
Mailed in February and August for these Funds.
- --------------------------------------------------------------------------------
Tax Statements
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------
Average Cost Review Statement [GRAPHIC APPEARS HERE]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using the average cost single category method.
- --------------------------------------------------------------------------------
Checkwriting Statement
Sent monthly to shareholders using Vanguard's checkwriting option. Our statement
provides images of the front and back of each checkwriting draft paid in the
previous month. This consolidated statement is sent instead of the original
canceled drafts, which will not be returned.
- --------------------------------------------------------------------------------
<PAGE>
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<PAGE>
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<PAGE>
(This page intentionally left blank.)
<PAGE>
Glossary of Investment Terms
Active Management
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
Bond
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and make regular interest payments until
that date.
Capital Gains Distribution
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit, minus any realized losses.
Cash Reserves
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
Corporate Bond
An IOU issued by a business that wants to borrow money. As with other types of
bonds, the issuer promises to repay the borrowed money on a specific date and to
make interest payments in the meantime.
Dividend Income
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
Expense Ratio
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
Face Value
The amount to be paid at maturity of a bond; also known as the par value or
principal.
Index
An unmanaged group of securities whose overall performance is used as a standard
to measure investment performance.
International Dollar-Denominated Bond
A bond denominated in U.S. dollars issued by foreign governments and companies.
Because the bond's value is designated in dollars, an investor is not exposed to
foreign currency risk.
Investment Grade
A bond whose credit quality is considered by independent bond-rating agencies to
be sufficient to ensure timely payment of principal and interest under current
economic circumstances.
Maturity
The date when a bond issuer agrees to repay the bond's principal, or face value,
to the bond's buyer.
Mortgage-Backed Security
A bond or pass-through certificate that represents an interest in an underlying
pool of mortgages and is issued by any number of government agencies or private
corporations. Unlike ordinary fixed-income securities, mortgage-backed
securities pay both interest and principal as part of their regular
payments.
Net Asset Value (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
Passive Management
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform--a particular stock or bond market index. Also known as
indexing.
Total Return
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
Volatility
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
Yield
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[LETTERHEAD OF THE VANGUARD GROUP(R) APPEARS HERE]
For More Information
If you'd like more information about Vanguard Bond Index Funds, the following
documents are available free upon request:
Annual/Semiannual Report to Shareholders
Additional information about the Funds' investments is available in the Funds'
annual and semiannual reports to shareholders. In these reports, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Funds' performance during the most recent fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about the Funds.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Funds or other Vanguard funds,
please contact us as follows:
The Vanguard Group Investor Information Department
P.O. Box 2600
Valley Forge, PA 19482-2600
Telephone:
1-800-662-7447 (SHIP)
Text Telephone: 1-800-952-3335
World Wide Web: www.vanguard.com
If you are a current Fund shareholder and would like information about your
account, account transactions, and/or account statements, please call:
Client Services Department Telephone: 1-800-662-2739 (CREW)
Text Telephone: 1-800-662-2738
Information provided by the Securities and Exchange Commission (SEC)
You can review and copy information about the Funds (including the SAI) at the
SEC's Public Reference Room in Washington, D.C. To find out more about this
public service, call the SEC at 1-800-SEC-0330. Reports and other information
about the Funds are also available on the SEC's website (www.sec.gov), or you
can receive copies of this information, for a fee, by writing the Public
Reference Section, Securities and Exchange Commission, Washington, DC
20549-6009.
Funds' Investment Company Act file number: 811-4681
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation, Distributor.
P084N-04/30/1999
<PAGE>
Vanguard Bond Index Funds
Participant Prospectus
April 30, 1999
A Group of Bond Index Mutual Funds
Contents
1 An Introduction to Index Funds
2 Fund Profiles
2 Vanguard Total Bond Market Index Fund
5 Vanguard Short-Term Bond Index Fund
8 Vanguard Intermediate-Term Bond Index Fund
11 Vanguard Long-Term Bond Index Fund
14 More on the Funds
19 The Funds and Vanguard
20 Investment Adviser
20 Year 2000 Challenge
21 Dividends, Capital Gains, and Taxes
21 Share Price
22 Financial Highlights
25 Investing with Vanguard
25 Accessing Fund Information by Computer
Glossary (inside back cover)
- --------------------------------------------------------------------------------
Why Reading This Prospectus Is Important
This prospectus explains the objective, risks, and strategies of each of the
Vanguard Bond Index Funds. To highlight terms and concepts important to mutual
fund investors, we have provided "Plain Talk((R))" explanations along the way.
Reading the prospectus will help you to decide which Funds, if any, are the
right investments for you. We suggest that you keep it for future reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Important Note
This prospectus is intended for participants in employer-sponsored retirement or
savings plans. Another version--for investors who would like to open a personal
investment account--can be obtained by calling Vanguard at 1-800-662-7447. The
Total Bond Market Index Fund features two separate classes of shares: Investor
and Institutional. Total Bond Market Index Fund Investor Shares are offered
through this prospectus. Total Bond Market Index Fund Institutional Shares have
an investment minimum of $10 million, and are available through a separate
prospectus. Investor Shares and Institutional Shares do not have the same
expenses; as a result, the performance of these separate classes could differ.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
<PAGE>
1
An Introduction to Index Funds
What is indexing?
An index is an unmanaged group of securities whose overall performance is used
as a standard to measure investment performance. An index (or "passively
managed") fund tries to match, as closely as possible, the performance of an
established target index. The fund does this by holding either all or a
representative sample of the securities in the index. Keep in mind that an index
fund has operating expenses and transaction costs, while a market index does
not. Therefore, an index fund, while expected to track its target index closely,
typically will be unable to match the performance of the index exactly.
Bond index funds may seek to track indexes that hold a certain type of bond--
such as short-term or long-term bonds--or they may seek to track indexes that
consist of a broader range of bonds--for example, the entire U.S. bond
market.
Index funds are not actively managed by investment advisers who buy and sell
securities based on research and analysis in an attempt to outperform the
market as a whole. Rather, index funds simply mirror what the target index does,
for better or worse.
What index funds does Vanguard offer?
Vanguard offers a variety of stock (both U.S. and international), bond, and
balanced index funds. This prospectus provides information about Vanguard's Bond
Index Funds. There are four such funds, each of which seeks to track a different
segment of the U.S. bond market:
- --------------------------------------------------------------------------------
Fund Seeks to Track
- --------------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund The overall bond market
Vanguard Short-Term Bond Index Fund Short-term bonds
Vanguard Intermediate-Term Bond Index Fund Intermediate-term bonds
Vanguard Long-Term Bond Index Fund Long-term bonds
- --------------------------------------------------------------------------------
This prospectus contains profiles that summarize key features of each Fund.
Following the profiles, there is important additional information about the
Funds.
<PAGE>
2
Fund Profile--Vanguard Total Bond Market Index Fund
The following profile summarizes key features of Vanguard Total Bond Market
Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a broad, market-weighted bond index.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
holding a mix of bonds that seeks to match the performance of the Lehman
Brothers Aggregate Bond Index. This index measures the total universe of
investment-grade fixed-income securities in the U.S.--including government,
corporate, mortgage-backed, asset-backed, and international dollar-denominated
bonds, all with maturities of over one year. The Fund primarily holds bonds
represented in the Index. For more information about passive management, see
"Indexing Methods" under More on the Funds.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause investors to lose
money. These include:
. Interest rate risk, which is the chance that bond prices overall will
decline over short or even long periods due to rising interest rates.
Interest rate risk should be least for shorter-term bonds, and greatest for
longer-term bonds.
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally higher for short-term
bonds, and lower for long-term bonds.
. Credit risk, which is the chance that a bond issuer will fail to pay
interest and principal in a timely manner, reducing the Fund's return.
Credit risk should be low for the Fund.
. Prepayment risk, which is the chance that during periods of falling
interest rates, a mortgage-backed bond issuer will repay a higher-yielding
bond before its maturity date. Forced to reinvest the unanticipated
proceeds at lower rates, the Fund would experience a decline in income and
lose the opportunity for additional price appreciation associated with
falling rates.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
-------------------------------------------------------------------
Annual Total Returns*
-------------------------------------------------------------------
[BAR CHART APPEARS HERE]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
13.64% 8.65% 15.25% 7.14% 9.68% -2.66% 18.18% 3.58% 9.44% 8.58%
</TABLE>
-----------------------------------------------------------------------------
*Total return do not reflect the annual account maintenance fee of $10
-----------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 7.60% (quarter ended June 30, 1989) and the lowest return for a
quarter was -2.71% (quarter ended March 31, 1994).
<PAGE>
3
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund* 8.58% 7.21% 9.00%
Lehman Brothers Aggregate Bond Index 8.69 7.27 9.26
- --------------------------------------------------------------------------------
*Total return figures do not reflect the annual account maintenance fee of $10
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1998.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None(*)
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.16%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.20%
*A portfolio transaction fee of 0.18% may apply to aggregate purchases over
$250 million by a single investor.
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year and that operating expenses remain the same. The results apply whether or
not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$20 $64 $113 $255
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
<PAGE>
4
Fund Profile--Vanguard Total Bond Market Index Fund (continued)
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
Inception Date
December 11, 1986
Net Assets as of December 31, 1998
$7.77 billion (for Investor Shares)
Newspaper Abbreviation
TotBd
Vanguard Fund Number
084
Cusip Number
921937108
Ticker Symbol
VBMFX
<PAGE>
5
Fund Profile--Vanguard Short-Term Bond Index Fund
The following profile summarizes key features of Vanguard Short-Term Bond Index
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a market-weighted bond index with a
short-term dollar-weighted average maturity.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"-- or index--investment approach, by
holding a mix of bonds that seeks to match the performance of the Lehman
Brothers 1-5 Year Government/Corporate Bond Index. This index is made up of all
U.S. government, investment-grade corporate, and international
dollar-denominated bonds, all with maturities between one and five years.
The Fund primarily holds bonds represented in the Index. For more
information about passive management, see "Indexing Methods" under More on the
Funds.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause investors to lose
money. These include:
. Interest rate risk, which is the chance that bond prices overall will
decline over short or even long periods due to rising interest rates.
Interest rate risk should be modest for short-term bonds.
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally high for short-term
bonds.
. Credit risk, which is the chance that a bond issuer will fail to pay
interest and principal in a timely manner, reducing the Fund's return.
Credit risk should be low for the Fund.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual returns for one
calendar year and since inception compare with those of a market-weighted bond
index. Keep in mind that the Fund's past performance does not indicate how it
will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns*
- --------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
1995 12.88%
1996 4.55%
1997 7.04%
1998 7.63%
- --------------------------------------------------------------------------------
*Total return figures do not reflect the annual account maintenance fee of $10.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 3.96% (quarter ended March 31, 1995) and the lowest return for a
quarter was -0.12% (quarter ended March 31, 1996).
<PAGE>
6
Fund Profile--Vanguard Short-Term Bond Index Fund (continued)
<TABLE>
- --------------------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------------------
1 Year Since Inception*
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Vanguard Short-Term Bond Index Fund** 7.63% 6.48%
Lehman Brothers 1-5 Year Government/Corporate Bond Index 7.63 6.56
- --------------------------------------------------------------------------------------------
*March 1, 1994.
**Total return figures do not reflect the annual account maintenance fee of $10.
- --------------------------------------------------------------------------------------------
</TABLE>
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1998.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None(*)
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.16%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.20%
*A portfolio transaction fee of 0.15% may apply to aggregate purchases over
$50 million by a single investor.
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year and that operating expenses remain the same. The results apply whether or
not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$20 $64 $113 $255
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
<PAGE>
7
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
Inception Date
March 1, 1994
Net Assets as of December 31, 1998
$709 million
Newspaper Abbreviation
STBond
Vanguard Fund Number
132
Cusip Number
921937207
Ticker Symbol
VBISX
<PAGE>
8
Fund Profile--Vanguard Intermediate-Term Bond Index Fund
The following profile summarizes key features of Vanguard Intermediate-Term Bond
Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a market-weighted bond index with an
intermediate-term dollar-weighted average maturity.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
holding a mix of bonds that seeks to match the performance of the Lehman
Brothers 5-10 Year Government/Corporate Bond Index. This index includes all U.S.
government, investment-grade corporate, and international dollar-denominated
bonds, all with maturities between five and ten years. The Fund primarily holds
bonds represented in the Index. For more information about passive management,
see "Indexing Methods" under More on the Funds.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause investors to lose
money. These include:
. Interest rate risk, which is the chance that bond prices overall will decline
over short or even long periods due to rising interest rates. Interest rate
risk should be moderate for intermediate-term bonds.
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk should be moderate for intermediate-
term bonds.
. Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, reducing the Fund's return. Credit risk
should be low for the Fund.
. Call risk, which is the chance that during periods of falling interest rates,
a bond issuer will "call"--or repay--a higher-yielding bond before the bond's
maturity date. Forced to reinvest the unanticipated proceeds at lower
interest rates, the Fund would experience a decline in income and lose the
opportunity for additional price appreciation associated with falling rates.
Call risk is generally moderate for intermediate-term bonds.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual returns for one
calendar year and since inception compare with those of a market-weighted bond
index. Keep in mind that the Fund's past performance does not indicate how it
will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns*
- --------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
1995 21.07%
1996 2.55%
1997 9.41%
1998 10.09%
- --------------------------------------------------------------------------------
* Total return figures do not reflect the annual account maintenance fee of $10.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 7.37% (quarter ended June 30, 1995) and the lowest return for a
quarter was -2.52% (quarter ended March 31, 1996).
<PAGE>
9
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- ----------------------------------------------------------------------------------
1 Year Since Inception*
- ----------------------------------------------------------------------------------
<S> <C> <C>
Vanguard Intermediate-Term Bond Index Fund** 10.09% 8.02%
Lehman Brothers 5-10 Year Government/Corporate
Bond Index 10.14 8.12
- ----------------------------------------------------------------------------------
* March 1, 1994.
**Total return figures do not reflect the annual account maintenance fee of $10.
- ----------------------------------------------------------------------------------
</TABLE>
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1998.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.16%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.20%
* A portfolio transaction fee of 0.23% may apply to aggregate purchases over $50
million by a single investor.
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year and that operating expenses remain the same. The results apply whether or
not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$20 $64 $113 $255
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
<PAGE>
10
Fund Profile--Vanguard Intermediate-Term Bond Index Fund (continued)
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
Inception Date
March 1, 1994
Net Assets as of December 31, 1998
$1.1 billion
Newspaper Abbreviation
ITBond
Vanguard Fund Number
314
Cusip Number
921937306
Ticker Symbol
VBIIX
<PAGE>
11
Fund Profile--Vanguard Long-Term Bond Index Fund
The following profile summarizes key features of Vanguard Long-Term Bond Index
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a market-weighted bond index with a
long-term dollar-weighted average maturity.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
holding a mix of bonds that seeks to match the performance of the Lehman
Brothers Long Government/Corporate Bond Index. This index is made up of all U.S.
government, investment-grade corporate, and international dollar-denominated
bonds, all with maturities greater than 10 years. The Fund primarily holds bonds
represented in the Index. For more information about passive management, see
"Indexing Methods" under More on the Funds.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause investors to lose
money. These include:
. Interest rate risk, which is the chance that bond prices overall will
decline over short or even long periods due to rising interest rates.
Interest rate risk is generally high for long-term bonds.
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally low for long-term bonds.
. Credit risk, which is the chance that a bond issuer will fail to pay
interest and principal in a timely manner, reducing the Fund's return.
Credit risk should be low for the Fund.
. Call risk, which is the chance that during periods of falling interest
rates, a bond issuer will "call"--or repay--a higher-yielding bond before
the bond's maturity date. Forced to reinvest the unanticipated proceeds at
lower interest rates, the Fund would experience a decline in income and
lose the opportunity for additional price appreciation associated with
falling rates. Call risk is generally moderate for long-term bonds.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual returns for one
calendar year and since inception compare with those of a market-weighted bond
index. Keep in mind that the Fund's past performance does not indicate how it
will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns*
- --------------------------------------------------------------------------------
[BAR GRAPH APPEARS HERE]
1995 1996 1997 1998
29.72% -0.26% 14.30% 11.98%
- --------------------------------------------------------------------------------
*Total return figures do not reflect the annual account maintenance fee of $10.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 10.26% (quarter ended June 30, 1995) and the lowest return for a
quarter was -6.17% (quarter ended March 31, 1996).
<PAGE>
12
Fund Profile--Vanguard Long-Term Bond Index Fund (continued)
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- ------------------------------------------------------------------------------
1 Year Since Inception*
- ------------------------------------------------------------------------------
Vanguard Long-Term Bond Index Fund** 11.98% 9.93%
Lehman Brothers Long Government/Corporate Bond Index 11.77 10.04
- ------------------------------------------------------------------------------
*March 1, 1994.
**Total return figures do not reflect the annual account maintenance fee of
$10.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1998.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None(*)
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.15%
12b-1 Distribution Fees: None
Other Expenses: 0.05%
Total Annual Fund Operating Expenses: 0.20%
*A portfolio transaction fee of 0.21% may apply to aggregate purchases over
$10 million by a single investor.
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year and that operating expenses remain the same. The results apply whether or
not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$20 $64 $113 $255
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
<PAGE>
13
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first business day of each
month; capital gains, if any, are distributed annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since inception
Inception Date
March 1, 1994
Net Assets as of December 31, 1998
$210 million
Newspaper Abbreviation
LTBond
Vanguard Fund Number
522
Cusip Number
921937405
Ticker Symbol
VBLTX
<PAGE>
14
More on the Funds
The following sections discuss other important features of Vanguard Bond Index
Funds, including indexing methods, security selection, additional risk
information, costs and market-timing, turnover rate, and other investment
policies and risks.
Why invest in index funds?
Index funds appeal to many investors for a number of reasons:
. Diversification. Index funds generally invest in a diversified mix of
companies and industries.
. Low cost. Index funds do not have many of the expenses of an actively
managed fund--such as research--and keep trading activity, and thus
brokerage commissions, to a minimum.
. Low realization of capital gains. Because an index fund typically sells
securities only to respond to redemption requests or to adjust the number
of shares it holds to reflect a change in its target index, the fund's
turnover rate--and thus its realization of taxable capital gains--is
usually very low.
Indexing Methods
In seeking to track a particular index, a fund generally uses one of two methods
to select the stocks or bonds in which it invests.
Some index funds hold each stock or bond found in their target indexes in
about the same proportions as represented in the indexes themselves. This is
called a "replication" method. For example, if 5% of the S&P 500 Index were made
up of the stock of a specific company, a fund tracking that index would invest
about 5% of its assets in that company.
Other index funds may use a different security selection process. Because it
would be very expensive to buy and sell all of the securities held in certain
indexes (the Lehman Brothers Aggregate Bond Index, for example, includes more
than 7,200 bonds), funds tracking these larger indexes use a "sampling"
technique. Using sophisticated computer programs, these funds select securities
that will recreate their target indexes in terms of industry weightings, market
capitalization, and other characteristics. For instance, if 30% of the Lehman
Brothers Aggregate Bond Index were made up of mortgage-backed securities, the
Total Bond Market Index Fund would invest about 30% of its assets in
mortgage-backed securities that have similar characteristics as a group to those
in the Index. Each of the Vanguard Bond Index Funds employs this method of
indexing.
The following table shows the number of bonds held by each of the Funds as of
December 31, 1998.
- --------------------------------------------------------------------------------
Fund Number of Bonds Held Number of Bonds in Target Index
- --------------------------------------------------------------------------------
Total Bond Market 737 7,257
Short-Term Bond 213 2,608
Intermediate-Term Bond 201 2,087
Long-Term Bond 165 1,865
Corporate Substitution Strategy
In "sampling" its target index, each Fund has the flexibility to overweight
particular types of bonds relative to their representation in the index.
Normally, this involves substituting corporate bonds for government bonds of the
same maturity. The corporate substitution strategy may increase a Fund's income,
but it may also marginally increase exposure to credit risk, which is explained
on page 17. The Funds limit corporate substitutions to bonds with less than 4
years remaining maturity, and each Fund will limit corporate substitutions to
approximately 15% of its net assets.
<PAGE>
15
Security Selection
Each Fund invests at least 80% of its assets in securities included in its
target index. As of December 31, 1998, each Fund and its target index was
composed of the following types of bonds:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Type of Bond
--------------------------------------------------------
International
Vanguard Fund/ U.S. Mortgage- Dollar-
Target Index Government Corporate Backed Denominated Total
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Bond Market Index 27.9% 35.8% 33.2% 3.1% 100%
Lehman Brothers
Aggregate Bond Index 45.0 19.0 32.0 4.0 100
- -------------------------------------------------------------------------------------------------
Short-Term Bond Index 57.1% 39.7% 0.0% 3.2% 100%
Lehman Brothers 1-5 Year
Gov't./Corp. Bond Index 76.0 20.0 0.0 4.0 100
- -------------------------------------------------------------------------------------------------
Intermediate-Term
Bond Index 54.5% 38.9% 0.0% 6.6% 100%
Lehman Brothers 5-10 Year
Gov't./Corp. Bond Index 56.0 34.0 0.0 10.0 100
- -------------------------------------------------------------------------------------------------
Long-Term Bond Index 63.2% 31.9% 0.0% 4.9% 100%
Lehman Brothers Long
Gov't./Corp. Bond Index 62.0 32.0 0.0 6.0 100
- -------------------------------------------------------------------------------------------------
</TABLE>
An explanation of each type of bond follows.
. U.S. government securities include U.S. Treasury and agency bonds, which
represent loans by investors to the U.S. Treasury Department or a wide
variety of governmental agencies and instrumentalities. Timely payment of
principal and interest on U.S. Treasury bonds is always guaranteed by the
full faith and credit of the U.S. government; many (but not all) agency
bonds have the same guarantee.
. Corporate bonds are IOUs issued by businesses that want to borrow money for
some purpose--often to develop a new product or service, to expand into a
new market, or to buy another company. As with other types of bonds, the
issuer promises to repay the principal on a specific date and to make
interest payments in the meantime. The amount of interest offered depends
on market conditions and also on the financial health of the corporation
issuing the bonds; a company whose credit rating is not strong will have to
offer a higher interest rate to obtain buyers for its bonds. (Note: The
Bond Index Funds expect to invest only in investment-grade corporate bonds,
which are corporate bonds rated in one of the four highest rating
categories by independent bond-rating agencies).
. Mortgage-backed securities represent interests in underlying pools of
mortgages. Unlike ordinary bonds, which generally pay a fixed rate of
interest at regular intervals and then pay principal upon maturity,
mortgage-backed securities pay both interest and principal as part of
their regular payments. Because the mortgages underlying the securities can
be prepaid at any time by homeowners or corporate borrowers,
mortgage-backed securities are subject to prepayment risk, discussed later
in this prospectus. These types of securities are issued by a number of
government agencies, including the Government National Mortgage Association
(GNMA or "Ginnie Mae"), the Federal Home Loan Mortgage Corporation (FHLMC),
and the Federal National Mortgage Association (FNMA or "Fannie Mae"). GNMAs
are guaranteed by the full faith and credit of the U.S. government as to
the timely payment of principal and interest; mortgage securities issued by
other government agencies or private corporations are not.
(Note: The Total Bond Market Index Fund may also invest to a lesser
extent in conventional mortgage securities, which are packaged by private
corporations and are not guaranteed by the U.S. government.)
. International dollar-denominated bonds (or yankee bonds) are bonds
denominated in U.S. dollars issued by foreign governments and companies.
Because the bond's value is designated in dollars rather than the currency
of the issuer's country, the investor is not exposed to currency risk;
rather, the issuer assumes that risk, usually in order to attract U.S.
investors.
<PAGE>
16
PLAIN TALK ABOUT
Bonds and Interest Rates
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--causing you to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you should be able to sell your 5% bond for more than you
paid.
PLAIN TALK ABOUT
Bond Maturities
A bond is issued with a specific maturity date--the date when the bond's issuer,
or seller, must pay back the bond's initial value (known as its "face value").
Bond maturities generally range from less than one year (short-term) to 30 years
(long-term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise--but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks in hope of higher yields; short-term bond investors should be willing to
accept lower yields in return for less fluctuation in the value of their
investment.
Additional Risk Information
The Funds are subject to several risks associated with investments in bonds.
[GRAPHIC APPEARS HERE] Each Fund is subject to interest rate risk, which is the
possibility that bond prices overall will decline over short or even
long periods due to rising interest rates. Interest rate risk should
be low for shorter-term bonds, moderate for intermediate-term bonds,
and high for longer-term bonds.
Changes in interest rates will affect bond income as well as bond prices.
[GRAPHIC APPEARS HERE]Each Fund is subject to income risk, which is the
possibility that a Fund's dividends (income) will decline due to
falling interest rates. Income risk is generally higher for short-term
bonds and lower for long-term bonds.
In the past, bond investors have seen the value of their investment rise and
fall--sometimes significantly--with changes in interest rates. Between December
1976 and September 1981, for instance, rising interest rates caused long-term
bond prices to fall by almost 48%.
Because each Fund invests mainly in bonds, changes in interest rates will
impact, to varying degrees, the value of each Fund's assets. To illustrate how
much of an impact, the following table shows the effect of a 2% change (both up
and down) in interest rates on three bonds with a face value of $1,000; each has
a different maturity.
- --------------------------------------------------------------------------------
How Interest Rate Changes Affect Bonds*
- --------------------------------------------------------------------------------
Value of a $1,000 Bond Value of a $1,000 Bond
After a 2% Increase After a 2% Decrease
Type of Bond (Maturity) in Interest Rates in Interest Rates
- --------------------------------------------------------------------------------
Short-Term (2.5 years) $ 956 $1,046
Intermediate-Term (10 years) 870 1,156
Long-Term (20 years) 816 1,251
- --------------------------------------------------------------------------------
*Assuming a 7% yield
- --------------------------------------------------------------------------------
These figures are for illustration only; you should not regard them as an
indication of future returns from the bond market as a whole or any Fund in
particular.
While falling interest rates tend to strengthen bond prices, they can cause
other sorts of problems for bond fund investors--bond calls and prepayments.
<PAGE>
17
PLAIN TALK ABOUT
Callable Bonds
Although bonds are issued with clearly defined maturities, a bond issuer may be
able to redeem, or call, a bond earlier than its maturity date. The bondholder
must now replace the called bond with a bond that may have a lower yield than
the original. One way for bond investors to protect themselves against call risk
is to purchase a bond early in its lifetime, long before its call date. The
other way is to buy bonds with low coupons, which makes them less likely to be
called.
[GRAPHIC APPEARS HERE] Because they invest in corporate bonds that are callable,
the Intermediate-Term and Long-Term Bond Index Funds are subject to
call risk, which is the possibility that during periods of falling
interest rates, a bond issuer will "call"--or repay--a higher-yielding
bond before its maturity date. Forced to reinvest the unanticipated
proceeds at lower interest rates, a Fund would experience a decline in
income and lose the opportunity for additional price appreciation
associated with falling rates.
Call risk is generally moderate for longer-term bonds, and consequently it
should be moderate for the IntermediateTerm and Long-Term Bond Index Funds.
[GRAPHIC APPEARS HERE] Because it invests in mortgage-backed securities, the
Total Bond Market Index Fund is subject to prepayment risk, which is
the possibility that during periods of falling interest rates, a
homeowner will repay a higher-yielding mortgage earlier than
scheduled. Forced to reinvest the unanticipated proceeds at lower
rates, the Fund would experience a decline in income and lose the
opportunity for additional price appreciation associated with falling
rates.
With only a portion of its assets invested in mortgage-backed securities,
prepayment risk for the Total Bond Market Index Fund is moderate.
[GRAPHIC APPEARS HERE] Each Fund is subject to credit risk, which is the
possibility that a bond issuer will fail to pay interest and principal
in a timely manner.
The credit quality of each Fund is expected to be very high, and thus credit
risk should be low. The following table shows the weighted average credit
quality of each Fund's holdings and that of its target index, as rated by
Moody's Investors Service, as of December 31, 1998.
- --------------------------------------------------------------------------------
Average Credit Quality
------------------------------------
Fund Fund's Holdings Target Index
- --------------------------------------------------------------------------------
Total Bond Market Aa1 Aaa
Short-Term Bond Aa1 Aaa
Intermediate-Term Bond Aa1 Aaa
Long-Term Bond Aa1 Aa1
- --------------------------------------------------------------------------------
To a limited extent, the Funds are also exposed to event risk, which is the
possibility that corporate fixed-income securities held by the Funds may suffer
a substantial decline in credit quality and market value due to a corporate
restructuring.
PLAIN TALK ABOUT
Credit Quality
A bond's credit quality depends on the issuer's ability to pay interest on the
bond and, ultimately, to repay the debt. The lower the rating by one of the
independent bond-rating agencies (for example, Moody's or Standard & Poor's),
the greater the chance (in the rating agency's opinion) that the bond issuer
will default, or fail to meet its payment obligations. All things being equal,
the lower a bond's credit rating, the higher its yield should be to compensate
investors for assuming additional risk. Bonds rated in one of the four highest
rating categories are considered "investment grade."
<PAGE>
18
PLAIN TALK ABOUT
The Costs of Investing
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in fund expenses can, over time,
have a dramatic effect on a fund's performance.
The Funds are generally managed without regard to tax ramifications.
To help you distinguish between the Funds and their various risks, a summary
table is provided below.
- --------------------------------------------------------------------------------
Risks of the Funds
- --------------------------------------------------------------------------------
Prepayment/
Income Interest Call Credit
Fund Risk Rate Risk Risk Risk
- --------------------------------------------------------------------------------
Total Bond Market Moderate Moderate Moderate Low
Short-Term Bond High Low Low Low
Intermediate-Term Bond Moderate Moderate Moderate Low
Long-Term Bond Low High Moderate Low
- --------------------------------------------------------------------------------
Costs and Market-Timing
Some investors try to profit from a strategy called market-timing--switching
money into investments when they expect prices to rise, and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, Vanguard Bond Index Funds have adopted the following policies, among
others, to discourage short-term trading:
* Each Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of
the investment or because of a history of excessive trading by the
investor.
* There is a limit on the number of times you can exchange into or out of a
Fund (see "Exchanges" in the Investing with Vanguard section).
* Each Fund reserves the right to stop offering shares at any time.
The Vanguard funds do not permit market-timing. Do not invest in these Funds
if you are a market-timer.
<PAGE>
19
Turnover Rate
Although the Funds generally seek to invest for the long term, they may sell
securities regardless of how long the securities have been held. Shorter-term
bonds will mature or be sold, and need to be replaced, more frequently than
longer-term bonds. As a result, shorter-term bond funds tend to have higher
turnover rates than longer-term bond funds.
Other Investment Policies and Risks
Besides investing in fixed-income securities comprising its target index, each
Fund may invest up to 20% of its assets in short-term money market instruments
and certain derivatives in order to manage cash flow into and out of the Fund.
[GRAPHIC APPEARS HERE] The Funds may invest, to a limited extent, in
derivatives.
The Funds may invest, to a limited extent, in bond (interest rate) futures
and options contracts and other types of derivatives. Losses (or gains)
involving futures can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. The Funds will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The value of all futures and options contracts in which
a Fund acquires an interest cannot exceed 20% of the Fund's total assets. The
reasons for which a Fund will invest in futures and options are:
. To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in bonds.
. To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Funds may also invest in a relatively conservative class of collater-
alized mortgage obligations (CMOs), which offer a high degree of cash-flow
predictability and less vulnerability to mortgage prepayment risk. To reduce
credit risk, a Fund may purchase these less-risky classes of CMOs only if they
are issued by agencies of the U.S. government or, if issued by private
companies, carry high-quality investment-grade ratings.
The Funds and Vanguard
Vanguard Bond Index Funds are members of The Vanguard Group, a family of more
than 35 investment companies with more than 100 distinct investment portfolios
holding assets with more than $470 billion. All of the Vanguard funds share in
the expenses associated with business operations, such as personnel, office
space, equipment, and advertising.
PLAIN TALK ABOUT
Turnover Rate
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. The average turnover rate for passively managed domestic bond
funds is roughly 69%; for all domestic bond funds, the average turnover rate is
approximately 90%, according to Morningstar, Inc.
PLAIN TALK ABOUT
Derivatives
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
<PAGE>
20
PLAIN TALK ABOUT
Vanguard's Unique
Corporate Structure
The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 distribution fees, each fund pays its
allocated share of The Vanguard Group's marketing costs.
Investment Adviser
Vanguard's Fixed Income Group (the Group), P.O. Box 2600, Valley Forge, PA
19482, provides advisory services on an at-cost basis to Vanguard Bond Index
Funds. For the fiscal year ended December 31, 1998, the Funds' advisory fees
represented an effective annual rate of 0.01% of each Fund's average net assets.
The Funds have authorized the Group to choose brokers or dealers to handle the
purchase and sale of securities for the Funds, and to get the best available
price and most favorable execution from these brokers or dealers with respect to
all transactions. The Funds may direct the Group to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Funds.
Year 2000 Challenge
The common practice in computer programming of using just two digits to identify
a year has resulted in the Year 2000 challenge throughout the information
technology industry. If unchanged, many computer applications and systems could
misinterpret dates occurring after December 31, 1999, leading to errors or
failure. Such failure could adversely affect a fund's operations, including
pricing, securities trading, and the servicing of shareholder accounts.
The Vanguard Group is dedicated to providing uninterrupted, high-quality
performance from our computer systems before, during, and after 2000. In July
1998, we completed the renovation and initial testing of our internal systems.
Vanguard is diligently working with external partners, suppliers, and vendors,
including fund managers and other service providers, to assure that the systems
with which we interact remain operational at all times.
In addition to taking every reasonable step to secure our internal systems and
external relationships, Vanguard is further developing contingency plans
intended to assure that unexpected systems failures will not adversely affect
the Funds' operations. Vanguard intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternate solutions if
necessary.
PLAIN TALK ABOUT
The Funds' Adviser
Vanguard Fixed Income Group provides investment advisory services to many
Vanguard funds; as of December 31, 1998, the Group managed more than $127
billion in total assets.
The individuals responsible for overseeing the implementation of the Funds'
investment strategies are:
Ian A. MacKinnon, Managing Director of Vanguard; has worked in investment
management since 1974; primary responsibility for Vanguard's internal fixed-
income policy and strategy since 1981; B.A., Lafayette College; M.B.A.,
Pennsylvania State University.
Kenneth E. Volpert, CFA, Principal, and head of Vanguard's Bond Index
Group; Fund Manager of the Total Bond Market and Intermediate-Term Bond Index
Funds since their inception; has worked in investment management since 1981;
has managed portfolio investments since 1982; B.S., University of Illinois;
M.B.A., University of Chicago.
Christopher W. Alwine, CFA, and (since 1998) Fund Manager of the Short-Term
and Long-Term Bond Index Funds; has worked in investment management since
joining Vanguard in 1991, holding trading and research positions up until
1996; has managed portfolio investments since 1996; B.B.A., Temple
University; M.S., Drexel University.
<PAGE>
21
PLAIN TALK ABOUT
Distributions
As a shareholder, you are entitled to your share of the fund's income from
interest, and gains from the sale of investments. You receive such earnings as
either an income dividend or a capital gains distribution. Income dividends come
from interest the fund earns from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term depending
on whether the fund held the securities for less than or more than one year.
However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on a Fund's business,
operations, or financial condition. Additionally, a Fund's performance could be
hurt if a computer-system failure at a company or governmental unit affects the
price of securities the Fund owns.
Dividends, Capital Gains, and Taxes
As a shareholder, you are entitled to your share of a Fund's net income
(interest less expenses). The Funds' income dividends accrue daily and are
distributed monthly; capital gains distributions generally occur in December. In
addition, the Funds may occasionally be required to make supplemental capital
gains distributions at some other time during the year.
Dividend and capital gains distributions of Fund shares that are held as an
investment option in an employer-sponsored retirement or savings plan will be
reinvested in additional Fund shares and accumulate on a tax-deferred basis. You
will not owe taxes on these distributions until you begin withdrawals. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of an investment in any of the Funds
and of any plan withdrawals.
Share Price
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of trading on the New York Stock Exchange (the NAV
is not calculated on holidays or other days the Exchange is closed). Net asset
value per share for the Short-, Intermediate-, and Long-Term Bond Index Funds is
computed by adding up the total value of the Fund's investments and other
assets, subtracting any of its liabilities (debts), and then dividing by the
number of Fund shares outstanding:
Total Assets - Liabilities
Net Asset Value = --------------------------------------------
Number of Shares Outstanding
Net asset value per share for the Total Bond Market Index Fund is computed in
a similar way, by dividing the net assets attributed to each class by the number
of Fund shares outstanding for each class.
Knowing the daily net asset value is useful to you as a shareholder because it
indicates the current value of your investment. A Fund's NAV, multiplied by the
number of shares you own, gives you the dollar amount you would have received
had you sold all of your shares back to the Fund that day.
A Note on Pricing: Each Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Funds' Board of Trustees.
Each Fund's share price can be found daily in the mutual fund listings of most
major newspapers under the heading "Vanguard Index Funds." Different newspapers
use different abbreviations for each Fund, but the most common are TotBd,
STBond, ITBond, and LTBond.
<PAGE>
22
PLAIN TALK ABOUT
How to Read the
Financial Highlights Tables
This explanation uses the Total Bond Market Index Fund Investor Shares as
an example. The Fund began fiscal 1998 with a net asset value (price) of $10.09
per share. During the year, the Fund earned $.624 per share from investment
income (interest and dividends) and $.218 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $.662 per share in the form of dividend and capital
gains distributions. A portion of each year's distributions may come from the
prior year's income or capital gains.
The earnings ($.842 per share) minus the distributions ($.662 per share)
resulted in a share price of $10.27 at the end of the year. This was an increase
of $.18 per share (from $10.09 at the beginning of the year to $10.27 at the end
of the year). For a shareholder who reinvested the distributions in the purchase
of more shares, the total return from the Fund was 8.58% for the year.
As of December 31, 1998, the Fund had $7.77 billion in net assets. For the
year, its expense ratio was 0.20% ($2.00 per $1,000 of net assets); and its net
investment income amounted to 6.10% of its average net assets. It sold and
replaced securities valued at 57% of its net assets.
Financial Highlights
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years or since inception,
and certain information reflects financial results for a single Fund share in
each case. The total returns in each table represent the rate that an investor
would have earned or lost each year on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
derived from the financial statements audited by PricewaterhouseCoopers LLP,
independent accountants, whose report--along with the Funds' financial
statements--is included in the Funds' most recent annual report to shareholders.
You may have the annual report sent to you without charge by contacting
Vanguard.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund
Investor Shares
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.09 $ 9.84 $10.14 $ 9.17 $10.06
- -------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .624 .645 .640 .650 .622
Net Realized and Unrealized Gain (Loss)
on Investments .218 .250 (.300) .970 (.888)
---------------------------------------------------------
Total from Investment Operations .842 .895 .340 1.620 (.266)
---------------------------------------------------------
Distributions
Dividends from Net Investment Income (.624) (.645) (.640) (.650) (.622)
Distributions from Realized Capital Gains (.038) -- -- -- (.002)
---------------------------------------------------------
Total Distributions (.662) (.645) (.640) (.650) (.624)
- -------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 10.27 $10.09 $ 9.84 $10.14 $ 9.17
=============================================================================================================
Total Return(*) 8.58 9.44% 3.58% 18.18% -2.66%
=============================================================================================================
Ratios/Supplemental Data
Net Assets, End of Year (Millions) $ 7,765 $5,129 $2,962 $2,405 $1,731
Ratio of Total Expenses to
Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.18%
Ratio of Net Investment Income to
Average Net Assets 6.10% 6.54% 6.54% 6.66% 6.57%
Turnover Rate 57%** 39% 39% 36% 33%
=============================================================================================================
</TABLE>
* Total return figures do not reflect the annual account maintenance fee of
$10.
**Turnover rate excluding in-kind redemptions was 56%.
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a measure of past dividend income. Total return includes both
past dividend income (assuming that it has been reinvested) plus realized and
unrealized capital appreciation (or depreciation). Neither yield nor total
return should be used to predict the future performance of a fund.
<PAGE>
23
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Vanguard Short-Term Bond Index Fund
Year Ended December 31,
------------------------------------------ Mar. 1* to
1998 1997 1996 1995 Dec. 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.00 $ 9.92 $10.07 $ 9.50 $10.00
- ----------------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .574 .597 .587 .623 .463
Net Realized and Unrealized Gain (Loss) on Investments .168 .080 (.146) .570 (.500)
-------------------------------------------------------------
Total from Investment Operations .742 .677 .441 1.193 (.037)
-------------------------------------------------------------
Distributions
Dividends from Net Investment Income (.574) (.597) (.587) (.623) (.463)
Distributions from Realized Capital Gains (.068) -- (.004) -- --
-------------------------------------------------------------
Total Distributions (.642) (.597) (.591) (.623) (.463)
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.10 $10.00 $ 9.92 $10.07 $ 9.50
============================================================================================================================
Total Return** 7.63% 7.04% 4.55% 12.88% -0.37%
============================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) $ 709 $ 446 $ 328 $ 208 $ 77
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.18%+
Ratio of Net Investment Income to Average Net Assets 5.68% 6.03% 5.93% 6.28% 5.77%+
Turnover Rate 112% 88% 65% 65% 53%
============================================================================================================================
</TABLE>
* Subscription period for the Fund was from January 18, 1994, through
February 28, 1994, during which time all assets were held in money market
instruments.
**Total return figures do not reflect the annual account maintenance fee of
$10.
+ Annualized.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Vanguard Intermediate-Term Bond Index Fund
Year Ended December 31,
------------------------------------------ Mar. 1* to
1998 1997 1996 1995 Dec. 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.20 $ 9.96 $10.37 $ 9.18 $10.00
- ------------------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .647 .661 .648 .661 .533
Net Realized and Unrealized Gain (Loss) on Investments .353 .240 (.406) 1.217 (.820)
---------------------------------------------------------------
Total from Investment Operations 1.000 .901 .242 1.878 (.287)
---------------------------------------------------------------
Distributions
Dividends from Net Investment Income (.647) (.661) (.648) (.661) (.533)
Distributions from Realized Capital Gains (.073) -- (.004) (.027) --
---------------------------------------------------------------
Total Distributions (.720) (.661) (.652) (.688) (.533)
- ------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.48 $10.20 $ 9.96 $10.37 $ 9.18
==============================================================================================================================
Total Return** 10.09% 9.41% 2.55% 21.07% -2.88%
==============================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) $1,102 $ 687 $ 460 $ 346 $ 71
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.18%+
Ratio of Net Investment Income to Average Net Assets 6.23% 6.64% 6.54% 6.55% 6.88%+
Turnover Rate 77% 56% 80% 71% 63%
==============================================================================================================================
</TABLE>
* Subscription period for the Fund was from January 18, 1994, through
February 28, 1994, during which time all assets were held in money market
instruments.
**Total return figures do not reflect the annual account maintenance fee of
$10.
+Annualized.
<PAGE>
24
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Vanguard Long-Term Bond Index Fund
Year Ended December 31,
------------------------------------------ Mar. 1* to
1998 1997 1996 1995 Dec. 31, 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.78 $10.08 $10.82 $ 8.96 $10.00
- -----------------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .666 .678 .674 .692 .586
Net Realized and Unrealized Gain (Loss) on Investments .588 .700 (.731) 1.884 1.040)
--------------------------------------------------------------
Total from Investment Operations 1.254 1.378 (.057) 2.576 (.454)
--------------------------------------------------------------
Distributions
Dividends from Net Investment Income (.666) (.678) (.674) (.692) (.586)
Distributions from Realized Capital Gains (.048) -- (.009) (.024) --
--------------------------------------------------------------
Total Distributions (.714) (.678) (.683) (.716) (.586)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.32 $10.78 $10.08 $10.82 $ 8.96
=============================================================================================================================
Total Return** 11.98% 14.30% -0.26% 29.72% -4.53%
=============================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) $ 210 $ 88 $ 44 $ 24 $ 9
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.18%+
Ratio of Net Investment Income to Average Net Assets 6.01% 6.66% 6.75% 6.90% 7.70%+
Turnover Rate 57% 58% 46% 45% 70%
=============================================================================================================================
</TABLE>
* Subscription period for the Fund was from January 18, 1994, through February
28, 1994, during which time all assets were held in money market instruments.
**Total return figures do not reflect the annual account maintenance fee of
$10.
+Annualized.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE>
25
Investing with Vanguard
One or more of the Funds is an investment option in your retirement or savings
plan. Your plan administrator or your employee benefits office can provide you
with detailed information on how to participate in your plan and how to elect a
Fund as an investment option.
. If you have any questions about the Funds or Vanguard, including a Fund's
investment objective, strategies, or risks, contact Vanguard's Participant
Services Center, toll-free, at 1-800-523-1188.
. If you have questions about your account, contact your plan administrator
or the organization that provides record-keeping services for your plan.
Investment Options and Allocations
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
Transactions
Contributions, exchanges, or redemptions of a Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the Fund's next-determined net
asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of trading on the New York Stock Exchange, generally 4 p.m. Eastern
time, you will receive that day's net asset value.
Exchanges
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of a Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than four
substantive "round trips" through the Fund (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
. Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
. Make sure to read that fund's prospectus. Contact Participant Services,
toll-free, at 1-800-523-1188 for a copy.
. Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
Accessing Fund Information by Computer
- --------------------------------------------------------------------------------
Vanguard on the World Wide Web www.vanguard.com
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
- --------------------------------------------------------------------------------
<PAGE>
(This page intentionally left blank.)
<PAGE>
(This page intentionally left blank.)
<PAGE>
(This page intentionally left blank.)
<PAGE>
Glossary of Investment Terms
Active Management
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
Bond
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and make regular interest payments until
that date.
Capital Gains Distribution
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit, minus any realized losses.
Cash Reserves
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
Corporate Bond
An IOU issued by a business that wants to borrow money. As with other types of
bonds, the issuer promises to repay the borrowed money on a specific date and to
make interest payments in the meantime.
Dividend Income
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
Expense Ratio
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
Face Value
The amount to be paid at maturity of a bond; also known as the par value or
principal.
Index
An unmanaged group of securities whose overall performance is used as a standard
to measure investment performance.
International Dollar-Denominated Bond
A bond denominated in U.S. dollars issued by foreign governments and companies.
Because the bond's value is designated in dollars, an investor is not exposed to
foreign currency risk.
Investment Grade
A bond whose credit quality is considered by independent bond-rating agencies to
be sufficient to ensure timely payment of principal and interest under current
economic circumstances.
Maturity
The date when a bond issuer agrees to repay the bond's principal, or face value,
to the bond's buyer.
Mortgage-Backed Security
A bond or pass-through certificate that represents an interest in an underlying
pool of mortgages and is issued by any number of government agencies or private
corporations. Unlike ordinary fixed-income securities, mortgage-backed
securities pay both interest and principal as part of their regular payments.
Net Asset Value (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
Passive Management
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform--a particular stock or bond market index. Also known as
indexing.
Total Return
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
Volatility
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
Yield
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[LOGO OF THE VANGUARD GROUP(R) APPEARS HERE]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
For More Information
If you'd like more information about Vanguard Bond Index Funds, the following
documents are available free upon request:
Annual/Semiannual Report to Shareholders
Additional information about the Funds' investments is available in the Funds'
annual and semiannual reports to shareholders. In these reports, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Funds' performance during the most recent fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about the Funds.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Funds or other Vanguard funds,
please contact us as follows:
The Vanguard Group
Participant Services Center
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone:
1-800-523-1188
Text Telephone:
1-800-523-8004
World Wide Web:
www.vanguard.com
Information provided by the Securities and Exchange Commission (SEC)
You can review and copy information about the Funds (including the SAI) at the
SEC's Public Reference Room in Washington, D.C. To find out more about this
public service, call the SEC at 1-800-SEC-0330. Reports and other information
about the Funds are also available on the SEC's website (www.sec.gov), or you
can receive copies of this information, for a fee, by writing the Public
Reference Section, Securities and Exchange Commission, Washington, DC
20549-6009.
Funds' Investment Company Act
file number: 811-4681
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
I084N-04/30/1999
<PAGE>
Vanguard Total Bond Market Index Fund
Institutional Shares
Prospectus
April 30, 1999
A Bond Index Mutual Fund
Contents
1 An Introduction to Index Funds
2 Fund Profile
4 Additional Information
4 More on the Fund
9 The Fund and Vanguard
9 Investment Adviser
10 Year 2000 Challenge
10 Dividends, Capital Gains, and Taxes
11 Share Price
12 Financial Highlights
13 Investing with Vanguard
13 Services and Account Features
13 Types of Accounts
14 Buying Shares
15 Redeeming Shares
18 Transferring Registration
18 Fund and Account Updates
19 Mandatory Conversion to Investor Shares
Glossary (inside back cover)
- --------------------------------------------------------------------------------
Why Reading This Prospectus Is Important
This prospectus explains the objective, risks, and strategies of Vanguard Total
Bond Market Index Fund Institutional Shares. To highlight terms and concepts
important to mutual fund investors, we have provided "Plain Talk((R))"
explanations along the way. Reading the prospectus will help you to decide
whether the Fund is the right investment for you. We suggest that you keep it
for future reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Important Note
The Total Bond Market Index Fund features two separate classes of shares:
Investor and Institutional. Total Bond Market Index Fund Institutional Shares
have an investment minimum of $10 million or more, and are available through
this prospectus. Total Bond Market Index Fund Investor Shares have an investment
minimum of $3,000, and are available through separate prospectuses (one for
individual investors and one for participants in employer-sponsored retirement
or savings plans). Investor Shares and Institutional Shares do not have the same
expenses; as a result, the performance of these separate classes could differ.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
<PAGE>
1
An Introduction to Index Funds
What is indexing?
An index is an unmanaged group of securities whose overall performance is used
as a standard to measure investment performance. An index (or "passively
managed") fund tries to match, as closely as possible, the performance of an
established target index. The fund does this by holding either all or a
representative sample of the securities in the index. Keep in mind that an index
fund has operating expenses and transaction costs, while a market index does
not. Therefore, an index fund, while expected to track its target index closely,
typically will be unable to match the performance of the index exactly.
Bond index funds may seek to track indexes that hold a certain type of
bond--such as short-term or long-term bonds--or they may seek to track indexes
that consist of a broader range of bonds--for example, the entire U.S. bond
market.
Index funds are not actively managed by investment advisers who buy and
sell securities based on research and analysis in an attempt to outperform the
market as a whole. Rather, index funds simply mirror what the target index does,
for better or worse.
This prospectus contains information about Vanguard Total Bond Market Index
Fund Institutional Shares.
<PAGE>
2
Fund Profile
The following profile provides you with a summary of the key features of
Vanguard Total Bond Market Index Fund Institutional Shares.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a broad, market-weighted bond index.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
holding a mix of bonds that seeks to match the performance of the Lehman
Brothers Aggregate Bond Index. This index measures the total universe of
investment-grade fixed-income securities in the U.S.--including government,
corporate, mortgage-backed, asset-backed, and international dollar-denominated
bonds, all with maturities of over one year. The Fund primarily holds bonds
represented in the Index. For more information about passive management, see
"Indexing Methods" under More on the Fund.
PRIMARY RISKS
The Fund is subject to several risks, any of which could cause investors to lose
money. These include:
. Interest rate risk, which is the chance that bond prices overall will
decline over short or even long periods due to rising interest rates.
Interest rate risk should be least for shorter-term bonds, and greatest for
longer-term bonds.
. Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally higher for short-term
bonds, and lower for long-term bonds.
. Credit risk, which is the chance that a bond issuer will fail to pay
interest and principal in a timely manner, reducing the Fund's return.
Credit risk should be low for the Fund.
. Prepayment risk, which is the chance that during periods of falling
interest rates, a mortgage-backed bond issuer will repay a higher-yielding
bond before its maturity date. Forced to reinvest the unanticipated
proceeds at lower rates, the Fund would experience a decline in income and
lose the opportunity for additional price appreciation associated with
falling rates.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual returns for one
calendar year and since inception compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
- --------------------------------------------------------------------------------
Annual Total Returns--Institutional Shares
- --------------------------------------------------------------------------------
1996 1997 1998
- --------------------------------------------------------------------------------
3.68% 9.55% 8.69%
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 4.16% (quarter ended September 30, 1998) and the lowest return for a
quarter was -1.88% (quarter ended March 31, 1996).
<PAGE>
3
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year Since Inception*
- --------------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund
Institutional Shares 8.69% 8.07%
Lehman Brothers Aggregate Bond Index 8.69 8.03
- --------------------------------------------------------------------------------
*September 18, 1995.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold Institutional Shares of the Fund. The expenses shown under Annual Fund
Operating Expenses are based upon those incurred in the fiscal year ended
December 31, 1998.
Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.06%
12b-1 Distribution Fees: None
Other Expenses: 0.04%
Total Annual Fund Operating Expenses: 0.10%
*A portfolio transaction fee of 0.18% may apply to aggregate purchases over
$250 million by a single investor.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's Institutional Shares. This example assumes that the Fund
provides a return of 5% a year and that operating expenses remain the same. The
results apply whether or not you redeem your investment at the end of each
period.
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$10 $32 $56 $128
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
PLAIN TALK ABOUT
Fund Expenses
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Total Bond Market Index Fund Institutional Shares' expense
ratio in fiscal year 1998 was 0.10%, or $1.00 per $1,000 of average net assets.
The average passively managed domestic bond fund had expenses in 1998 of 0.44%,
or $4.40 per $1,000 of average net assets, according to Lipper Inc., which
reports on the mutual fund industry.
<PAGE>
4
Additional Information
Dividends and Capital Gains
Dividends are declared daily and distributed on the first
business day of each month; capital gains, if any, are
distributed annually in December
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since
inception
Inception Date
September 18, 1995
Net Assets as of December 31, 1998
$2.49 billion (for Institutional Shares)
Minimum Initial Investment
$10 million
Newspaper Abbreviation
TotBdIst
Vanguard Fund Number
222
Cusip Number
921937504
Ticker Symbol
VBTIX
More on the Fund
The following sections discuss other important features of Vanguard Total Bond
Market Index Fund Institutional Shares, including who should invest, indexing
methods, security selection, additional risk information, turnover rate, and
other investment policies and risks.
Who Should Invest
The Fund may be a suitable investment for you if:
. You are an individual or institutional investor and wish to add a bond
index fund to your existing holdings, which could include other bond
investments as well as stock, money market, and tax-exempt investments.
. You are seeking a diversified, low-cost way to invest in the entire U.S.
bond market.
. You are seeking growth of capital over the long-term--at least five years.
. You are willing to tolerate fluctuations in share price.
The Vanguard funds do not permit market-timing. Do not invest in this Fund
if you are a market-timer.
The Fund has adopted the following policies, among others, to discourage
short-term trading:
. The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of
the investment or because of a history of excessive trading by the
investor.
. There is a limit on the number of times you can exchange into and out of
the Fund (see "Redeeming Shares" in the Investing with Vanguard section).
. The Fund reserves the right to stop offering shares at any time.
Why invest in index funds?
Index funds appeal to many investors for a number of reasons:
. Diversification. Index funds generally invest in a diversified mix of
companies and industries.
PLAIN TALK ABOUT
Costs and Market-Timing
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
<PAGE>
5
PLAIN TALK ABOUT
The Costs of Investing
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in fund expenses can, over time,
have a dramatic effect on a fund's performance.
. Low cost. Index funds do not have many of the expenses of an actively
managed fund--such as research--and keep trading activity, and thus
brokerage commissions, to a minimum.
. Low realization of capital gains. Because an index fund typically sells
securities only to respond to redemption requests or to adjust the number
of shares it holds to reflect a change in its target index, the fund's
turnover rate--and thus its realization of taxable capital gains--is
usually very low.
Indexing Methods
In seeking to track a particular index, a fund generally uses one of two methods
to select the stocks or bonds in which it invests.
Some index funds hold each stock or bond found in their target indexes in
about the same proportions as represented in the indexes themselves. This is
called a "replication" method. For example, if 5% of the S&P 500 Index were made
up of the stock of a specific company, a fund tracking that index would invest
about 5% of its assets in that company.
Other index funds may use a different security selection process. Because
it would be very expensive to buy and sell all of the securities held in certain
indexes (the Lehman Brothers Aggregate Bond Index, for example, includes more
than 7,200 bonds), funds tracking these larger indexes--such as the Total Bond
Market Index Fund--use a "sampling" technique. Using sophisticated computer
programs, these funds select securities that will recreate their target indexes
in terms of industry weightings, market capitalization, and other
characteristics. For instance, if 30% of the Lehman Brothers Aggregate Bond
Index were made up of mortgage-backed securities, the Total Bond Market Index
Fund would invest about 30% of its assets in mortgage-backed securities that
have similar characteristics as a group to those in the Index.
The following shows the number of bonds held by the Fund as of December 31,
1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Number of Bonds Held Number of Bonds in Target Index
- --------------------------------------------------------------------------------------
<S> <C> <C>
Total Bond Market Index Fund 737 7,257
- --------------------------------------------------------------------------------------
</TABLE>
Corporate Substitution Strategy
In "sampling" its target index, the Fund has the flexibility to overweight
particular types of bonds relative to their representation in the index.
Normally, this involves substituting corporate bonds for government bonds of the
same maturity. The corporate substitution strategy may increase a Fund's income,
but it may also marginally increase exposure to credit risk, which is explained
on page 7. The Fund limits corporate substitutions to bonds with less than 4
years remaining maturity, and approximately 15% of its net assets.
<PAGE>
Security Selection
In seeking to match the performance of its target index, the Fund invests at
least 80% of its assets in securities included in the Lehman Brothers Aggregate
Bond Index. As of December 31, 1998, the Fund and its target index was composed
of the following types of bonds.
<PAGE>
6
- --------------------------------------------------------------------------------
Type of Total Bond Market Lehman Brothers
Bond Index Fund Aggregate Bond Index
- --------------------------------------------------------------------------------
U.S. Government 27.9% 45.0%
Corporate 35.8 19.0
Mortgage-Backed 33.2 32.0
Int'l. Dollar-Denominated 3.1 4.0
- --------------------------------------------------------------------------------
100% 100%
- --------------------------------------------------------------------------------
An explanation of each type of bond follows.
. U.S. government securities include U.S. Treasury and agency bonds, which
represent loans by investors to the U.S. Treasury Department or a wide
variety of governmental agencies and instrumentalities. Timely payment of
principal and interest on U.S. Treasury bonds is always guaranteed by the
full faith and credit of the U.S. government; many (but not all) agency
bonds have the same guarantee.
. Corporate bonds are IOUs issued by businesses that want to borrow money for
some purpose--often to develop a new product or service, to expand into a
new market, or to buy another company. As with other types of bonds, the
issuer promises to repay the principal on a specific date and to make
interest payments in the meantime. The amount of interest offered depends
on market conditions and also on the financial health of the corporation
issuing the bonds; a company whose credit rating is not strong will have to
offer a higher interest rate to obtain buyers for its bonds. (Note: The
Total Bond Market Index Fund expects to invest only in investment-grade
corporate bonds, which are corporate bonds rated in one of the four highest
rating categories by independent bond-rating agencies.)
. Mortgage-backed securities represent interests in underlying pools of
mortgages. Unlike ordinary bonds, which generally pay a fixed rate of
interest at regular intervals and then pay principal upon maturity,
mortgage-backed securities pay both interest and principal as part of their
regular payments. Because the mortgages underlying the securities can be
prepaid at any time by homeowners or corporate borrowers, mortgage-backed
securities are subject to prepayment risk, discussed later in this
prospectus. These types of securities are issued by a number of government
agencies, including the Government National Mortgage Association (GNMA or
"Ginnie Mae"), the Federal Home Loan Mortgage Corporation (FHLMC), and the
Federal National Mortgage Association (FNMA or "Fannie Mae"). GNMAs are
guaranteed by the full faith and credit of the U.S. government as to the
timely payment of principal and interest; mortgage securities issued by
other government agencies or private corporations are not. The Fund may
also invest to a lesser extent in conventional mortgage securities, which
are packaged by private corporations and are not guaranteed by the U.S.
government.
. International dollar-denominated bonds (or yankee bonds) are bonds
denominated in U.S. dollars issued by foreign governments and companies.
Because the bond's value is designated in dollars rather than the currency
of the issuer's country, the investor is not exposed to currency risk;
rather, the issuer assumes that risk, usually in order to attract U.S.
investors.
Additional Risk Information
The Fund is subject to several risks associated with investments in bonds.
[GRAPHIC APPEARS HERE]
The Fund is subject to interest rate risk, which is the possibility that
bond prices overall will decline over short or even long periods due to
rising interest rates. Interest rate risk should be low for shorter-term
bonds, moderate for intermediate-term bonds, and high for longer-term
bonds.
Changes in interest rates will affect bond income as well as bond prices.
[GRAPHIC APPEARS HERE]
The Fund is subject to income risk, which is the possibility that the
Fund's dividends (income) will decline due to falling interest rates.
Income risk is generally greatest for short-term bonds, and least for
long-term bonds.
<PAGE>
7
PLAIN TALK ABOUT
Bonds and Interest Rates
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--causing you to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you should be able to sell your 5% bond for more than you
paid.
PLAIN TALK ABOUT
Bond Maturities
A bond is issued with a specific maturity date--the date when the bond's issuer,
or seller, must pay back the bond's initial value (known as its "face value").
Bond maturities generally range from less than one year (short-term) to 30 years
(long-term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise--but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks in hope of higher yields; short-term bond investors should be willing to
accept lower yields in return for less fluctuation in the value of their
investment.
In the past, bond investors have seen the value of their investment rise
and fall--sometimes significantly--with changes in interest rates. Between
December 1976 and September 1981, for instance, rising interest rates caused
long-term bond prices to fall by almost 48%.
Because the Fund invests mainly in bonds, changes in interest rates will
impact, to varying degrees, the value of the Fund's assets. To illustrate how
much of an impact, the following table shows the effect of a 2% change (both up
and down) in interest rates on three bonds with a face value of $1,000; each has
a different maturity.
- --------------------------------------------------------------------------------
How Interest Rate Changes Affect Bond Prices*
- --------------------------------------------------------------------------------
Value of a $1,000 Bond Value of a $1,000 Bond
After a 2% Increase After a 2% Decrease
Type of Bond (Maturity) in Interest Rates in Interest Rates
- --------------------------------------------------------------------------------
Short-Term (2.5 years) $956 $1,046
Intermediate-Term (10 years) 870 1,156
Long-Term (20 years) 816 1,251
- --------------------------------------------------------------------------------
*Assuming a 7% yield.
- --------------------------------------------------------------------------------
These figures are for illustration only; you should not regard them as an
indication of future returns from the bond market as a whole, or the Fund in
particular.
While falling interest rates tend to strengthen bond prices, they can cause
another sort of problem for bond fund investors--prepayment.
[GRAPHIC APPEARS HERE]
Because it invests in mortgage-backed securities, the Fund is subject to
prepayment risk, which is the possibility that during periods of falling
interest rates, a homeowner will repay a higher-yielding mortgage earlier
than scheduled. Forced to reinvest the unanticipated proceeds at lower
rates, the Fund would experience a decline in income and lose the
opportunity for additional price appreciation associated with falling
rates.
With only a portion of its assets invested in mortgage-backed securities,
prepayment risk for the Fund is moderate.
[GRAPHIC APPEARS HERE]
The Fund is subject to credit risk, which is the possibility that a bond
issuer will fail to pay interest and principal in a timely manner.
<PAGE>
PLAIN TALK ABOUT
Credit Quality
A bond's credit quality depends on the issuer's ability to pay interest on the
bond and, ultimately, to repay the debt. The lower the rating by one of the
independent bond-rating agencies (for example, Moody's or Standard & Poor's),
the greater the chance (in the rating agency's opinion) that the bond issuer
will default, or fail to meet its payment obligations. All things being equal,
the lower a bond's credit rating, the higher its yield should be to compensate
investors for assuming additional risk. Bonds rated in one of the four highest
rating categories are considered "investment grade."
PLAIN TALK ABOUT
Turnover Rate
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. The average turnover rate for passively managed domestic bond
funds is roughly 69%; for all domestic bond funds, the average turnover rate is
approximately 90%, according to Morningstar, Inc.
The credit quality of the Fund is expected to be very high, and thus credit
risk should be low. The average dollar-weighted credit quality of the Fund's
holdings and that of its target index, as rated by Moody's Investors Service, as
of December 31, 1998, was Aa1 and Aaa, respectively.
To a limited extent, the Fund is also exposed to event risk, which is the
possibility that corporate fixed-income securities held by the Fund may suffer a
substantial decline in credit quality and market value due to a corporate
restructuring.
The Fund is generally managed without regard to tax ramifications.
Turnover Rate
Although the Fund generally seeks to invest for the long term, it may sell
securities regardless of how long the securities have been held. Shorter-term
bonds will mature or be sold, and need to be replaced, more frequently than
longer-term bonds. As a result, shorter-term bond funds tend to have higher
turnover rates than longer-term bond funds.
Other Investment Policies and Risks
Besides investing in fixed-income securities comprising its target index, the
Fund may invest up to 20% of its assets in short-term money market instruments
and certain derivatives in order to manage cash flow into and out of the Fund.
[GRAPHIC APPEARS HERE]
The Fund may invest, to a limited extent, in derivatives.
The Fund may invest, to a limited extent, in bond (interest rate) futures
and options contracts and other types of derivatives. (Losses or gains)
involving futures can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The value of all futures and options contracts in which
the Fund acquires an interest cannot exceed 20% of the Fund's total assets. The
reasons for which the Fund will invest in futures and options are:
. To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in bonds.
. To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may also invest in a relatively conservative class of
collateralized mortgage obligations (CMOs), which offer a high degree of
cash-flow predictability and less vulnerability to mortgage prepayment risk. To
reduce credit risk, the Fund may purchase these less-risky classes of CMOs only
if they are issued by agencies of the U.S. government or, if issued by private
companies, carry high-quality investment-grade ratings.
<PAGE>
9
PLAIN TALK ABOUT
Derivatives
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
PLAIN TALK ABOUT
Vanguard's Unique Corporate Structure
The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
The Fund and Vanguard
Vanguard Total Bond Market Index Fund is a member of The Vanguard Group, a
family of more than 35 investment companies with more than 100 distinct
investment portfolios holding assets worth more than $470 billion. All of the
Vanguard funds share in the expenses associated with business operations, such
as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
Investment Adviser
Vanguard Fixed Income Group (the Group), P.O. Box 2600, Valley Forge, PA 19482,
provides advisory services on an at-cost basis to Vanguard Total Bond Market
Index Fund. For the fiscal year ended December 31, 1998, the advisory fees
represented an effective annual rate of 0.01% of the Fund's average net assets.
The Fund has authorized the Group to choose brokers or dealers to handle
the purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers or dealers with respect to
all transactions. The Fund may direct the Group to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Fund.
PLAIN TALK ABOUT
The Fund's Adviser
Vanguard Fixed Income Group provides investment advisory services to many
Vanguard funds; as of December 31, 1998, the Group managed more than $127
billion in total assets.
The individuals responsible for overseeing the implementation of the Fund's
investment strategies are:
Ian A. MacKinnon, Managing Director of Vanguard; has worked in investment
management since 1974; primary responsibility for Vanguard's internal
fixed-income policy and strategy since 1981; B.A., Lafayette College; M.B.A.,
Pennsylvania State University.
Kenneth E. Volpert, CFA, Principal, and head of Vanguard's Bond Index
Group; Fund Manager of the Fund since its inception; has worked in investment
management since 1981; has managed portfolio investments since 1982; B.S.,
University of Illinois; M.B.A., University of Chicago.
<PAGE>
10
Year 2000 Challenge
The common practice in computer programming of using just two digits to identify
a year has resulted in the Year 2000 challenge throughout the information
technology industry. If unchanged, many computer applications and systems could
misinterpret dates occurring after December 31, 1999, leading to errors or
failure. Such failure could adversely affect a fund's operations, including
pricing, securities trading, and the servicing of shareholder accounts.
The Vanguard Group is dedicated to providing uninterrupted, high-quality
performance from our computer systems before, during, and after 2000. In July
1998, we completed the renovation and initial testing of our internal systems.
Vanguard is diligently working with external partners, suppliers, and vendors,
including fund managers and other service providers, to assure that the systems
with which we interact remain operational at all times.
In addition to taking every reasonable step to secure our internal systems
and external relationships, Vanguard is further developing contingency plans
intended to assure that unexpected systems failures will not adversely affect
the Fund's operations. Vanguard intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternate solutions if
necessary.
However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on the Fund's business,
operations, or financial condition. Additionally, the Fund's performance could
be hurt if a computer-system failure at a company or governmental unit affects
the price of securities the Fund owns.
PLAIN TALK ABOUT
Distributions
As a shareholder, you are entitled to your share of the fund's income from
interest, and gains from the sale of investments. You receive such earnings as
either an income dividend or a capital gains distribution. Income dividends come
from interest the Fund earns from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term depending
on whether the fund held the securities for less than or more than one year.
Dividends, Capital Gains, and Taxes
As a shareholder, you are entitled to your share of the Fund's net income
(interest less expenses). The Fund's income dividends accrue daily and are
distributed monthly; capital gains distributions generally occur in December. In
addition, the Fund may occasionally be required to make supplemental capital
gains distributions at some other time during the year.
You can receive distributions of income or capital gains in cash, or you
can have them automatically invested in more shares of the Fund. In either case,
these distributions are taxable to you. It is important to note that
distributions of dividends and capital gains that are declared in December--if
paid to you by the end of January--are taxed as if they had been paid to you in
December.
Vanguard will send you a statement each year showing the tax status of all
your distributions.
. Any dividends and short-term capital gains that you receive are considered
ordinary income for tax purposes.
. Any distributions of net long-term capital gains by the Fund are taxable to
you as long-term capital gains, no matter how long you've owned shares in
the Fund.
. Although the Fund does not seek to realize capital gains, such gains are
realized from time to time as by-products of their ordinary investment
activities. Consequently, distributions may vary from year to year.
. If you sell or exchange shares, any gain or loss you have is a taxable
event. This means that you may have a capital gain to report as income, or
a capital loss to report as a deduction, when you complete your federal
income tax return.
. Distributions of dividends or capital gains, and capital gains or losses
from your sale or exchange of Fund shares, may be subject to state and
local income taxes as well.
The tax information in this prospectus is provided as general information
and will not apply to you if you are investing through a tax-deferred account
such as an IRA or a qualified employee benefit plan. (Non-U.S. investors may be
subject to U.S. withholding and estate tax.) You should consult your tax adviser
about the tax consequences of an investment in the Fund.
<PAGE>
11
PLAIN TALK ABOUT
"Buying a Capital Gain"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), it is not to your advantage to buy shares of a fund shortly before it
makes a capital gains distribution, because doing so can cost you money in
taxes. This is known as "buying a capital gain." For example: On December 15,
you invest $5,000, buying 250 shares for $20 each. If the fund pays a capital
gains distribution of $1 per share on December 16, its share price would drop to
$19 (not counting market change). You still have only $5,000 (250 shares x $19 =
$4,750 in share value, plus 250 shares x $1 = $250 in capital gains
distributions), but you owe tax on the $250 distribution you received, even if
you had reinvested it in more shares. To avoid "buying a capital gain," check a
fund's distribution schedule before you invest.
Important Note: By law, the Fund must withhold 31% of your taxable
distributions and any redemption proceeds if you do not provide your correct
taxpayer identification number, or certify that it is correct, or if the IRS
instructs the Fund to do so.
Share Price
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of trading on the New York Stock Exchange (the NAV
is not calculated on holidays or other days the Exchange is closed). Net asset
value per share is computed by dividing the net assets attributed to each class
by the number of Fund shares outstanding for each class:
Total Assets - Liabilities
Net Asset Value = ----------------------------
Number of Shares Outstanding
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A Note on Pricing: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Index Funds." Different
newspapers use different abbreviations for the Fund, but the most common is
TotBdIst.
<PAGE>
12
PLAIN TALK ABOUT
How to Read the Financial Highlights Table
The Fund began fiscal 1998 with a net asset value (price) of $10.09 per share.
During the year, the Fund earned $.635 per share from investment income
(interest and dividends) and $.218 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $.673 per share in the form of dividend and capital
gains distributions. A portion of each year's distributions may come from the
prior year's income or capital gains.
The earnings ($.853 per share) minus the distributions ($.673 per share)
resulted in a share price of $10.27 at the end of the year. This was an increase
of $.18 per share (from $10.09 at the beginning of the year to $10.27 at the end
of the year). For a shareholder who reinvested the distributions in the purchase
of more shares, the total return from the Fund's Institutional Shares was 8.69%
for the year.
As of December 31, 1998, the Fund's Institutional Shares had $2.49 billion
in net assets. For the year, its expense ratio was 0.10% ($1.00 per $1,000 of
net assets); and its net investment income amounted to 6.21% of its average net
assets. It sold and replaced securities valued at 57% of its net assets.
Financial Highlights
The following financial highlights table is intended to help you understand the
Fund's financial performance since inception, and certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned or lost each year on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been derived from the financial statements
audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund
Institutional Shares
- ----------------------------------------------------------------------------------------
Year Ended December 31,
------------------------ Sep. 18* to
1998 1997 1996 Dec. 31, 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.09 $ 9.84 $10.14 $ 9.87
- ----------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .635 .655 .650 .174
Net Realized and Unrealized Gain (Loss)
on Investments .218 .250 (.300) .270
------------------------------------------
Total from Investment Operations .853 .905 .350 .444
------------------------------------------
Distributions
Dividends from Net Investment Income (.635) (.655) (.650) (.174)
Distributions from Realized Capital Gains (.038) -- -- --
------------------------------------------
Total Distributions (.673) (.655) (.650) (.174)
- ----------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.27 $10.09 $ 9.84 $10.14
========================================================================================
Total Return 8.69% 9.55% 3.68% 4.53%
========================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) $2,493 $1,628 $1,024 $ 413
Ratio of Total Expenses to
Average Net Assets 0.10% 0.10% 0.10% 0.10%**
Ratio of Net Investment Income to
Average Net Assets 6.21% 6.64% 6.66% 6.48%**
Turnover Rate 57%+ 39% 39% 36%
========================================================================================
</TABLE>
*Inception date.
**Annualized.
+Turnover rate excluding in-kind redemptions was 56%.
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a measure of past dividend income. Total return includes both
past dividend income (assuming that it has been reinvested) plus realized and
unrealized capital appreciation (or depreciation). Neither yield nor total
return should be used to predict the future performance of a fund.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500,"
and "500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE>
13
Investing with Vanguard
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services
we offer. Booklets providing detailed information are available on the services
marked with a [GRAPHIC APPEARS HERE]. Please call us to request copies.
Services and Account Features
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
Telephone Redemptions (Sales and Exchanges)
Automatically set up for this Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
Checkwriting [GRAPHIC APPEARS HERE]
Method for drawing money from your account by writing a check for $250 or more.
- --------------------------------------------------------------------------------
Vanguard Automatic Exchange Service(TM) [GRAPHIC APPEARS HERE]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
Vanguard Tele-Account(R) 1-800-662-6273 (ON-BOARD) [GRAPHIC APPEARS HERE]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange fund shares.
- --------------------------------------------------------------------------------
Access Vanguard(TM) www.vanguard.com [GRAPHIC APPEARS HERE]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through the website. We will then send to you, by mail, an account
access password that allows you to process the following financial and
administrative transactions online:
. Open a new account.*
. Buy, sell, or exchange shares of most funds.
. Change your name/address.
. Add/change fund options (including dividend options, bank instructions,
checkwriting, and Vanguard Automatic Exchange Service).
* Only current Vanguard shareholders can open a new account online, by
exchanging shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
Services for Clients of Vanguard's Institutional Division: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks.
- --------------------------------------------------------------------------------
Types of Accounts
Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
For One or More People
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
For Holding Personal Trust Assets [GRAPHIC APPEARS HERE]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
For an Organization [GRAPHIC APPEARS HERE]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
<PAGE>
14
Types of Accounts (continued)
- --------------------------------------------------------------------------------
A Note on Investing with Vanguard Through Other Firms
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------
Buying Shares
You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value. You may convert Investor Shares
of the Fund into Institutional Shares provided that you meet the minimum initial
investment requirements for Institutional Shares.
- --------------------------------------------------------------------------------
Minimum Investment to . . .
open a new account
$10 million
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
By Wire to Open a New Account or Add to an Existing Account [GRAPHIC APPEARS
HERE]
Call your assigned Service Associate to arrange your wire transaction.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
Vanguard Total Bond Market Index Fund Institutional Shares-222
[Account number, or temporary number for a new account]
[Registered account owner/s]
[Registered address]
- --------------------------------------------------------------------------------
By Mail to . . .[GRAPHIC APPEARS HERE]
open a new account
Complete and sign the application form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form.
Make your check payable to: The Vanguard Group-222
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 100 Vanguard Boulevard
Valley Forge, PA 19482-2900 Malvern, PA 19355
- --------------------------------------------------------------------------------
<PAGE>
15
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
By Telephone to . . .[GRAPHIC APPEARS HERE]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or your assigned Service Associate
during business hours--to exchange from another Vanguard fund account with the
same registration (name, address, taxpayer identification number, and account
type).
add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or your assigned Service Associate
during business hours--to exchange from another Vanguard fund account with the
same registration (name, address, taxpayer identification number, and account
type).
Vanguard Tele-Account
1-800-662-6273
* You must obtain a Personal Identification Number through Tele-Account at
least seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you've requested a telephone transaction and a confirmation
number has been assigned, the transaction cannot be revoked. We reserve the
right to refuse any purchase request.
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check at any
time. However, while your redemption request will be processed at the
next-determined net asset value after it is received, your redemption proceeds
will not be available until payment for your purchase is collected, which may
take up to ten calendar days.
- --------------------------------------------------------------------------------
A Note on Large Purchases
It is important that you call Vanguard before you invest a large dollar amount.
We must consider the interests of all Fund shareholders and so reserve the right
to refuse any purchase that will disrupt the Fund's operation or performance.
- --------------------------------------------------------------------------------
Redeeming Shares
This section describes how you can redeem--that is, sell or exchange--the Fund's
shares.
When Selling Shares:
. Vanguard sends the redemption proceeds to you or a designated third party.*
. You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 17.
When Exchanging Shares:
. The redemption proceeds are used to purchase shares of a different Vanguard
fund.
. You must meet the receiving fund's minimum investment requirements.
. Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus. For
exchanges, the purchase side of the transaction will be based on the receiving
fund's next-determined share price, again subject to any special rules discussed
in this prospectus.
- --------------------------------------------------------------------------------
Note: Once a redemption is requested and a confirmation number given, the
transaction cannot be canceled.
- --------------------------------------------------------------------------------
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail. You can also sell shares by check.
- --------------------------------------------------------------------------------
<PAGE>
16
Redeeming Shares (continued)
- --------------------------------------------------------------------------------
Online Requests [GRAPHIC APPEARS HERE]
Access Vanguard at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through the website. We will then send you, by mail, an account access password
that will enable you to sell or exchange shares online (as well as perform other
transactions).
Note: The Vanguard funds whose shares you cannot exchange online or by
telephone are Vanguard U.S. Stock Index Funds, Vanguard Balanced Index Fund,
Vanguard International Stock Index Funds, Vanguard REIT Index Fund, Vanguard
Total International Stock Index Fund, and Vanguard Growth and Income Fund. These
funds do, however, permit online and telephone exchanges within IRAs and other
retirement accounts. If you sell shares of these funds online, you will receive
a redemption check at your address of record.
- --------------------------------------------------------------------------------
Telephone Requests [GRAPHIC APPEARS HERE]
Call Vanguard Tele-Account 24 hours a day--or your assigned Service Associate
during business hours--to sell or exchange shares. You can exchange shares from
this Fund to open an account in another Vanguard fund or to add to an existing
Vanguard fund account with an identical registration.
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
[X] The ten-digit account number.
[X] The name and address exactly as registered on the account.
[X] The primary Social Security or employer identification number as registered
on the account.
[X] The Personal Identification Number, if applicable.
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A Note on Unusual Circumstances
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.
- --------------------------------------------------------------------------------
Mail Requests [GRAPHIC APPEARS HERE]
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
- --------------------------------------------------------------------------------
Check Requests
You can sell shares by writing a check for $250 or more.
- --------------------------------------------------------------------------------
A Note on Large Redemptions
It is important that you call Vanguard before you redeem a large dollar amount.
We must consider the interests of all Fund shareholders and so reserve the right
to delay delivery of your redemption proceeds--up to seven days--if the amount
will disrupt the Fund's operation or performance.
<PAGE>
17
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in kind, i.e., in securities, rather than in cash. If
payment is made in kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check, wire
(money market funds and other daily dividend funds only), or exchange to another
Vanguard fund.
- --------------------------------------------------------------------------------
Check Redemptions
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
Wire Redemptions [GRAPHIC APPEARS HERE]
The wire redemption option is not automatic; you must establish it by completing
a special form or the appropriate section of your account application. Wire
redemptions can be initiated by mail or by telephone during Vanguard's business
hours, but not online.
For Money Market Funds:
For telephone requests made by 10:30 a.m. EST, the wire will arrive at your bank
by the close of business that same day. Requests made by 4 p.m. EST will arrive
at your bank by the close of business on the following business day.
For Other Daily Dividend Funds:
For telephone requests made by 4 p.m. EST, the wire will arrive at your bank by
the close of business on the following business day.
- --------------------------------------------------------------------------------
NOTE: Wire redemptions of less than $5,000 are subject to a $5 processing fee.
- --------------------------------------------------------------------------------
Exchange Redemptions
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions.
Request in "Good Order"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
[X] The Fund name and account number.
[X] The amount of the transaction (in dollars or shares).
[X] Signatures of all owners exactly as registered on the account (for mail
requests).
[X] Signature guarantees (if required).*
[X] Any supporting legal documentation that may be required.
[X] Any outstanding certificates representing shares to be redeemed.
* For instance, a signature guarantee must be provided by all registered
account shareholders when redemption proceeds are to be sent to a different
person or address. A signature guarantee can be obtained from most banks,
credit unions, and licensed brokers.
Transactions are processed at the next-determined share price after Vanguard has
received all required information.
- --------------------------------------------------------------------------------
Limits on Account Activity
Because excessive account transactions can disrupt management of the Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
. You may make no more than two substantive "round trips" through the Fund
during any 12-month period
. Your round trips through the Fund must be at least 30 days apart.
. The Fund may refuse a share purchase at any time, for any reason.
. Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
<PAGE>
18
Redeeming Shares (continued)
A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also, "round trip" covers transactions accomplished by any combination
of methods, including transactions conducted by check, wire, or exchange to/from
another Vanguard fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
- --------------------------------------------------------------------------------
All Trades Final
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been received
and a confirmation number assigned.
- --------------------------------------------------------------------------------
Transferring Registration
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 100 Vanguard Boulevard
Valley Forge, PA 19482-2900 Malvern, PA 19355
- --------------------------------------------------------------------------------
Fund and Account Updates
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about the Fund twice a
year. These comprehensive reports include an assessment of the Fund's
performance (and a comparison to its industry benchmark), an overview of the
markets, a report from the advisers, and the Fund's financial statements which
include a listing of the Fund's holdings.
To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When we find that two or
more Fund shareholders have the same last name and address, we send just one
Fund report to that address--instead of mailing separate reports to each
shareholder. If you want us to send separate reports, however, you may notify
our Institutional Division at 1-888-809-8102.
- --------------------------------------------------------------------------------
Confirmation Statement
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
Portfolio Summary [GRAPHIC APPEARS HERE]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
Fund Financial Reports
Mailed in February and August for this Fund.
- --------------------------------------------------------------------------------
Tax Statements
Generally mailed in January; report previous year's dividend and capital gains
distributions, and proceeds from the sale of shares.
- --------------------------------------------------------------------------------
Average Cost Review Statement [GRAPHIC APPEARS HERE]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using the average cost single category method.
- --------------------------------------------------------------------------------
<PAGE>
19
- --------------------------------------------------------------------------------
Checkwriting Statement
Sent monthly to shareholders using Vanguard's checkwriting option. Our statement
provides images of the front and back of each checkwriting draft paid in the
previous month. This consolidated statement is sent instead of the original
canceled drafts, which will not be returned.
- --------------------------------------------------------------------------------
Mandatory Conversion to Investor Shares
The Fund reserves the right to convert an investor's Institutional Shares into
Investor Shares of the Fund if the investor's account balance falls below $10
million. Any such conversion will be preceded by written notice to the investor.
<PAGE>
(This page intentionally left blank.)
<PAGE>
Glossary of Investment Terms
Active Management
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
Bond
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and make regular interest payments until
that date.
Capital Gains Distribution
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit, minus any realized losses.
Cash Reserves
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
Corporate Bond
An IOU issued by a business that wants to borrow money. As with other types of
bonds, the issuer promises to repay the borrowed money on a specific date and to
make interest payments in the meantime.
Dividend Income
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
Expense Ratio
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
Face Value
The amount to be paid at maturity of a bond; also known as the par value or
principal.
Index
An unmanaged group of securities whose overall performance is used as a standard
to measure investment performance.
International Dollar-Denominated Bond
A bond denominated in U.S. dollars issued by foreign governments and companies.
Because the bond's value is designated in dollars, an investor is not exposed to
foreign currency risk.
Investment Grade
A bond whose credit quality is considered by independent bond-rating agencies to
be sufficient to ensure timely payment of principal and interest under current
economic circumstances.
Maturity
The date when a bond issuer agrees to repay the bond's principal, or face value,
to the bond's buyer.
Mortgage-Backed Security
A bond or pass-through certificate that represents an interest in an underlying
pool of mortgages and is issued by any number of government agencies or private
corporations. Unlike ordinary fixed-income securities, mortgage-backed
securities pay both interest and principal as part of their regular payments.
Net Asset Value (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
Passive Management
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform--a particular stock or bond market index. Also known as
indexing.
Total Return
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
Volatility
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
Yield
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[LOGO OF THE VANGUARD GROUP APPEARS HERE]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
For More Information
If you'd like more information about Vanguard Total Bond Market Index Fund
Institutional Shares, the following documents are available free upon request:
Annual/Semiannual Report to Shareholders
Additional information about the Fund's investments is available in Vanguard
Bond Index Funds' annual and semiannual reports to shareholders. In these
reports, you will find a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during the most
recent fiscal year.
Statement of Additional Information (SAI)
The SAI (for Vanguard Bond Index Funds) provides more detailed information about
the Fund.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Fund or other Vanguard funds, please
contact us as follows:
If you are an Individual Investor:
The Vanguard Group
Investor Information Department
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone: 1-800-662-7447 (SHIP)
Text Telephone: 1-800-952-3335
If you are a client of Vanguard's Institutional Division:
The Vanguard Group
Institutional Investor Information
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone: 1-888-809-8102
World Wide Web: www.vanguard.com
If you are a current Fund shareholder and would like information about your
account, account transactions, and/or account statements, please call:
Client Services Department Telephone: 1-800-662-2739 (CREW)
Text Telephone: 1-800-662-2738
Information provided by the Securities and Exchange Commission (SEC)
You can review and copy information about the Fund (including the SAI) at the
SEC's Public Reference Room in Washington, D.C. To find out more about this
public service, call the SEC at 1-800-SEC-0330. Reports and other information
about the Fund are also available on the SEC's website (www.sec.gov), or you can
receive copies of this information, for a fee, by writing the Public Reference
Section, Securities and Exchange Commission, Washington, DC 20549-6009.
Fund's Investment Company Act file number: 811-4681
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation, Distributor.
I222N-04/30/1999
<PAGE>
PART B
VANGUARD BOND INDEX FUNDS
(the Trust)
STATEMENT OF ADDITIONAL INFORMATION
April 30, 1999
This Statement is not a prospectus, but should be read in conjunction with
the Trust's current Prospectuses (dated April 30, 1999). To obtain the Pro-
spectuses or an additional 1998 Annual Report to Shareholders which contains
Vanguard Bond Index Funds' Financial Statements as hereby incorporated by ref-
erence, please call:
Vanguard Investor Information Center
1-800-662-7447(SHIP)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Description of the Trust................................................... B-1
Investment Policies........................................................ B-3
Fundamental Investment Limitations......................................... B-7
Yield and Total Return..................................................... B-8
Purchase of Shares......................................................... B-10
Redemption of Shares....................................................... B-10
Share Price................................................................ B-10
Management of the Trust.................................................... B-12
Portfolio Transactions..................................................... B-16
Performance Measures....................................................... B-17
Financial Statements....................................................... B-20
Appendix--Description of Bond Ratings...................................... B-21
</TABLE>
DESCRIPTION OF THE TRUST
Organization
The Trust was organized as a Maryland corporation in 1986, and was reorga-
nized as a Delaware business trust in May, 1998. Prior to its reorganization
as a Delaware business trust, the Trust was known as Vanguard Bond Index Fund,
Inc. The Trust is registered with the United States Securities and Exchange
Commission (the Commission) under the Investment Company Act of 1940 (the 1940
Act) as an open-end, diversified management investment company. It currently
offers the following funds and classes of shares:
Vanguard Short-Term Bond Index Fund
Vanguard Intermediate-Term Bond
Index Fund
Vanguard Long-Term Bond Index Fund
Vanguard Total Bond Market Index Fund--Individual Shares and Institutional
Shares
(individually, the Fund; collectively, the Funds)
The Trust has the ability to offer additional funds or classes of shares.
There is no limit on the number of full and fractional shares that the Trust
may issue for a single fund or class of shares.
Service Providers
Custodian. State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110 and The Chase Manhattan Bank, N.A., 4 Chase MetroTech Cen-
ter, Brooklyn, New York 11245
B-1
<PAGE>
serve as the Funds' custodians. The custodians are responsible for maintaining
the Funds' assets and keeping all necessary accounts and records.
Independent Accountants. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, serves as the Funds' independent accoun-
tants. The accountants audit the Funds' financial statements and provide other
related services.
Transfer and Dividend-Paying Agent. The Funds' transfer agent and dividend-
paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern,
Pennsylvania 19355.
Characteristics of the Trust's Shares
Restrictions on Holding or Disposing of Shares. There are no restrictions on
the right of shareholders to retain or dispose of the Trust's shares, other
than the possible future termination of the Trust or any of its funds. The
Trust or any of its funds may be terminated by reorganization into another mu-
tual fund or by liquidation and distribution of the assets of the affected
fund. Unless terminated by reorganization or liquidation, the Trust and its
funds will continue indefinitely.
Shareholder Liability. The Trust is organized under Delaware law, which pro-
vides that shareholders of a business trust are entitled to the same limita-
tions of personal liability as shareholders of a corporation organized under
Delaware law. Effectively, this means that a shareholder of the Trust will not
be personally liable for payment of the Trust's debts except by reason of his
or her own conduct or acts. In addition, a shareholder could incur a financial
loss on account of a Trust obligation only if the Trust itself had no remain-
ing assets with which to meet such obligation. We believe that the possibility
of such a situation arising is extremely remote.
Dividend Rights. The shareholders of a fund are entitled to receive any div-
idends or other distributions declared for such fund. No shares have priority
or preference over any other shares of the same fund with respect to distribu-
tions. Distributions will be made from the assets of a fund, and will be paid
ratably to all shareholders of the fund (or class) according to the number of
shares of such fund (or class) held by shareholders on the record date. The
amount of income dividends per share may vary between separate share classes
of the same fund based upon differences in the way that expenses are allocated
between share classes pursuant to a multiple class plan.
Voting Rights. Shareholders are entitled to vote on a matter if: (i) a
shareholder vote is required under the 1940 Act; (ii) the matter concerns an
amendment to the Declaration of Trust that would adversely affect to a mate-
rial degree the rights and preferences of the shares of any class or fund; or
(iii) the Trustees determine that it is necessary or desirable to obtain a
shareholder vote. The 1940 Act requires a shareholder vote under various cir-
cumstances, including to elect or remove Trustees upon the written request of
shareholders representing 10% or more of the Trust's net assets, and to change
any fundamental policy of the Trust. Shareholders of the Trust receive one
vote for each dollar of net asset value owned on the record date, and a frac-
tional vote for each fractional dollar of net asset value owned on the record
date. However, only the shares of the fund affected by a particular matter are
entitled to vote on that matter. Voting rights are non-cumulative and cannot
be modified without a majority vote.
Liquidation Rights. In the event of liquidation, shareholders will be enti-
tled to receive a pro rata share of the net assets of applicable funds of the
Trust.
Preemptive Rights. There are no preemptive rights associated with shares of
the Funds.
Conversion Rights. Shareholders of the Total Bond Market Index Fund may con-
vert their Individual (or Institutional) Shares into Institutional (or Indi-
vidual) Shares upon the satisfaction of any then applicable eligibility re-
quirements.
B-2
<PAGE>
Redemption Provisions. The Trust's redemption provisions are described in
its current prospectuses and elsewhere in this Statement of Additional Infor-
mation.
Sinking Fund Provisions. The Trust has no sinking fund provisions.
Calls or Assessment. The Trust's shares, when issued, are fully paid and
non-assessable.
Tax Status of the Trust
Each Fund of the Trust intends to qualify as a "regulated investment compa-
ny" under Subchapter M of the Internal Revenue Code. This special tax status
means that a fund will not be liable for federal tax on income and capital
gains distributed to shareholders. In order to preserve its tax status, each
Fund of the Trust must comply with certain requirements. If a fund fails to
meet these requirements in any taxable year, it will be subject to tax on its
taxable income at corporate rates, and all distributions from earnings and
profits, including any distributions of net tax-exempt income and net long-
term capital gains, will be taxable to shareholders as ordinary income. In ad-
dition, the fund could be required to recognize unrealized gains, pay substan-
tial taxes and interest, and make substantial distributions before regaining
its tax status as a regulated investment company.
INVESTMENT POLICIES
The following policies supplement the investment policies set forth in the
Trust's Prospectuses:
Repurchase Agreements
Each Fund of the Trust may invest in repurchase agreements with commercial
banks, brokers or dealers either for defensive purposes due to market condi-
tions or to generate income from its excess cash balances. A repurchase agree-
ment is an agreement under which a Fund acquires a fixed income security (gen-
erally a security issued by the U.S. Government or an agency thereof, a
banker's acceptance, or a certificate of deposit) from a commercial bank, bro-
ker, or dealer, subject to resale to the seller at an agreed upon price and
date (normally, the next business day). A repurchase agreement may be consid-
ered a loan collateralized by securities. The resale price reflects an agreed
upon interest rate effective for the period the instrument is held by a Fund
and is unrelated to the interest rate on the underlying instrument. In these
transactions, the securities acquired by a Fund (including accrued interest
earned thereon) must have a total value in excess of the value of the repur-
chase agreement and are held by a custodian bank until repurchased. In addi-
tion, the Trust's Board of Trustees will monitor each Fund's repurchase agree-
ment transactions generally and will establish guidelines and standards for
review by the investment adviser of the creditworthiness of any bank, broker,
or dealer party to a repurchase agreement relating to a Fund.
The use of repurchase agreements involves certain risks. For example, if the
other party to the agreement defaults on its obligation to repurchase the un-
derlying security at a time when the value of the security has declined, a
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the under-
lying security is collateral for a loan by the Fund not within its control and
therefore the realization by the Fund on such collateral may be automatically
stayed. Finally, it is possible that the Fund may not be able to substantiate
its interest in the underlying security and may be deemed an unsecured credi-
tor of the other party to the agreement. While each Fund's management acknowl-
edges these risks, it is expected that they can be controlled through careful
monitoring procedures.
Lending of Securities
Each Fund of the Trust may lend its investment securities to qualified in-
stitutional investors (typically brokers, dealers, banks, or other financial
institutions) who need to borrow securities in order to
B-3
<PAGE>
complete certain transactions, such as covering short sales, avoiding failures
to deliver securities, or completing arbitrage operations. By lending its in-
vestment securities, a Fund attempts to increase its net investment income
through the receipt of interest on the loan. Any gain or loss in the market
price of the securities loaned that might occur during the term of the loan
would be for the account of the Fund. The terms and the structure and the ag-
gregate amount of such loans must be consistent with the 1940 Act, and the
Rules and Regulations or interpretations of the Commission thereunder. These
provisions limit the amount of securities a fund may lend to 33 1/3% of the
Fund's total assets, and require that (a) the borrower pledge and maintain
with the Fund collateral consisting of cash, an irrevocable letter of credit
or securities issued or guaranteed by the United States Government having at
all times not less than 100% of the value of the securities loaned, (b) the
borrower add to such collateral whenever the price of the securities loaned
rises (i.e., the borrower "marks to the market" on a daily basis), (c) the
loan be made subject to termination by the Fund at any time, and (d) the Fund
receive reasonable interest on the loan (which may include the Fund's invest-
ing any cash collateral in interest bearing short-term investments), any dis-
tribution on the loaned securities and any increase in their market value.
Loan arrangements made by each Fund will comply with all other applicable reg-
ulatory requirements, including the rules of the New York Stock Exchange,
which presently require the borrower, after notice, to redeliver the securi-
ties within the normal settlement time of three business days. All relevant
facts and circumstances, including the creditworthiness of the broker, dealer
or institution, will be considered in making decisions with respect to the
lending of securities, subject to review by the Trust's Board of Trustees.
At the present time, the Staff of the Commission does not object if an in-
vestment company pays reasonable negotiated fees in connection with loaned se-
curities, so long as such fees are set forth in a written contract and ap-
proved by the investment company's Trustees. In addition, voting rights pass
with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
Vanguard Interfund Lending Program
The Commission has issued an exemptive order permitting the Funds to partic-
ipate in Vanguard's interfund lending program. This program allows the Van-
guard funds to borrow money from and loan money to each other for temporary or
emergency purposes. The program is subject to a number of conditions, includ-
ing the requirement that no fund may borrow or lend money through the program
unless it receives a more favorable interest rate than is available from a
typical bank for a comparable transaction. In addition, a fund may participate
in the program only if and to the extent that such participation is consistent
with the fund's investment objective and other investment policies. The Boards
of Trustees of the Vanguard funds are responsible for ensuring that the
interfund lending program operates in compliance with all conditions of the
Commission's exemptive order.
Futures Contracts and Options
Each Fund may enter into futures contracts, options, and options on futures
contracts for the purpose of remaining fully invested and reducing transaction
costs. Futures contracts provide for the future sale by one party and purchase
by another party of a specified amount of a specific security at a specified
future time and at a specified price. Futures contracts which are standardized
as to maturity date and underlying financial instrument are traded on national
futures exchanges. Futures exchanges and trading are regulated under the Com-
modity Exchange Act by the Commodity Futures Trading Commission (CFTC), a U.S.
Government agency. Assets committed to futures contracts will be segregated to
the extent required by law.
Although futures contracts by their terms call for actual delivery or ac-
ceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Clos-
ing out an open futures position is done by taking an opposite position (buy-
B-4
<PAGE>
ing a contract which has previously been sold, or selling a contract previ-
ously purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith initial margin deposit in
cash or securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure comple-
tion of the contract (delivery or acceptance of the underlying security) if it
is not terminated prior to the specified delivery date. Minimal initial margin
requirements are established by the futures exchange and may be changed. Bro-
kers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold with deposits
that may range upward from less than 5% of the value of the contract being
traded. A Fund's initial margin requirement is ordinarily in the form of port-
folio securities.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the con-
tract value may reduce the required margin, resulting in a repayment of excess
margin to the contract holder. Variation margin payments are made to and from
the futures broker for as long as the contract remains open. The Funds expect
to earn interest income on their initial margin deposit.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset unfavor-
able changes in the value of securities otherwise held for investment purposes
or expected to be acquired by them. Speculators are less inclined to own the
securities underlying the futures contracts which they trade, and use futures
contracts with the expectation of realizing profits from fluctuations in the
prices of underlying securities. The Funds intend to use futures contracts for
bona fide hedging purposes only.
Regulations of the CFTC applicable to a Fund require that all of its futures
transactions constitute bona fide hedging transactions except to the extent
that the aggregate initial margins and premiums required to establish any non-
hedging positions do not exceed five percent of the value of the Fund's port-
folio. Each Fund will only sell futures contracts to protect securities it
owns against price declines or purchase contracts to protect against an in-
crease in the price of securities it intends to purchase. As evidence of this
hedging interest, each Fund expects that approximately 75% of its futures con-
tract purchases will be "completed," that is, equivalent amounts of related
securities will have been purchased or are being purchased by the Fund upon
sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Funds' exposure to market fluctuations, the use
of futures contracts may be a more effective means of hedging this exposure.
While each Fund will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in
the purchase and sale of the underlying securities.
Restrictions on the Use of Futures Contracts
A Fund will not enter into futures contract transactions to the extent that,
immediately thereafter, the sum of its initial margin deposits on open con-
tracts exceeds 5% of the market value of the Fund's total assets. In addition,
a Fund will not enter into futures contracts to the extent that its outstand-
ing obligations to purchase securities under these contracts would exceed 20%
of its total assets.
Risk Factors in Futures Transactions
Positions in futures contracts may be closed out only on an Exchange which
provides a secondary market for such futures. However, there can be no assur-
ance that a liquid secondary market will exist for any particular futures con-
tract at any specific time. Thus, it may not be possible to close a futures
B-5
<PAGE>
position. In the event of adverse price movements, a Fund would continue to be
required to make daily cash payments to maintain its required margin. In such
situations, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily margin requirements at a time when it may be disad-
vantageous to do so. In addition, a Fund may be required to make delivery of
the instruments underlying futures contracts it holds. The inability to close
options and futures positions also could have an adverse impact on the ability
to effectively hedge.
A Fund will minimize the risk that it will be unable to close out a futures
contract by only entering into futures which are traded on national futures
exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be sub-
stantial, due both to the low margin deposits required, and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and sub-
stantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin,
a subsequent 10% decrease in the value of the futures contract would result in
a total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of a Fund are engaged in only for hedging purposes, the Adviser
does not believe that the Funds are subject to the risks of loss frequently
associated with futures transactions. A Fund would presumably have sustained
comparable losses if, instead of the futures contract, it had invested in the
underlying financial instrument and sold it after the decline.
Utilization of futures transactions by a Fund does involve the risk of im-
perfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is
also possible that a Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by each Fund of margin deposits in the event of bankruptcy of a
broker with whom a Fund has an open position in a futures contract or related
option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades
may be made on that day at a price beyond that limit. The daily limit governs
only price movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the liquidation of unfa-
vorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of future positions and subjecting some
futures traders to substantial losses.
Federal Tax Treatment of Futures Contracts
Except for transactions a Fund has identified as hedging transactions, a
Fund is required for Federal income tax purposes to recognize as income for
each taxable year its net unrealized gains and losses on certain futures con-
tracts as of the end of the year as well as those actually realized during the
year. In most cases, any gain or loss recognized with respect to a futures
contract is considered to be 60% long-term capital gain or loss and 40% short-
term capital gain or loss, without regard to the holding period of the con-
tract. Furthermore, sales of futures contracts which are intended to hedge
against a change in the value of securities held by a Fund may affect the
holding period of such securities and, consequently, the nature of the gain or
loss on such securities upon disposition. A Fund may be required to defer the
recognition of losses on futures contracts to the extent of any unrecognized
gains on related positions held by the Fund.
B-6
<PAGE>
In order for a Fund to continue to qualify for Federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a tax-
able year must be derived from qualifying income; i.e., dividends, interest,
income derived from loans of securities, gains from the sale of securities or
of foreign currencies, or other income derived with respect to a Fund's busi-
ness of investing in securities. It is anticipated that any net gain realized
from the closing out of futures contracts will be considered qualifying income
for purposes of the 90% requirement.
A Fund will distribute to shareholders annually any net capital gains which
have been recognized for Federal income tax purposes (including unrealized
gains at the end of the Fund's fiscal year) on futures transactions. Such dis-
tributions will be combined with distributions of capital gains realized on
the Fund's other investments and shareholders will be advised on the nature of
the transactions.
FUNDAMENTAL INVESTMENT LIMITATIONS
Each Fund of the Trust is subject to the following fundamental investment
limitations, which cannot be changed in any material way without the approval
of the holders of a majority of the affected Fund's shares. For these purpos-
es, a "majority" of a Fund's shares means shares representing the lesser of:
(i) 67% or more of the votes cast to approve a change, so long as shares rep-
resenting more than 50% of the Fund's net asset value are present or repre-
sented by proxy; or (ii) more than 50% of a Fund's net asset value.
Borrowing. Each Fund may not borrow money, except for temporary or emergency
purposes in an amount not exceeding 15% of the Fund's net assets. Each Fund
may borrow money through banks, reverse repurchase agreements, or Vanguard's
interfund lending program only, and must comply with all applicable regulatory
conditions. Each Fund may not make any additional investments whenever its
outstanding borrowings exceed 5% of net assets.
Commodities. Each Fund may not invest in commodities, except that it may in-
vest in futures contracts and options transactions. No more than 5% of a
Fund's total assets may be used as initial margin deposit for futures con-
tracts, and no more than 20% of the Fund's total assets may be invested in
futures contracts or options at any time.
Diversification. Each Fund may not: (i) purchase more than 5% of the out-
standing voting securities of any one issuer, or (ii) purchase securities of
any issuer if, as a result, more than 5% of the Fund's total assets would be
invested in that issuer's securities. This limitation does not apply to obli-
gations of the United States Government, its agencies, or instrumentalities.
Illiquid Securities. Each Fund may not acquire any security if, as a result,
more than 15% of its net assets would be invested in securities that are
illiquid.
Investing for Control. Each Fund may not invest in a company for the purpose
of controlling its management.
Investment Companies. Each Fund may not invest in any other investment com-
pany, except through a merger, consolidation or acquisition of assets, or to
the extent permitted by Section 12 of the 1940 Act. Investment companies whose
shares a Fund acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.
Loans. Each Fund may not lend money to any person except by purchasing fixed
income securities that are publicly distributed or customarily purchased by
institutional investors, by entering into repurchase agreements, by lending
its portfolio securities, or through Vanguard's interfund lending program.
Margin. Each Fund may not purchase securities on margin or sell securities
short, except as permitted by the Funds' investment policies relating to com-
modities.
B-7
<PAGE>
Oil, gas, minerals. Each Fund may not invest in interests in oil, gas or
other mineral exploration or development programs.
Pledging assets. Each Fund may not pledge, mortgage or hypothecate more than
15% of its net assets.
Real Estate. Each Fund may not invest directly in real estate, although it
may invest in securities of companies that deal in real estate and bonds se-
cured by real estate.
Senior securities. Each Fund may not issue senior securities.
Underwriting. Each Fund may not engage in the business of underwriting secu-
rities issued by other persons. Each Fund will not be considered an under-
writer when disposing of its investment securities.
The investment limitations set forth above are considered at the time in-
vestment securities are purchased. If a percentage restriction is adhered to
at the time the investment is made, a later increase in percentage resulting
from a change in the market value of assets will not constitute a violation of
such restriction.
None of these limitations prevents a Fund from participating in The Vanguard
Group, Inc. (Vanguard). As a member of The Vanguard Group of Investment Compa-
nies, the Trust may own securities issued by Vanguard, make loans to Vanguard,
and contribute to Vanguard's costs or other financial requirements. See "Man-
agement of the Trust" for more information.
YIELD AND TOTAL RETURN
SEC Yield
Yield is the net annualized yield based on a specified 30-day (or one month)
period assuming semiannual compounding of income. Yield is calculated by di-
viding the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to
the following formula:
YIELD = 2[((a-b)/cd+1)/6/-1]
Where:
<TABLE>
<C> <C> <S>
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
</TABLE>
The yield* of each Fund of the Trust for the 30-day period ended December
31, 1998 was as follows:
<TABLE>
<S> <C>
Short-Term Bond Index.................................................. 5.01%
Intermediate-Term Bond Index........................................... 5.31%
Long-Term Bond Index................................................... 5.65%
Total Bond Market Index Individual Shares.............................. 5.63%
Total Bond Market Index Institutional Shares........................... 5.73%
</TABLE>
--------
*Yield is calculated daily
B-8
<PAGE>
Average Annual Total Return
Average annual total return is the average annual compounded rate of return
for the periods of one year, five years, ten years or the life of the Fund,
all ended on the last day of a recent month. Average annual total return quo-
tations will reflect changes in the price of the Fund's shares and assume that
all dividends and capital gains distributions during the respective periods
were reinvested in Fund shares. Average annual total return is calculated by
finding the average annual compounded rates of return of a hypothetical in-
vestment over such periods according to the following formula (average annual
total return is then expressed as a percentage):
T = (ERV/P)/1/n/-1
Where:
<TABLE>
<C> <C> <S>
T = average annual total return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at
the beginning of the applicable period
</TABLE>
The average annual total return of the Total Bond Market Index Fund Individ-
ual Shares for the one-, five-, and ten-year periods ended December 31, 1998
was 8.58%*, 7.21%*, and 9.00%*, respectively. The average annual total return
of the Short-Term Bond Index Fund for the one-year period ended December 31,
1998 and since its inception on March 1, 1994 was 7.63%* and 6.48%*, respec-
tively. The average annual total return of the Intermediate-Term Bond Index
Fund for the one-year period ended December 31, 1998 and since its inception
on March 1, 1994 was 10.09%* and 8.02%*, respectively. The average annual to-
tal return of the Long-Term Bond Index Fund for the one-year period ended De-
cember 31, 1998 and since its inception on March 1, 1994 was 11.98%* and
9.93%*, respectively. The average annual total return of the Total Bond Market
Index Fund Institutional Shares for the one-year period ended December 31,
1998 and since its inception on September 18, 1995 was 8.69%* and 8.07%*, re-
spectively.
*Total return figures do not reflect the $10 annual account maintenance fee
applied on balances under $10,000.
Cumulative Total Return
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that
all dividends and capital gains distributions during the period were rein-
vested in Fund shares. Cumulative total return is calculated by finding the
cumulative rates of a return of a hypothetical investment over such periods,
according to the following formula (cumulative total return is then expressed
as a percentage):
C = (ERV/P)-1
Where:
<TABLE>
<C> <C> <S>
C = cumulative total return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value; ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at
the beginning of the applicable period
</TABLE>
B-9
<PAGE>
PURCHASE OF SHARES
The Trust reserves the right in its sole discretion (i) to suspend the of-
ferings of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Trust, and (iii) to
reduce or waive the minimum investment for or any other restrictions on ini-
tial and subsequent investments for certain fiduciary accounts or under cir-
cumstances where certain economies can be achieved in sales of a Fund's
shares.
The Trust reserves the right to deduct a portfolio transaction fee from pur-
chases of the shares of each Fund. Fees will not be charged on any investment
where the aggregate balance is expected to be less than $250 million for the
Total Bond Market Index Fund; $50 million for the Short-Term Bond Index Fund;
$50 million for the Intermediate-Term Bond Index Fund; and $10 million for the
Long-Term Bond Index Fund. Fees may be charged on the entire lump-sum purchase
for transactions that exceed or are expected to exceed over the next twelve
months the amount indicated for each Fund if such purchases are reasonably
deemed to be disruptive to efficient portfolio management. Lump-sum purchases
exceeding the indicated amount for each Fund may be considered disruptive, for
example, if the portfolio manager incurs significant transaction costs in pur-
chasing portfolio securities needed to match the investment performance of the
respective benchmark index. If such purchases can be offset by redemptions of
shares by other shareholders, such fee may be waived or reduced. A prospective
investor may determine whether a fee will be charged by calling his/her client
representative or plan sponsor in advance of his/her purchase. The fee, if im-
posed, will be 0.18% for the Total Bond Market Index Fund; 0.23% for the In-
termediate-Term Bond Index Fund; 0.15% for the Short-Term Bond Index Fund; and
0.21% for the Long-Term Bond Index Fund. The fees are based on the portfolio
manager's estimate of transaction costs, which depends on the types of securi-
ties in which each Fund invests.
REDEMPTION OF SHARES
The Trust may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading
on the Exchange is restricted as determined by the Commission, (ii) during any
period when an emergency exists as defined by the rules of the Commission as a
result of which it is not reasonably practicable for a Fund to dispose of se-
curities owned by it, or fairly to determine the value of its assets, and
(iii) for such other periods as the Commission may permit.
SHARE PRICE
Each Fund's share price, or "net asset value" per share, is calculated by
dividing the total assets of the Fund, less all liabilities, by the total num-
ber of shares outstanding except for the Total Bond Market Index Fund whereby
net asset value is calculated by dividing the net assets attributed to each
share class by the total number of shares outstanding for each share class.
The net asset value is determined as of the close of the New York Stock Ex-
change (the Exchange, generally 4:00 p.m. Eastern time) on each day that the
Exchange is open for trading.
Short term instruments (those with remaining maturities of 60 days or less)
may be valued at cost, plus or minus any amortized discount or premium, which
approximates market value.
Bonds and other fixed income securities may be valued on the basis of prices
provided by a pricing service when such prices are believed to reflect the
fair market value of such securities. The prices provided by a pricing service
may be determined without regard to bid or last sale prices of each security,
but take into account institutional-size transactions in similar groups of se-
curities as well as any developments related to specific securities.
B-10
<PAGE>
Other assets and securities for which no quotations are readily available or
which are restricted as to sale (or resale) are valued by such methods as the
Board of Trustees deems in good faith to reflect fair value.
The share price for the Fund can be found daily in the mutual fund listings
of most major newspapers under the heading "Vanguard Index Funds."
B-11
<PAGE>
MANAGEMENT OF THE TRUST
Officers and Trustees
The Officers of the Trust manage its day-to-day operations and are responsi-
ble to the Trust's Board of Trustees. The Trustees set broad policies for the
Trust and choose its Officers. The following is a list of the Trustees and Of-
ficers of the Trust and a statement of their present positions and principal
occupations during the past five years. As a group, the Trust's Trustees and
Officers own less than 1% of the outstanding shares of each Fund of the Trust.
Each Trustee also serves as a Director of The Vanguard Group, Inc., and as a
Trustee of each of the 36 investment companies administered by Vanguard (35 in
the case of Mr. Malkiel and 28 in the case of Mr. MacLaury). The mailing ad-
dress of the Trustees and Officers of the Trust is Post Office Box 876, Valley
Forge, Pennsylvania 19482.
JOHN C. BOGLE, (DOB: 5/8/1929) Senior Chairman and Trustee*
Senior Chairman and Director of The Vanguard Group, Inc., and Trustee of each
of the investment companies in The Vanguard Group; Director of The Mead Corp.
(Paper Products), General Accident Insurance, and Chris-Craft Industries, Inc.
(Broadcasting & Plastics Manufacturer).
JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer, and
Trustee*
Chairman, Chief Executive Officer and Director of The Vanguard Group, Inc.,
and Trustee of each of the investment companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee
Vice President, Chief Information Officer, and member of the Executive Commit-
tee of Johnson and Johnson (Pharmaceuticals/Consumer Products); Director of
Johnson & Johnson*MERCK Consumer Pharmaceuticals Co., Women First HealthCare,
Inc. (Research and Education Institution), Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.
BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee
President Emeritus of The Brookings Institution (Independent Non-Partisan Re-
search Organization); Director of American Express Bank, Ltd., The St. Paul
Companies, Inc. (Insurance and Financial Services), and National Steel Corp.
BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University; Direc-
tor of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker
Fentress & Co. (Investment Management), The Jeffrey Co. (Holding Company), and
Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee
Chairman, President, Chief Executive Officer, and Director of NACCO Industries
(Machinery/Coal/Appliances); Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals), and The Standard Products Co. (Rubber Prod-
ucts Company).
JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee
President and Chief Executive Officer of The Nature Conservancy (Non-Profit
Conservation Group); Director of Pacific Gas and Electric Co., Procter & Gam-
ble Co., NACCO Industries (Machinery/ Coal/Appliances), and Newfield Explora-
tion Co. (Energy); formerly, Director and Senior Partner of McKinsey & Co.,
and President of New York University.
JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee
Retired Chairman of Nabisco Brands, Inc. (Food Products); retired Vice Chair-
man and Director of RJR Nabisco (Food and Tobacco Products); Director of TECO
Energy, Inc., and Kmart Corp.
B-12
<PAGE>
J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee
Chairman and Chief Executive Officer of Rohm & Haas Co. (Chemicals); Director
of Cummins Engine Co. (Diesel Engine Company), and The Mead Corp. (Paper Prod-
ucts); and Trustee of Vanderbilt University.
RAYMOND J. KLAPINSKY, (DOB:12/7/1938) Secretary*
Managing Director of the Vanguard Group, Inc.; Secretary of The Vanguard
Group, Inc. and of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS, (DOB: 5/21/1957) Treasurer*
Principal of The Vanguard Group, Inc.; Treasurer of each of the investment
companies in The Vanguard Group.
ROBERT D. SNOWDEN, (DOB: 9/4/1961) Controller*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.
- --------
*Officers of the Trust are "interested persons" as defined in the 1940 Act.
The Vanguard Group
The Trust is a member of The Vanguard Group of Investment Companies which
consists of more than 35 investment companies (the Trusts). Through their
jointly-owned subsidiary, The Vanguard Group, Inc. (Vanguard), the Trust and
the other Trusts in The Vanguard Group obtain at cost virtually all of their
corporate management, administrative, and distribution services. Vanguard also
provides investment advisory services on an at-cost basis to several of the
Vanguard Trusts.
Vanguard employs a supporting staff of management and administrative person-
nel needed to provide the requisite services to the Trusts and also furnishes
the Trusts with necessary office space, furnishings, and equipment. Each Trust
pays its share of Vanguard's total expenses which are allocated among the
Trusts under methods approved by the Trustees of each Trust. In addition, each
Trust bears its own direct expenses such as legal, auditing, and custodian
fees.
The Trust's Officers are also Officers and employees of Vanguard. No Officer
or employee is permitted to own any securities of any external adviser for the
Trusts.
Vanguard adheres to a Code of Ethics established pursuant to Rule 17j-1 un-
der the 1940 Act. The Code is designed to prevent unlawful practices in con-
nection with the purchase or sale of securities by persons associated with
Vanguard. Under Vanguard's Code of Ethics certain Officers and employees of
Vanguard who are considered access persons are permitted to engage in personal
securities transactions. However, such transactions are subject to procedures
and guidelines similar to, and in many cases more restrictive than, those rec-
ommended by a blue ribbon panel of mutual fund industry executives.
Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the
Trusts. The amounts which each of the Trusts has invested are adjusted from
time to time in order to maintain the proportionate relationship between each
Trust's relative net assets and its contribution to Vanguard's capital. At De-
cember 31, 1998, each Fund had contributed capital to Vanguard representing
0.02% of each Fund's net assets. The total amount contributed by the Trust was
$2,093,000, which represented 3.00% of Vanguard's capitalization. The Amended
and Restated Funds' Service Agreement provides as follows: (a) each Vanguard
Trust may be called upon to invest up to .40% of its assets in Vanguard; and
(b) there is no other limitation on the dollar amount that each Vanguard Trust
may contribute to Vanguard's capitalization.
B-13
<PAGE>
Management
Corporate management and administrative services include: (1) executive
staff; (2) accounting and financial; (3) legal and regulatory; (4) shareholder
account maintenance; (5) monitoring and control of custodian relationships;
(6) shareholder reporting; and (7) review and evaluation of advisory and other
services provided to the Vanguard Trusts by third parties. During the last
three years, the Funds' allocated shares of Vanguard's actual net costs of op-
eration relating to management and administrative services (including transfer
agency) were:
<TABLE>
<CAPTION>
Fund 1996 1997 1998
---- ---------- ---------- ----------
<S> <C> <C> <C>
Total Bond Market Investor Shares........... $3,597,000 $5,892,000 $9,859,000
Total Bond Market Institutional Shares...... 431,000 617,000 989,000
Short-Term Bond............................. 396,000 611,000 878,000
Intermediate-Term Bond...................... 616,000 801,000 1,411,000
Long-Term Bond.............................. 30,000 62,000 207,000
</TABLE>
Distribution
Vanguard Marketing Corporation, a wholly-owned subsidiary of The Vanguard
Group, Inc., provides all distribution and marketing activities for the Trusts
in the Group. The principal distribution expenses are for advertising, promo-
tional materials, and marketing personnel. Distribution services may also in-
clude organizing and offering to the public, from time to time, one or more
new investment companies which will become members of The Vanguard Group. The
Trustees and Officers of Vanguard determine the amount to be spent annually on
distribution activities, the manner and amount to be spent on each Trust, and
whether to organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Trusts based upon relative net assets. The remaining
one half of those expenses is allocated among the Trusts based upon each
Trust's sales for the preceding 24 months relative to the total sales of the
Trusts as a Group, provided, however, that no Trust's aggregate quarterly rate
of contribution for distribution expenses of a marketing and promotional na-
ture shall exceed 125% of the average distribution expense rate for The Van-
guard Group, and that no Trust shall incur annual distribution expenses in ex-
cess of .20 of 1% of its average month-end net assets. During the last three
years, the Funds incurred the following approximate amounts of The Vanguard
Group's distribution and marketing expenses.
<TABLE>
<CAPTION>
Fund 1996 1997 1998
---- -------- ---------- ----------
<S> <C> <C> <C>
Total Bond Market Investor Shares............. $786,000 $1,136,000 $1,699,000
Total Bond Market Institutional Shares........ 146,000 376,000 561,000
Short-Term Bond............................... 77,000 124,000 168,000
Intermediate-Term Bond........................ 123,000 172,000 242,000
Long-Term Bond................................ 9,000 16,000 33,000
</TABLE>
Investment Advisory Services
Vanguard also provides investment advisory services to several Vanguard
Trusts including this Trust. These services are provided on an at-cost basis
from a money management staff employed directly by Vanguard. The compensation
and other expenses of this staff are paid by the Funds and Trusts utilizing
these services. During the last three years, the Funds incurred the following
approximate amounts of Vanguard's expenses relating to investment advisory
services.
<TABLE>
<CAPTION>
Fund 1996 1997 1998
---- -------- -------- --------
<S> <C> <C> <C>
Total Bond Market Investor Shares................. $322,000 $583,000 $757,000
Total Bond Market Institutional Shares............ 78,000 181,000 227,000
Short-Term Bond................................... 32,000 60,000 69,000
Intermediate-Term Bond............................ 52,000 81,000 106,000
Long-Term Bond.................................... 4,000 8,000 16,000
</TABLE>
B-14
<PAGE>
Trustee Compensation
The same individuals serve as Trustees of all Vanguard Trusts (with two ex-
ceptions, which are noted in the table appearing below), and each Trust pays a
proportionate share of the Trustees' compensation. The Trusts employ their of-
ficers on a shared basis, as well. However, officers are compensated by The
Vanguard Group, Inc., not the Trusts.
Independent Trustees. The Trusts compensate their independent Trustees--that
is, the ones who are not also officers of the Trust--in three ways:
. The independent Trustees receive an annual fee for their service to the
Trusts, which is subject to reduction based on absences from scheduled
Board meetings.
. The independent Trustees are reimbursed for the travel and other
expenses that they incur in attending Board meetings.
. Upon retirement, the independent Trustees receive an aggregate annual
fee of $1,000 for each year served on the Board, up to fifteen years of
service. This annual fee is paid for ten years following retirement or
until each Trustee's death.
"Interested" Trustees. The Trusts' interested Trustees--Messrs. Bogle and
Brennan--receive no compensation for their service in that capacity. However,
they are paid in their role as officers of The Vanguard Group, Inc.
Compensation Table. The following table provides compensation details for
each of the Trustees. We list the amounts paid as compensation and accrued as
retirement benefits by the Trust for each Trustee. In addition, the table
shows the total amount of benefits that we expect each Trustee to receive from
all Vanguard Trusts upon retirement, and the total amount of compensation paid
to each Trustee by all Vanguard Trusts. All information shown is for the fis-
cal year ended December 31, 1998:
VANGUARD BOND INDEX FUNDS
COMPENSATION TABLE
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Estimated Compensation
Accrued Annual From
Aggregate As Part Benefits All Vanguard
Compensation of Trust Upon Trusts Paid
Names of Trustees From Trust Expenses Retirement to Trustees(1)
- ----------------- ------------ ---------- ---------- --------------
<S> <C> <C> <C> <C>
John C. Bogle................ None None None None
John J. Brennan.............. None None None None
Barbara Barnes
Hauptfuhrer(2).............. $1,889 $255 $15,000 $75,000
Robert E. Cawthorn(2)........ 787 170 6,000 31,250
JoAnn Heffernan Heisen....... 944 111 15,000 37,500
Bruce K. MacLaury............ 1,973 192 12,000 70,000
Burton G. Malkiel............ 1,902 184 15,000 75,000
Alfred M. Rankin, Jr. ....... 1,889 134 15,000 75,000
John C. Sawhill.............. 1,889 170 15,000 75,000
James O. Welch, Jr. ......... 1,889 196 15,000 75,000
J. Lawrence Wilson........... 1,889 142 15,000 75,000
</TABLE>
- --------
(1) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Trustee of 36 Vanguard Trusts (35
in the case of Mr. Malkiel; 28 in the case of Mr. MacLaury).
(2) Mr. Cawthorn and Mrs. Hauptfuhrer have retired from the Trust's Board,
effective May 31, 1998 and December 31, 1998, respectively.
B-15
<PAGE>
PORTFOLIO TRANSACTIONS
How Transactions Are Affected
The types of securities in which the Funds invest are generally purchased
and sold through principal transactions, meaning that the Funds normally pur-
chase securities directly from the issuer or a primary market-maker acting as
principal for the securities on a net basis. Explicit brokerage commissions
are not paid on these transactions, although the purchase price for securities
usually includes an undisclosed compensation. Purchases from underwriters of
securities typically include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers serving as market makers typically
include a dealer's mark-up (i.e., a spread between the bid and the asked pric-
es). During the fiscal years ended December 31, 1996, 1997, and 1998, the
Funds did not pay any explicit brokerage commissions.
How Brokers and Dealers Are Selected
Vanguard's Fixed Income Group (the Group) chooses brokers or dealers to han-
dle the purchase and sale of the Funds' securities, and is responsible for
getting the best available price and most favorable execution for all transac-
tions. When the Funds purchase a newly issued security at a fixed price, the
Group may designate certain members of the underwriting syndicate to receive
compensation associated with that transaction. Certain dealers have agreed to
rebate a portion of such compensation directly to the Funds to offset their
management expenses. The Group is required to seek best execution of all
transactions and is not authorized to pay a higher brokerage commission solely
on account of the receipt of research or other services.
How the Reasonableness of Brokerage Commissions Is Evaluated
As previously explained, the types of securities that the Funds purchase do
not normally involve the payment of explicit brokerage commissions. If any
such brokerage commissions are paid, however, the Group will evaluate their
reasonableness by considering: (a) historical commission rates; (b) rates
which other institutional investors are paying, based upon publicly available
information; (c) rates quoted by brokers and dealers; (d) the size of a par-
ticular transaction, in terms of the number of shares, dollar amount, and num-
ber of clients involved; (e) the complexity of a particular transaction in
terms of both execution and settlement; (f) the level and type of business
done with a particular firm over a period of time; and (g) the extent to which
the broker or dealer has capital at risk in the transaction.
B-16
<PAGE>
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member trusts of The Vanguard Group of Investment Companies. Each
of the investment company members, including Vanguard Bond Index Funds, may
from time to time, use one or more of the following unmanaged indexes for com-
parative performance purposes.
Standard & Poor's 500 Composite Stock Price Index--includes stocks selected
by Standard & Poor's Index Committee to include leading companies in leading
industries and to reflect the U.S. stock market.
Standard & Poor's MidCap 400 Index--is composed of 400 medium sized domestic
stocks.
Standard & Poor's SmallCap 600/BARRA Value Index--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
Standard & Poor's SmallCap 600/BARRA Growth Index--contains stocks of the
S&P SmallCap 600 Index which have a higher than average price-to-book ratio.
Russell 1000 Value Index--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
Wilshire 5000 Equity Index--consists of more than 7,000 common equity secu-
rities, covering all stocks in the U.S. for which daily pricing is available.
Wilshire 4500 Equity Index--consists of all stocks in the Wilshire 5000 ex-
cept for the 500 stocks in the Standard and Poor's 500 Index.
Russell 3000 Stock Index--a diversified portfolio of approximately 3,000
common stocks accounting for over 90% of the market value of publicly-traded
stocks in the U.S.
Russell 2000 Stock Index--a subset of approximately 2,000 of the smallest
stocks contained in the Russell 3000, a widely-used benchmark for small capi-
talization common stocks.
Morgan Stanley Capital International EAFE Index--is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia, Asia and the Far East.
Goldman Sachs 100 Convertible Bond Index--currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for convert-
ible issues of $100 million or greater in market capitalization. The index is
priced monthly.
Salomon Brothers GNMA Index--includes pools of mortgages originated by pri-
vate lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
Salomon Brothers High-Grade Corporate Bond Index--consists of publicly-is-
sued, non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted,
total return index, including approximately 800 issues with maturities of 12
years or greater.
Lehman Long-Term Treasury Bond Index--is a market weighted index that con-
tains individually priced U.S. Treasury securities with maturities of 10 years
or greater.
Merrill Lynch Corporate & Government Bond Index--consists of over 4,500 U.S.
Treasury, agency and investment grade corporate bonds.
B-17
<PAGE>
Lehman Corporate (Baa) Bond Index--all publicly-offered fixed-rate, noncon-
vertible domestic corporate bonds rated Baa by Moody's, with a maturity longer
than 1 year and with more than $100 million outstanding. This index includes
over 1,500 issues.
Lehman Brothers Long-Term Corporate Bond Index--is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate, non-
convertible U.S. debt issues rated at least Baa, with at least $100 million
principal outstanding and maturity greater than 10 years.
Bond Buyer Municipal Bond Index--is a yield index on current coupon high-
grade general obligation municipal bonds.
Standard & Poor's Preferred Index--is a yield index based upon the average
yield for four high-grade, non-callable preferred stock issues.
NASDAQ Industrial Index--is composed of more than 3,000 industrial issues.
It is a value-weighted index calculated on price change only and does not in-
clude income.
Composite Index--70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
Composite Index--65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
Composite Index--65% Lehman Long-Term Corporate AA or Better Bond Index and
a 35% weighting in a blended equity composite (75% Standard & Poor's/BARRA
Value Index, 12.5% Standard & Poor's Utilities Index and 12.5% Standard &
Poor's Telephone Index).
Lehman Long-Term Corporate AA or Better Bond Index--consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated, SEC-
registered corporate debt rated AA or AAA.
Lehman Brothers Aggregate Bond Index--is a market-weighted index that con-
tains individually priced U.S. Treasury, agency, corporate, and mortgage pass-
through securities corporate rated BBB- or better. The Index has a market
value of over $5 trillion.
Lehman Brothers Mutual Fund Short (1-5) Government/Corporate Index--is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities be-
tween 1 and 5 years. The index has a market value of over $1.6 trillion.
Lehman Brothers Mutual Fund Intermediate (5-10) Government/Corporate Index--
is a market-weighted index that contains individually priced U.S. Treasury,
agency, and corporate securities rated BBB- or better with maturities between
5 and 10 years. The index has a market value of over $800 billion.
Lehman Brothers Long (10+) Government/Corporate Index--is a market-weighted
index that contains individually priced U.S. Treasury, agency, and corporate
securities rated BBB- or better with maturities greater than 10 years. The in-
dex has a market value of over $1.1 trillion.
Lipper Small Company Growth Fund Average--the average performance of small
company growth funds as defined by Lipper Inc. Lipper defines a small company
growth fund as a fund that by prospectus or portfolio practice, limits its in-
vestments to companies on the basis of the size of the company. From time to
time, Vanguard may advertise using the average performance and/or the average
expense ratio of the small company growth funds. (This fund category was first
established in 1982. For years prior to 1982, the results of the Lipper Small
Company Growth category were estimated using the returns of the Funds that
constituted the Group at its inception.)
B-18
<PAGE>
Lipper Balanced Fund Average--an industry benchmark of average balanced
funds with similar investment objectives and policies, as measured by Lipper
Inc.
Lipper Non-Government Money Market Fund Average--an industry benchmark of
average non-government money market funds with similar investment objectives
and policies, as measured by Lipper Inc.
Lipper Government Money Market Fund Average--an industry benchmark of aver-
age government money market funds with similar investment objectives and poli-
cies, as measured by Lipper Inc.
Lipper General Equity Fund Average--an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Inc.
Lipper Fixed Income Fund Average--an industry benchmark of average fixed in-
come funds with similar investment objectives and policies, as measured by
Lipper Inc.
B-19
<PAGE>
FINANCIAL STATEMENTS
The Funds' financial statements as of and for the year ended December 31,
1998, appearing in the Vanguard Bond Index Funds' 1998 Annual Report to Share-
holders, and the report thereon of PricewaterhouseCoopers LLP, independent ac-
countants, also appearing therein, are incorporated by reference in this
Statement of Additional Information. For a more complete discussion of the
Funds' performance, please see the Trust's 1998 Annual Report to Shareholders,
which may be obtained without charge.
B-20
<PAGE>
APPENDIX--DESCRIPTION OF BOND RATINGS
The Trust will invest primarily in investment grade bonds (i.e., those rated
at least Baa3 by Moody's Investors Service, Inc. or those rated BBB- by Stan-
dard & Poor's Corporation.) In the event that a Bond held by the Trust is
downgraded, the adviser, may continue to hold such bond. Excerpts from Moody's
Investors Service, Inc. description of its four highest bond ratings:
Aaa--judged to be the best quality by all standards. Together with the Aa
group they comprise what are generally known as high grade bonds; A--possess
many favorable investment attributes and are to be considered as "upper medium
grade obligations"; Baa--considered as medium grade obligations (i.e., they
are neither highly protected nor poorly secured). Interest payments and prin-
cipal security appear adequate for the present but certain protective elements
may be lacking or may be characteristically unreliable over any great length
of time. Such bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well.
Moody's also supplies numerical indicators 1, 2, and 3 to rating categories.
The modifier 1 indicates that the obligation ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and 3
indicates a ranking toward the lower end of that generic rating category.
Excerpts from Standard & Poor's Corporation description of its four highest
bond ratings:
AAA--highest rating assigned by S&P. Capacity to pay interest and repay
principal is extremely strong; AA--also qualify as investment grade obliga-
tions, a very strong capacity to pay interest and repay principal and differs
from AAA--issues only in small degree; A--regarded as upper medium grade. It
has a strong capacity to pay interest and repay principal although it is some-
what susceptible to the adverse effects of changes in circumstances and eco-
nomic conditions than debt in higher rated categories; BBB--regarded as having
an adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or chang-
ing circumstances are more likely to lead to a weakened capacity to pay inter-
est and repay principal for debt in this category than in higher rated catego-
ries.
Standard & Poor's applies indicators "+", no character, and "-" to its rat-
ing categories. The indicators show relative standing within the major rating
categories.
B-21
<PAGE>
PART C
VANGUARD BOND INDEX FUNDS
OTHER INFORMATION
Item 23. Exhibits
Exhibit
Description
<TABLE>
<C> <S>
(a) Declaration of Trust*
(b) By-Laws*
Reference is made to Articles III and V of the Registrant's Declaration
(c) of Trust
(d) Not Applicable
(e) Not Applicable
(f) Reference is made to the section entitled "Management of the Trust" in
the Registrant's Statement of Additional Information
(g) Custodian Agreement*
(h) Amended and Restated Funds' Service Agreement*
(i) Legal Opinion*
(j) Consent of Independent Accountants**
(k) Not Applicable
(l) Not Applicable
(m) Not Applicable
(n) Financial Data Schedule**
(o) Rule 18f-3 Plan*
</TABLE>
- --------
*Filed Previously
**Filed Herewith
Item 24. Persons Controlled by or under Common Control with The Trust
Registrant is not controlled by or under common control with any person.
Item 25. Indemnification
The Registrant's organizational documents contain provisions indemnifying
Trustees and Officers against liability incurred in their official capacity.
Article VII, Section 2 of the Declaration of Trust provides that the Regis-
trant may indemnify and hold harmless each and every Trustee and Officer from
and against any and all claims, demands, costs, losses, expenses, and damages
whatsoever arising out of or related to the performance of his or her duties
as a Trustee or Officer. However, this provision does not cover any liability
to which a Trustee or Officer would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office. Article VI of the By-Laws gener-
ally provides that the Registrant shall indemnify its Trustees and Officers
from any liability arising out of their past or present service in that capac-
ity. Among other things, this provision excludes any liability arising by rea-
son of willful misfeasance, bad faith, gross negligence, or the reckless dis-
regard of the duties involved in the conduct of the Trustee's or Officer's
office with the Registrant.
Item 26. Business and Other Connections of the Investment Adviser
Investment advisory services are provided to the Registrant on an at-cost
basis by The Vanguard Group, Inc., a jointly-owned subsidiary of the Regis-
trant and the other Trusts in the Group. See the information concerning The
Vanguard Group set forth in Parts A and B. For information as to any other
business, vocation, or employment of a substantial nature in which each
trustee or officer of the Registrant's investment advisor is or has been en-
gaged for his own account or in the capacity of trustee, officer, employee, or
partner reference is made to Form ADV (File #801-11953) filed by it under the
Investment Advisers Act of 1940.
C-1
<PAGE>
Item 27. Principal Underwriters
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
Item 28. Location of Accounts and Records
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the Rules thereunder will be maintained at the of-
fices of Registrant; Registrant's Transfer Agent, The Vanguard Group, Inc.,
Valley Forge, Pennsylvania 19482; and the Registrant's Custodians, State
Street Bank and Trust Company, Boston, Massachusetts 02105, and The Chase Man-
hattan Bank, Brooklyn, New York 11245.
Item 29. Management Services
Other than as set forth under the description of The Vanguard Group in Part
B of this Registration Statement, Registrant is not a party to any management-
related service contract.
Item 30. Undertakings
Not Applicable
C-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Invest-
ment Company Act of 1940, the Registrant hereby certifies that it meets all
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this Regis-
tration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Town of Valley Forge and the Commonwealth of Pennsyl-
vania, on the 29th day of April, 1999.
Vanguard Bond Index Funds
(Heidi Stam)
By: _________________________________
John J. Brennan*,
Chairman of the Board,
and Chief Executive Officer and
Trustee
Pursuant to the requirements of the Securities Act of 1933, this Post-Effec-
tive Amendment to the Registration Statement has been signed below by the fol-
lowing persons in the capacities and on the date indicated:
Signatures Title Date
(Heidi Stam) Senior Chairman of the
By: _________________________________ Board and Trustee April 29, 1999
John C. Bogle*,
(Heidi Stam)
By: _________________________________ Chairman, Trustee and April 29, 1999
John J. Brennan*, Chief Executive
Officer
(Heidi Stam) Trustee
By: _________________________________ April 29, 1999
JoAnn Heffernan Heisen*,
(Heidi Stam) Trustee
By: _________________________________ April 29, 1999
Bruce K. MacLaury*,
(Heidi Stam) Trustee
By: _________________________________ April 29, 1999
Burton G. Malkiel*,
(Heidi Stam) Trustee
By: _________________________________ April 29, 1999
Alfred M. Rankin, Jr.*,
(Heidi Stam) Trustee
By: _________________________________ April 29, 1999
John C. Sawhill*,
(Heidi Stam) Trustee
By: _________________________________ April 29, 1999
James O. Welch, Jr.*,
(Heidi Stam) Trustee
By: _________________________________ April 29, 1999
J. Lawrence Wilson*,
(Heidi Stam) Treasurer and
By: _________________________________ Principal Financial April 29, 1999
Thomas J. Higgins*, Officer and
Accounting Officer
- --------
* By Power of Attorney. See 1933 Act File Number 33-4424, filed on January 25,
1999. Incorporated by Reference.
<PAGE>
VANGUARD BOND INDEX FUNDS
EXHIBIT INDEX
<TABLE>
<S> <C>
Consent of Independent Accountants..................................... EX-99.BJ
Financial Data Schedule................................................ EX-99.BN
</TABLE>
<PAGE>
EX-99.BJ
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 20 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated February 2, 1999, relating to the financial
statements and financial highlights appearing in the December 31, 1998 Annual
Report to Shareholders of Vanguard Bond Index Funds, which are also incorpo-
rated by reference into the Registration Statement. We also consent to the
references to us under the heading "Financial Highlights" in the Prospectuses
and under the headings "Financial Statements" and "Service Providers -- Inde-
pendent Accountants" in the Statement of Additional Information.
PricewaterhouseCoopers LLP
Philadelphia, PA
April 22, 1999
<PAGE>
[ARTICLE] 6
[CIK] 0000794105
[NAME] VANGUARD BOND INDEX FUNDS
[SERIES]
[NUMBER] 02
[NAME] VANGUARD SHORT-TERM BOND INDEX FUND
[MULTIPLIER] 1,000
[CURRENCY] US
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] DEC-31-1998
[EXCHANGE-RATE] 1
[INVESTMENTS-AT-COST] 689,633
[INVESTMENTS-AT-VALUE] 696,673
[RECEIVABLES] 27,892
[ASSETS-OTHER] 126
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 724,691
[PAYABLE-FOR-SECURITIES] 13,894
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1,877
[TOTAL-LIABILITIES] 15,771
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 699,229
[SHARES-COMMON-STOCK] 70,217
[SHARES-COMMON-PRIOR] 44,613
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 2,651
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 7,040
[NET-ASSETS] 708,920
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 33,737
[OTHER-INCOME] 23
[EXPENSES-NET] 1,170
[NET-INVESTMENT-INCOME] 32,590
[REALIZED-GAINS-CURRENT] 6,344
[APPREC-INCREASE-CURRENT] 2,874
[NET-CHANGE-FROM-OPS] 41,808
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 32,590
[DISTRIBUTIONS-OF-GAINS] 4,414
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 37,200
[NUMBER-OF-SHARES-REDEEMED] 14,760
[SHARES-REINVESTED] 3,165
[NET-CHANGE-IN-ASSETS] 262,651
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 721
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 69
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 1,172
[AVERAGE-NET-ASSETS] 575,288
[PER-SHARE-NAV-BEGIN] 10.00
[PER-SHARE-NII] 0.574
[PER-SHARE-GAIN-APPREC] 0.168
[PER-SHARE-DIVIDEND] 0.574
[PER-SHARE-DISTRIBUTIONS] 0.068
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.10
[EXPENSE-RATIO] 0.20
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE>
[ARTICLE] 6
[CIK] 0000794105
[NAME] VANGUARD BOND INDEX FUNDS
[SERIES]
[NUMBER] 03
[NAME] VANGUARD INTERMEDIATE-TERM BOND INDEX FUND
[MULTIPLIER] 1,000
[CURRENCY] US
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] DEC-31-1998
[EXCHANGE-RATE] 1
[INVESTMENTS-AT-COST] 1,058,428
[INVESTMENTS-AT-VALUE] 1,094,494
[RECEIVABLES] 19,251
[ASSETS-OTHER] 365
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 1,114,110
[PAYABLE-FOR-SECURITIES] 8,320
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 3,374
[TOTAL-LIABILITIES] 11,694
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1,062,249
[SHARES-COMMON-STOCK] 105,143
[SHARES-COMMON-PRIOR] 67,296
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 4,101
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 36,066
[NET-ASSETS] 1,102,416
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 57,371
[OTHER-INCOME] 88
[EXPENSES-NET] 1,819
[NET-INVESTMENT-INCOME] 55,640
[REALIZED-GAINS-CURRENT] 15,703
[APPREC-INCREASE-CURRENT] 14,878
[NET-CHANGE-FROM-OPS] 86,221
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 55,640
[DISTRIBUTIONS-OF-GAINS] 7,583
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 50,863
[NUMBER-OF-SHARES-REDEEMED] 18,083
[SHARES-REINVESTED] 5,067
[NET-CHANGE-IN-ASSETS] 415,834
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (4,019)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 106
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 1,823
[AVERAGE-NET-ASSETS] 894,379
[PER-SHARE-NAV-BEGIN] 10.20
[PER-SHARE-NII] 0.647
[PER-SHARE-GAIN-APPREC] 0.353
[PER-SHARE-DIVIDEND] 0.647
[PER-SHARE-DISTRIBUTIONS] 0.073
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.48
[EXPENSE-RATIO] 0.20
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE>
[ARTICLE] 6
[CIK] 0000794105
[NAME] VANGUARD BOND INDEX FUNDS
[SERIES]
[NUMBER] 04
[NAME] VANGUARD LONG-TERM BOND INDEX FUND
[MULTIPLIER] 1,000
[CURRENCY] US
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] DEC-31-1998
[EXCHANGE-RATE] 1
[INVESTMENTS-AT-COST] 195,560
[INVESTMENTS-AT-VALUE] 207,530
[RECEIVABLES] 4,630
[ASSETS-OTHER] 57
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 212,217
[PAYABLE-FOR-SECURITIES] 1,645
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 547
[TOTAL-LIABILITIES] 2,192
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 197,621
[SHARES-COMMON-STOCK] 18,547
[SHARES-COMMON-PRIOR] 8,157
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 434
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 11,970
[NET-ASSETS] 210,025
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 8,975
[OTHER-INCOME] 0
[EXPENSES-NET] 293
[NET-INVESTMENT-INCOME] 8,682
[REALIZED-GAINS-CURRENT] 1,152
[APPREC-INCREASE-CURRENT] 6,379
[NET-CHANGE-FROM-OPS] 16,213
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 8,682
[DISTRIBUTIONS-OF-GAINS] 810
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 15,843
[NUMBER-OF-SHARES-REDEEMED] 6,180
[SHARES-REINVESTED] 727
[NET-CHANGE-IN-ASSETS] 122,073
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 92
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 16
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 295
[AVERAGE-NET-ASSETS] 145,460
[PER-SHARE-NAV-BEGIN] 10.78
[PER-SHARE-NII] 0.666
[PER-SHARE-GAIN-APPREC] 0.588
[PER-SHARE-DIVIDEND] 0.666
[PER-SHARE-DISTRIBUTIONS] 0.048
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 11.32
[EXPENSE-RATIO] 0.20
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE>
[ARTICLE] 6
[CIK] 0000794105
[NAME] VANGUARD BOND INDEX FUNDS
[SERIES]
[NUMBER] 011
[NAME] VANGUARD TOTAL BOND MARKET INDEX FUND - INVESTOR SHARES
[MULTIPLIER] 1,000
[CURRENCY] US
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] DEC-31-1998
[EXCHANGE-RATE] 1
[INVESTMENTS-AT-COST] 9,983,817
[INVESTMENTS-AT-VALUE] 10,292,571
[RECEIVABLES] 492,117
[ASSETS-OTHER] 1,773
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 10,786,461
[PAYABLE-FOR-SECURITIES] 483,475
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 44,961
[TOTAL-LIABILITIES] 528,436
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 9,934,370
[SHARES-COMMON-STOCK] 756,128
[SHARES-COMMON-PRIOR] 508,189
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 14,901
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 308,754
[NET-ASSETS] 10,258,025
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 517,286
[OTHER-INCOME] 246
[EXPENSES-NET] 14,769
[NET-INVESTMENT-INCOME] 502,763
[REALIZED-GAINS-CURRENT] 65,401
[APPREC-INCREASE-CURRENT] 101,026
[NET-CHANGE-FROM-OPS] 669,190
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 385,446
[DISTRIBUTIONS-OF-GAINS] 28,406
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 334,291
[NUMBER-OF-SHARES-REDEEMED] 122,914
[SHARES-REINVESTED] 36,562
[NET-CHANGE-IN-ASSETS] 3,500,581
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (12,869)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 984
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 14,787
[AVERAGE-NET-ASSETS] 6,345,531
[PER-SHARE-NAV-BEGIN] 10.09
[PER-SHARE-NII] 0.624
[PER-SHARE-GAIN-APPREC] 0.218
[PER-SHARE-DIVIDEND] 0.624
[PER-SHARE-DISTRIBUTIONS] 0.038
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.27
[EXPENSE-RATIO] 0.20
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE>
[ARTICLE] 6
[CIK] 0000794105
[NAME] VANGUARD BOND INDEX FUNDS
[SERIES]
[NUMBER] 012
[NAME] VANGUARD TOTAL BOND MARKET INDEX FUND - INSTITUTIONAL SHARES
[MULTIPLIER] 1,000
[CURRENCY] US
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] DEC-31-1998
[EXCHANGE-RATE] 1
[INVESTMENTS-AT-COST] 9,983,817
[INVESTMENTS-AT-VALUE] 10,292,571
[RECEIVABLES] 492,117
[ASSETS-OTHER] 1,773
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 10,786,461
[PAYABLE-FOR-SECURITIES] 483,475
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 44,961
[TOTAL-LIABILITIES] 528,436
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 9,934,370
[SHARES-COMMON-STOCK] 242,803
[SHARES-COMMON-PRIOR] 161,306
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 14,901
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 308,754
[NET-ASSETS] 10,258,025
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 517,286
[OTHER-INCOME] 246
[EXPENSES-NET] 14,769
[NET-INVESTMENT-INCOME] 502,763
[REALIZED-GAINS-CURRENT] 65,401
[APPREC-INCREASE-CURRENT] 101,026
[NET-CHANGE-FROM-OPS] 669,190
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 117,317
[DISTRIBUTIONS-OF-GAINS] 8,371
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 107,590
[NUMBER-OF-SHARES-REDEEMED] 36,368
[SHARES-REINVESTED] 10,275
[NET-CHANGE-IN-ASSETS] 3,500,581
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (12,869)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 984
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 14,787
[AVERAGE-NET-ASSETS] 1,908,146
[PER-SHARE-NAV-BEGIN] 10.09
[PER-SHARE-NII] 0.635
[PER-SHARE-GAIN-APPREC] 0.218
[PER-SHARE-DIVIDEND] 0.635
[PER-SHARE-DISTRIBUTIONS] 0.038
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.27
[EXPENSE-RATIO] 0.10
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
