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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 33-6001) UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 27
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 29
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
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
ON APRIL 28, 2000 PURSUANT TO PARAGRAPH (B) OF RULE 485.
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<PAGE>
VANGUARD(R)
BOND INDEX FUNDS
Prospectus
April 28, 2000
This prospectus contains
financial data for the
Funds through the
fiscal year ended
December 31, 1999.
VANGUARD TOTAL BOND
MARKET INDEX FUND
VANGUARD SHORT-TERM
BOND INDEX FUND
VANGUARD INTERMEDIATE-
TERM BOND INDEX FUND
VANGUARD LONG-TERM
BOND INDEX FUND
[MEMBERS OF
THE VANGUARD GROUP LOGO]
<PAGE>
VANGUARD BOND INDEX FUNDS
Prospectus
April 28, 2000
A Group of Bond Index Mutual Funds
<TABLE>
<CAPTION>
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CONTENTS
<S> <C>
1 AN INTRODUCTION TO INDEX FUNDS 22 DIVIDENDS, CAPITAL GAINS, AND TAXES
2 FUND PROFILES 24 SHARE PRICE
2 Vanguard Short-Term Bond Index 25 FINANCIAL HIGHLIGHTS
Fund
28 INVESTING WITH VANGUARD
5 Vanguard Short-Term Bond Index
Fund 28 Service and Account Features
8 Vanguard Intermediate-Term Bond 29 Types of Accounts
Index Fund
30 Buying Shares
11 Vanguard Long-Term Bond Index
Fund 32 Redeeming Shares
14 MORE ON THE FUNDS 36 Transferring Registration
21 THE FUNDS AND VANGUARD 36 Fund and Account Updates
21 INVESTMENT ADVISER GLOSSARY (inside back cover)
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</TABLE>
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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.
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IMPORTANT NOTE
The Total Bond Market Index Fund offers two separate classes of shares: Investor
and Institutional. This prospectus offers the Fund's Investor Shares, which have
an investment minimum of $3,000 ($1,000 for IRAs) and are intended for
individual investors. Please call Vanguard's Institutional Investor Group at
1-800-523-1036 to obtain a separate prospectus that offers the Fund's
Institutional Shares, which have an investment minimum of $10 million and
generally are not available to investors who require special employee benefit
plan services
The Fund's separate share classes have different expenses; as a result,
their investment performances will vary. UNLESS OTHERWISE NOTED, ALL REFERENCES
IN THIS PROSPECTUS TO FEES, EXPENSES, AND INVESTMENT PERFORMANCE RELATE
SPECIFICALLY TO INVESTOR SHARES.
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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 the investment performance of a particular market. 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 AS
CLOSELY AS POSSIBLE--WILL TYPICALLY 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 do not have active managers, who buy and sell securities based
on research and analysis. Rather, index funds are passively managed. To the
extent they invest in securities that are not in the index, they may be viewed
as enhanced or actively managed. The more the securities outside the index are
like those inside the index (e.g., for bond funds in terms of sector, credit
quality, etc.), the more likely that the funds will track their target index.
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 The overall bond market
Vanguard Short-Term Bond Index Short-term bonds
Vanguard Intermediate-Term Bond Index Intermediate-term bonds
Vanguard Long-Term Bond Index 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(R) 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 public
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 1 year.
The Fund invests at least 80% of its total assets in bonds represented in
the Index. The remainder of its assets may be invested outside the Index, in
securities whose characteristics and risks are similar to those in the Index. To
the extent that the Fund invests outside the Index, it may employ active
management strategies. The Index and non-Index securities, in combination, will
have characteristics and risks similar to the Index. The Fund maintains a
dollar-weighted average maturity of between 5 and 10 years. 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 bond funds, and
greatest for longer-term bond funds.
- - 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
bond funds, and lower for long-term bond funds.
- - 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 because the underlying mortgages have been
paid off ahead of schedule. If this were to occur, the Fund would lose the
opportunity for additional price appreciation, and would be forced to
reinvest the unanticipated proceeds at lower interest rates. As a result,
the Fund would experience a decline in income.
- - Index sampling risk, which is the chance that the securities selected for
the Fund do not provide investment performance matching that of the Index.
Index sampling risk for the Fund should be low.
PERFORMANCE/RISK INFORMATION
The following bar chart and table provide an indication of the risks 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 total 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.
<PAGE>
3
----------------------------------------------------
ANNUAL TOTAL RETURNS*
----------------------------------------------------
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%
1999 -0.76%
----------------------------------------------------
*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 6.01% (quarter ended June 30, 1995) and the lowest return for a
quarter was -2.71% (quarter ended March 31, 1994).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
-------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund* -0.76% 7.62% 7.54%
Lehman Brothers Aggregate Bond Index -0.82 7.73 7.70
-------------------------------------------------------------------------
*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 may 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, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: 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: 0.17%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
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 dividend that month is less than the fee,
fractional shares will be automatically redeemed to make up the difference.
<PAGE>
4
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.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are declared daily and $3,000; $1,000 for IRAs and custodial
distributed on the first business day of accounts
each month; capital gains, if any, are for minors
distributed annually in December
NEWSPAPER ABBREVIATION
INVESTMENT ADVISER TotBd
The Vanguard Group, Valley Forge, Pa.,
since inception VANGUARD FUND NUMBER
084
INCEPTION DATE CUSIP NUMBER
December 11, 1986 921937108
NET ASSETS (ALL SHARE CLASSES) AS OF TICKER SYMBOL
DECEMBER 31, 1999 VBMFX
$12.68 billion
SUITABLE FOR IRAS
Yes
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<PAGE>
5
FUND PROFILE--VANGUARD (R) 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 sample 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 1 and 5 years.
The Fund invests at least 65% of its total assets in bonds represented in
the Index. The remainder of its assets may be invested outside the Index, in
bonds whose characteristics--including maturity, credit quality, and issuer
type--are similar to those of the Index. To the extent that the Fund invests
outside the Index, it may employ active management strategies. The Index and
non-Index securities, in combination, will have characteristics and risks
similar to the Index. The Fund maintains a dollar-weighted average maturity of
between 1 and 5 years. 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 low for short-term bond funds.
- - 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
bond funds than for long-term bond funds.
- - 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.
- - Index sampling risk, which is the chance that the securities selected for
the Fund do not provide investment performance matching that of the Index.
Index sampling risk for the Fund should be low.
PERFORMANCE/RISK INFORMATION
The following bar chart and table 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 total returns for
one and five calendar years 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.
<PAGE>
6
----------------------------------------------------
ANNUAL TOTAL RETURNS*
----------------------------------------------------
1995 12.88%
1996 4.55%
1997 7.04%
1998 7.63%
1999 2.08%
----------------------------------------------------
*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 -0.29% (quarter ended June 30, 1994).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
SINCE
1 YEAR 5 YEARS INCEPTION*
-------------------------------------------------------------------------
Vanguard Short-Term Bond Index Fund** 2.08% 6.77% 5.71%
Lehman Brothers 1-5 Year Government/
Corporate Bond Index 2.09 6.82 5.78
-------------------------------------------------------------------------
* 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 may 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, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: 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: 0.17%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
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 dividend 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
<PAGE>
7
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.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are declared daily and $3,000; $1,000 for IRAs and custodial
distributed on the first business day of accounts
each month; capital gains, if any, are for minors
distributed annually in December
NEWSPAPER ABBREVIATION
INVESTMENT ADVISER STBond
The Vanguard Group, Valley Forge, Pa.,
since inception VANGUARD FUND NUMBER
132
INCEPTION DATE CUSIP NUMBER
March 1, 1994 921937207
NET ASSETS AS OF DECEMBER 31, 1999 TICKER SYMBOL
$1.16 billion VBISX
SUITABLE FOR IRAS
Yes
- --------------------------------------------------------------------------------
<PAGE>
8
FUND PROFILE--VANGUARD(R) 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 sample 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 5 and 10 years.
The Fund invests at least 65% of its total assets in bonds represented in
the Index. The remainder of its assets may be invested outside the Index, in
bonds whose characteristics and risks--including maturity, credit quality, and
issuer type--are similar to those of the Index. To the extent the Fund invests
outside the Index, it may employ active management strategies. The Index and
non-Index securities, in combination, will have characteristics and risks
similar to the Index. The Fund maintains a dollar-weighted average maturity of
between 5 and 10 years. 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 bond funds.
- - 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 bond funds.
- - 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.
- - Index sampling risk, which is the chance that the securities selected for
the Fund do not provide investment performance matching that of the Index.
Index sampling risk for the Fund should be low.
PERFORMANCE/RISK INFORMATION
The following bar chart and table 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 total returns for
one and five calendar years 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.
<PAGE>
9
----------------------------------------------------
ANNUAL TOTAL RETURNS*
----------------------------------------------------
1995 21.07%
1996 2.55%
1997 9.41%
1998 10.09%
1999 -3.00%
----------------------------------------------------
*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).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
SINCE
1 YEAR 5 YEARS INCEPTION*
-------------------------------------------------------------------------
Vanguard Intermediate-Term Bond Index
Fund** -3.00% 7.72% 6.05%
Lehman Brothers 5-10 Year Government/
Corporate Bond Index -2.88 7.86 6.15
-------------------------------------------------------------------------
* 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 may 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, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: 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: 0.17%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
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 per year. If your dividend that month is less than the fee,
fractional shares will be automatically redeemed to make up the
difference.
<PAGE>
10
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.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are declared daily and $3,000; $1,000 for IRAs and custodial
distributed on the first business day of accounts
each month; capital gains, if any, are for minors
distributed annually in December
NEWSPAPER ABBREVIATION
INVESTMENT ADVISER ITBond
The Vanguard Group, Valley Forge, Pa.,
VANGUARD FUND NUMBER
since inception 314
INCEPTION DATE CUSIP NUMBER
March 1, 1994 921937306
NET ASSETS AS OF DECEMBER 31, 1999 TICKER SYMBOL
$1.45 billion VBIIX
SUITABLE FOR IRAS
Yes
- --------------------------------------------------------------------------------
<PAGE>
11
FUND PROFILE--VANGUARD(R) 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 sample 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 invests at least 65% of its total assets in bonds represented in
the Index. The remainder of its assets may be invested outside the Index, in
bonds whose characteristics--including maturity, credit quality, and issuer
type--are similar to those of the Index. To the extent that the Fund invests
outside the Index, it may employ active management strategies. The Index and
non-Index securities, in combination, will have characteristics and risks
similar to the Index. The Fund maintains a dollar-weighted average maturity of
between 20 and 30 years. 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 bond funds.
- - Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally lower for long-term bond
funds than for short-term bond funds.
- - 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.
- - Index sampling risk, which is the chance that the securities selected for
the Fund do not provide investment performance matching that of the Index.
Index sampling risk for the Fund should be low.
PERFORMANCE/RISK INFORMATION
The following bar chart and table 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 total returns for
one and five calendar years 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.
<PAGE>
12
----------------------------------------------------
ANNUAL TOTAL RETURNS*
----------------------------------------------------
1995 29.72%
1996 -0.26%
1997 14.30%
1998 11.98%
1999 -7.85%
----------------------------------------------------
*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).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
SINCE
1 YEAR 5 YEARS INCEPTION*
-------------------------------------------------------------------------
Vanguard Long-Term Bond Index Fund** -7.85% 8.82% 6.66%
Lehman Brothers Long Government/
Corporate Bond Index -7.65 8.99 6.78
-------------------------------------------------------------------------
* 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 may 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, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: 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 Fee: None
Other Expenses: 0.04%
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 per year. If your dividend that month is less than the fee,
fractional shares will be automatically redeemed to make up the
difference.
<PAGE>
13
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.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are declared daily and $3,000; $1,000 for IRAs and custodial
distributed on the first business day of accounts
each month; capital gains, if any, are for minors
distributed annually in December
NEWSPAPER ABBREVIATION
INVESTMENT ADVISER LTBond
The Vanguard Group, Valley Forge, Pa.,
since inception VANGUARD FUND NUMBER
522
INCEPTION DATE CUSIP NUMBER
March 1, 1994 921937405
NET ASSETS AS OF DECEMBER 31, 1999 TICKER SYMBOL
$313 million VBLTX
SUITABLE FOR IRAS
Yes
- --------------------------------------------------------------------------------
<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, account maintenance fee, 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:
- - Variety of investments. Vanguard index funds generally invest in a wide
variety of companies and industries.
- - Relative performance consistency. Because they seek to track market
benchmarks, index funds by definition should not perform dramatically
better or worse than their target indexes.
- - Low cost. Index funds are inexpensive to run as compared to actively
managed funds. They have lower research costs and keep trading activity,
and thus trading costs, to a minimum.
INDEXING METHODS
In seeking to track a particular index, an index 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 impractical to buy and sell all of the securities held in certain
indexes (the Lehman Brothers Aggregate Bond Index, for example, included more
than 5,500 bonds as of December 31, 1999), many 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
duration, cash flow distribution, sector and quality weights, 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,
and the number of bonds in each Fund's target index as of December 31, 1999.
- --------------------------------------------------------------------------------
FUND NUMBER OF BONDS HELD NUMBER OF BONDS IN TARGET INDEX
- --------------------------------------------------------------------------------
Total Bond Market Index 721 5,545
Short-Term Bond Index 270 1,874
Intermediate-Term Bond Index 192 1,415
Long-Term Bond Index 190 1,385
- --------------------------------------------------------------------------------
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. For the
Total Bond Market Index and Short-Term Bond Index Funds, this normally involves
substituting corporate bonds for gov-
<PAGE>
15
ernment bonds of the same maturity. The corporate substitution strategy
increases a Fund's income, but also marginally increases exposure to credit
risk, which is explained on page 17. The Funds limit corporate substitutions to
bonds with less than approximately 4 years' remaining maturity, and each Fund
will limit corporate substitutions to approximately 15% of its net assets.
SECURITY SELECTION
The Total Bond Index Fund invests at least 80% of its total assets in securities
included in its target index. The other Funds invest at least 65% of their total
assets in securities included in their target indexes. Each Fund's target index
is actually a subset of the Lehman Brothers Aggregate Bond Index (except for the
Total Bond Index Fund, whose target index is 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
over 1 year.
As of December 31, 1999, each Fund's target index was composed of the
following types of bonds:
- --------------------------------------------------------------------------------
TARGET INDEX COMPOSITION
------------------------------------
INTERNATIONAL
U.S. MORTGAGE- DOLLAR-
FUND GOVERNMENT CORPORATE BACKED DENOMINATED TOTAL
- --------------------------------------------------------------------------------
Total Bond Market Index 41.6% 18.2% 35.6% 4.6% 100%
Short-Term Bond Index 74.0 20.3 0.0 5.7 100
Intermediate-Term Bond Index 52.5 35.5 0.0 12.0 100
Long-Term Bond Index 63.6 30.2 0.0 6.2 100
- --------------------------------------------------------------------------------
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
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 securi-
<PAGE>
16
ties 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-backed 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
ADDITIONAL RISK INFORMATION
The Funds are subject to several risks associated with investments in bonds.
[FLAG] EACH FUND IS SUBJECT TO 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 LOW FOR SHORTER-TERM BOND
FUNDS, MODERATE FOR INTERMEDIATE-TERM BOND FUNDS, AND HIGH FOR LONGER-TERM
BOND FUNDS.
Changes in interest rates will affect bond income as well as bond prices.
[FLAG] EACH FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE 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,
<PAGE>
17
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 THE
VALUE OF A $1,000 BOND
- -------------------------------------------------------------------------------
AFTER A 1% AFTER A 1% AFTER A 2% AFTER A 2%
TYPE OF BOND (MATURITY) INCREASE DECREASE INCREASE DECREASE
- -------------------------------------------------------------------------------
Short-Term (2.5 years) $978 $1.023 $956 $1,046
Intermediate-Term (10 years) 932 1,074 870 1,156
Long-Term (20 years) 901 1,116 816 1,251
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 more
than 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.
- --------------------------------------------------------------------------------
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.
[FLAG] BECAUSE IT INVESTS IN MORTGAGE-BACKED SECURITIES, THE TOTAL BOND MARKET
INDEX FUND IS SUBJECT TO PREPAYMENT RISK, WHICH IS THE CHANCE 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.
<PAGE>
18
[FLAG] EACH FUND IS SUBJECT TO CREDIT RISK, WHICH IS THE CHANCE THAT A BOND
ISSUER WILL FAIL TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER.
- --------------------------------------------------------------------------------
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." The Funds' Statement of
Additional Information includes a detailed description of the credit-rating
scales used by major, independent bond-rating agencies.
- --------------------------------------------------------------------------------
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, 1999.
--------------------------------------------------------------
AVERAGE CREDIT QUALITY
--------------------------------------
FUND FUND'S HOLDINGS TARGET INDEX
--------------------------------------------------------------
Total Bond Market Index Aa1 Aaa
Short-Term Bond Index Aa1 Aaa
Intermediate-Term Bond Index Aa2 Aaa
Long-Term Bond Index Aa1 Aaa
--------------------------------------------------------------
[FLAG] EACH FUND IS SUBJECT TO INDEX SAMPLING RISK, WHICH IS THE CHANCE THAT THE
SECURITIES SELECTED FOR A FUND DO NOT PROVIDE INVESTMENT PERFORMANCE
MATCHING THAT OF THE INDEX. INDEX SAMPLING RISK FOR EACH FUND SHOULD BE
LOW.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
The Funds are generally managed without regard to tax ramifications.
<PAGE>
19
To help you distinguish between the Funds and their various risks, a
summary table is provided below.
- --------------------------------------------------------------------------------
RISKS OF THE FUNDS
---------------------------------------------
INCOME INTEREST PREPAYMENT/CALL CREDIT
FUND RISK RATE RISK RISK RISK
- --------------------------------------------------------------------------------
Total Bond Market Index Moderate Moderate Moderate Low
Short-Term Bond Index High Low Low Low
Intermediate-Term Bond Index Moderate Moderate Low Low
Long-Term Bond Index Low High Low 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. This fee cannot be prepaid.
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. A purchase request could be rejected
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 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.
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.
<PAGE>
20
- --------------------------------------------------------------------------------
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. As of December 31, 1999, the average turnover rate for
passively managed domestic bond funds was roughly 68%; for all domestic bond
funds, the average turnover rate was approximately 150%, according to
Morningstar, Inc.
- --------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in fixed-income securities comprising its target index, each
Fund may invest up to 35% of its total assets, (20% in the case of the Total
Bond Market Index Fund,) in fixed-income securities not in the target index. The
Funds may purchase non-public, investment-grade securities, generally referred
to as 144A securities, as well as smaller public issues or medium-term notes not
included in the index due to the small size of the issue. The vast majority of
these securities will have characteristics and risks similar to those in the
target indexes. The Short-Term, Intermediate-Term, and Long-Term Bond Index
Funds may also purchase securities that are outside of their target indexes, but
are within the larger Lehman Brothers Aggregate Bond Index. Each Fund may also
purchase money market instruments and certain derivatives in order to manage
cash flow into and out of the Fund, reduce the Fund's transaction costs, or add
value when these instruments are favorably priced.
- --------------------------------------------------------------------------------
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). Some
futures and options ^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.
- --------------------------------------------------------------------------------
[FLAG] 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. Each Fund's obligation to purchase securities under
futures con tracts will not exceed 20% of its total assets. The reasons for
which a Fund will invest in futures and options are:
<PAGE>
21
- - 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
cashflow 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 funds holding assets with more
than $540 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1975, serves as the Funds' adviser through its Fixed Income Group. As of
December 31, 1999, Vanguard served as adviser for about $371.4 billion in
assets. Vanguard manages the Funds on an at-cost basis, subject to the control
of the Trustees and officers of the Funds. For the fiscal year ended December
31, 1999, the Funds paid advisory fees at an effective annual rate (applied to
the average daily net assets of each Fund) of less than 0.01%.
The Funds have authorized Vanguard 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 with respect to all
transactions. The Funds may direct Vanguard to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Funds.
<PAGE>
22
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUNDS' ADVISER
The individuals responsible for overseeing the Funds' investments are:
IAN A. MACKINNON, Managing Director of Vanguard and head of Vanguard's Fixed
Income Group; 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.
FELIX B. LIM, Fund Manager of the Short-Term and Long-Term Bond Index Funds
since January 2000; has worked in investment management since completing his
education in 1996; worked as credit analyst until January 2000; joined Vanguard
in January 1999; B.A. and M.S., University of Pennsylvania (Wharton School).
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
Each Fund distributes to shareholders virtually all of its net income (interest
less expenses), as well as any capital gains realized from the sale of its
holdings. The Fund's income dividends accrue daily and are distributed on the
first business day of every month; 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 dividends or capital gains in cash, or you
can have them automatically reinvested in more shares of the Fund.
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- - Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
- - Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
- - Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
- - Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- - Capital gains distributions may vary considerably from year to year as a
result of the Funds' normal investment activities and cash flows.
- - A sale or exchange of Fund shares 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.
<PAGE>
23
- - Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes. Depending on your state's rules, however, any
dividends attributable to interest earned on direct obligations of the U.S.
Treasury may be exempt from state and local taxes. Vanguard will notify you
each year how much, if any, of your dividends may qualify for this
exemption.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
- - provide us with your correct taxpayer identification number;
- - certify that the taxpayer identification number is correct; and
- - confirm that you are not subject to backup withholdings.
Similarly, Vanguard must withhold from your account if the IRS instructs us
to do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
- --------------------------------------------------------------------------------
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 that the fund earns from its money market and bond investments.
The portion of such dividends that are exempt from federal income tax will be
designated as "exempt-interest dividends." 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 one year or less, or more than one year.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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>
24
SHARE PRICE
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when 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:
NET ASSET VALUE = TOTAL ASSETS - LIABILITIES
-------------------------------
NUMBER OF SHARES OUTSTANDING
The Total Bond Market Index Fund, which offers two classes of shares,
computes a separate net asset value for each share class. This is done 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>
25
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years, 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 Fund's 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.
- --------------------------------------------------------------------------------
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 1999 with a net asset value (price) of $10.27 per
share. During the year, the Fund earned $0.617 per share from investment income
(interest and dividends). There was a decline of $0.695 per share in the value
of investments held or sold by the Fund.
Shareholders received $0.632 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 dividend or capital gains.
The earnings decline ($0.078 per share) minus the distributions ($0.632 per
share) resulted in a share price of $9.56 at the end of the year. This was a
decrease of $0.71 per share (from $10.27 at the beginning of the year to $9.56
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 -0.76% for the
year.
As of December 31, 1999, the Fund had $9.48 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 6.26% of its average net assets. It sold and
replaced securities valued at 55% of its net assets.
- --------------------------------------------------------------------------------
<PAGE>
26
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
VANGUARD TOTAL BOND MARKET INDEX FUND
INVESTOR SHARES
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.27 $10.09 $9.84 $10.14 $ 9.17
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .617 .624 .645 .640 .650
Net Realized and Unrealized Gain (Loss) on
Investments (.695) .218 .250 (.300) .970
-----------------------------------------------------------------
Total from Investment Operations (.078) .842 .895 .340 1.620
-----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.617) (.624) (.645) (.640) (.650)
Distributions from Realized Capital Gains (.015) (.038) -- -- --
-----------------------------------------------------------------
Total Distributions (.632) (.662) (.645) (.640) (.650)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 9.56 $10.27 $10.09 $ 9.84 $10.14
===================================================================================================================
TOTAL RETURN* -0.76% 8.58% 9.44% 3.58% 18.18%
===================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $9,477 $7,765 $5,129 $2,962 $2,405
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to
Average Net Assets 6.26% 6.10% 6.54% 6.54% 6.66%
Turnover Rate 55% 57%** 39% 39% 36%
===================================================================================================================
</TABLE>
*Total return figures do not reflect the annual account maintenance fee of $10.
**Turnover rate excluding in-kind redemptions was 56%.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
VANGUARD SHORT-TERM BOND INDEX FUND
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.10 $10.00 $ 9.92 $10.07 $ 9.50
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .539 .574 .597 .587 .623
Net Realized and Unrealized Gain (Loss) on
Investments (.336) .168 .080 (.146) .570
------------------------------------------------------------
Total from Investment Operations .203 .742 .677 .441 1.193
-----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.539) (.574) (.597) (.587) (.623)
Distributions from Realized Capital Gains (.034) (.068) -- (.004) --
------------------------------------------------------------
Total Distributions (.573) (.642) (.597) (.591) (.623)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 9.73 $10.10 $10.00 $ 9.92 $10.07
===================================================================================================================
TOTAL RETURN* 2.08% 7.63% 7.04% 4.55% 12.88%
===================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $1,156 $709 $446 $328 $208
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to
Average Net Assets 5.48% 5.68% 6.03% 5.93% 6.28%
Turnover Rate 108% 112% 88% 65% 65%
===================================================================================================================
</TABLE>
*Total return figures do not reflect the annual account maintenance fee of $10.
<PAGE>
27
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
VANGUARD INTERMEDIATE-TERM BOND
INDEX FUND
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.48 $10.20 $ 9.96 $10.37 $ 9.18
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .628 .647 .661 .648 .661
Net Realized and Unrealized Gain (Loss) on
Investments (.936) .353 .240 (.406) 1.217
------------------------------------------------------------
Total from
Investment Operations (.308) 1.000 .901 .242 1.878
------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.628) (.647) (.661) (.648) (.661)
Distributions from
Realized Capital Gains (.034) (.073) -- (.004) (.027)
------------------------------------------------------------
Total Distributions (.662) (.720) (.661) (.652) (.688)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 9.51 $10.48 $10.20 $ 9.96 $10.37
===================================================================================================================
TOTAL RETURN* -3.00% 10.09% 9.41% 2.55% 21.07%
===================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $1,449 $1,102 $687 $460 $346
Ratio of Total
Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to
Average Net Assets 6.33% 6.23% 6.64% 6.54% 6.55%
Turnover Rate 120% 77% 56% 80% 71%
===================================================================================================================
</TABLE>
*Total return figures do not reflect the annual account maintenance fee of $10.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
VANGUARD LONG-TERM BOND INDEX FUND
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $11.32 $10.78 $10.08 $10.82 $ 8.96
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .662 .666 .678 .674 .692
Net Realized and Unrealized Gain (Loss) on
Investments (1.531) .588 .700 (.731) 1.884
------------------------------------------------------------
Total from Investment Operations (.869) 1.254 1.378 (.057) 2.576
------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.662) (.666) (.678) (.674) (.692)
Distributions from Realized Capital Gains (.019) (.048) -- (.009) (.024)
------------------------------------------------------------
Total Distributions (.681) (.714) (.678) (.683) (.716)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 9.77 $11.32 $10.78 $10.08 $10.82
===================================================================================================================
TOTAL RETURN* -7.85% 11.98% 14.30% -0.26% 29.72
===================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $313 $210 $88 $44 $24
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to
Average Net Assets 6.39% 6.01% 6.66% 6.75% 6.90%
Turnover Rate 61% 57% 58% 46% 45%
===================================================================================================================
</TABLE>
*Total return figures do not reflect the annual account maintenance fee of $10.
"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>
28
- --------------------------------------------------------------------------------
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 [FLAG]. 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 each Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
CHECKWRITING [CHECK]
Method for drawing money from your account by writing a check for $250 or more.
- --------------------------------------------------------------------------------
VANGUARD(R) DIRECT DEPOSIT SERVICE [BOOKLET]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
VANGUARD(R) AUTOMATIC EXCHANGE SERVICE [BOOKLET]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
VANGUARD FUND EXPRESS(R)[BOOKLET]
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 [BOOKLET]
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) [BOOKLET]
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 ex-change shares to and from most
Vanguard funds.
- --------------------------------------------------------------------------------
ACCESS VANGUARD TM www.vanguard.com [COMPUTER]
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 our website. We will then mail you 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.
<PAGE>
29
- - Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
(Some restrictions may apply.) Please call our Client Services Department
for assistance.
*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: 1-800-749-7273
Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------
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 [BOOKLET]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR INDIVIDUAL RETIREMENT ACCOUNTS [BOOKLET]
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 [BOOKLET]
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.
- --------------------------------------------------------------------------------
<PAGE>
30
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 will begin earning dividends
on your investment the following business day.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 fund 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 low balance fee is waived for investors who have aggregate Vanguard
account assets of $50,000 or more.
- --------------------------------------------------------------------------------
BY MAIL TO . . .[ENVELOPE]
open a new account
Complete and sign the account registration 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. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.
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 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
<PAGE>
31
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 . . .[TELEPHONE]
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). (Note that
some restrictions apply to index fund accounts.)
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). (Note that
some restrictions apply to index fund accounts.) 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 available.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
*You must obtain a Personal Identification Number (PIN) through Tele-Account at
least seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you have initiated 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 [WIRE] Call Client
Services to arrange your wire transaction. Wire transactions to retirement
accounts are only available for asset transfers and rollovers from other
financial institutions. Individual IRA contributions will not be accepted by
wire.
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-84;
Vanguard Short-Term Bond Index Fund-132;
Vanguard Intermediate-Term Bond Index Fund-314;
Vanguard Long-Term Bond Index Fund-522
<PAGE>
32
[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. It is our responsibility to consider the interests
of all Fund shareholders, and so we reserve the right to refuse any purchase
that may 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 35.
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 order to exchange into an account with a different registration
(including a different name, address, or taxpayer identification number),
you must include the guaranteed signatures of all current account owners on
your written instructions.
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.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is initiated 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 (sell, but not exchange), or by mail. You can also sell
shares by check.
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, 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.
- --------------------------------------------------------------------------------
<PAGE>
33
- --------------------------------------------------------------------------------
ONLINE REQUESTS
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 our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).
- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [TELEPHONE]
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 this 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 (PIN), if applicable (for instance,
Tele-Account).
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.
- --------------------------------------------------------------------------------
<PAGE>
34
MAIL REQUESTS [ENVELOPE]
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.
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 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 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 [CHECK]
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.
It is our responsibility to consider the interests of all fund shareholders, and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt a Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, each 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 four ways: wire (money market
funds and other daily dividend funds only), check, exchange to another Vanguard
fund, or Fund Express redemption.
- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
<PAGE>
35
- --------------------------------------------------------------------------------
WIRE REDEMPTIONS [WIRE]
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. Eastern time, the wire will arrive at
your bank by the close of business that same day. Requests made by 4 p.m.
Eastern time 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. Eastern time, 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.
- --------------------------------------------------------------------------------
FUND EXPRESS REDEMPTIONS
Vanguard will electronically transfer funds to your pre-linked checking or
savings account.
- --------------------------------------------------------------------------------
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 commercial and savings
banks, credit unions, trust companies, or member firms of a U.S. stock
exchange.
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 A FUND
during any 12-month period.
- - Your round trips through a Fund must be at least 30 days apart.
- - A 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>
36
A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also, a "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 ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- --------------------------------------------------------------------------------
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
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 19482-1110 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
<PAGE>
37
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 your 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
financial 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 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, 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 [BOOKLET]
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 [BOOKLET]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using only 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.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
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.
CREDIT QUALITY
A measure of a bond issuer's ability to pay interest and principal in a timely
manner.
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. Bonds rated in one of the four highest rating categories
are considered "investment grade."
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>
[SHIP]
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard Bond Index Funds, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS TO
SHAREHOLDERS
Additional information about the
Funds' investments is available in
the Funds' annual and semiannual
reports to shareholders.
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 shareholder of
any of the Funds 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:
1-800-749-7273
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, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. 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 electronic request at the
following e-mail address:
[email protected], or by writing
the Public Reference Section,
Securities and Exchange
Commission, Washington, DC
20549-0102.
Funds' Investment Company Act
file number: 811-4681
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P084N-04/28/2000
<PAGE>
VANGUARD(R)
BOND INDEX FUNDS
Participant Prospectus
April 28, 2000
This prospectus contains
financial data for the
Funds through the
fiscal year ended
December 31, 1999.
VANGUARD TOTAL BOND
MARKET INDEX FUND
VANGUARD SHORT-TERM
BOND INDEX FUND
VANGUARD INTERMEDIATE-
TERM BOND INDEX FUND
VANGUARD LONG-TERM
BOND INDEX FUND
<PAGE>
VANGUARD BOND INDEX FUNDS
Participant Prospectus
April 28, 2000
A Group of Bond Index Mutual Funds
- --------------------------------------------------------------------------------
CONTENTS
1 AN INTRODUCTION TO INDEX FUNDS 21 THE FUNDS AND VANGUARD
2 FUND PROFILES 21 INVESTMENT ADVISER
2 Vanguard Total Bond Market Index 22 DIVIDENDS, CAPITAL GAINS, AND TAXES
Fund
23 SHARE PRICE
5 Vanguard Short-Term Bond Index
Fund 23 FINANCIAL HIGHLIGHTS
8 Vanguard Intermediate-Term Bond 27 INVESTING WITH VANGUARD
Index Fund
28 ACCESSING FUND INFORMATION BY
11 Vanguard Long-Term Bond Index COMPUTER
Fund
GLOSSARY (inside back cover)
14 MORE ON THE FUNDS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 offers two separate classes of shares: Investor
and Institutional. This prospectus offers the Fund's Investor Shares to
participants in employer-sponsored retirement or savings plans. Please call
Vanguard to obtain separate prospectuses that offer: n Investor Shares for
private investors ($3,000 minimum)--1-800-662-7447 nInstitutional Shares for
very large investors ($10 million minimum)--1-800-523-1036
The Fund's separate share classes have different expenses; as a result,
their investment performances will vary. UNLESS OTHERWISE NOTED, ALL REFERENCES
IN THIS PROSPECTUS TO FEES, EXPENSES, AND INVESTMENT PERFORMANCE RELATE
SPECIFICALLY TO INVESTOR SHARES.
- -------------------------------------------------------------------------------
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 the investment performance of a particular market. 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 AS
CLOSELY AS POSSIBLE--WILL TYPICALLY 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 do not have active managers, who buy and sell securities based
on research and analysis. Rather, index funds are passively managed. To the
extent they invest in securities that are not in the index, they may be viewed
as enhanced or actively managed. The more the securities outside the index are
like those inside the index (e.g., for bond funds in terms of sector, credit
quality, etc.), the more likely that the funds will track their target index.
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 The overall bond market
Vanguard Short-Term Bond Index Short-term bonds
Vanguard Intermediate-Term Bond Index Intermediate-term bonds
Vanguard Long-Term Bond Index 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(R) 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 public
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 1 year.
The Fund invests at least 80% of its total assets in bonds represented in
the Index. The remainder of its assets may be invested outside the Index, in
securities whose characteristics and risks are similar to those in the Index. To
the extent that the Fund invests outside the Index, it may employ active
management strategies. The Index and non-Index securities, in combination, will
have characteristics and risks similar to the Index. The Fund maintains a
dollar-weighted average maturity of between 5 and 10 years. 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 bond funds, and
greatest for longer-term bond funds.
- - 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
bond funds, and lower for long-term bond funds.
- - 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 because the underlying mortgages have been
paid off ahead of schedule. If this were to occur, the Fund would lose the
opportunity for additional price appreciation, and would be forced to
reinvest the unanticipated proceeds at lower interest rates. As a result,
the Fund would experience a decline in income.
- - Index sampling risk, which is the chance that the securities selected for
the Fund do not provide investment performance matching that of the Index.
Index sampling risk for the Fund should be low.
PERFORMANCE/RISK INFORMATION
The following bar chart and table provide an indication of the risks 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 total 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.
<PAGE>
3
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
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%
1999 -0.76%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 6.01% (quarter ended June 30, 1995) and the lowest return for a
quarter was -2.71% (quarter ended March 31, 1994).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
-------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund -0.76% 7.62% 7.54%
Lehman Brothers Aggregate Bond Index -0.82 7.73 7.70
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may 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, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.17%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
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.
<PAGE>
4
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.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Dividends are declared daily and distributed on TotBd
the first business day of each month; capital
gains, if any, are distributed annually in VANGUARD FUND NUMBER
December 084
INVESTMENT ADVISER CUSIP NUMBER
The Vanguard Group, Valley Forge, Pa., 921937108
since inception
TICKER SYMBOL
INCEPTION DATE VBMFX
December 11, 1986
NET ASSETS (ALL SHARE CLASSES) AS OF
DECEMBER 31, 1999
$12.68 billion
- --------------------------------------------------------------------------------
<PAGE>
5
FUND PROFILE--VANGUARD(R) 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 sample 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 1 and 5 years.
The Fund invests at least 65% of its total assets in bonds represented in the
Index. The remainder of its assets may be invested outside the Index, in bonds
whose characteristics--including maturity, credit quality, and issuer type--are
similar to those of the Index. To the extent that the Fund invests outside the
Index, it may employ active management strategies. The Index and non-Index
securities, in combination, will have characteristics and risks similar to the
Index. The Fund maintains a dollar-weighted average maturity of between 1 and 5
years. 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 low 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 higher for short-term
bond funds than for long-term bond funds.
- - 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.
- - Index sampling risk, which is the chance that the securities selected for
the Fund do not provide investment performance matching that of the Index.
Index sampling risk for the Fund should be low.
PERFORMANCE/RISK INFORMATION
The following bar chart and table 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 total returns for
one and five calendar years 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.
<PAGE>
6
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1995 12.88%
1996 4.55%
1997 7.04%
1998 7.63%
1999 2.08%
----------------------------------------------------
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 -0.29% (quarter ended June 30, 1994).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
SINCE
1 YEAR 5 YEARS INCEPTION*
-------------------------------------------------------------------------
Vanguard Short-Term Bond Index Fund 2.08% 6.77% 5.71%
Lehman Brothers 1-5 Year Government/
Corporate Bond Index 2.09 6.82 5.78
-------------------------------------------------------------------------
* March 1, 1994.
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may 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, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.17%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
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.
<PAGE>
7
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.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Dividends are declared daily and distributed on STBond
the first business day of each month; capital
gains, if any, are distributed annually in VANGUARD FUND NUMBER
December 132
INVESTMENT ADVISER CUSIP NUMBER
The Vanguard Group, Valley Forge, Pa., 921937207
since inception
TICKER SYMBOL
INCEPTION DATE VBISX
March 1, 1994
NET ASSETS AS OF DECEMBER 31, 1999
$1.16 billion
- --------------------------------------------------------------------------------
<PAGE>
8
FUND PROFILE--VANGUARD(R) 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 sample 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 5 and 10 years.
The Fund invests at least 65% of its total assets in bonds represented in
the Index. The remainder of its assets may be invested outside the Index, in
bonds whose characteristics and risks--including maturity, credit quality, and
issuer type--are similar to those of the Index. To the extent the Fund invests
outside the Index, it may employ active management strategies. The Index and
non-Index securities, in combination, will have characteristics and risks
similar to the Index. The Fund maintains a dollar-weighted average maturity of
between 5 and 10 years. 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 bond funds.
- - 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 bond funds.
- - 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.
- - Index sampling risk, which is the chance that the securities selected for
the Fund do not provide investment performance matching that of the Index.
Index sampling risk for the Fund should be low.
PERFORMANCE/RISK INFORMATION
The following bar chart and table 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 total returns for
one and five calendar years 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.
<PAGE>
9
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1995 21.07%
1996 2.55%
1997 9.41%
1998 10.09%
1999 -3.00%
----------------------------------------------------
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).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
SINCE
1 YEAR 5 YEARS INCEPTION*
-------------------------------------------------------------------------
Vanguard Intermediate-Term Bond
Index Fund -3.00% 7.72% 6.05%
Lehman Brothers 5-10 Year Government/
Corporate Bond Index -2.88 7.86 6.15
-------------------------------------------------------------------------
* March 1, 1994.
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may 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, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.17%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
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.
<PAGE>
10
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.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Dividends are declared daily and distributed on ITBond
the first business day of each month; capital
gains, if any, are distributed annually in VANGUARD FUND NUMBER
December 314
INVESTMENT ADVISER CUSIP NUMBER
The Vanguard Group, Valley Forge, Pa., 921937306
since inception TICKER SYMBOL
VBIIX
INCEPTION DATE
March 1, 1994
NET ASSETS AS OF DECEMBER 31, 1999
$1.45 billion
- --------------------------------------------------------------------------------
<PAGE>
11
FUND PROFILE--VANGUARD(R) 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 sample 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 invests at least 65% of its total assets in bonds represented in
the Index. The remainder of its assets may be invested outside the Index, in
bonds whose characteristics--including maturity, credit quality, and issuer
type--are similar to those of the Index. To the extent that the Fund invests
outside the Index, it may employ active management strategies. The Index and
non-Index securities, in combination, will have characteristics and risks
similar to the Index. The Fund maintains a dollar-weighted average maturity of
between 20 and 30 years. 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 bond funds.
- - Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally lower for long-term bond
funds than for short-term bond funds.
- - 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.
- - Index sampling risk, which is the chance that the securities selected for
the Fund do not provide investment performance matching that of the Index.
Index sampling risk for the Fund should be low.
PERFORMANCE/RISK INFORMATION
The following bar chart and table 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 total returns for
one and five calendar years 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.
<PAGE>
12
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1995 29.72%
1996 -0.26%
1997 14.30%
1998 11.98%
1999 -7.85%
----------------------------------------------------
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).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
SINCE
1 YEAR 5 YEARS INCEPTION*
-------------------------------------------------------------------------
Vanguard Long-Term Bond Index Fund -7.85% 8.82% 6.66%
Lehman Brothers Long Government/
Corporate Bond Index -7.65 8.99 6.78
-------------------------------------------------------------------------
* March 1, 1994.
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may 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, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.16%
12b-1 Distribution Fee: None
Other Expenses: 0.04%
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.
<PAGE>
13
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.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Dividends are declared daily and distributed on LTBond
the first business day of each month; capital
gains, if any, are distributed annually in VANGUARD FUND NUMBER
December 522
INVESTMENT ADVISER CUSIP NUMBER
The Vanguard Group, Valley Forge, Pa., 921937405
since inception
TICKER SYMBOL
VBLTX
INCEPTION DATE
March 1, 1994
NET ASSETS AS OF DECEMBER 31, 1999
$313 million
- --------------------------------------------------------------------------------
<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:
- - Variety of investments. Vanguard index funds generally invest in a wide
variety of companies and industries.
- - Relative performance consistency. Because they seek to track market
benchmarks, index funds by definition should not perform dramatically
better or worse than their target indexes.
- - Low cost. Index funds are inexpensive to run as compared to actively
managed funds. They have lower research costs and keep trading activity,
and thus trading costs, to a minimum.
INDEXING METHODS
In seeking to track a particular index, an index 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 impractical to buy and sell all of the securities held in certain
indexes (the Lehman Brothers Aggregate Bond Index, for example, included more
than 5,500 bonds as of December 31, 1999), many 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
duration, cash flow distribution, sector and quality weights, 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,
and the number of bonds in each Fund's target index as of December 31, 1999.
- --------------------------------------------------------------------------------
FUND NUMBER OF BONDS HELD NUMBER OF BONDS IN TARGET INDEX
- --------------------------------------------------------------------------------
Total Bond Market Index 721 5,545
Short-Term Bond Index 270 1,874
Intermediate-Term Bond Index 192 1,415
Long-Term Bond Index 190 1,385
- --------------------------------------------------------------------------------
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. For the
Total Bond Market Index and Short-Term Bond Index Funds, this normally involves
substituting corporate bonds for government bonds of the same maturity. The
corporate substitution strategy increases a
<PAGE>
15
Fund's income, but also marginally increases exposure to credit risk, which is
explained on page 18. The Funds limit corporate substitutions to bonds with less
than approximately 4 years' remaining maturity, and each Fund will limit
corporate substitutions to approximately 15% of its net assets.
SECURITY SELECTION
The Total Bond Index Fund invests at least 80% of its total assets in securities
included in its target index. The other Funds invest at least 65% of their total
assets in securities included in their target indexes. Each Fund's target index
is actually a subset of the Lehman Brothers Aggregate Bond Index (except for the
Total Bond Index Fund, whose target index is 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
over 1 year.
As of December 31, 1999, each Fund's target index was composed of the following
types of bonds:
- --------------------------------------------------------------------------------
TARGET INDEX COMPOSITION
------------------------------------
INTERNATIONAL
U.S. MORTGAGE- DOLLAR-
FUND GOVERNMENT CORPORATE BACKED DENOMINATED TOTAL
- --------------------------------------------------------------------------------
Total Bond Market Index 41.6% 18.2% 35.6% 4.6% 100%
Short-Term Bond Index 74.0 20.3 0.0 5.7 100
Intermediate-Term Bond Index 52.5 35.5 0.0 12.0 100
Long-Term Bond Index 63.6 30.2 0.0 6.2 100
- --------------------------------------------------------------------------------
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
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
<PAGE>
16
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-backed
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
ADDITIONAL RISK INFORMATION
The Funds are subject to several risks associated with investments in bonds.
[FLAG] EACH FUND IS SUBJECT TO 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 LOW FOR SHORTER-TERM BONDS,
MODERATE FOR INTERMEDIATE-TERM BOND FUNDS, AND HIGH FOR LONGER-TERM BOND
FUNDS.
Changes in interest rates will affect bond income as well as bond prices.
[FLAG]EACH FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT A FUND'S
DIVIDENDS (INCOME) WILL DECLINE DUE TO FALLING INTEREST RATES. INCOME RISK
IS GENERALLY HIGHER FOR SHORT-TERM BOND FUNDS AND LOWER FOR LONG-TERM BOND
FUNDS.
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
<PAGE>
17
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 THE
VALUE OF A $1,000 BOND
- -------------------------------------------------------------------------------
AFTER A 1% AFTER A 1% AFTER A 2% AFTER A 2%
TYPE OF BOND (MATURITY) INCREASE DECREASE INCREASE DECREASE
- -------------------------------------------------------------------------------
Short-Term (2.5 years) $978 $1.023 $956 $1,046
Intermediate-Term (10 years) 932 1,074 870 1,156
Long-Term (20 years) 901 1,116 816 1,251
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 more
than 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.
- --------------------------------------------------------------------------------
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.
[FLAG] BECAUSE IT INVESTS IN MORTGAGE-BACKED SECURITIES, THE TOTAL BOND MARKET
INDEX FUND IS SUBJECT TO PREPAYMENT RISK, WHICH IS THE CHANCE 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.
<PAGE>
18
[FLAG]EACH FUND IS SUBJECT TO CREDIT RISK, WHICH IS THE CHANCE THAT A BOND
ISSUER WILL FAIL TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER.
- --------------------------------------------------------------------------------
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." The Funds' Statement of
Additional Information includes a detailed description of the credit-rating
scales used by major, independent bond-rating agencies.
- --------------------------------------------------------------------------------
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, 1999.
--------------------------------------------------------------
AVERAGE CREDIT QUALITY
--------------------------------------
FUND FUND'S HOLDINGS TARGET INDEX
--------------------------------------------------------------
Total Bond Market Index Aa1 Aaa
Short-Term Bond Index Aa1 Aaa
Intermediate-Term Bond Index Aa2 Aaa
Long-Term Bond Index Aa1 Aaa
--------------------------------------------------------------
[FLAG]EACH FUND IS SUBJECT TO INDEX SAMPLING RISK, WHICH IS THE CHANCE THAT THE
SECURITIES SELECTED FOR A FUND DO NOT PROVIDE INVESTMENT PERFORMANCE
MATCHING THAT OF THE INDEX. INDEX SAMPLING RISK FOR EACH FUND SHOULD BE
LOW.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
The Funds are generally managed without regard to tax ramifications.
<PAGE>
19
To help you distinguish between the Funds and their various risks, a
summary table is provided below.
- --------------------------------------------------------------------------------
RISKS OF THE FUNDS
---------------------------------------------
INCOME INTEREST PREPAYMENT/CALL CREDIT
FUND RISK RATE RISK RISK RISK
- --------------------------------------------------------------------------------
Total Bond Market Index Moderate Moderate Moderate Low
Short-Term Bond Index High Low Low Low
Intermediate-Term Bond Index Moderate Moderate Low Low
Long-Term Bond Index Low High Low 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. A purchase request could be rejected
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 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.
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.
- --------------------------------------------------------------------------------
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. As of December 31, 1999 the average turnover rate for
passively managed domestic bond funds was roughly 68%; for all domestic bond
funds, the average turnover rate was approximately 150%, according to
Morningstar, Inc.
- --------------------------------------------------------------------------------
<PAGE>
20
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in fixed-income securities comprising its target index, each
Fund may invest up to 35% of its total assets, (20% in the case of the Total
Bond Market Index Fund), in fixed income securities not in the target index. The
Funds may purchase non-public, investment-grade securities, generally referred
to as 144A securities, as well as smaller public issues or medium-term notes not
included in the index due to the small size of the issue. The vast majority of
these securities will have characteristics and risks similar to those in the
target indexes. The Short-Term, Intermediate-Term, and Long-Term Bond Index
Funds may also purchase securities that are outside of their target indexes, but
are within the larger Lehman Brothers Aggregate Bond Index. Each Fund may also
purchase money market instruments and certain derivatives in order to manage
cash flow into and out of the Fund, reduce the Fund's transaction costs, or add
value when these instruments are favorably priced.
- --------------------------------------------------------------------------------
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). Some
futures and options 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.
- --------------------------------------------------------------------------------
[FLAG] 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. Each Fund's obligation to purchase securities under
futures contracts will not exceed 20% of its 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
cashflow 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.
<PAGE>
21
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 funds holding assets with more
than $540 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1975, serves as the Funds' adviser through its Fixed Income Group. As of
December 31, 1999, Vanguard served as adviser for about $371.4 billion in
assets. Vanguard manages the Funds on an at-cost basis, subject to the control
of the Trustees and officers of the Funds. For the fiscal year ended December
31, 1999, the Funds paid advisory fees at an effective annual rate (applied to
the average daily net assets of each Fund) of less than 0.01%.
The Funds have authorized Vanguard 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 with respect to all
transactions. The Funds may direct Vanguard to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Funds.
<PAGE>
22
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUNDS' ADVISER
The individuals responsible for overseeing the Funds' investments are:
IAN A. MACKINNON, Managing Director of Vanguard and head of Vanguard's Fixed
Income Group; 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.
FELIX B. LIM, Fund Manager of the Short-Term and Long-Term Bond Index Funds
since January 2000; has worked in investment management since completing his
education in 1996; worked as credit analyst until January 2000; joined Vanguard
in January 1999; B.A. and M.S., University of Pennsylvania (Wharton School).
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each Fund distributes to shareholders virtually all of its net income (interest
less expenses), as well as any capital gains realized from the sale of its
holdings. The Fund's income dividends accrue daily and are distributed on the
first business day of every month; 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.
Your dividend and capital gains distributions will be reinvested in
additional Fund shares and accumulate on a tax-deferred basis if you are
investing through an employer-sponsored retirement or savings plan. You will not
owe taxes on these distributions until you begin withdrawals from the plan. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of plan withdrawals.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
<PAGE>
23
SHARE PRICE
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when 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:
NET ASSET VALUE = TOTAL ASSETS - LIABILITIES
-------------------------------
NUMBER OF SHARES OUTSTANDING
The Total Bond Market Index Fund, which offers two classes of shares,
computes a separate net asset value for each share class 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.
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years, 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 Funds (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 Fund's 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.
<PAGE>
24
- --------------------------------------------------------------------------------
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 1999 with a net asset value (price) of $10.27 per
share. During the year, the Fund earned $0.617 per share from investment income
(interest and dividends). There was a decline of $0.695 per share in the value
of investments held or sold by the Fund.
Shareholders received $0.632 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 dividend or capital gains.
The earnings decline ($0.078 per share) minus the distributions ($0.632 per
share) resulted in a share price of $9.56 at the end of the year. This was a
decrease of $0.71 per share (from $10.27 at the beginning of the year to $9.56
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 -0.76% for the
year.
As of December 31, 1999, the Fund had $9.48 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 6.26% of its average net assets. It sold and
replaced securities valued at 55% of its net assets.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
VANGUARD TOTAL BOND MARKET INDEX FUND
INVESTOR SHARES
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.27 $10.09 $9.84 $10.14 $ 9.17
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .617 .624 .645 .640 .650
Net Realized and Unrealized Gain (Loss) on
Investments (.695) .218 .250 (.300) .970
-----------------------------------------------------------------
Total from Investment Operations (.078) .842 .895 .340 1.620
-----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.617) (.624) (.645) (.640) (.650)
Distributions from Realized Capital Gains (.015) (.038) -- -- --
-----------------------------------------------------------------
Total Distributions (.632) (.662) (.645) (.640) (.650)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 9.56 $10.27 $10.09 $ 9.84 $10.14
===================================================================================================================
TOTAL RETURN -0.76% 8.58% 9.44% 3.58% 18.18%
===================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $9,477 $7,765 $5,129 $2,962 $2,405
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to
Average Net Assets 6.26% 6.10% 6.54% 6.54% 6.66%
Turnover Rate 55% 57%* 39% 39% 36%
===================================================================================================================
</TABLE>
*Turnover rate excluding in-kind redemptions was 56%.
<PAGE>
25
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
VANGUARD SHORT-TERM BOND INDEX FUND
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.10 $10.00 $ 9.92 $10.07 $ 9.50
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .539 .574 .597 .587 .623
Net Realized and Unrealized Gain (Loss) on
Investments (.336) .168 .080 (.146) .570
------------------------------------------------------------
Total from Investment Operations .203 .742 .677 .441 1.193
-----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.539) (.574) (.597) (.587) (.623)
Distributions from Realized Capital Gains (.034) (.068) -- (.004) --
------------------------------------------------------------
Total Distributions (.573) (.642) (.597) (.591) (.623)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 9.73 $10.10 $10.00 $ 9.92 $10.07
===================================================================================================================
TOTAL RETURN 2.08% 7.63% 7.04% 4.55% 12.88%
===================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $1,156 $709 $446 $328 $208
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to
Average Net Assets 5.48% 5.68% 6.03% 5.93% 6.28%
Turnover Rate 108% 112% 88% 65% 65%
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
VANGUARD INTERMEDIATE-TERM BOND
INDEX FUND
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.48 $10.20 $ 9.96 $10.37 $ 9.18
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .628 .647 .661 .648 .661
Net Realized and Unrealized Gain (Loss) on
Investments (.936) .353 .240 (.406) 1.217
------------------------------------------------------------
Total from
Investment Operations (.308) 1.000 .901 .242 1.878
------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.628) (.647) (.661) (.648) (.661)
Distributions from
Realized Capital Gains (.034) (.073) -- (.004) (.027)
------------------------------------------------------------
Total Distributions (.662) (.720) (.661) (.652) (.688)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 9.51 $10.48 $10.20 $ 9.96 $10.37
===================================================================================================================
TOTAL RETURN -3.00% 10.09% 9.41% 2.55% 21.07%
===================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $1,449 $1,102 $687 $460 $346
Ratio of Total
Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to
Average Net Assets 6.33% 6.23% 6.64% 6.54% 6.55%
Turnover Rate 120% 77% 56% 80% 71%
===================================================================================================================
</TABLE>
<PAGE>
26
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
VANGUARD LONG-TERM BOND INDEX FUND
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $11.32 $10.78 $10.08 $10.82 $ 8.96
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .662 .666 .678 .674 .692
Net Realized and Unrealized Gain (Loss) on
Investments (1.531) .588 .700 (.731) 1.884
------------------------------------------------------------
Total from Investment Operations (.869) 1.254 1.378 (.057) 2.576
------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.662) (.666) (.678) (.674) (.692)
Distributions from Realized Capital Gains (.019) (.048) -- (.009) (.024)
------------------------------------------------------------
Total Distributions (.681) (.714) (.678) (.683) (.716)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 9.77 $11.32 $10.78 $10.08 $10.82
===================================================================================================================
TOTAL RETURN -7.85% 11.98% 14.30% -0.26% 29.72
===================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $313 $210 $88 $44 $24
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to
Average Net Assets 6.39% 6.01% 6.66% 6.75% 6.90%
Turnover Rate 61% 57% 58% 46% 45%
===================================================================================================================
</TABLE>
"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>
27
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 a Fund or Vanguard, including those about a
Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access Center, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping 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 a 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. You will begin earning
dividends on your investment the following business day.
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 A FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from a 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 a
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 Vanguard's Participant
Access Center, 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.
<PAGE>
28
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>
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.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
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.
CREDIT QUALITY
A measure of a bond issuer's ability to pay interest and principal in a timely
manner.
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. Bonds rated in one of the four highest rating categories
are considered "investment grade."
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>
[SHIP]
[THE VANGUARD GROUP LOGO]
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 REPORTS TO
SHAREHOLDERS
Additional information about the
Funds' investments is available in
the Funds' annual and semiannual
reports to shareholders.
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 ACCESS 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, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. 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 electronic request at
the following e-mail address:
[email protected], or by writing
the Public Reference Section,
Securities and Exchange
Commission, Washington, DC
20549-0102.
Funds' Investment Company Act
file number: 811-4681
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I084N-04/28/2000
<PAGE>
VANGUARD(R)
TOTAL BOND MARKET
INDEX FUND
INSTITUTIONAL SHARES
Prospectus
April 28, 2000
This prospectus contains
financial data for the
Fund through the
fiscal year ended
December 31, 1999.
[A MEMBER OF
THE VANGUARD GROUP LOGO]
<PAGE>
VANGUARD TOTAL BOND MARKET INDEX FUND
INSTITUTIONAL SHARES
Prospectus
April 28, 2000
A Bond Index Mutual Fund
- --------------------------------------------------------------------------------
CONTENTS
1 AN INTRODUCTION TO INDEX FUNDS 16 INVESTING WITH VANGUARD
2 FUND PROFILE 16 Services and Account Features
4 ADDITIONAL INFORMATION 17 Types of Accounts
5 MORE ON THE FUND 17 Buying Shares
11 THE FUND AND VANGUARD 19 Redeeming Shares
12 INVESTMENT ADVISER 22 Transferring Registration
12 DIVIDENDS, CAPITAL GAINS, AND TAXES 22 Fund and Account Updates
14 SHARE PRICE 23 Mandatory Conversion to Investor
Shares
14 FINANCIAL HIGHLIGHTS
GLOSSARY (inside back cover)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objectives, 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 offers two separate classes of shares: Investor
and Institutional. This prospectus offers the Fund's Institutional Shares, which
have an investment minimum of $10 million and generally are not available to
investors who require special employee benefit plan services. Please call
Vanguard at 1-800-662-7447 to obtain a separate prospectus that offers the
Fund's Investor Shares, which have an investment minimum of $3,000 ($1,000 for
IRAs).
The Fund's separate share classes have different expenses; as a result,
their investment performances will vary. UNLESS OTHERWISE NOTED, ALL REFERENCES
IN THIS PROSPECTUS TO FEES, EXPENSES, AND INVESTMENT PERFORMANCE RELATE
SPECIFICALLY TO INSTITUTIONAL SHARES.
- -------------------------------------------------------------------------------
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 the investment performance of a particular market. 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 AS
CLOSELY AS POSSIBLE--WILL TYPICALLY 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 do not have active managers, who buy and sell securities based
on research and analysis. Rather, index funds are passively managed. To the
extent they invest in securities that are not in their target indexes, they may
be viewed as enhanced or actively managed. The more the securities outside the
index are like those inside the index (e.g., for bond funds in terms of sector,
credit quality, etc.), the more likely that a fund will track its target index.
This prospectus contains information about Vanguard Total Bond Market Index
Fund Institutional Shares.
<PAGE>
2
FUND PROFILE
The following profile summarizes 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 public
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 1 year.
The Fund invests at least 80% of its total assets in bonds represented in
the Index. The remainder of its assets may be invested outside the Index, in
securities whose characteristics and risks are similar to those in the Index. To
the extent that the Fund invests outside the Index, it may employ active
management strategies. The Index and non-Index securities, in combination, will
have characteristics and risks similar to the Index. The Fund maintains a
dollar-weighted average maturity of between 5 and 10 years. 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 bond funds, and
greatest for longer-term bond funds.
- - 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
bond funds, and lower for long-term bond funds.
- - 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 because the underlying mortgages have been
paid off ahead of schedule. If this were to occur, the Fund would lose the
opportunity for additional price appreciation, and would be forced to
reinvest the unanticipated proceeds at lower interest rates. As a result,
the Fund would experience a decline in income.
- - Index sampling risk, which is the chance that the securities selected for
the Fund do not provide investment performance matching that of the Index.
Index sampling risk for the Fund should be low.
PERFORMANCE/RISK INFORMATION
The following bar chart and table provide an indication of the risks 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
total 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.
<PAGE>
3
----------------------------------------------------
ANNUAL TOTAL RETURNS--INSTITUTIONAL SHARES
----------------------------------------------------
1996 3.68%
1997 9.55%
1998 8.69%
1999 -0.66%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 4.43% (quarter ended December 31, 1995) and the lowest return for a
quarter was -1.88% (quarter ended March 31, 1996).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
SINCE
1 YEAR INCEPTION*
-------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund -0.66% 5.97%
Lehman Brothers Aggregate Bond Index -0.82 5.90
-------------------------------------------------------------------------
* September 18, 1995.
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may 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, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.07%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
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.
<PAGE>
4
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 1999 was 0.10%, or $1.00 per $1,000 of average net assets.
The average passively managed domestic bond fund had expenses in 1999 of 0.68%,
or $6.80 per $1,000 of average net assets, according to Lipper Inc., which
reports on the mutual fund industry. Management expenses, which are one part of
operating expenses, include investment advisory fees as well as other costs of
managing a fund--such as account maintenance, reporting, accounting, legal, and
other administrative expenses.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Dividends are declared daily and distributed on TotBdIst
the first business day of each month; capital
gains, if any, are distributed annually in VANGUARD FUND NUMBER
December 222
INVESTMENT ADVISER CUSIP NUMBER
The Vanguard Group, Valley Forge, Pa., 921937504
since inception
TICKER SYMBOL
INCEPTION DATE VBTIX
September 18, 1995
NET ASSETS (ALL SHARE CLASSES)
AS OF DECEMBER 31, 1999
$12.68 billion
- --------------------------------------------------------------------------------
<PAGE>
5
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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. A purchase request could be rejected
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:
- - Variety of investments. Vanguard index funds generally invest in a wide
variety of companies and industries.
- - Relative performance consistency. Because they seek to track market
benchmarks, index funds by definition should not perform dramatically
better or worse than their target indexes.
- - Low cost. Index funds are inexpensive to run as compared to actively
managed funds. They have lower research costs and keep trading activity,
and thus trading costs, to a minimum.
<PAGE>
6
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
INDEXING METHODS
In seeking to track a particular index, an index 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 impractical to buy and sell all of the securities held in certain
indexes (the Lehman Brothers Aggregate Bond Index, for example, included more
than 5,500 bonds as of December 31, 1999), many 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 durations, cash flow distribution,
sector and quality weights, 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, and the number of
bonds in the Fund's target index as of December 31, 1999.
- --------------------------------------------------------------------------------
NUMBER OF BONDS IN
FUND NUMBER OF BONDS HELD TARGET INDEX
- --------------------------------------------------------------------------------
Total Bond Market Index Fund 721 5,545
- --------------------------------------------------------------------------------
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 also marginally increase exposure to credit risk, which is explained on page
9. The Fund limits corporate substitutions to bonds with less than approximately
4 years' remaining maturity and approximately 15% of its net assets.
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, 1999, the Fund and its target index was composed
of the following types of bonds:
<PAGE>
7
--------------------------------------------------------
TOTAL BOND MARKET
TYPE OF BOND INDEX FUND
--------------------------------------------------------
U. S. Government 41.6%
Corporate 18.2
Mortgage-Backed 35.6
International Dollar-Denominated 4.6
--------------------------------------------------------
100.0%
--------------------------------------------------------
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-backed 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.
<PAGE>
8
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
ADDITIONAL RISK INFORMATION
The Fund is subject to several risks associated with investments in bonds.
[FLAG] THE FUND IS SUBJECT TO 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 LOW FOR SHORTER-TERM BOND
FUNDS, MODERATE FOR INTERMEDIATE-TERM BOND FUNDS, AND HIGH FOR LONGER-TERM
BOND FUNDS.
Changes in interest rates will affect bond income as well as bond prices.
[FLAG] THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT THE FUND'S
DIVIDENDS (INCOME) WILL DECLINE DUE TO FALLING INTEREST RATES. INCOME RISK
IS GENERALLY GREATEST FOR SHORT-TERM BOND FUNDS, AND LEAST FOR LONG-TERM
BOND FUNDS.
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 THE
VALUE OF A $1,000 BOND
- --------------------------------------------------------------------------------
AFTER A 1% AFTER A 1% AFTER A 2% AFTER A 2%
TYPE OF BOND (MATURITY) INCREASE DECREASE INCREASE DECREASE
- --------------------------------------------------------------------------------
Short-Term (2.5 years) $978 $1,023 $956 $1,046
Intermediate-Term (10
years) 932 1,074 870 1,156
Long-Term (20 years) 901 1,116 816 1,251
- --------------------------------------------------------------------------------
*Assuming a 7% yield.
- --------------------------------------------------------------------------------
<PAGE>
9
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--prepayments.
- --------------------------------------------------------------------------------
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 more
than 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.
- --------------------------------------------------------------------------------
[FLAG] BECAUSE IT INVESTS IN MORTGAGE-BACKED SECURITIES, THE FUND IS SUBJECT TO
PREPAYMENT RISK, WHICH IS THE CHANCE 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.
[FLAG] THE FUND IS SUBJECT TO CREDIT RISK, WHICH IS THE CHANCE THAT A BOND
ISSUER WILL FAIL TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER.
- --------------------------------------------------------------------------------
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." The Statement of Additional
Information includes a detailed description of the credit-rating scales used by
major, independent bond-rating agencies.
- --------------------------------------------------------------------------------
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, 1999, was Aa1 and Aaa, respectively.
<PAGE>
10
[FLAG] THE FUND IS SUBJECT TO INDEX SAMPLING RISK, WHICH IS THE CHANCE THAT THE
SECURITIES SELECTED FOR THE FUND DO NOT PROVIDE INVESTMENT PERFORMANCE
MATCHING THAT OF THE INDEX. INDEX SAMPLING RISK FOR THE FUND SHOULD BE LOW.
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.
- --------------------------------------------------------------------------------
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. As of December 31, 1999 the average turnover rate for
passively managed domestic bond funds was roughly 68%; for all domestic bond
funds, the average turnover rate was approximately 150%, according to
Morningstar, Inc.
- --------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in fixed-income securities comprising its target index, the
Fund may invest up to 20% of its total assets in fixed-income securities not in
the target index. The Fund may purchase non-public, investment-grade securities,
generally referred to as 144A securities, as well as smaller public issues or
medium-term notes not included in the index due to the small size of the issue.
The vast majority of these securities will have characteristics and risks
similar to those in the target indexes. The Fund may also purchase money market
instruments and certain derivatives in order to manage cash flow into and out of
the Fund, reduce the Fund's transaction costs, or add value when these
instruments are favorably priced.
[FLAG] 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. The Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The Fund's obligation to purchase securities under
future con-
<PAGE>
11
tracts will not exceed 20% of its 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.
- --------------------------------------------------------------------------------
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). Some
futures and options 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.
- --------------------------------------------------------------------------------
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 funds holding
assets worth more than $540 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
<PAGE>
12
INVESTMENT ADVISER
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1975, serves as the Fund's adviser through its Fixed Income Group. As of
December 31, 1999, Vanguard served as adviser for about $371.4 billion in
assets. Vanguard manages the Fund on an at-cost basis, subject to the control of
the Trustees and officers of the Fund. For the fiscal year ended December 31,
1999, the Fund paid advisory fees at an effective annual rate (applied to the
average daily net assets of the Fund) of less than 0.01%.
The Fund has authorized Vanguard 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 with respect to all
transactions. The Fund may direct Vanguard 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
The individuals responsible for overseeing the Fund's investments are:
IAN A. MACKINNON, Managing Director of Vanguard and head of Vanguard's Fixed
Income Group; 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 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.
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
The Fund distributes to shareholders virtually all of its net income (interest
less expenses), as well as any capital gains realized from the sale of its
holdings. The Fund's income dividends accrue daily and are distributed on the
first business day of every month; 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 dividends or capital gains in cash, or you
can have them automatically reinvested in more shares of the Fund.
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- - Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
- - Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
- - Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
<PAGE>
13
- - Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- - Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
- - A sale or exchange of Fund shares 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.
- - Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes. Depending on your state's rules, however, any
dividends attributable to interest earned on direct obligations of the U.S.
Treasury may be exempt from state and local taxes. Vanguard will notify you
each year how much, if any, of your dividends may qualify for this
exemption.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
- - provide us with your correct taxypayer identification number;
- - certify that the taxpayer identification number is correct; and
- - confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
<PAGE>
14
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). The Fund computes a separate net asset value for each of its share
classes. This is done by adding up the total value of the Fund's investments and
other assets attributed to each share class, subtracting any of its liabilities
(debts) attributed to each share class and then dividing by the number of Fund
shares outstanding for each share class.
NET ASSET VALUE = TOTAL ASSETS - LIABILITIES
-------------------------------
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.
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.
<PAGE>
15
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1999 with a net asset value (price) of $10.27 per share.
During the year, the Fund earned $0.627 per share from investment income
(interest and dividends). There was a decline of $0.695 per share in the value
of investments held or sold by the Fund.
Shareholders received $0.642 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings decline ($.068 per share) minus the distributions ($0.642 per
share) resulted in a share price of $9.56 at the end of the year. This was a
decrease of $0.71 per share (from $10.27 at the beginning of the year to $9.56
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 -0.66% for the
year.
As of December 31, 1999, the Fund had $3.20 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 6.36% of its average net assets. It sold and
replaced securities valued at 55% of its net assets.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
VANGUARD TOTAL BOND MARKET INDEX FUND
INSTITUTIONAL SHARES
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
SEP. 18*
TO DEC.
1999 1998 1997 1996 31, 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.27 $10.09 $ 9.84 $10.14 $ 9.87
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .627 .635 .655 .650 .174
Net Realized and Unrealized Gain (Loss)
on Investments (.695) .218 .250 (.300) .270
---------------------------------------------------------------------
Total from Investment Operations (.068) .853 .905 .350 .444
---------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.627) (.635) (.655) (.650) (.174)
Distributions from Realized Capital Gains (.015) (.038) -- -- --
---------------------------------------------------------------------
Total Distributions (.642) (.673) (.655) (.650) (.174)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.56 $10.27 $10.09 $ 9.84 $10.14
===============================================================================================================
TOTAL RETURN -0.66% 8.69% 9.55% 3.68% 4.53%
===============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $3,204 $2,493 $1,628 $1,024 $413
Ratio of Total Expenses to Average Net Assets 0.10% 0.10% 0.10% 0.10% 0.10%**
Ratio of Net Investment Income to Average
Net Assets 6.36% 6.21% 6.64% 6.66% 6.48%**
Turnover Rate 55% 57%+ 39% 39% 36%
===============================================================================================================
</TABLE>
*Inception date.
** Annualized.
+ Turnover rate excluding in-kind redemptions was 56%.
"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>
16
- --------------------------------------------------------------------------------
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 [BOOKLET]. 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.
Note: Limitations do apply; see page 19.
- --------------------------------------------------------------------------------
VANGUARD(R) AUTOMATIC EXCHANGE SERVICE [BOOKLET]
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) [BOOKLET]
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 ex-change shares to and from most
Vanguard funds.
- --------------------------------------------------------------------------------
ACCESS VANGUARD TM www.vanguard.com [COMPUTER]
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 our website. We will then mail you 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). (Some restrictions
may apply.) Please call our Client Services Department for assistance.
*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.
- --------------------------------------------------------------------------------
<PAGE>
17
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 [BOOKLET]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR AN ORGANIZATION [BOOKLET]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
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 will begin earning dividends
on your investment the following business day.You may convert Investor Shares of
the Total Bond Market Index 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 [WIRE]
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]
- --------------------------------------------------------------------------------
<PAGE>
18
- --------------------------------------------------------------------------------
BY MAIL TO . . .[ENVELOPE]
open a new account
Complete and sign the account registration 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. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.
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 19355-2331
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . .[TELEPHONE]
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). (Note that some restrictions apply to index fund accounts.)
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). (Note that some restrictions apply to index fund accounts.)
Vanguard Tele-Account
1-800-662-6273
*You must obtain a Personal Identification Number (PIN) through Tele-Account at
least seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you have initiated 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.
It is our responsibility to consider the interests of all Fund shareholders, and
so we reserve the right to refuse any purchase that may disrupt the Fund's
operation or performance.
- --------------------------------------------------------------------------------
<PAGE>
19
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 21.
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 order to exchange into an account with a different registration
(including a different name, address, or taxpayer identification number),
you must include the guaranteed signatures of all current account owners on
your written instructions.
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.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is initiated 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.
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,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.
- --------------------------------------------------------------------------------
ONLINE REQUESTS [COMPUTER]
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 our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).
- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [TELEPHONE]
Call Vanguard Tele-Account 24 hours a day--or your assigned 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
<PAGE>
20
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 (PIN), if applicable (for instance,
Tele-Account).
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 [ENVELOPE]
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.
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
- --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders, and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may 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.
- --------------------------------------------------------------------------------
<PAGE>
21
- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
WIRE REDEMPTIONS [WIRE]
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:
- - 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 commercial and savings
banks, credit unions, trust companies, or member firms of a U.S. stock exchange.
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.
<PAGE>
22
- - 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, a "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 ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- --------------------------------------------------------------------------------
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 19355-2331
- --------------------------------------------------------------------------------
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
financial 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 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.
- --------------------------------------------------------------------------------
<PAGE>
23
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOKLET]
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, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------
AVERAGE COST REVIEW STATEMENT [BOOKLET]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using only 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.
- --------------------------------------------------------------------------------
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.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
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.
CREDIT QUALITY
A measure of a bond issuer's ability to pay interest and principal in a timely
manner.
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. Bonds rated in one of the four highest rating categories
are considered "investment grade."
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>
[SHIP]
[THE VANGUARD GROUP LOGO]
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 REPORTS TO
SHAREHOLDERS
Additional information about the
Fund's investments is available in
Vanguard Bond Index Funds' annual
and semiannual reports to shareholders.
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:
1-800-749-7273
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, DC. To find out more
about this public service, call the SEC
at 1-202-942-8090. 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 electronic request at the
following e-mail address:
[email protected], or by writing the
Public Reference Section, Securities
and Exchange Commission,
Washington, DC 20549-0102.
Fund's Investment Company Act
file number: 811-4681
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I222N-04/28/2000
<PAGE>
PART B
VANGUARD (R) BOND INDEX FUNDS
(THE TRUST)
STATEMENT OF ADDITIONAL INFORMATION
APRIL 28, 2000
This Statement is not a prospectus, but should be read in conjunction with the
Trust's current Prospectuses (dated April 21, 2000). To obtain, without charge,
the Prospectuses or the most recent Annual Report to Shareholders which contains
Vanguard Bond Index Funds' Financial Statements as hereby incorporated by
reference, please call:
VANGUARD INVESTOR INFORMATION CENTER
1-800-662-7447(SHIP)
TABLE OF CONTENTS
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-9
REDEMPTION OF SHARES.............................................B-9
SHARE PRICE......................................................B-10
MANAGEMENT OF THE FUNDS .........................................B-10
PORTFOLIO TRANSACTIONS...........................................B-14
COMPARATIVE MEASURES.............................................B-14
FINANCIAL STATEMENTS.............................................B-16
APPENDIX--DESCRIPTION OF BOND RATINGS............................B-16
DESCRIPTION OF THE TRUST
ORGANIZATION
The Trust was organized as a Maryland corporation in 1986, and was reorganized
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 Center, Brooklyn, New York 11245
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serve as the Funds' custodians. The custodians are responsible for maintaining
the Funds' assets and keeping all necessary accounts and records of each Fund's
assets.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, serves as the Funds' independent accountants.
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 mutual 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
provides that shareholders of a business trust are entitled to the same
limitations 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
remaining 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
dividends or other distributions declared for such fund. No shares have priority
or preference over any other shares of the same fund with respect to
distributions. 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 material
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 circumstances,
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 fractional 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
entitled 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
convert their Individual (or Institutional) Shares into Institutional (or
Individual) Shares upon the satisfaction of any then applicable eligibility
requirements.
REDEMPTION PROVISIONS. The Funds' redemption provisions are described in
their current prospectuses and elsewhere in this Statement of Additional
Information.
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 continue to qualify as a ''regulated
investment company'' 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 the
Fund
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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
addition, the Fund could be required to recognize unrealized gains, pay
substantial 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 may invest in repurchase agreements with
commercial banks, brokers or dealers either for defensive purposes due to market
conditions or to generate income from its excess cash balances. A repurchase
agreement is an agreement under which a Fund acquires a fixed income security
(generally 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,
broker, 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 considered
a loan collateralized by securities. The resale price reflects an agreed upon
interest rate effective for the period the instrument is held by a 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 repurchase
agreement and are held by a custodian bank until repurchased. In addition, the
Trust's Board of Trustees will monitor each Fund's repurchase agreement
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
underlying 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 or other laws, a court may determine that the underlying
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 creditor
of the other party to the agreement. While the adviser acknowledges these risks,
it is expected that they will be controlled through careful monitoring
procedures.
LENDING OF SECURITIES. Each Fund may lend its investment securities to
qualified institutional investors (typically brokers, dealers, banks, or other
financial institutions) who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to deliver
securities, or completing arbitrage operations. By lending its investment
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 aggregate amount of
such loans must be consistent with the 1940 Act, and the Rules 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 investing any cash collateral
in interest bearing short-term investments), any distribution on the loaned
securities and any increase in their market value. Loan arrangements made by
each Fund will comply with all other applicable regulatory requirements,
including the rules of the New York Stock Exchange, which presently require the
borrower, after notice, to redeliver the securities within the normal settlement
time of three business days. All relevant facts and circumstances, including the
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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
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's 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 and other Vanguard funds to participate in Vanguard's
interfund lending program. This program allows the Vanguard 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, including 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 Vanguard 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.
ILLIQUID SECURITIES. Each Fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities that may not be sold or
disposed of in the ordinary course of business within seven business days at
approximately the value at which they are being carried on the Fund's books.
Each Fund may invest in restricted, privately placed securities that, under
securities laws, may be sold only to qualified institutional buyers. Because
these securities can be resold only to qualified institutional buyers or after
they have been held for a number of years, they may be considered illiquid
securities--meaning that they could be difficult for the Fund to convert to cash
if needed.
If a substantial market develops for a restricted security held by a Fund,
it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the Board of Trustees. This generally includes securities
that are unregistered that can be sold to qualified institutional buyers in
accordance with Rule 144A under the Securities Act of 1933. While the Fund's
investment adviser determines the liquidity of restricted securities on a daily
basis, the Board oversees and retains ultimate responsibility for the adviser's
decisions. Several factors that the Board considers in monitoring these
decisions include the valuation of a security, the availability of qualified
institutional buyers, and the availability of information about the security's
issuer.
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 Commodity 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
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position (buying a
contract which has previously been sold, or selling a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith initial margin deposit in
cash or securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin
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requirements are established by the futures exchange and may be changed. Brokers
may establish deposit requirements which are higher than the exchange minimums.
Futures contracts are customarily purchased and sold with deposits that may
range upward from less than 5% of the value of the contract being traded. A
Fund's initial margin requirement is ordinarily in the form of portfolio
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
contract 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 unfavorable changes in the value of securities otherwise held for
investment purposes or expected to be acquired by them. Speculators are less
inclined to own the securities underlying the futures contracts which they
trade, and use futures contracts with the expectation of realizing profits from
fluctuations in the prices of underlying securities. The 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
portfolio. Each Fund will only sell futures contracts to protect securities it
owns against price declines or purchase contracts to protect against an increase
in the price of securities it intends to purchase. As evidence of this hedging
interest, each Fund expects that approximately 75% of its futures contract
purchases will be ''completed,'' that is, equivalent amounts of related
securities will have been purchased or are being purchased by 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 contracts 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 outstanding 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 assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a 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 disadvantageous 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
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of
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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
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that a 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 unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. Each 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 contracts as of the end of the
year as well as those actually realized during the year. In these cases, any
gain or loss recognized with respect to a futures contract is considered to be
60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the contract. Gains and losses on
certain other futures contracts (primarily non-U.S. futures contracts) are not
recognized until the contracts are closed and treated as long-term or short-term
depending on the holding period of the contract. 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.
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
taxable year must be derived from qualifying income; i.e., dividends, interest,
income derived from loans of securities, gains from the sale of securities or of
foreign currencies, or other income derived with respect to a Fund's business of
investing in securities or currencies. It is anticipated that any net gain
recognized on 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 on futures transactions.
Such distributions 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.
FEDERAL TAX TREATMENT OF NON U.S. TRANSACTIONS. Special rules govern the
Federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option or similar
financial instrument if such instrument is not marked to market. The disposition
of a currency other than the U.S. dollar by a taxpayer whose
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functional currency is the U.S. dollar is also treated as a transaction subject
to the special currency rules. However, foreign currency-related regulated
futures contracts and nonequity options are generally not subject to the special
currency rules if they are or would be treated as sold for their fair market
value at year-end under the marking-to-market rules applicable to other futures
contracts unless an election is made to have such currency rules apply. With
respect to transactions covered by the special rules, foreign currency gain or
loss is calculated separately from any gain or loss on the underlying
transaction and is normally taxable as ordinary income or loss. A taxpayer may
elect to treat as capital gain or loss foreign currency gain or loss arising
from certain identified forward contracts, futures contracts and options that
are capital assets in the hands of the taxpayer and which are not part of a
straddle. The Treasury Department issued regulations under which certain
transactions subject to the special currency rules that are part of a "section
988 hedging transaction" (as defined in the Internal Revenue Code of 1986, as
amended, and the Treasury regulations) will be intergrated and treated as a
single transaction or otherwise treated consistently for purposes of the Code.
Any gain or loss attributable to the foreign currency component of a transaction
engaged in by a Fund which is not subject to the special currency rules (such as
foreign equity investments other than certain preferred stocks) will be treated
as capital gain or loss and will not be segregated from the gain or loss on the
underlying transaction. It is anticipated that some of the non-U.S.
dollar-denominated investments and foreign currency contracts the Funds may make
or enter into will be subject to the special currency rules described above.
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 purposes, 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 representing
more than 50% of the Fund's net asset value are present or represented 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
invest 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 contracts,
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
outstanding 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
obligations 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
company, 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
commodities.
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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 secured
by real estate.
SENIOR SECURITIES. Each Fund may not issue senior securities.
UNDERWRITING. Each Fund may not engage in the business of underwriting
securities issued by other persons. Each Fund will not be considered an
underwriter when disposing of its investment securities.
The investment limitations set forth above are considered at the time
investment 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
Companies, the Trust may own securities issued by Vanguard, make loans to
Vanguard, and contribute to Vanguard's costs or other financial requirements.
See ''Management 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
dividing 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:
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.
The yield* of each Fund of the Trust for the 30-day period ended December
31, 1999 was as follows:
Short-Term Bond Index........................ 6.53%
Intermediate-Term Bond Index................. 7.04%
Long-Term Bond Index......................... 7.15%
Total Bond Market Index Individual Shares.... 6.85%
Total Bond Market Index Institutional Shares. 6.95%
*Yield is calculated daily
AVERAGE ANNUAL AFTER-TAX TOTAL RETURN QUOTATION
We calculate the Fund's average annual after-tax total return by finding the
average annual compounded rate of return over the 1-, 5-, and 10-year periods
that would equate the initial amount invested to the after-tax value, according
to the following formulas:
After-tax return:
P (1+T) N = ATV
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Where:
P = a hypothetical initial payment of $1,000
T = average annual after-tax total return
n = number of years
ATV = after-tax value at the end of the 1-, 5-, or 10-year
periods of a hypothetical $1,000 payment made at the
beginning of the time period, assuming no liquidation
of the investment at the end of the measurement
periods.
Instructions.
1. Assume all distributions by the Fund are reinvested--less the taxes due on
such distributions--at the price on the reinvestment dates during the
period. Adjustments may be made for subsequent re-characterizations of
distributions.
2. Calculate the taxes due on distributions by the Fund by applying the
highest federal marginal tax rates to each component of the distributions
on the reinvestment date (e.g., ordinary income, short-term capital gain,
long-term capital gain, etc.). For periods after December 31, 1997, the
federal marginal tax rates used for the calculations are 39.6% for ordinary
income and short-term capital gains and 20% for long-term capital gains.
Note that the applicable tax rates may vary over the measurement period.
Assume no taxes are due on the portions of any distributions classified as
exempt interest or non-taxable (i.e., return of capital). Ignore any
potential tax liabilities other than federal tax liabilities (e.g., state
and local taxes).
3. Include all recurring fees that are charged to all shareholder accounts.
For any account fees that vary with the size of the account, assume an
account size equal to the Fund's mean (or median) account size. Assume that
no additional taxes or tax credits result from any redemption of shares
required to pay such fees.
4. State the total return quotation to the nearest hundredth of one percent.
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 reinvested 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:
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.
PURCHASE OF SHARES
The Trust reserves the right in its sole discretion (i) to suspend the
offerings of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Trust, and (iii) to
reduce or waive the minimum investment for or any other restrictions on initial
and subsequent investments for certain fiduciary accounts or under circumstances
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
purchases 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--
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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 purchasing portfolio
securities needed to match the investment performance of the respective
benchmark index. If such purchases can be offset by redemptions of shares by
other shareholders, such fee may be waived or reduced. A prospective investor
may determine whether a fee will be charged by calling his/her client
representative or plan sponsor in advance of his/her purchase. The fee, if
imposed, will be 0.18% for the Total Bond Market Index Fund; 0.23% for the
Intermediate-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
securities 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 Commission as a result of
which it is not reasonably practicable for a Fund to dispose of securities owned
by it, or fairly to determine the value of its assets, and (iii) for such other
periods as the Commission may permit.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period.
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 number
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 Exchange (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 securities as well as any developments related to specific securities.
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 each Fund can be found daily in the mutual fund
listings of most major newspapers under the heading ''Vanguard Index Funds.''
MANAGEMENT OF THE FUNDS
OFFICERS AND TRUSTEES
The Officers of the Trust manage its day-to-day operations and are
responsible 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 Officers 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 103 funds administered by
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Vanguard (102 in the case of Mr. Malkiel and 93 in the case of Mr. MacLaury).
The mailing address of the Trustees and Officers of the Trust is Post Office Box
876, Valley Forge, Pennsylvania 19482.
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 Committee
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
Research 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; Director
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 Products
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 & Gamble
Co., NACCO Industries (Machinery/ Coal/ Appliances), and Newfield Exploration
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 Chairman
and Director of RJR Nabisco (Food and Tobacco Products); Director of TECO
Energy, Inc., and Kmart Corp.
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), The Mead Corp. (Paper Products), and
AmeriSource Health Corp.; 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.
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<PAGE>
Vanguard employs a supporting staff of management and administrative
personnel 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 has adopted a Code of Ethics designed to prevent employees who may
have access to nonpublic information about the trading activities of the Funds
(access persons) from profiting from that information. The Code permits access
persons to invest in securities for their own accounts, including securities
that may be held by the Fund, but places substantive and procedural restrictions
on their trading activities. For example, the Code requires that access persons
of the Fund receive advance approval for every securities trade to ensure that
there is no conflict with the trading activities of the Fund.
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 December 31,
1999, each Fund had contributed capital to Vanguard representing 0.02% of each
Fund's net assets. The total amount contributed by the Trust was $3,180,000,
which represented 3.2% 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.
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 operation relating to management and administrative services
(including transfer agency) were:
FUND 1997 1998 1999
- ---- ---- ---- ----
Total Bond Market Investor Shares...... $5,892,000 $9,859,000 $14,164,000
Total Bond Market Institutional Shares. 617,000 989,000 1,842,000
Short-Term Bond........................ 611,000 878,000 1,530,000
Intermediate-Term Bond................. 801,000 1,411,000 2,164,000
Long-Term Bond......................... 62,000 207,000 419,000
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, promotional materials, and marketing personnel. Distribution
services may also include organizing and offering to the public, from time to
time, one or more new investment companies which will become members of The
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 Vanguard funds 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
nature shall exceed 125% of the average distribution expense rate for The
Vanguard Group, and that no Trust shall incur annual distribution expenses in
excess of .20 of 1% of its average month-end net assets. During the
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<PAGE>
last three years, the Funds incurred the following approximate amounts of The
Vanguard Group's distribution and marketing expenses.
FUND 1997 1998 1999
- ---- ---- ---- ----
Total Bond Market Investor Shares...... $1,136,000 $1,699,000 $1,750,000
Total Bond Market Institutional Shares. 376,000 561,000 555,000
Short-Term Bond........................ 124,000 168,000 178,000
Intermediate-Term Bond................. 172,000 242,000 244,000
Long-Term Bond......................... 16,000 33,000 50,000
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.
FUND 1997 1998 1999
- ---- ---- ---- ----
Total Bond Market Investor Shares...... $583,000 $757,000 $1,079,000
Total Bond Market Institutional Shares. 181,000 227,000 351,000
Short-Term Bond........................ 60,000 69,000 113,000
Intermediate-Term Bond................. 81,000 106,000 163,000
Long-Term Bond....................... . 8,000 16,000 33,000
TRUSTEE COMPENSATION
The same individuals serve as Trustees of all Vanguard Trusts (with two
exceptions, which are noted in the table appearing below), and each Trust pays a
proportionate share of the Trustees' compensation. The Trusts employ their
officers 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.
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VANGUARD BOND INDEX FUNDS
COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PENSION OR
RETIREMENT TOTAL
BENEFITS COMPENSATION
AGGREGATE ACCRUED AS ESTIMATED FROM ALL
COMPENSATION PART OF THESE ANNUAL VANGUARD
FROM THIS FUNDS BENEFITS UPON FUNDS PAID TO
NAMES OF TRUSTEES FUND(1) EXPENSES(1) RETIREMENT TRUSTEES(2)
- -----------------------------------------------------------------------------------------------------
John C. Bogle(3) .................... None None None None
John J. Brennan ..................... None None None None
JoAnn Heffernan Heisen .............. $2,444 $135 $15,000 $80,000
Bruce K. MacLaury ................... $2,532 $228 $12,000 $75,000
Burton G. Malkiel ................... $2,462 $223 $15,000 $80,000
Alfred M. Rankin, Jr. ............... $2,444 $163 $15,000 $80,000
John C. Sawhill ..................... $2,444 $207 $15,000 $80,000
James O. Welch, Jr. ................. $2,444 $238 $15,000 $80,000
J. Lawrence Wilson .................. $4,430 $172 $15,000 $80,000
</TABLE>
(1) The amounts shown in this column are based on the Funds' fiscal year ended
October 31, 1999.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Trustee of 103 funds (102 in the
case of Mr. Malkiel; 93 in the case of Mr. MacLaury) for the 1999 calendar
year.
(3) Mr. Bogle has retired from the Funds' Board, effective December 31, 1999.
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
purchase 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
prices). During the fiscal years ended December 31, 1997, 1998, and 1999, 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
handle the purchase and sale of the Funds' securities, and is responsible for
getting the best available price and most favorable execution for all
transactions. 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
particular transaction, in terms
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of the number of shares, dollar amount, and number 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.
COMPARATIVE 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 comparative
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
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX--consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
RUSSELL 3000 STOCK INDEX--a diversified portfolio of approximately 3,000 common
stocks accounting for over 90% of the market value of publicly-traded stocks in
the U.S.
RUSSELL 2000 STOCK INDEX--a subset of approximately 2,000 of the smallest stocks
contained in the Russell 3000, a widely-used benchmark for small capitalization
common stocks.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX--is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia, 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
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX--includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX--consists of publicly-issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
LEHMAN LONG-TERM TREASURY BOND INDEX--is a market weighted index that contains
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.
LEHMAN CORPORATE (BAA) BOND INDEX--all publicly-offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $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,
nonconvertible 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.
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<PAGE>
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 include
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 Brothers
Corporate A or Better Bond Index.
COMPOSITE INDEX--65% Lehman Brothers 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 BROTHERS 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 contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$5 trillion.
LEHMAN BROTHERS CORPORATE A OR BETTER BOND INDEX--consists of all publicly
issued, investment grade corporate bonds rated A or better, of all maturity
levels.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX--is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.6 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 index
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
investments to companies on the basis of the size of the company. From time to
time, Vanguard may advertise using the average performance and/or the average
expense ratio of the small company growth funds. (This fund category was first
established in 1982. For years prior to 1982, the results of the Lipper Small
Company Growth category were estimated using the returns of the Funds that
constituted the Group at its inception.)
LIPPER BALANCED FUND AVERAGE--an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper 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 average
government money market funds with similar investment objectives and policies,
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 income
funds with similar investment objectives and policies, as measured by Lipper
Inc.
FINANCIAL STATEMENTS
The Funds' financial statements as of and for the year ended December 31,
1999, appearing in the Vanguard Bond Index Funds' 1999 Annual Report to
Shareholders, and the report thereon of
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<PAGE>
PricewaterhouseCoopers LLP, independent accountants, 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 1999
Annual Report to Shareholders, which may be obtained without charge.
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
Standard & 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 principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Moody's also supplies numerical indicators 1, 2, and 3 to rating
categories. The modifier 1 indicates that the 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 obligations,
a very strong capacity to pay interest and repay principal and differs from
AAA--issues only in small degree; A--regarded as upper medium grade. It has a
strong capacity to pay interest and repay principal although it is somewhat
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories; BBB--regarded as having an
adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories.
Standard & Poor's applies indicators ''+'', no character, and ''-'' to its
rating categories. The indicators show relative standing within the major rating
categories.
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SAI084-04/28/2000
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<PAGE>
PART C
VANGUARD BOND INDEX FUNDS
OTHER INFORMATION
ITEM 23. EXHIBITS
EXHIBITS DESCRIPTION
- -------- -----------
(a) Declaration of Trust*
(b) By-Laws*
(c) Reference is made to Articles III and V of the Registrant's Declaration
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) Not Applicable
(o) Rule 18f-3 Plan*
(p) Code of Ethics**
*Filed Previously
**Filed Herewith
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
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 Registrant
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
generally provides that the Registrant shall indemnify its Trustees and officers
from any liability arising out of their past or present service in that
capacity. Among other things, this provision excludes any liability arising by
reason of willful misfeasance, bad faith, gross negligence, or the reckless
disregard 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 INVESTMENT ADVISER
The Vanguard Group, Inc. ("Vanguard"), is an investment adviser registered under
the Investment Advisers Act of 1940, as amended (the "Advisers Act"). The list
required by this Item 26 of officers and directors of Vanguard, together with
any information as to any business profession, vocation or employment of a
substantial nature engaged in by such officers and directors during the past two
years, is incorporated herein by reference from Schedules B and D of Form ADV
filed by Vanguard pursuant to the Advisers Act (SEC File No. 801-11953).
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 1940
Act and the Rules thereunder will be maintained at the offices of Registrant;
Registrant's Transfer Agent, The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, Pennsylvania 19355; and the Registrant's Custodians, State Street Bank
and Trust Company, Boston, Massachusetts 02105, and The Chase Manhattan Bank,
Boorlyn, 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, the 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 Investment
Company Act of 1940, the Registrant hereby certifies that it meets all
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Valley Forge and the Commonwealth of Pennsylvania, on
the 15th day of April, 2000.
VANGUARD BOND INDEX FUNDS
BY:_____________(signature)________________
(HEIDI STAM) JOHN J. BRENNAN* CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:
SIGNATURE TITLE DATE
- --------------------------------------------------------------------------------
By:/S/ JOHN J. BRENNAN President, Chairman, Chief April 15, 2000
---------------------------Executive Officer, and Trustee
(Heidi Stam)
John J. Brennan*
By:/S/ JOANN HEFFERNAN HEISEN Trustee April 15, 2000
---------------------------
(Heidi Stam)
JoAnn Heffernan Heisen*
By:/S/ BRUCE K. MACLAURY Trustee April 15, 2000
---------------------------
(Heidi Stam)
Bruce K. MacLaury*
By:/S/ BURTON G. MALKIEL Trustee April 15, 2000
---------------------------
(Heidi Stam)
Burton G. Malkiel*
By:/S/ ALFRED M. RANKIN, JR. Trustee April 15, 2000
---------------------------
(Heidi Stam)
Alfred M. Rankin, Jr.*
By:/S/ JOHN C. SAWHILL Trustee April 15, 2000
---------------------------
(Heidi Stam)
John C. Sawhill*
By:/S/ JAMES O. WELCH, JR. Trustee April 15, 2000
---------------------------
(Heidi Stam)
James O. Welch, Jr.*
By:/S/ J. LAWRENCE WILSON Trustee April 15, 2000
---------------------------
(Heidi Stam)
J. Lawrence Wilson*
By:/S/ THOMAS J. HIGGINS Treasurer and Principal April 15, 2000
---------------------------
(Heidi Stam) Financial OfficeR and Principal
Thomas J. Higgins* Accounting Officer
*By Power of Attorney. See File Number 33-4424, filed on January 25, 1999.
Incorporated by Reference.
<PAGE>
INDEX TO EXHIBITS
Consent of Independent Accountants . . . . . . . . . . .Ex-99.BJ
Code of Ethics. . . . . . . . . . . . . . . . . . . . . Ex-99.BP
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. 27 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated February 2, 2000, relating to the financial
statements and financial highlights appearing in the December 31, 1999 Annual
Report to Shareholders of Vanguard Bond Index Funds, which are also incorporated
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-- Independent
Accountants" in the Statement of Additional Information.
PricewaterhouseCoopers LLP
Philadelphia, PA
April 7, 2000
THE VANGUARD GROUP, INC.
------------------------
CODE OF ETHICS
--------------
SECTION 1: BACKGROUND
This Code of Ethics has been approved and adopted by the Board of Directors of
The Vanguard Group, Inc. ("Vanguard") and the Boards of Trustees of each of the
Vanguard funds in compliance with Rule 17j-1 under the Investment Company Act of
1940. The Code has been amended and restated effective as of May 1, 1999. Except
as otherwise provided, the Code applies to all "Vanguard personnel," which term
includes all employees, officers, Directors and Trustees of Vanguard and the
Vanguard funds. The Code also contains provisions which apply to the investment
advisers to the Vanguard funds (see section 11).
SECTION 2: STATEMENT OF GENERAL FIDUCIARY STANDARDS
This Code of Ethics is based on the overriding principle that Vanguard personnel
act as fiduciaries for shareholders' investments in the Vanguard funds.
Accordingly, Vanguard personnel must conduct their activities at all times in
accordance with the following standards:
a) SHAREHOLDERS' INTERESTS COME FIRST. In the course of fulfilling their
duties and responsibilities to Vanguard fund shareholders, Vanguard personnel
must at all times place the interests of Vanguard fund shareholders first. In
particular, Vanguard personnel must avoid serving their own personal interests
ahead of the interests of Vanguard fund shareholders.
b) CONFLICTS OF INTEREST MUST BE AVOIDED. Vanguard personnel must avoid
any situation involving an actual or potential conflict of interest or possible
impropriety with respect to their duties and responsibilities to Vanguard fund
shareholders.
c) COMPROMISING SITUATIONS MUST BE AVOIDED. Vanguard personnel must not
take advantage of their position of trust and responsibility at Vanguard.
Vanguard personnel must avoid any situation that might compromise or call into
question their exercise of full independent judgment in the best interests of
Vanguard fund shareholders.
<PAGE>
All activities of Vanguard personnel should be guided by and adhere to these
fiduciary standards. The remainder of this Code sets forth specific rules and
procedures which are consistent with these fiduciary standards. However, all
activities by Vanguard personnel are required to conform with these fiduciary
standards regardless of whether the activity is specifically covered in this
Code.
SECTION 3: DUTY OF CONFIDENTIALITY
Vanguard personnel must keep confidential at all times any nonpublic information
they may obtain in the course of their employment at Vanguard. This information
includes but is not limited to:
1) information on the vanguard funds, including recent or impending
securities transactions by the funds, activities of the
funds' advisers, offerings of new funds, and closings of funds;
2) information on Vanguard fund shareholders and prospective
shareholders, including their identities, investments, and account
transactions;
3) information on other vanguard personnel, including their pay,
benefits, position level, and performance ratings; and
4) information on Vanguard business activities, including new services,
products, technologies, and business initiatives.
Vanguard personnel have the highest fiduciary obligation not to reveal
confidential Vanguard information to any party that does not have a clear and
compelling need to know such information.
SECTION 4: GIFT POLICY
Vanguard personnel are prohibited from seeking or accepting gifts of material
value from any person or entity, including any Vanguard fund shareholder or
Vanguard client, when such gift is in relation to doing business with Vanguard.
In certain cases, Vanguard PERSONNEL MAY ACCEPT GIFTS OF DE MINIMIS value (as
determined in accordance with guidelines set forth in Vanguard's Human Resources
Policy Manual) but only if they obtain the approval of a Vanguard officer.
<PAGE>
SECTION 5: OUTSIDE ACTIVITIES
a) PROHIBITIONS ON SECONDARY EMPLOYMENT. Vanguard employees are
prohibited from working for any business or enterprise in the financial services
industry that competes with Vanguard. In addition, Vanguard employees are
prohibited from working for any organization that could possibly benefit from
the employee's knowledge of confidential Vanguard information, such as new
Vanguard services and technologies. Beyond these prohibitions, Vanguard
employees may accept secondary employment, but only with prior approval from the
Vanguard Compliance Department. Vanguard officers are prohibited from accepting
or serving in any form of secondary employment unless they have received
approval from a Vanguard Managing Director or the Vanguard Chairman and Chief
Executive Officer.
b) PROHIBITION ON SERVICE AS DIRECTOR OR PUBLIC OFFICIAL. Vanguard
officers and employees are prohibited from serving on the board of directors of
any publicly traded company or in an official capacity for any federal, state,
or local government (or governmental agency or instrumentality) without prior
approval from the Vanguard Compliance Department.
c) PROHIBITION ON MISUSE OF VANGUARD TIME OR PROPERTY. Vanguard personnel
are prohibited from using Vanguard time, equipment, services, personnel or
property for any purposes other than the performance of their duties and
responsibilities at Vanguard.
SECTION 6: GENERAL PROHIBITIONS ON TRADING
a) TRADING ON KNOWLEDGE OF VANGUARD FUNDS ACTIVITIES. All Vanguard
personnel are prohibited from taking personal advantage of their knowledge of
recent or impending securities activities of the Vanguard funds or the funds'
investment advisers. In particular, Vanguard personnel are prohibited from
purchasing or selling, directly or indirectly, any security when they have
actual knowledge that the security is being purchased or sold, or considered for
purchase or sale, by a Vanguard fund. This prohibition applies to all securities
in which the person has acquired or will acquire "beneficial ownership." For
these purposes, a person is considered to have beneficial ownership in all
securities over which the person enjoys economic benefits substantially
equivalent to ownership (for example, securities held in trust for the person's
benefit), regardless of who is the registered owner. Under this Code of Ethics,
Vanguard personnel are considered to have beneficial ownership of all securities
owned by their spouse or minor children.
<PAGE>
b) VANGUARD INSIDER TRADING POLICY. All Vanguard personnel are subject
to Vanguard's Insider Trading Policy, which is considered an integral part of
this Code of Ethics. Vanguard's Insider Trading Policy prohibits Vanguard
personnel from buying or selling any security while in the possession of
material nonpublic information about the issuer of the security. The policy also
prohibits Vanguard personnel from communicating to third parties any material
nonpublic information about any security or issuer of securities. Any violation
of Vanguard's Insider Trading Policy may result in penalties which could include
termination of employment with Vanguard.
SECTION 7: ADDITIONAL TRADING RESTRICTIONS FOR ACCESS PERSONS
a) APPLICATION. The restrictions of this section 7 apply to all Vanguard
access persons. For purposes of the Code of Ethics, "access persons" include:
1) any Director or Trustee of Vanguard or a Vanguard fund, excluding
disinterested Directors and Trustees (i.e., any Director or Trustee
who is not an "interested person" of a Vanguard fund within the
meaning of Section 2(a)(19) of the Investment Company Act of 1940);
2) any officer of Vanguard or a Vanguard fund; and
3) any employee of Vanguard or a Vanguard fund who in the course of his
or her regular duties participates in the selection of a Vanguard
fund's securities or who works in a Vanguard department or unit that
has access to information regarding a Vanguard fund's impending
purchases or sales of securities.
The Vanguard Compliance Department will notify all Vanguard personnel who
qualify as access persons of their duties and responsibilities under this Code
of Ethics. The restrictions of this section 7 apply to all transactions in which
a Vanguard access person has or will acquire beneficial ownership (see section
6a) of a security, including transactions by a spouse or minor child. However,
the restrictions do not apply to transactions involving: (i) direct obligations
of the Government of the United States; (ii) high quality short-term debt
instruments, including bankers' acceptances, bank certificates of deposit,
commercial paper, and repurchase agreements; and (iii) shares of registered
open-end investment companies (including shares of
<PAGE>
any Vanguard fund). In addition, the restrictions do not apply to transactions
in accounts over which the access person has no direct or indirect control or
influence.
b) GENERAL RESTRICTIONS FOR ACCESS PERSONS. Vanguard access persons are
subject to the following restrictions with respect to their securities
transactions:
1) PRE-CLEARANCE OF SECURITIES TRANSACTIONS. Vanguard access persons must
receive approval from the Vanguard Compliance Department before
purchasing or selling any securities. The Vanguard Compliance
Department will notify Vanguard access persons if their proposed
securities transactions are permitted under this Code of Ethics.
2) TRADING THROUGH VANGUARD BROKERAGE SERVICES. Vanguard access persons
must conduct all their securities transactions through Vanguard
Brokerage Services. Vanguard Brokerage Services will send a
confirmation notice of any purchase or sale of securities by a
Vanguard access person to the Vanguard Compliance Department.
3) PROHIBITION ON INITIAL PUBLIC OFFERINGS. Vanguard access persons are
prohibited from acquiring securities in an initial public offering.
4) PROHIBITION ON PRIVATE PLACEMENTS. Vanguard access persons are
prohibited from acquiring securities in a private placement without
prior approval from the Vanguard Compliance Department. In the event
an access person receives approval to purchase securities in a private
placement, the access person must disclose that investment if he or
she plays any part in a Vanguard fund's later consideration of an
investment in the issuer.
5) PROHIBITION ON OPTIONS. Vanguard access persons are prohibited from
acquiring or selling any option on any security.
6) PROHIBITION ON SHORT-SELLING. Vanguard access persons are prohibited
from selling any security that the access person does not own or
otherwise engaging in "short-selling" activities.
7) PROHIBITION ON SHORT-TERM TRADING PROFITS. Vanguard access persons are
prohibited from profiting in the purchase and sale, or sale and
purchase, of the same (or related) securities within 60 calendar days.
In the event that an access person realizes profits on
<PAGE>
such short-term trades, the access person must relinquish such profits
to The Vanguard Group Foundation.
c) BLACKOUT RESTRICTIONS FOR ACCESS PERSONS. All Vanguard access persons
are subject to the following restrictions when their purchases and sales of
securities coincide with trades by the Vanguard funds:
1) PURCHASES AND SALES WITHIN THREE DAYS FOLLOWING A FUND TRADE. Vanguard
access persons are prohibited from purchasing or selling any security
within three calendar days after a Vanguard fund has traded in the
same (or a related) security. In the event that an access person makes
a prohibited purchase or sale within the three-day period, the access
person must unwind the transaction and relinquish any gain from the
transaction to The Vanguard Group Foundation.
2) PURCHASES WITHIN SEVEN DAYS BEFORE A FUND PURCHASE. A Vanguard access
person who purchases a security within seven calendar days before a
Vanguard fund purchases the same (or a related) security is prohibited
from selling the security for a period of six months following the
fund's trade. In the event that an access person makes a prohibited
sale within the six-month period, the access person must relinquish to
The Vanguard Group Foundation any gain from the transaction.
3) SALES WITHIN SEVEN DAYS BEFORE A FUND SALE. A Vanguard access person
who sells a security within seven days before a Vanguard fund sells
the same (or a related) security must relinquish to The Vanguard Group
Foundation the difference between the access person's sale price and
the Vanguard fund's sale price (assuming the access person's sale
price is higher).
4) RESTRICTIONS NOT APPLICABLE TO TRADES BY VANGUARD INDEX FUNDS. The
restrictions of this section 7c do not apply to purchases and sales of
securities by Vanguard access persons which would otherwise violate
section 7c solely because the transactions coincide with trades by any
Vanguard index funds.
SECTION 8: ADDITIONAL TRADING RESTRICTIONS FOR INSTITUTIONAL CLIENT CONTACTS
<PAGE>
a) APPLICATION. The restrictions of this section 8 apply to all Vanguard
Institutional client contacts. For purposes of the Code of Ethics, an
"Institutional client contact" includes any Vanguard employee who works in a
department or unit at Vanguard that has significant levels of interaction or
dealings with the management of clients of Vanguard's Institutional Investor
Group. The Vanguard Compliance Department will notify Vanguard employees who
qualify as Institutional client contacts of the restrictions of this Section 8.
b) PROHIBITION ON TRADING SECURITIES OF INSTITUTIONAL CLIENTS. Vanguard
Institutional client contacts are prohibited from acquiring securities issued by
clients of the Vanguard Institutional Investor Group (including any options or
futures contracts based on such securities). In the event that any individual
who becomes subject to this prohibition already owns securities issued by
Institutional clients, the individual will be prohibited from disposing of those
securities without prior approval from the Vanguard Compliance Department. The
restrictions of this section 8 apply to all transactions in which Institutional
client contacts have acquired or would acquire beneficial ownership (see section
6a) of a security, including transactions by a spouse or minor child. However,
the restrictions do not apply to transactions in any account over which an
individual does not possess any direct or indirect control or influence. The
Vanguard Compliance Department will maintain a list of the Institutional clients
to which the prohibitions of this section 8 apply. The Vanguard Compliance
Department may waive the prohibition on acquiring securities of Institutional
clients in appropriate cases (including, for example, cases in which an
individual acquires securities as part of an inheritance or through an
employer-sponsored employee benefits or compensation program).
SECTION 9: COMPLIANCE PROCEDURES
a) APPLICATION. The requirements of this section 9 apply to all Vanguard
personnel other than disinterested Directors and Trustees (see section 7a). The
requirements apply to all transactions in which Vanguard personnel have acquired
or would acquire beneficial ownership (see section 6a) of a security, including
transactions by a spouse or minor child. However, the requirements do not apply
to transactions involving: (i) direct obligations of the Government of the
United States; (ii) high quality short-term debt instruments, including bankers'
acceptances, bank certificates of deposit, commercial paper, and repurchase
agreements; and (iii) shares of registered open-end investment companies
(including shares of any Vanguard fund). In addition, the requirements do not
apply to securities acquired for accounts over which the person has no direct or
indirect control or influence.
<PAGE>
b) DISCLOSURE OF PERSONAL HOLDINGS. All Vanguard personnel must disclose
their personal securities holdings to the Vanguard Compliance Department upon
commencement of employment with Vanguard. These disclosures must identify the
title, number of shares, and principal amount with respect to each security
holding.
c) RECORDS OF SECURITIES TRANSACTIONS. All Vanguard personnel must notify
the Vanguard Compliance Department if they have opened or intend to open a
brokerage account. Vanguard personnel must direct their brokers to supply the
Vanguard Compliance Department with duplicate confirmation statements of their
securities transactions and copies of all periodic statements for their
brokerage accounts.
d) CERTIFICATION OF COMPLIANCE. All Vanguard personnel must certify
annually to the Vanguard Compliance Department that: (i) they have read and
understand this Code of Ethics; (ii) they have complied with all requirements of
the Code of Ethics; and (3) they have reported all transactions required to be
reported under the Code of Ethics.
SECTION 10: REQUIRED REPORTS BY DISINTERESTED DIRECTORS AND TRUSTEES
Disinterested Directors and Trustees (see section 7a) are required to report
their securities transactions to the Vanguard Compliance Department only in
cases where the Director or Trustee knew or should have known during the 15-day
period immediately preceding or following the date of the transaction that the
security had been purchased or sold, or was being considered for purchase or
sale, by a Vanguard fund.
SECTION 11: APPLICATION TO INVESTMENT ADVISERS
a) ADOPTION OF CODE OF ETHICS. Each investment adviser to a Vanguard fund
must adopt a code of ethics in compliance with Rule 17j-1 and provide the
Vanguard Compliance Department with a copy of the code of ethics and any
subsequent amendments. Each investment adviser is responsible for enforcing its
code of ethics and reporting to the Vanguard Compliance Department on a timely
basis any violations of the code of ethics and resulting sanctions.
<PAGE>
b) PREPARATION OF ANNUAL REPORTS. Each investment adviser to a Vanguard
fund must prepare an annual report on its code of ethics for review by the Board
of Trustees of the Vanguard fund. This report must contain the following:
1) a description of any issues arising under the adviser's code of ethics
including, but not limited to, information about any violations of the
code, sanctions imposed in response to such violations, changes made
to the code's provisions or procedures, and any recommended changes to
the code; and
2) a certification that the investment adviser has adopted such
procedures as are reasonably necessary to prevent access persons from
violating the code of ethics.
SECTION 12: REVIEW BY BOARDS OF DIRECTORS AND TRUSTEES
a) REVIEW OF INVESTMENT ADVISERS' CODE OF ETHICS. Prior to retaining the
services of any investment adviser for a Vanguard fund, the Board of Trustees of
the Vanguard fund must review the code of ethics adopted by the investment
adviser pursuant to Rule 17j-1 under the Investment Company Act of 1940. The
Board of Trustees must receive a certification from the investment adviser that
the adviser has adopted such procedures as are reasonably necessary to prevent
access persons from violating the adviser's code of ethics. A majority of the
Trustees of the Vanguard fund, including a majority of the disinterested
Trustees of the Fund, must determine whether the adviser's code of ethics
contains such provisions as are reasonably necessary to prevent access persons
from engaging in any act, practice, or course of conduct prohibited by the
anti-fraud provisions of Rule 17j-1.
b) REVIEW OF VANGUARD ANNUAL REPORTS. The Vanguard Compliance Department
must prepare an annual report on this Code of Ethics for review by the Board of
Directors of Vanguard and the Boards of Trustees of the Vanguard funds. The
report must contain the following:
1) a description of issues arising under the Code of Ethics since the
last report including, but not limited to, information about any
violations of the Code, sanctions imposed in response to such
violations, changes made to the Code's provisions or procedures, and
any recommended changes to the Code; and
<PAGE>
2) a certification that Vanguard and the Vanguard Funds have adopted such
procedures as are reasonably necessary to prevent access persons from
violating the Code of Ethics.
SECTION 13: SANCTIONS
In the event of any violation of this Code of Ethics, Vanguard senior management
will impose such sanctions as deemed necessary and appropriate under the
circumstances and in the best interests of Vanguard fund shareholders. In the
case of any violations by Vanguard employees, the range of sanctions could
include a letter of censure, suspension of employment without pay, or permanent
termination of employment.
SECTION 14: RETENTION OF RECORDS
Vanguard must maintain all records required by Rule 17j-1 including: (i) copies
of this Code of Ethics and the codes of ethics of all investment advisers to the
Vanguard funds; (ii) records of any violations of the codes of ethics and
actions taken as a result of the violations; (iii) copies of all certifications
made by Vanguard personnel pursuant to section 9d; (iv) lists of all Vanguard
personnel who are, or within the past five years have been, access persons
subject to the trading restrictions of section 8 and lists of the Vanguard
compliance personnel responsible for monitoring compliance with those trading
restrictions; and (v) copies of the annual reports to the Boards of Directors
and Trustees pursuant to section 12.